The U.S. ban bans the Top Glove bubble

Top Glove seemed to end a strong or tumultuous twelve months when the world’s largest rubber glove maker was named the best Asian businessman by a magazine for a fifth year in March.

Shares in the Malaysian manufacturer of personal protective equipment had risen more than 500 percent since reports of new coronaviruses emerged in China a year earlier.

However, the stock price was affected by the approval of vaccines in late 2020. Then, the day after the award, in March, the U.S. Customs and Border Protection ordered confiscation of Top Glove products upon arrival in U.S. ports over allegations that the company used forced labor.

U.S. accusations have wiped out the fortune of one of the world’s largest corporate beneficiaries of the pandemic. So fast was the company’s rise in the early days of the Covid-19, that Lim Wee Chai, Founder and president of Top Glove, saw his fortune nearly tripled in the twelve months to April to $ 3.5 billion, according to Forbes, making him the eighth richest person in Malaysia.

Today, in addition to the U.S. confiscation order, the company’s prospects are clouded by the rapid deployment of vaccines in developed markets, which may reduce demand for Top Glove products and increase competition from low-yielding Chinese producers. cost.

Top Glove last week saw a 22% quarter-on-quarter drop in sales revenue to $ 4.146 billion ($ 1.01 million), although it was still up 147% year-over-year. The company attributed its weaker third-quarter earnings to a rise in latex prices and a 16% drop in the average selling price of gloves.

“Of all the summits there will always be a correction,” Top Glove managing director Lee Kim Meow told the Financial Times.

The company also said the drop in revenue in the third quarter stemmed from the U.S. ban. Sales volumes in North America, the largest Top Glove market that pays the highest prices for gloves, fell 68% in the third quarter.

The group likely had to lower its prices to attract buyers in new markets, said Ng Chi Hoong, an analyst at Affin Hwang Capital in Malaysia. Top Glove “was forced to look for new avenues to make up for the gap left by the US market.”

The U.S. order, which highlighted allegations of forced labor related to Malaysia’s glove industry for years, also delayed the company’s proposal to maintain a $ 1 billion “Hong Kong” quote for a few more months. “said Top Glove’s Lim earnings call.

The company had addressed Customs and Border Protection issues and “just expected” the agency to check Top Glove’s payment and repair practices, he said. The US agency told the Financial Times that it was in talks with Top Glove, adding that such orders were only lifted when there was evidence that forced labor was no longer used.

The ban on imports to the United States came after a Top Glove employee died of Covid-19 last year, as an outbreak it spread to the company’s factories and workers ’dormitories, which Malaysian authorities described at the time as crowded, uncomfortable and lacking adequate ventilation. The outbreak has been contained ever since.

Top Glove, which houses about 12,000 foreign workers in Malaysia, said it was investing RMB 200 million in additional dormitories for 14,200 employees. The conditions of their hostels now meet or exceed the requirements of a new Malaysian law on housing for workers that came into force last year, he said.

Norges Bank Investment Management, which oversees Norway’s $ 1.3 million oil fund, voted in January against the election of several directors at its annual Top Glove meeting. The fund, which has a $ 0.89% stake in Top Glove worth $ 109 million, declined to comment.

When asked about the vote, Lee said institutional investors were “probably not so comfortable” with “what happened last year,” adding that the company is working to improve shareholder engagement.

Top Glove’s Lim said the U.S. ban was “temporary,” but analysts don’t see it lifting until the end of the year.

“Even though [Top Glove] guided by the correction of all indicators by the International Labor Organization, we only expect the ban to be lifted by the end of 2021, ”said Affin Hwang Capital’s Ng.

Patrick Stokvis, vice president of research firm Third Bridge, said in a report that the examination of Top Glove’s work practices “will continue to increase costs among Malaysian rubber glove manufacturers”. This would potentially erode its cost advantages over Chinese competitors.

Lee of Top Glove, however, predicted that demand for its products would remain strong as countries stocked gloves in anticipation of future health crises.

Supramaniam Shanmugam, president of the Association of Rubber Glove Manufacturers of Malaysia, stated that the consumption of gloves would not be reduced as a result of vaccines. The pandemic, like the 2003 Sars outbreak, would stimulate long-term demand for protective equipment, he added.

The association estimated that global demand in 2021 would increase by 18-27% to 420 million gloves, and Malaysia will produce about two-thirds.

While Top Glove appeared to have addressed the allegations of forced labor, analysts said, the U.S. ban needed to be lifted to allay investor concerns.

“What we’ve done in the past isn’t good enough,” Lee of Top Glove admitted.