Windfall Tax On Glove Stocks Explained

Cham lo! There is a lot of buzz about the possibility of windfall tax being levied on glove manufacturers. Why does this concern you as an investor? Additional taxes mean reduced profits. An open and business-friendly political climate is essential for industry to thrive. If Supermax, Top Glove, Hartalega and Kossan kena windfall tax, it’ll be bad for their stock prices.

Supernormal Profits

This is the term being bandied around by pundits and politicians alike. What does it mean? The word merely means higher than usual profits. Why is it higher than usual? The COVID-19 pandemic has resulted in an increase in glove demand (due to more sick people) in healthcare situations. Furthermore, non-medical staff are now ALSO using gloves e.g. police, front-line workers etc.

This results in manufacturers increasing the ASP (average selling price) of gloves, which in turn boosts the profit margin.

Now the government is rumored to want another slice from the cake (windfall tax), in addition to the slice they already have (corporate tax).

Is this right or wrong? Let me put the same situation in real-world terms.

Real-world Example

Makcik Kiah runs a nasi lemak stall in Jalan Bahagia. She normally sells each pack at RM1 to office workers in the area. One day, a huge China corporation opens a factory with a massive 1,000 person dormitory right across her stall. The Chinese workers all go to eat at Makcik Kiah’s stall coz rice is familiar to them and there’s no other vendors in the area. It’s very difficult to get a street food stall license from Majlis Perbandaran Bahagia (FDA).

This is not a monopoly, merely an economic moat. It takes time and expertise to research the recipes, submit for council approval and get a license. So Makcik Kiah is the only food stall on the street.

Makcik Kiah only can make 100 packets of nasi lemak per day. She can’t make more coz her rice cooker is only that size and it costs a lot of time and money to buy a new rice cooker (for example la, the rice cooker analogy = factory). So, she increases the price of each packet. Her nasi lemak is now RM10 instead of RM1.

The workers are not very happy but they still purchase from her stall coz the area is very remote. Taking a Grab out of Jalan Bahagia will cost RM50 so the RM10 is still worth it. Makcik Kiah now earns RM1,000 instead of RM100 per day. She is happy, workers are happy, everyone happy.

Suddenly, Samseng Balan turns up and kicks Makcik Kiah’s stall.

“Oi. Saya dengar you sekarang manyak untung oooo.”

Makcik Kiah says, “Tak ada la. Cari makan sahaja. Besides, I already pay you RM1 each day in protection money (corporate tax).”

“TAK BOLEH!” screams Samseng Balan in Makcik Kiah’s face. “You untung manyak so you kena bagi saya manyak juga! Saya ada manyak machai nak makan. I don’t care, you give me RM50 every day now!”

And that, boys and girls, is the story of windfall tax. Samseng Balan really does have hungry machas under him. They are legitimately poor, B40 dudes who could use the RM50 to buy food. But whether Samseng Balan would give them a portion of the protection money is a big question mark and whether they deserve a cut from Makcik Kiah’s efforts is another.

Sekian, terima kasih, financial gangsters.

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