It is now May 2022, some 2+ years since MCO 1.0. 

At this stage, it seems that the glove mania in 2020-2021 has come to its end as I don’t find people talking about it any longer. Glove is now out of fashion in the investment community. In this light, I think it is timely to pen down my personal observations and lessons to be learnt from this episode. 

Before I do, I would like to share some key contents sent to me via email by one of my subscribers at DividendVault.com. They are as follows: 


Hi, 

I bought Top Glove and Hartalega one year ago. My average prices for them are RM 3.99 and RM 9.86 respectively. Thus, my capital losses are 50%-60% to-date based on their current stock prices of RM 1.50 and RM 4.35 a share. 

I’d read your case studies on both stocks and have discovered their P/E Ratios to be below their 10-Year Averages but their revenue declined in 2021 and 2022. In this view, my question is, ‘Should I sell them off, hold, or average down on these stocks?’ 

Regards

Miss L


To start off, I’d observed that there are 3 groups of people who bought gloves in 2020-2021. They are: 


1. People who chased spikes in glove stocks in 2020. 

2. People who bought gloves based on a discount from their peak prices. So, for example, Hartalega traded at RM 20 a share at its peak in July 2020. Then, it fell to RM 10 in early 2022, causing them to buy thinking that Hartalega was at 50% discount from its peak in July 2020. 

3. People who bought gloves based on their current P/E Ratios in 2020-2021. At that point in time, their actual P/Es were at their lowest points and below 10. In some instances, they were at below 5 in P/E Ratios. So, they believed that these stocks were hugely undervalued due to ridiculously low P/E Ratios. 


In Miss L’s case, I believe she belongs to the third group of people. 

Yes for this group, they may understand the importance of using P/E Ratio to do stock valuation. However, the unprecedented glove mania has offered investors a new challenge as to using the fine art of P/E Ratio in stock valuation. 

Here, I would use Hartalega as my case study to illustrate my points. 


2 Calculations on P/E Ratio

Miss L mentioned that she’d found Hartalega’s P/E Ratio to be below its 10-year average in my case study. 

That is true. In my case studies for gloves, I offered two sets of calculations, one that is based on its latest 12-month earnings and another that is based upon its latest pre-pandemic annual earnings (before COVID-19 earnings). 

Why did I do so? Let’s examine. 

First, from its quarterly reports, the highest 12-month earnings Hartalega made was RM 5.3 billion (Q3 2021-Q2 2022) or RM 1.55 on a per share basis (EPS). So based on Miss L’s average purchase cost of RM 9.86 a share, her lowest possible P/E Ratio was 6.36, which was indeed below its 10-Year Average. 


Calculation 1: 
Lowest Possible P/E Ratio (based on highest 12-Month EPS in 2020-2021)
= Miss L’s Average Purchase Cost / 12-Month Highest EPS in 2020-2021
= RM 9.86 / RM 1.55 
= 6.36


But with it, investors should know that this calculation is based on its 12-Month earnings of RM 5.3 billion. So when we use this figure, we are essentially basing our valuation on its ability to generate RM 5.3 billion in yearly earnings over the long-term. Thus, the question to ask is, ‘Could Hartalega do so?’ 

This brings us to Calculation 2, which is calculated alongside Calculation 1. 

Based on its annual reports, Hartalega had made RM 400+ million in earnings in the last 3 years (2018-2020). They were earnings at pre-pandemic levels which I believed to be Hartalega’s actual income-generating capability at present. So I’d decided to calculate its P/E Ratio based on its pre-COVID earnings. Therefore, in 2020, Hartalega’s EPS was 12.88 sen and thus, based on Miss L’s average cost of RM 9.86 a share, its P/E Ratio would work out to be 76.55. 


Calculation 2: 
P/E Ratio (based on EPS 2020: Pre-COVID Earnings)
= Miss L’s Average Purchase Cost / EPS 2020
= RM 9.86 / RM 0.1288
= 76.55


Which One to Use? 

Once again, we have 2 calculations of P/E Ratios: 


P/E Ratio Calculation 1: 6.36 (based on annual earnings of RM 5.3 billion) 
P/E Ratio Calculation 2: 76.55 (based on annual earnings of RM 400+ million) 


So, which of the two P/E Ratios should investors use? 

