Corporate Malaysia has certainly seen an upset in the form of the Covid-19 pandemic, leading some firms to reevaluate their business plans going forward.
Some have made decisions to go after businesses now considered lucrative in today’s times.
For example, many have gone into production of personal protective equipment (PPE) when supply was once deemed insufficient for healthcare workers, let alone for the general public.
PPEs remain vital in preventing transmission of infections through activities such as cleaning, waste management and healthcare related to the outbreak.
Companies have since ramped up the production of PPEs such as face masks and rubber gloves as demand continues to rise for these two hot items.
Players such as Notion VTec Bhd, SCGM Bhd, Karex Bhd, Caely Holdings Bhd and even national automotive manufacturer DRB-Hicom Bhd jumped on the PPE production bandwagon.
Meanwhile, others like MyEG Services Bhd, Ho Wah Genting Bhd and LYC Healthcare Bhd tapped into distribution of Covid-19-related products such as test kits or sanitation.
Datuk Seri Dr Adham Baba
Pandemic longer than expected
Meanwhile, the Covid-19 pandemic has now entered into the third quarter of 2020 (3Q20), which analysts observe has turned out to be more lasting than expected.
“In our last strategy note, we stated our projection that the crisis would subside sometime in May or June from which the market would recover sustainably,” the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said in its 3QCY20 investment strategy report in July.
“Our base case projection now is that Covid-19 risks in global markets will only subside substantially in early 2021 and in the near term, we expect markets to be unnerved every now and then with concerns over spikes in new second wave infections.”
“The rise in new infections in the US in late June has been quite alarming with recent readings showing north of 45,000 versus peaks of 39,000 in the first wave.
“If such high readings continue to rise, we would not be surprised if the lockdown easing reverses in the badly affected states, which would put a dent to confidence in this nascent phase of market recovery.
“Fortunately, the outlook on Covid-19 containment locally is much better as the number of new cases has continued to decline without significant evidence of a lasting second wave yet.
The race for Covid-19 vaccines
Today, firms are vying for vaccines as the once-all solution against Covid-19.
Globally, countries are hot on each other’s heels in the race to produce the first batch of its coronavirus vaccine. Russia is currently leading the pack after President Vladimir Putin announced on August 16 it is first in the world to approve a vaccine.
“The first batch of the novel coronavirus vaccine developed by the Gamaleya research institute has been produced,” the health ministry said in a statement quoted by Russian news agencies, according to AFP.
Putin said the vaccine was safe and that one of his own daughters had been inoculated, although clinical trials were not yet complete and final stage testing involving more than 2,000 people only started recently.
Putin’s announcement about the vaccine was met with caution from scientists and the World Health Organisation who said it still needs a rigorous safety review.
In the US, Moderna and Pfizer, the companies leading the US race for a coronavirus vaccine, disclosed this week they have enrolled more than half the people needed for the 30,000-person trials that represent the final phase of testing.
Malaysia ramps up efforts
Not one to be left out is Malaysia. Malaysia will adopt the World Health Organisation’s (WHO) recommendations for the country’s eventual Covid-19 vaccine rollout.
According to Health Minister Datuk Seri Dr Adham Baba in reponse to a Malay Mail query, “The vaccine will be given according to recommendations made by WHO.”
However, Dr Adham said that the government has not yet decided if it would make vaccinations – for Covid-19 or other diseases – mandatory.
“On mandatory vaccination, a special committee will be conducting a review session with stakeholders,” he said, adding that the government was now using an educational approach to vaccines.
Last week Science, Technology and Innovation minister Khairy Jamaluddin said that he would recommend to the Cabinet that Covid-19 vaccine be provided for free to all Malaysians.
“The Cabinet has not decided yet, but my recommendation is that once we have purchased the Covid-19 vaccine, they should be given to all Malaysians free of charge,” he told reporters during a press conference after the launch of the National Technology and Innovation Sandbox (NTIS).
Apart from China, Khairy reportedly said that Malaysia was also looking at other vaccine manufacturers that could produce a safe and effective vaccine fast and at a reasonable cost.
Khairy said that his ministry had been assigned by Prime Minister Tan Sri Muhyiddin Yassin to negotiate directly with the vaccine manufacturers so that Malaysia could purchase them at the best possible price.
Pharmaniaga, Duopharma frontrunners to win tenders for bottling vaccine
In line with the anticipated vaccines – projected to be available as early as 1Q21 – local pharmaceutical players are ready to play their part in getting these out to the market.
