Source: Google

What does the recent news flow imply?

One of the biggest and most important negative developments was that Top Glove Corporation was removed from three indices based on ESG factors, following the FTSE4Good Index Semi Annual Review. Top Glove has been removed from the FTSE4Good Bursa Malaysia Index, Asean 5 and Emerging Markets Index. In a media statement, Bursa Malaysia announced deletion of Top Glove from the FTSE4Good Bursa Malaysia Index.

The recent ESG related news flow has been negative for the Top Glove stock. But what deteriorated the situation further was the widespread media coverage that comprised of scathing articles in several leading global media companies, including print and electronic media.

• 18th June 2021 – Nikkei ASIA published an article, Top Glove faces ESG reckoning on forced-labor allegations: Shareholders call for action following US import ban and COVID-19 outbreak. The article highlighted that for the six months through February, net profit was up 22x on year to 5.22 bn ringgit ($ 1.27 bn) while sales went up 315% to 10.12 bn ringgit. Now, the company has to work on satisfying stakeholders in a post-pandemic world.
• 17th June 2021 – Financial Times published an article, US import ban bursts Top Glove bubble: Fortunes of Malaysian PPE maker slide after forced labour allegations and vaccine rollout.
• 15th June 2021 – EdgeMarkets published, Fund managers shy away from glove stocks even as analysts keep ‘buy’ call, highlighting that while some analysts are maintaining their “buy” call on glove stocks, fund managers have turned cautious on the sector.
• 10th June 2021 – EdgeMarkets published, Analysts cut earnings forecasts for Top Glove after imputing lower glove ASPs, highlighting that the analysts have now factored in lower average selling prices (ASPs) moving forward. The cut was steep for the year ending August 2021 but it was even more drastic for the next year.
• 9th June 2021 – Reuters published, Malaysia’s Top Glove waits for U.S. Customs to verify remedial labour action, highlighting that Top Glove which has a U.S. import ban over concerns about forced labour, is waiting for US customs authorities to verify action it has taken on workers’ recruitment fees. However, there is no clarity as to when U.S. customs would lift the ban.
• 1st June 2021 – CNBC published, Top Glove’s $1 billion Hong Kong listing delayed amid U.S. import ban problems, sources say: highlighting that Top Glove Corporation’s plan to list in Hong Kong to raise up to $1 billion has been delayed, according to Reuters’ sources. Top Glove, which is already listed in Kuala Lumpur and Singapore, had cut down the size of share sale in late April announcing that it would sell 793.5 million shares in the listing, half of what the company had proposed in its application to the Hong Kong Stock Exchange in February.
• 29th May 2021 – The Straits Times published, US probes two Malaysian glove makers over forced labour allegations: Report, highlighting that the United States is investigating Malaysian glove makers Hartalega Holdings and a unit of Supermax Corp over allegations of forced labour.
• 28th May 2021 – The EdgeMarkets published, Canada probes forced labour claims in Malaysian palm oil, glove-making industries, highlighting that Employment and Social Development Canada told Reuters in an email that its Labour Programme was “actively researching a number of forced labour allegations in different countries and sectors, including palm oil and glove manufacturing in Malaysia”.

Things would have been worse for Top Glove had it not been for the business performance which has been robust. The capacity growth continues and the financial performance has been very good. Also, there are some reports which mention that the impact on selling prices for its products will not be as severe as feared.

• 11th June 2021 – The Straits Times reported that Top Glove Q3 profit soared almost six times to $655m as it reported a net profit of RM2.04 billion (S$655 million) for the third quarter ended May 31, almost six times the amount of RM 347.9 million in the previous year. Sales revenue for the third quarter rose to RM4.16 billion, nearly 2.5 times the RM 1.69 billion for the preceding year.
• 4th June 2021 – The EdgeMarkets published, Top Glove’s annual glove production capacity hits 100 billion pieces, highlighting that Top Glove which is already the world’s largest rubber glove manufacturer by production capacity, increased its annual glove production capacity further to 100 billion pieces as of June 2021. Global demand remains resilient as glove usage continues to rise, driven by the pandemic, it added.

What does the future reckon for Top Glove?

ESG based investment theme has become very popular and the number of investment managers following ESG for their decisions on portfolio construction and rebalancing is increasing. We expect Top Glove to remain under pressure in the near term on ESG related challenges. On business fundamentals for the sector, the covid vaccination has progressed at a very good rate in many countries and the situation has also improved. Even in some of the most affected countries like the USA, the pandemic is not being seen as a big threat anymore. We think that the news flow rightly suggests that there is concern on selling prices for the sector.

In the case of Top Glove, the past fifteen months have been a tumultuous period. In the third quarter of 2020, investor sentiment improved significantly as the company started to deliver excellent operating and financial performance. It didn’t come as a surprise that August and September were the months when sentiment was at its peak. However, the negative news flow such as poor living conditions for workers which appeared in October and November hurt the stock badly. There was also backlash from Institutional Shareholders. The stock has not been able to recoup its losses so far.

Following a significant correction, there was some stability and consolidation in the stock price in the first quarter of 2021, but the overall trend has remained weak. We think that the negative perception, especially on the ESG front will take time to dissolve and hence it is unlikely, in the near term, that the stock price will reach the peak seen in the last twelve months. We don’t expect this to happen in 2021 at least. We also think that ESG issues will continue to overshadow the news on business fundamentals for Top Glove and hence, ESG news flow will remain the primary driver of stock price performance.

How EMAlpha’s analysis of Unstructured data can help Investors

Top Glove has been one of the most interesting names from stock price movement perspective over 2020 and 2021 and it has been repeatedly picked up by EMAlpha AI-ML analysis. There are important takeaways in terms of how EMAlpha’s AI-ML analysis can help investors:

• Can the local news flow collection pick up issues like the condition of workers, earlier than the English media? Considering how important the Sustainability and ESG issues have become, the local language along with English news analysis can be tracked for the companies experiencing ESG 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.
• Can regular analysis of social media (such as Reddit feed) be used as an input before taking an investment decision? EMAlpha’s analysis of unstructured data becomes a key tool for investors. 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 Glove from Malaysia which is very similar to Supermax from Malaysia and 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 trading information 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 news flow analysis provided by EMAlpha is useful in picking up the signals when the views change for institutional investors.