CELINA EVANGELISTA PANGESTU

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Economic Outlook

Global economy

The World Health Organization (WHO) formally announced the COVID-19 outbreak to be a
global pandemic on March 11, 2020. The uncertainties concerning the pandemic has led to a
profound global economic contraction much worse than the 2008 Global Financial Crisis
(Congressional Research Service, 2020).

According to updated global growth projection issued by the International Monetary Fund
(IMF) on April 14, 2020 (See Table 1):
• The global growth in 2020 to decline by 3.0%, before improving by 5.8% in 2021.
(assuming the pandemic recedes in the second half of 2020 and containment measures
can be deliberately implemented)
• The economic growth in the advanced economies is expected at -6.1% in 2020.
• The growth of the emerging markets and developing economies in 2020 is forecasted
to decline by 1.0%.

Malaysia economy

GDP annual growth rate

• Malaysia’s economy in January – February 2020 showed an annual real GDP growth
at 3.6% YoY, slightly declined compared to 4Q19 being 4.4% YoY.
Reflecting the global pandemic effect, Malaysia’s GDP growth bottomed out to 0.7%
YoY in 1Q20 (See Figure 1), the lowest since 3Q09 being 1.2%.

• Bank Negara Malaysia (BNM) maintains its forecast Malaysia’s GDP to remain low
between -2.0% and 0.5% in 2020 (Ng, 2020).

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Inflation rate

Malaysia’s inflation has been decreasing continuously since January 2020. Starting off with a
20-month high of 1.6% in January, the inflation rate plummeted to -2.9% YoY in April, after
a decline of 0.2% in March,
(See Figure 2).

Unemployment

The decision to shut down businesses in containing the spread of the COVID-19 significantly
affects workers worldwide. Malaysia’s seasonally adjusted unemployment rate hit 3.9% YoY
in March 2020 (see Figure 3) as opposed to 3.3% in February 2020.

Industry outlook

Rubber gloves industry

• Malaysia being the world’s largest rubber glove producer that contributes to 62% of
global supply (Televisory, 2020) sees an escalating demand for the product, reflecting
the increasing health awareness due to COVID-19 pandemic.

• MARGMA (Malaysian Rubber Glove Manufacturers Association) forecasted the

international demand of rubber gloves to hit 300Bn units in 2020 with a 9% annual
growth, compared to 2019 being 298Bn units. Malaysia is also expecting to export
225Bn units of rubber gloves this year (See Figure 4).

• DOSM (Department Statistics of Malaysia) reported that as of March 2020, domestic

consumption of natural rubber increased 1.8% to 42,244 tonnes from 41,512 tonnes in
February 2020 (See Table 2). Where 80.7% of the total domestic consumption is
dominated by rubber gloves (34,086 tonnes). The exports for rubber gloves hit a high
of RM1,76Bn, a rose of 11.9% compared to February 2020.

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 • Estimated rubber gloves supply in 2020 was revised from roughly 188Bn to
approximately 220Bn units, a substantial rise comparing to 2019 production, being
around 187Bn units (Televisory, 2020).

Aviation industry

Flight cancellation and travel restriction enforced by countries around the world, drive airlines
into substantial defaults, leading aviation industry to be one of the most severely affected
sectors in the midst of the COVID-19 pandemic (see Figure 5).

Lower tourist arrivals reflecting the travel restrictions

The MCO incorporates a complete travel ban for international passengers. It led to a fall in
tourists arrivals and receipt in the country as passengers have been cancelling their journeys.

During the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, Malaysia’s total
tourist arrivals contracted from to 10.6mn in 2003 from 13.3mn in 2002 (see Figure 6).
According to the WHO, a total of 8,096 cases were detected across 29 countries. While as of
March 26, 2020, 416,686 cases has been recognized in 197 countries for COVID-19. Therefore,
the contraction is expected to be greater in 2020.

Contraction of passenger traffic growth

MAVCOM projects passenger traffic growth in Malaysia based on three different scenarios
with different severities of the pandemic, MAVCOM estimates passenger traffic in Malaysia
to sink down by between 36.2% YoY an 38.1% YoY, under the assumption of base case
scenario (See Table 3).