Last month, Science, Technology and Innovation Minister Khairy Jamaluddin said the government had agreed that the facilities owned by Duopharma Biotech Bhd (Duopharma) and Pharmaniaga Bhd (Pharmaniaga) be used for bottling the vaccine.
According to Bernama, Khairy had reportedly explained that the two companies were chosen as both are government-linked – Duopharma is owned by Permodalan Nasional Bhd and Pharmaniaga is owned by Boustead Holdings Bhd – and currently have unused capacity that can be directed towards this purpose.
Pharmaniaga in particular, has been in the headlines with the group’s acting managing director Mohamed Iqbal Abdul Rahman saying that the company is pumping in RM2 million to repurpose its existing small volume injectable (SVI) plant in Puchong for Covid-19 vaccine fill and finishing process.
To note, Pharmaniaga has seven plants at six sites in Malaysia and one plant in Bandung, Indonesia, out of which only one, Pharmaniaga LifeScience Sdn Bhd in Puchong, has the necessary equipment for Covid-19 fill and finish process.
Mohamed Iqbal added that the facility is good manufacturing practise (GMP) approved plant and the only SVI plant in Malaysia with European Union GMP.
“Our capacity is around 10 million doses per month on 10 doses vial,” he said.
For the outlook for this year, Mohamed Iqbal expects the company’s business to normalise in 4Q20 – such as receiving the government’s orders at pre-Covid-19 level, and private sector to continue to grow.
“We will ensure the continuity of the government’s concession, focus on niche manufacturing such as to invest in new therapeutics, and expand our digitalisation exercise.”
Overall, he foresees continuous growth for the pharmaceutical industry albeit in a more competitive environment, as the government had increased about six per cent of expenses in the healthcare sector under the previous budget.
Frontrunner for tender
Following Pharmaniaga’s briefing, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) gathered that Pharmaniaga is one of the frontrunners to win the tender.
This is due to the fact that Pharmaniaga has a well-established logistics and distribution network nationwide and large capacity of sterile and liquid plant to conduct the fill and finish process for the vaccine.
“While there is no information on the financial impact on Pharmaniaga if it were to land the tender, the volume is expected to be quite substantial,” the research arm said in its review.
“We were made to understand that at a bare minimum, the vaccine needs to prepared for 20 per cent of the Malaysian population that belongs to the vulnerable group – those aged above 60 years old and frontliners which makes up about seven million of the population.
“This translates to about 21 million doses required to be prepared as the vaccine will require dual or triple doses to complete an immunisation program.”
“Additionally, management also disclosed during the briefing that it intends to embark on producing vaccines in the coming years. The company envisages producing all the 12 vaccines that are currently listed under the National Immunisation Program in the future and currently in the midst of constructing the plant will be dedicated to the vaccine program.
“It is estimated to cost Pharmaniaga a capital expenditure (capex) of RM100 million within the next two years.”
Overall, MIDF Research has a ‘positive bias’ on Pharmaniaga given that the company remains as the few beneficiary in the current global Covid-19 pandemic crisis.
“In this regard, Pharmaniaga is well-positioned to benefit from this as it among the few industry players that have the capability to manufacture as well as; distribute medical drugs and pharmaceutical products nationwide owing to its extensive network of logistics.”
Earnings review show strengths
In MIDF Research’s view, Pharmaniaga’s 2QFY20 and 1HFY20 earnings, which came in at RM9.9 million and RM32.4 million respectively, were commendable despite it being its seasonally weakest quarter.
“We understand that 2QFY20 was challenging due to the enforcement of the movement control order (MCO) which has not only restricted sales but also increases the logistics costs during the period by +RM3.0m during the quarter.
“That said, its logistics and distribution (L&D) segment was operating at full capacity as it was deemed as an essential service whilst its manufacturing segment was operating at 50 per cent capacity during the MCO.”
As for Duopharma, after accounting for taxation, the group’s net profit for 2Q20 rose to RM14.73 million, up from RM13.92 million in 2019.
In a statement on the group’s latest financial results, group managing director Leonard Ariff Abdul Shatar confirmed that Duopharma had been informed that the contract period for the supply of pharmaceutical and/or non-pharmaceutical products to hospitals, clinics and others under the Malaysian Government have been extended for 25 months, commencing December 1, 2019 until December 31, 2021.
Also, the contract period of the Offtake Agreement Programme for the supply of human insulin formulations has been extended for one year, commencing December 2, 2019 until December 1, 2020.
“These extensions will help to stabilise a significant portion of the group’s revenue for the said period,” he said.
