We attended a webinar by Top Glove on 16 July 20 to update investors on the detention order issued by the US Customs and Border Protection (CBP) on its goods:

1. Event: The U.S. Customs and Border Protection (“CBP”) has placed a detention order on disposable gloves manufactured by two of the Company’s subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd on 15 July 2020.
2. Why the detention? Related to foreign labour issues and likely due to retrospective payment of recruitment fees by our workers to agents prior to January 2019, without our knowledge.
3. Background: In the past 20 years, agents that arrange the interviews, logistics and other processes for foreign workers were paid recruitment/agent fees by the foreign worker. Since January 2019, Top Glove has implemented zero recruitment fee policy. Top Glove was looking to reimburse their foreign workers for agency fees paid before January 2019. The estimated compensation is between RM20mn to RM50mn. Another separate issue is the detention of passports which Top Glove has not done so for the past two years.
4. Impact from detention: The US accounts for 25% of Top Glove total sales. The two subsidiaries that were hit by the detention orders account for 12.5% of total sales. Top Glove will still ship to the US but the gloves will be parked at the warehouse in the free trade zone. It is unclear if the other two subsidiaries that supply to the U.S will be similarly impacted.
5. WRP: Another similar incident was on 1 October 2019, where CBP issued WRP Asia Pacific a withhold release order. The issue was the non-payment of two months of wages. It took six months for WRP to resolve it.
6. Alternative: Demand for gloves is now stronger than supply. Top Glove can ship the gloves elsewhere such as Canada, Latin America, Middle East, etc.
7. Engage the CBP: Top Glove has an office in the US to engage the CBP. And will use the consultant that advised WRP to help remove the detention order.

Comment

We do not have coverage on Top Glove. The following are just our views based on the above webinar that we attended.

We do not think this detention order will material impact Top Glove earnings:

1. Top Glove aims to resolve the issue within 2 weeks.
2. Demand remains vibrant and disrupted supply can be re-channel to order countries.
3. Even if the disruption is one month, the impact on sales is delayed by only 1 or 2%.
4. Top Glove has the resources and network to resolve the issue.
5. With Covid-19 cases worsening, there will be pressure from customers and even health authorities to release these gloves (as they are an essential healthcare protection gear).

# Phillip Securities Research does not have any research coverage or recommendation on SPH. The article reflects the writer own views.