ESG Matters, Act Now or Repent Later: An Analysis of Top Glove
Summary: Top Glove Corporation Berhad (Top Glove) is a Malaysian rubber glove manufacturer and is one of the global leaders in the industry. As such naturally, the Covid-19 pandemic has brought good times for the company. The stock’s 52-week high to 52-week low was 5.7x (stock’s 52-week high price was 9.77 MYR and its 52-week low was 1.71 MYR at Bursa Malaysia). But the stock price is currently 35% down from its peak, and that too after staging a 20% recovery since the first week of January, owing to trends similar to short selling frenzy that was seen in GameStop. EMAlpha Machines have been collecting news flow on Top Glove very actively since January 2020 and the EMAlpha Research team has analysed the last three months data in more detail. The answer to the above predicament is simple: ESG. First, there were reports that cramped dormitories for labourers led to over thousands of Covid-19 cases and there were also attempts to cover up the same. Naturally, there was backlash from Institutional Shareholders. And secondly, BlackRock, the world’s largest asset manager and a strong advocate of sustainable business practices, voted against the re-election of six independent directors at the Annual General Meeting on 6th January 2021. These developments along with the saga that has unfolded over the last three months in the Top Glove stock has several interesting components: a) Can the local news flow collection pick up issues like the condition of workers, faster than the English media? b) Considering how vocal Blackrock has been on Sustainability and ESG issues, was it not entirely expected that they would vote against the official resolutions in the Annual General Meeting? And c) Can regular analysis of social media (such as Reddit feed) be used as an input before taking an investment decision? It is here that EMAlpha’s analysis of unstructured data becomes a much-needed tool for investors.
Covid-19 posed a strong headwind for Global Economy but it also helped a few Industries
The Coronavirus pandemic has been a disaster for the global economy. However, the pandemic has also ensured that the Sustainability and ESG (Environmental, Social and Governance) issues are more actively talked about and the ensuing crisis has certainly been a big contributing factor in making them more mainstream. Many of the global market participants have started to pay more attention to the need for a ‘more sustainable business model’ in the context of not just the organization, but also the environment and the society i.e. all the stakeholders directly or indirectly impacted from business operations of a company.
The pandemic had immediate fallouts like various degrees of lockdowns, travel restrictions and quarantines, slowing down of the supply chain, etc. In general, there was serious impact on livelihood and the way of living for billions of people. Apart from these short term shocks, there are going to be medium to long term effects as well. For example, the Central Banks and Governments globally have responded swiftly but the long-term consequences of these responses are still uncertain. This uncertainty and unchartered territories have raised questions like, have we put the global financial system under a big risk by unprecedented liquidity injection and never before seen fiscal stimulus? To sum it up, because of the pandemic, there was direct impact on production and demand with supply chains being disrupted which led to market disturbance. And all of this preceded the financial impact.
If we look specifically at the impact that Covid-19 had on various industries, it’s clear that the pandemic was a big negative for many businesses. Anything that required physical presence for a transaction to take place was the worst hit. While there were industries that took the punch, there were also industries that benefited. Tech is a well-known and meticulously documented industry that was a direct beneficiary of Covid-19 and the massive outperformance of stocks like Amazon and Apple is proof of that. We are not even including some of the other star performers like Tesla and Zoom. The excitement on pharma stocks is evident and there has also been considerable investor interest in vaccine value chain. But all of this is just scratching the surface. If you took a deep dive, you will find many other companies and sectors as well.
For example, just last week, we talked about the stupendous performance of Sri Lankan markets in January 2021 and how Covid-19 helped some of the companies like Dipped Products and Hayleys. These were the companies that benefitted from the demand for specific products that rose as a direct result of the Coronavirus pandemic. For more on this, please refer to the EMAlpha insight Sri Lankan Stock Market is on Fire: An Analysis on How the News Flow Is Driving the Blaze? dated 30th January 2021. For example, the global disposable gloves market has several major players such as Ansell, Top Glove, Hartalega, Kossan Rubber, Supermax and Kimberly-Clark. The coronavirus pandemic was a major driver for the industry in 2020 and it will continue to significantly affect the disposable glove market in 2021.
Top Glove: The exhilarating ride of the stock over the last twelve months
Top Glove Corporation Berhad (Top Glove) is a Malaysian rubber glove manufacturer and is one of the global leaders in the industry. The company not only owns and operates several manufacturing facilities across South East Asia including countries like Malaysia, Thailand and Vietnam, but it is also big on exports. Naturally, Covid-19 boosted the stock and the following graph tells this story well. The ratio of the stock’s 52-week high to 52-week low is 5.7x (52-week high stock price is 9.77 MYR and the 52-week low is 1.71 MYR at Bursa ¬Malaysia, the Malaysian Stock Exchange).