“This will also enable the group to mobilise our resources to intensify our foray into specialty products as one of our strategies moving forward to create a pool of niche products.
“Additional allocations have also been made to the Ministry of Health as a part of its national Covid-19 countermeasures, which further fuels an optimistic outlook since approximately 50 per cent of our sales are to the public sector.”
Ho Wah Genting researches Covid-19 patent applications
On August 6, Ho Wah Genting Bhd (HWGB) through its wholly-owned subsidiary HWGB Biotech Sdn Bhd (HWGB Biotech) unveiled that it has signed a memorandum of agreement (MoA) with US-based E-MO Biology Inc (EBI) to undertake research on Covid-19 patent applications.
In a statement, HWGB said EBI had on June 15 submitted the Initial Investigational New Drug (IND) application to the US Food and Drug Administration (FDA) to conduct phase IV clinical trials for a new indication which proposed the use of existing poliomyelitis virus vaccines (polio vaccines) for prevention of Covid-19 which is currently pending approval.
Its chief executive officer Lim Ooi Hong said the proposed collaboration is expected to contribute positively to the earnings of HWGB upon commercialisation of the vaccines.
“The proposed collaboration will see HWGB investing RM4.18 million into EBI, entitling the company to 40 per cent of the total profits from the commercialised vaccine.
“HWGB will also have exclusive rights for the production, distribution and sale of the repurposed vaccine based on the polio vaccine for use in preventing Covid-19 infections in Southeast Asian countries,” he said.
In addition, HWGB will have the right to retain all profits from the vaccines, as well as a royalty-free license together with the granting of sub-licenses for the use of the trademark and other intellectual property rights in relation to the vaccines in Southeast Asian countries.
EBI sole director and shareholder Prof Qiyi Xie said by having HWGB Biotech on board, the company would be able to penetrate Southeast Asian countries as soon as the vaccines are made available to the market.
On Friday August 28, HWGB revealed the United States Food and Drug Administration (FDA) has responded to the second communication to its joint venture by requesting EBI to provide further information on the Investigational New Drug application which proposes the use of existing poliomyelitis virus vaccines for prevention of Covid-19.
US’ Generex signs agreement with Malaysia’s Bintai Kinden
Generex Biotechnology Corporation on August 18 announced that the company has signed a memorandum of understanding with Bintai Kinden Corporation of Malaysia for the development and commercialization of the Covid-19 vaccine.
The vaccine is designed as a “Complete Vaccine” that has the potential to induce the T-Cell and antibody immune responses that can provide protective immunity with long-lasting immunologic memory against Covid-19 in a highly specific manner to ensure safety.
With this agreement, Bintai has agreed to pay Generex up-front development fees and back-end licensing payments, and will pay 100 per cent of the funding required for the commercial development of the vaccine including laboratory work, manufacturing, regulatory filings and the clinical development program for regulatory approval of the vaccine in Malaysia.
Additionally, upon approval of the Ii-Key-CoV-2 vaccine in Malaysia, Generex will earn royalties on sales of the vaccine with potential revenues of up to US$150 million.
Bintai and Generex agree that the vaccine manufacturing should serve not only as an essential element of a vaccination program for each country, but also as an economic stimulus, as many countries shift their focus to rebuild their economies following the inevitable economic shutdown as the battle of the global pandemic continues.
Generex chief executive officer Joseph Moscato in a statement said, “We are excited and proud to have Bintai as a partner to develop our Ii-Key-SARS-CoV-2 vaccine against Covid-19. Our ‘complete vaccine’ has the potential to generate both a cellular (T-Cell) and humoral (antibody) response to ensure immune system memory and long-term immunity from Covid-19.
“Our partners in Malaysia have recognised the true potential of the Ii-Key technology to activate the T-Cell response as part of any successful coronavirus vaccine that enables long-term immunity.
“Further, our proprietary vaccine development process is designed using computational vaccinology and immune system screening program to identify specific target regions of the SARS-CoV-2 spike protein that can neutralise the virus without generating the off-target effects that lead to the terrible complications of Covid-19.
“This deal also leverages Bintai’s expertise in industrial engineering and construction to provide the manufacturing capability that can produce the billions of doses of vaccine that will be necessary to immunise a global population.”
Gloves to keep growing despite strides in vaccine
The vaccines sentiment, whilst being good news, may not be good for all.
As news of vaccine clinical trials emerged in the past few weeks, Malaysia’s glove sector initially took a hit and analysts even projected that average selling prices (ASPs) of gloves will be affected by the latest developments.
