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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
• 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
• 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.
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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).
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.
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
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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.
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.
• 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.
Financial analysis
Top Glove released its financial results for 2QFY20 on March 19, 2020:
• 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
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
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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
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Figure 3
Malaysia Unemployment Rate
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Figure 4
Steady growth of Global Demand for Rubber Gloves
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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
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