Chart 1: Stock Price Chart for Top Glove Corporation Berhad (KLSE: TOPGLOV) over the last twelve months
Source: Top Glove Share price, Google
As is clear from the graph, the stock soared from May till October. Now what happened from October onwards? As Covid-19 continued to worsen across many countries around the globe and the demand for Top Glove products remained robust, the financials were in excellent shape. But the Top Glove stock price is currently 35% down from its peak, and that too, after staging a 20% recovery since the first week of January. EMAlpha AI has focussed on and analyzed information flow on Top Glove very actively since January 2020 and the EMAlpha Research team tried to figure out as to what happened and why? The answer, as we found out, was straight and simple: ESG. The company apparently faltered on some basics and media was quick to grab on the opportunity to highlight its poor track record. There were also some influential global asset managers who were not on the same page as the company’s management.
Top Glove and where things went wrong?
There were reports that cramped dormitories for labourers led to over 5,000 Covid-19 cases and one death in the company’s factories near Kuala Lumpur. There were also attempts made to cover it up and a whistle-blower was fired for sharing photos about the factory’s conditions which showed that social distancing was not being enforced. There were also negative stories like how the overcrowded workers’ dormitories led to conditions which helped fuel the coronavirus outbreak, thus infecting thousands of people. EMAlpha machines picked up several interesting stories over the last several weeks of 2020. These stories were picked up not just from the local media publications and digital mediums in South East Asia, but even from global media houses like New York Times. Some of the more prominent ones are as follows:
- Malaysia to charge Top Glove over poor worker accommodation, government says (1st December 2020, https://www.reuters.com/article/us-malaysia-top-glove-labour-idUSKBN28B4Q1 )
- Top Glove fired whistle blower before virus outbreak (13th December 2020, https://www.reuters.com/article/health-coronavirus-top-glove-idUSL1N2IR0ZQ )
- Coronavirus Malaysia: Top Glove put profits before people, say migrant workers (14th December 2020, https://www.scmp.com/news/asia/southeast-asia/article/3113822/coronavirus-malaysia-top-glove-put-profits-people-say )
- A Company Made P.P.E. for the World. Now Its Workers Have the Virus (20th December 2020, https://www.nytimes.com/2020/12/20/world/asia/top-glove-ppe-covid-malaysia-workers.html )
Backlash from Institutional Shareholders
What made the dichotomy even more difficult to digest for institutional shareholders was that the company that was providing protective gear to countries across the world was, at home, acting in an irresponsible and exclusively ‘profit focused’ manner. A backlash was, therefore natural. BlackRock, the world’s largest asset manager has been a strong advocate of sustainable business practices and it has been nudging its portfolio companies to pay more attention to ESG parameters. So, naturally, they reacted in this case as well. Blackrock, which currently holds more than 1.5% equity stake in Top Glove, voted against the re-election of six independent directors at the Top Glove’s Annual General Meeting, held on 6th January 2021.
BlackRock was scathing in its criticism of the board and explicitly mentioned that the asset manager held the view that the board had failed in its oversight responsibility, concerning the company’s migrant workers’ health and safety. There was also a warning for the future as BlackRock said that it also “intends to hold other incumbent directors not on the ballot at this AGM accountable by voting against their re-election at future shareholder meetings”. For more details, refer Blackrock’s Vote Bulletin: Top Glove Corporation Bhd. (https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-top-glove-jan-2021.pdf )
Again, this was a big story for the media and it appeared in all major publications. Several such news items were flagged by EMAlpha’s proprietary algorithms and the most prominent are as follows:
- BlackRock raps board of world’s biggest glove maker over worker safety (7th January 2021, https://www.reuters.com/article/uk-malaysia-top-glove-idUKKBN29C0J4 )
• Top Glove defends board after BlackRock criticism (9th January 2021, https://www.thestar.com.my/business/business-news/2021/01/09/top-glove-defends-board-after-blackrock-criticism )
• Top Glove’s independent directors suffer ire of institutional investors (11th January 2021, https://www.businesstimes.com.sg/companies-markets/top-gloves-independent-directors-suffer-ire-of-institutional-investors )
Brokers’ Support for the Stock
After the lows of the first week of January, there was a lot of support from analysts who were speaking about the ‘deep value’ the stock was offering.