This was apparent when rubber glovemakers experienced its worst declines this month.
When queried by investors on the turning point in glove demand or ASP trend due to the vaccine news, Macquarie Equities Research (MQ Research) believed demand should remain buoyant in the near term.
This is due to limited vaccine manufacturing capacity and various concerns on clinical trials.
“In addition, the first-ever published list of medical supply shortages by US FDA has reiterated MQ Research’s investment thesis that market continues experiencing severe glove shortages.
“Hence, it believes recent pullback in share prices is an opportunity to accumulate,” the research firm said.
In MQ Research’s view, the market had priced in the recent vaccine news – the approval of Russian vaccine Sputnik V, which comes after less than two months of human trials, and promising trial results of a Chinese vaccine. This had led to the market questioning glove demand and overall ASP trends going forward.
“Undoubtedly, news on vaccines will continue giving volatility on glove share prices. MQ Research, however, reiterate its view that glove demand to remain strong into the first half of 2021 (1H21).”
This was considering that the World Health Organisation (WHO) and several countries such as the US and Germany are striking a cautious note on Covid-19 vaccines; Russia vaccine manufacturer, Sistema currently only has capacity of 1.5 million doses of vaccine per year, which is not sufficient to supply worldwide; resurgence of Covid-19 in Hong Kong, Japan and South Korea, suggesting countries’ healthcare systems will continue to increase their personal protective equipment (PPE) stockpile; and the flu season will hit the US in October, which could bring a ‘double barrel’ outbreak there, and flu activity usually peaks between December and February.
Echoing this sentiment is Chua Zhu Lian, partner in charge of group strategy at Vision Group, who told BizHive that for the glove business, what matters to the fundamentals of their business is the impact of a vaccine distribution on the demand of gloves.
“After speaking to multiple glove owners, my conclusion is that the demand for gloves is here to stay due to significantly heightened hygiene awareness as a global phenomenon even in less developed countries,” he said.
“I foresee that there should be quite a low probability of the world downgrading their hygiene standards back to pre-Covid level even after the pandemic. Nevertheless, while glove consumption is still expected to remain at a higher level after a vaccine is found, growth rate should normalise back to historical trends in the longer run, tracing back to the increase in standards of living.
“In short, we now live in a world with much higher standards of hygiene, thanks to the unified battle against Covid-19.”
Chua said the next key consideration would be the impact of supply and demand as well as how the average selling prices of gloves determine the top and bottom line of glove companies.
“My take is that glove prices are unlikely to rise perpetually given that supply will naturally catch up with demand when there are “abnormal” profits to be made. This is just how the market works,” he enthused.
“I think glove makers will continue to enjoy a good harvest until supply picks up, especially from China. In my opinion, in order for glove makers to sustain their profits, it has to come with an increase in production volume as average selling prices normalise in the longer run.”
The final consideration, he said, is whether a vaccine would affect market valuations of the glove companies against their bottomline and whether investors can time the market to make profits.
“I am not an advocate of market timing – I simply believe it is impossible to accurately time the market, so my best guess is as good as yours – on whether there will be news on a vaccine this evening, tomorrow or next month,” Chua put forward.
“In the short run, market is sure to correct itself and as it is the news on vaccine has already contributed to the volatility on glove counters though I doubt there can be consistency in returns through timing the gloves counters.
“In a nutshell, I think the impact of a vaccine on the earnings of glove companies would be quite limited in the short run but the impact on its’ share price remains everyone’s wild guess.
“In the short run, market behaves like a voting machine, if you think you can predict the aggregate votes of the market on the glove counter, including the moves from the more sophisticated institutional investors, you may participate in the volatility.
“Otherwise, it is better to remain conservative and stick to investing based on the fundamentals of a company, back to the basics.”
No slowing down for glovemakers
AmInvestment Bank Bhd (AmInvestment Bank) gathered that big glove producers such as Top Glove Corporation Bhd (Top Glove), Kossan Rubber Industries Bhd (Kossan), Hartalega Holdings Bhd (Hartalega), Supermax Corporation Bhd (Supermax) and Sri Trang, have plans to increase capacity by 21 per cent in 2020E, 23 per cent in 2021F and 27 per cent in 2022F.
“We believe that higher supply of gloves from the expanded capacity will more than offset the increase in demand,” the research firm said.
“Moreover, we think that recent strides in vaccines formation will affect the ASP of gloves as the urgency of glove orders would be lessened.
“We are not making any changes to our earnings forecasts as we have already assumed that a Covid-19 vaccine would be available by 2H21.”