In response, Malaysian carriers have undertaken a drastic seat capacity reduction in 2020, with
a total cutback of 7.3mn seats (8.6% of total seat capacity). Given the severity of the pandemic,
the recovery to pre-COVID-19 levels for Asia Pacific is expected to be longer than SARS
outbreak recovery (seven months). MAVCOM forecasts the earliest recovery of passenger
traffic growth in 2020 to pre-pandemic levels is in 4Q20 (MAVCOM, 2020).

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MAVCOM, further estimates the 2020 revenue losses for Malaysian carriers together with
aerodrome operators to be RM7.2Bn, while IATA forecasts Malaysia’s aviation sector to face
a loss of US$3.32 billion, equivalent to RM14.4Bn.

Company Analysis

Company profile

Top Glove Corporation Bhd (TG) is a Malaysian rubber gloves manufacturer company
established by Tan Sri Dr Lim Wee Chai (Executive Chairman) in 1991 and managed by Dato
Lee Kim Meow (Managing Director) and Mr Lim Cheong Guan (Executive Director).
The company is one of the largest gloves producers, commanding 26% of the global market
share. Headquartered in Setia Alam, Malaysia, it has 44 factories (as of March 2020) in
Malaysia, Thailand, and China and exports to 195 countries globally (Top Glove, n.d.).

As of June 1, 2020, TG’s paid up capital amounts to RM1,169,953,917 while its market
capitalisation stood at RM40.5Bn (Top Glove, n.d.). It expands its market coverage by offering
a comprehensive products ranging from rubber gloves, condoms, dental dams and exercise
bands (Top Glove, n.d.).

Industry analysis

1. Competitive rivalry: high

Main local competitors namely Hartalega Holdings Bhd, the Kossan Rubber Industries
Bhd, and Supermax Corporation Bhd expose TG to extreme competition (Cision,
2014).

2. Suppliers’ bargaining power: low

Attributed to the application of vertical integration through acquisition of its supplier
(packaging material) allows TG to control supply chain and the diversified suppliers
(Mahpar, 2017).

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 3. Buyers’ bargaining power: low
According to Puspadevi (2017), the diversifications of the customers in terms of the
countries which the company serves.

4. Threat of substitution: Medium

Top Glove’s products substitutable, however, this risk could be mitigated through
products differentiation and quality improvements.

5. Threat of new entry: medium

In order to produce various products similar to TG’s products, especially in terms of
products manufacture and advertisement, a relatively large capital is required, hence
new entrants are not able to enter the market easily (Tai, 2017).

Valuation

• Malaysian Rubber Board (MRB) (2020) projected that Malaysia would control 65% of
the global rubber gloves market in 2020, up by 3% due to escalating demand amid
COVID-19 pandemic.

• MARGMA and Malaysian Rubber Export Promotion Council (MREPC), anticipate

the global demand for rubber gloves to rise 287Bn pieces by 2020 from 228Bn pieces
in 2017 at a CAGR of 7.79%. Similarly, the total market size of rubber gloves is
expected to touch USD 3.714Bn by 2023 from USD 2.347Bn in 2017 with a CAGR
of 7.95% (Televisory, 2020).

• During the pandemic, TG forecasts at least 10-15% jump in its sales. The demand is
projected to continuously grow by at least 10% per year, even after the outbreak recedes
due to the awareness of their importance in protecting lives (Televisory, 2020).

• Domestic supply estimate was revised to around 220Bn pieces for 2020, overall
industry is set to see more than 30% supply of rubber gloves which may lead supply to
hit approximately 350Bn pieces by end of year (Televisory, 2020).

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 • According to MQ Research (2020), Top Glove increased target price of
RM20.50 based on a higher CY21 price-to-earnings (PE) ratio of 40x vs RM12.30 on
a 32x PE before.

• The Malaysia Rating Corporation Bhd (MARC) assigned TG a credit rating of AA on

January 23, 2020. The rating implies Top Glove’s strong revenue improvement and net
profit, positive cash flow achievement, and stable working capital handling, supported
by sustainable glove demand globally (Malaysia Rating Corporation, 2020).

Financial analysis

Top Glove released its financial results for 2QFY20 on March 19, 2020:

• Sales Revenue 2QFY20 amounted to RM1.23 billion, increased by 6% and 1.7%

compared with 2QFY19 and 1QFY20 respectively. This was attributed to steady Sales
Volume growth, with particularly 14% year-on-year growth in the nitrile glove segment

• In 2QFY20 Profit Before Tax (PBT) grew to RM130.4 million, 3.9% higher than
1QFY20 (RM125.5 million) as well as 2QFY19

• PAT 2QFY20 was up 8.7% YoY and 3.8% quarter-on-quarter to RM116 million from
RM111.8 million (1QFY20), attributed to the tax incentives drawn from the
Corporate’s ongoing expansion and unutilised tax allowances from some of its
subsidiaries.

