US Import Ban Shatters Top Glove Bubble

Top Glove seemed to end a strong but tumultuous year when the world’s largest rubber glove maker was named Asia’s Top Employer by a magazine for the fifth year in March.

Shares of the Malaysian personal protective equipment maker have jumped more than 500% since reports of a new coronavirus emerged in China a year earlier.

However, the share price was affected by the vaccine approval in late 2020. Then, the day after the award in March, US Customs and Border Protection ordered the seizure Top Glove products upon arrival at U.S. ports over allegations the company used forced labor.

The US accusations have shone the fortunes of one of the largest companies in the world to benefit from the pandemic. The company’s rise was so rapid in the early days of Covid-19, that Lim Wee Chai, founder and chairman of Top Glove, saw his fortune nearly triple in the 12 months leading up to April to $ 3.5 billion, according to Forbes, making him the eighth richest person in Malaysia.

Today, aside from the US seizure order, the company’s prospects are clouded by the rapid deployment of vaccines in developed markets, potentially reducing demand for Top Glove’s products and increasing competition from Chinese producers at low prices.

Last week, Top Glove reported a 22% drop in quarterly revenue to RM 4.16 billion ($ 1.01 billion), although it was still up 147% year on year . The company attributed the decline in third-quarter profits to higher latex prices and a 16% drop in the average selling price of gloves.

“At every peak there will always be a correction,” Top Glove chief executive Lee Kim Meow told the Financial Times.

The company also said the drop in revenue in the third quarter was a result of the US ban. Sales volumes in North America – Top Glove’s largest market that pays the highest prices for its gloves – fell 68 percent in the third quarter.

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

Lim Wee Chai,

Lim Wee Chai, founder and chairman of Top Glove, saw his fortune nearly triple in the 12 months leading up to April to $ 3.5 billion as the coronavirus increased demand for rubber gloves © Kiyoshi Ota / Bloomberg

The US ordinance, which has exposed allegations of forced labor linked to the Malaysian glove industry for years, also delayed the company’s proposal to hold a $ 1 billion listing for “a few more months”. dollars in Hong Kong, ”Top Glove’s Lim said on earnings call.

The company had responded to customs and border protection concerns and was “just” waiting for the agency to verify Top Glove’s payment and remediation practices, he said. The US agency told the Financial Times it was in talks with Top Glove, adding that these types of orders were only lifted when it was proven that forced labor was no longer being used.

US import ban came after Top Glove employee died of Covid-19 Last year, an epidemic spread through factories and dormitories of the company’s workers, which Malaysian authorities at the time described as overcrowded, uncomfortable and lacking adequate ventilation. The epidemic has since been contained.

Top Glove, which houses nearly 12,000 foreign workers in Malaysia, said it was investing RM200 million in additional dormitories for 14,200 employees. Conditions in his homes now meet or exceed the requirements of a new Malaysian workers’ housing law that came into effect last year, he said.

Norges Bank Investment Management, which oversees Norway’s $ 1.3 billion oil fund, voted in January against electing multiple directors at Top Glove’s annual meeting. The fund, which owns a 0.89% stake in Top Glove worth $ 109 million, declined to comment.

Bar chart of sales volume by geographic area (%) showing that the U.S. customs ban is reducing sales of Top Glove in North America

Asked about the vote, Lee said institutional investors “probably weren’t that comfortable” with “what happened last year,” adding that the company is working to improve the engagement with shareholders.

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

“Even if [Top Glove] guided by the fact that they have rectified all indicators by the International Labor Organization, we expect the ban to be lifted only by the end of 2021, ”said Ng of Affin Hwang Capital .

Patrick Stokvis, vice president of research firm Third Bridge, said in a report that the review of Top Glove’s labor practices “will continue to drive up costs for Malaysian rubber glove manufacturers.” This would potentially erode their cost advantages over Chinese competitors.

Top Glove’s Lee, however, predicted that demand for his products would remain strong as countries stockpile gloves in anticipation of future health crises.

Supramaniam Shanmugam, president of the Malaysian Association of Rubber Glove Manufacturers, said glove consumption would not stop because of the vaccines. The pandemic, like the Sars outbreak in 2003, would stimulate longer-term demand for protective equipment, he added.

The association estimated that global demand in 2021 would increase by 18-27% to 420 billion gloves, with Malaysia producing around two-thirds.

While Top Glove appeared to have responded to the forced labor allegations, analysts believe the U.S. ban should be lifted to allay investor concerns.

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

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