- Glove stocks oversold? Maybe, judging by analysts’ target prices (8th January 2021, https://www.theedgemarkets.com/article/glove-stocks-oversold-maybe-yes-judging-analysts-target-prices )
- All 4 big glove stocks offer plenty of upside: Kenanga (11th January 2021, https://www.thestar.com.my/business/business-news/2021/01/11/all-4-big-glove-stocks-offer-plenty-of-upside-kenanga )
- Downside risk for glove stocks limited (12th January 2021, https://www.thestar.com.my/business/business-news/2021/01/12/downside-risk-for-glove-stocks-limited )
- Top Glove valuation at unprecedented low — RHB IB (18th January 2021, https://www.theedgemarkets.com/article/top-glove-valuation-unprecedented-low-%E2%80%94-rhb-ib )
Aftereffects of ‘GameStop’ frenzy: The Short Selling squeeze that helped Top Glove
After the rally at US firm GameStop Corp, in which shares of GameStop surged 1,700% in just two weeks as amateur investors piled in and forced hedge funds to lose billions on their short positions, the same thing started to happen with Top Glove. It was well publicised that The WallStreetBets forum on Reddit, had fuelled the GameStop rally. In a new forum on Reddit called BursaBets, created in the last week of January, Malaysian retail investors discussed buying up stocks of glove makers, and complained about share prices having dropped in recent months even as the firms’ profits had grown. They also blamed large institutional holders for holding short positions in the stock and the sector. For example,
- Investors shorted RM1.7 billion worth of shares in big four glove stocks (9th January 2021, https://www.theedgemarkets.com/article/investors-shorted-rm17-billion-worth-shares-big-four-glove-stocks )
- Top Glove Stock in the limelight in the first trading week of the year 2021 (9th January 2021, https://www.theedgemarkets.com/article/these-stocks-limelight-first-trading-week )
- Short-sellers swarm over hot stock Top Glove Corporation Berhad (TOPGLOV) (11th January 2021, https://www.freemalaysiatoday.com/category/highlight/2021/01/11/short-sellers-swarm-over-hot-stock-top-glove/ )
This discussion on Reddit certainly helped the Top Glove stock. In the week between 26th January and 2nd February, the stock price was up by almost 15%. It did fall by a smaller margin later.
Chart 2: Stock Price Chart for Top Glove Corporation Berhad (KLSE: TOPGLOV) over last one month
Source: Top Glove Share price from Google
Several such news items were flagged by EMAlpha’s proprietary algorithms and the most prominent are as follows related with new forum on Reddit called BursaBets:
- Inspired by GameStop, Malaysian retail investors look to prop up medical glove shares (28th January 2021 https://www.theedgemarkets.com/article/inspired-gamestop-malaysian-retail-investors-look-prop-medical-glove-shares )
- Asia stock markets feel ripples of ‘GameStop’ frenzy, From Malaysia to Hong Kong, retail investors have taken aim at short sellers (29th January 2021, https://asia.nikkei.com/Business/Markets/Asia-stock-markets-feel-ripples-of-GameStop-frenzy )
- Why short squeeze on Top Glove isn’t as easy to achieve as with GameStop (30th January 2021, https://www.theedgemarkets.com/article/why-short-squeeze-top-glove-isnt-easy-gamestop )
- Rubber glove counters post gains as retail frenzy continues (2nd February 2021, https://www.theedgemarkets.com/article/rubber-glove-counters-post-gains-retail-frenzy-continues )
Other Interesting Developments
Some of the other relevant issues which can be highlighted on the basis of the news that EMAlpha AI has picked up are as follows:
- Has the company learnt its lesson and will it be more proactive in handling such issues in the future? For example, the following news flow: Top Glove Screens Malaysia Workers After Positive Test Results (17th January 2021, https://www.bloomberg.com/news/articles/2021-01-17/top-glove-screens-malaysia-workers-after-positive-test-results )
- Is the management negative on future stock price performance prospects? More importantly, are the Chairman and MD on the same page in regards to this. For instance, the news flow: Top Glove MD trims stake in group while chairman acquires more shares (5th Feb 2020, https://www.theedgemarkets.com/article/top-glove-md-trims-stake-group-while-chairman-acquires-more-shares )
How EMAlpha’s analysis of Unstructured data can help Investors
These developments and the saga that has unfolded over the last three months in the Top Glove stock has several interesting components:
- Can the local news flow collection pick up issues like the condition of workers, earlier than the English media?
- Considering how vocal Blackrock has been on Sustainability and ESG issues, was it not entirely expected that they would vote against the official resolutions in the Annual General Meeting?
- Can regular analysis of social media (such as Reddit feed) be used as an input before taking an investment decision? If yes, then how to do it in the most efficient manner?
It is here that EMAlpha’s analysis of unstructured data becomes a much-needed tool for investors. The following are four major components wherein EMAlpha can aid investors.
- The local language along with English news analysis can be tracked for the companies experiencing ESG related issues. Considering the sensitivities involved, especially when institutional investors have invested in the stock, these issues could escalate quickly, thus impacting the stock price performance.
- The unstructured data analysis in other geographies can also be used to assess the potential impact on some of the larger companies. Case in point being Top Gloves from Malaysia which is very similar to Dipped Products of Sri Lanka, in terms of the opportunity that was created because of the Covid-19 pandemic.
- Predicting the behaviour of large institutional investors on the basis of their public position on certain issues can help forecast the stock price impact. This is one of the key features of EMAlpha product as it combines technology with domain expertise.
- The social media analysis provided by EMAlpha is useful in picking up the signals when the views change for retail investors as compared to the stand of institutional investors.
EMAlpha Products and Services
In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.
Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.
There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.
Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.
EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.
With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.
At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.
EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.
We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should see ‘E’, ‘S’ and ‘G’ separately and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.
EM Alpha LLC
For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at [email protected].
EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.
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