MQ Research (2020), expect strong 3QFY20 results as COVID-19 order will be reflected in
3QFY20. 2HFY20 earnings before interest tax, depreciation and amortization (EBITDA)
margin is anticipated to expand to 33%, the highest since its listing.

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Risk

Legal issues

TG’s representative, Lim Kim Meow, stated that the company is experiencing a shortage of
10-20% in labour to meet the high demand for rubber gloves.

The shortage of labour rises a concern related to labour abuse as Andy Hall, a migrant workers’
rights specialist, expressed his concerns on workforce exploitation in behalf of the migrant
workers who have filed claims against Top Glove on the high working hours, illegal
recruitment fee, and low wages.

TG denied the allegation and stated that they comply with Malaysian labour laws and
improving working conditions for workers, however, labour rights activists are still concerned
and urging Malaysian Governments to ensure that workers are adequately protected (Looi,
2020)

Conclusion

Based on the above analysis of the current and future projection of Top Glove performance, it
is recommended to buy Top Glove Corporation Bhd stocks.

(1560 words)

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 TABLES

Table 1
Global growth projections 2020

Note. Adapted from “World Economic Outlook, April 2020: The Great Lockdown” by the
International Monetary Fund, 2020 https://www.imf.org/en/Publications/WEO. Copyright
2020 by International Monetary Fund.

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Table 2

Principal statistics of Rubber, March 2020

Note. Adapted from “Press Release: Monthly Rubber Statistics Malaysia, March 2020” by
DOSM, 2020
https://www.dosm.gov.my/v1/index.php?r=column/pdfPrev&id=VGlSNWpvVzRlSDgrRkp
UU21PaWtlZz09. Copyright 2020 by DOSM.

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Table 3

2020 Passenger Traffic Forecast

Note. Adapted from “Malaysian Aviation Industry Outlook” by MAVCOM, 2020

https://www.mavcom.my/wp-content/uploads/2020/03/200327-MAVCOM-Waypoint-
March-2020-Report-Final.pdf. Copyright 2020 MAVCOM.

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 FIGURES

Figure 1
Malaysia Annual GDP Growth Rate

Note. Adapted from “Malaysia GDP Annual Growth Rate” by Trading Economics, 2020
https://tradingeconomics.com/malaysia/gdp-growth-annual. Copyright 2020 by Department
Of Statistics Malaysia.

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Figure 2
Malaysia’s Inflation Rate

Note. Adapted from “Malaysia’s Inflation Rate” by Trading Economics, 2020

https://tradingeconomics.com/malaysia/inflation-cpi. Copyright 2020 by Department Of
Statistics Malaysia.

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Figure 3
Malaysia Unemployment Rate

Note. Adapted from “Malaysia Unemployment Rate” by Trading Economics, 2020

https://tradingeconomics.com/malaysia/unemployment-rate. Copyright 2020 by Department
Of Statistics Malaysia.

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Figure 4
Steady growth of Global Demand for Rubber Gloves

Note. Adapted from “Malaysian Rubber Gloves Industry – Impact of COVID-19” by

Televisory, 2020 https://www.televisory.com/blogs/-/blogs/malaysian-rubber-glove-industry-
impact-of-covid-19. Copyright 2020 by MARGMA.

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Figure 5
Probability of default model market signals, March 2020

Note. Adapted from “Industries Most and Least Impacted by COVID-19 from a Probability of
Default Perspective – March 2020 Update” by N. Kumar and D. Haydon,2020
https://www.spglobal.com/marketintelligence/en/news-insights/blog/industries-most-and-
least-impacted-by-covid-19-from-a-probability-of-default-perspective-march-2020-update.
Copyright 2020 S&P Global Market Intelligence.

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Figure 6

Tourist Arrivals to Malaysia and Receipts, 2000 – 2018

Note. Adapted from “Malaysian Aviation Industry Outlook” by MAVCOM, 2020

https://www.mavcom.my/wp-content/uploads/2020/03/200327-MAVCOM-Waypoint-
March-2020-Report-Final.pdf. Copyright 2018 Tourism Malaysia.

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