According to AmInvestment Bank, the glove companies’ capacity expansion plans will add 126 billion pieces (54 per cent) of capacity in two years by end-2022.
“Although this bodes well in terms of ability to cater to higher volume of orders for the next one to 1.5 years, we think that a short-term supply glut will come back into play in 2022F.
“On a positive note, we expect sales volume to continue growing in 2021F as we anticipate a structural change in the way gloves are used.
“There will be a new normal where glove usage per capita will increase as hygiene measures become stricter.”
AmInvestment Bank explained that this is expected to apply not only in the healthcare sector but also across different industries like food and beverage (F&B).
The research firm noted that the glove consumption per capita in emerging markets such as India and China is low at around two to six gloves as opposed to circa 100 to 280 gloves for developed countries.
Looking ahead, AmInvestment Bank believed that at current share price levels, the valuations for glove companies under coverage (Top Glove, Kossan and Hartalega) have fully priced in the companies’ earnings outlook.
“We think that the ASP will begin to taper off in the first quarter of 2021 (1Q21) after the expected increase in ASP until end-2020, which have been priced in.
“Share prices of all of the glove companies in our coverage have exceeded their target prices.”
Top Glove released its 3Q ended May 31, 2020 (3QFY20) results, which saw the group delivering its most stellar results to date, according to its statement on June 11.
To recap, profit after tax (PAT) was equally impressive at RM350 million, increasing by 365 per cent year-on-year and 202 per cent quarter-on-quarter, which at the nine-month mark already makes up 95 per cent of FY19’s full year achievement.
On the group’s sales volume, Top Glove noted that it grew by about 25 per cent versus the corresponding period in the previous financial year, as well as the preceding quarter.
“The group’s extraordinary performance was attributed to unparalleled growth in sales volume, on the back of the global Covid-19 pandemic,” the group said in its statement.
“Monthly sales orders went up by some 180 per cent, resulting in long lead times, which went up from 40 days to around 400 days, whereby orders placed now would only be delivered over a year later.
“However, Top Glove has endeavoured to allocate capacity to as many countries as possible, to ensure its life-saving gloves reach those most in need, while also prioritising its existing customers.
“It also accommodated requests from various governments of hard-hit countries who approached the group directly to procure gloves.
“Following the marked increase in glove demand from virtually every country in the world, the group’s utilisation rate rose from a pre-Covid level of 85 per cent to above 95 per cent in 3QFY20, resulting in greater efficiency and economies of scale.
“Additional capacity which came onstream in 3QFY20 also enabled the group to meet demand growth, while upward revisions in ASPs in line with prevailing market prices were also effected.”
Hartalega also recorded exceptional results recently, with net profit for 1QFY21 coming in at RM221.06 million, up from RM94.25 million in the year-earlier period.
Meanwhile, Supermax’s 4Q20 PAT soared by 2,815.4 per cent year on year to RM408.3 million.
With this strong performance, the group achieved industry leading earnings before interest, tax, depreciation and amortisation (EBITDA), profit before tax (PBT) and PAT margins of 60.4 per cent, 55.9 per cent and 43.9 per cent, respectively in 4Q20.
“The demand for gloves as a personal protective equipment has heightened as the world fights the Covid-19 pandemic,” Supermax said.
“We are seeing the emergence of new consumers and new consumption not previously seen before prior to Covid-19.
“Currently, the group is in an oversold position. The surge in demand has resulted in a rapid rise of ASPs since March 2020.
“Governments all over the world have increased healthcare spending budgets to contain the effects of the pandemic and in preparation of a possible second or more waves.
“At this point in time, the world continues to discover of new strain of viruses and in light of these developments, the group expects demand to remain buoyant in 2021 and beyond.”
Similarly, Kossan joined its fellow glove industry players in reporting PAT of RM132.35 million for 2QFY20, up 133.39 per cent from the preceding year corresponding quarter.
“New cases continue to be high with concerns of a second wave occurring as countries around the world reopen their economies. As a result, the demand for protective gloves grew exponentially, leading to a supply-demand imbalance,” Kossan said on its outlook.
“With our selling prices for gloves quoted 45 to 60 days before delivery, the increase in prices started to be reflected in June 2020 and we will definitely see a significant quarter-on-quarter increase in average selling prices in 3Q and especially in 4QFY20.
“Premised on the above and with additional capacity of around 15 per cent to 20 per cent, management is confident of a further step-up in revenue and profit growth on a quarter-on-quarter basis in 3Q and more significantly in the 4QFY20.”