Again, this is an art form by itself. Obviously, the first calculation was optimistic. Perhaps, it was a little too much to expect for Hartalega. However for some, the second calculation was deemed to be pessimistic for they view that Hartalega is more than able to raise earnings beyond RM 400+ million per annum. 

But, the question is, ‘By how much?’ 

Is it RM 800+ million a year? Or, is it RM 1+ billion or RM 2+ billion a year? 

The figures you choose to use would determine its P/E Ratio. 

To me, any amount in between RM 400+ million – RM 5.3 billion is speculation. I wouldn’t be able to offer such figures. At best, I can only provide two P/E Ratios calculated based on its actual earnings obtained from its financial reports. Then I believed it is best to leave it all to decide on the usage of these two figures. 

As such, here is a quick lesson on P/E Ratio – 

‘Stocks are to be assessed based on their actual earnings capabilities, not based on their earnings inflated by one-off events.’ 


What Should I Do with My Hartalega? 

As an education platform, we could not offer buy-sell recommendations and do not have any intentions to do so in the future. This is because our objective and mission is to nurture investors who could build stock portfolios independently. I would even say that stock recommendations are counterproductive to what we intend to achieve, which is to make you into a better investor. 

Instead, if you are Miss L today, here are some questions to ponder on: 

First, forget about past purchases and the 50+% capital loss for a moment. Here as I write, it is important to assess Hartalega’s ability to generate income for the long-term. This is because from this, you could then revalue Hartalega based on its situation today. 


Snapshot: Hartalega March 2020 and March 2022

As I write, Hartalega’s stock price had returned to pre-pandemic levels. But, this does not mean that Hartalega before the pandemic is the same company as the company we see today. From its quarterly reports, I discovered the following:

Sources and Calculations from Q4 2020, Q3 2022 and Q4 2022 Reports


In 2020-2022, Hartalega worked to set up its Plant 6 and Plant 7. This raised the company’s glove production capacity to 63 billion presently. During that time, it had more than 10x its bank balances due to significant increase in sales, profits, and operating cash flows. 

Having billions in cash balances is a good thing. 

But, the key question is, ‘Where will it deploy them for sustainable growth?’ 

Based on its 2021 Annual Report, Hartalega revealed the following: 


1. NGC 1.5, which is a RM 1.5 billion investment to acquire 60 acres of land that is situated at Sepang, Selangor and develop 4 production plants on them. These plants would increase its glove production capacity by 19 billion pieces a year. 

2. In addition, Hartalega has committed a RM 7 billion investment to buy and to develop 16 new manufacturing facilities on 250 acres of land that are located at the Kota Perdana Special Border Economic Zone, Bukit Kayu Hitam, Kedah Darul Aman. Hartalega plans to develop them progressively over the next 20 years. 


Hence, the decision to hold or sell Hartalega should be based upon your unique views and studies on its current glove production capabilities and your interests in participating in its growth plans for the next 20 years. 

Otherwise, you have to reassess your purpose for getting into Hartalega. 

Of course, even if you are interested, it is best not to overpay. So what investors could do is to perform stock valuation (P/E Ratio) based on Hartalega’s ability to generate current / future earnings. As reiterated, this would be an art form and I’ll leave it to all of you to decide on the best metrics to value Hartalega today. 


Conclusion: Key Lessons from the Glove Mania 2020-2021

Overall, I would say that investors may be disappointed with glove stocks if they bought theirs based on what they obtain in the short run. It would be helpful to shift the focus to the long-term when investing. Of course, this glove mania had demonstrated that greed and speculation are not the most sustainable method to profit in the stock market, even though they’ll continue to exist in the future. 

For investors who overpaid for glove stocks, the lessons would include: 


1. P/E Ratio is useful, only if you base it on a stock’s actual earning capabilities. 
2. Invest in a stock, only if you are okay to hold onto it for the next 10-20 years. 
3. Never base a stock’s valuation from its peak price. 
4. Never speculate where stock prices could go in the future. 
5. Base your investment decisions on actual facts and data, not guesses.


Here, if you wish to learn more on the art of stock investing, here’s a free training you can attend:

Link: How to Build a Stock Portfolio that Pays Increasing Dividends?


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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