Can China Capitalize on the Global Face Mask Bonanza?

Is it smarter to buy a mask...or a mask stock?

Author: Chiu-Ti Jansen   


After a severe shortage of surgical masks and N95 respirators during its own COVID-19 crisis, China is now churning out face masks like printing money.  With the coronavirus sweeping through Europe and the United States, every Chinese person wants to sell you face masks.

By one account, more than 12,000 new Chinese mask production companies sprouted up in the wake of the global pandemic.

As work gradually resumes in China, Chinese consumer industries brace themselves for dwindling demands and cancelled orders worldwide. Face mask production has attracted the latest inflow of speculative capital. Consequently, stock markets have staged impressive "face mask rally". 

A large number of companies and capital investments drove China's mask production to reach 116 million daily by the end of February, and the  momentum continues. In Fujian Province alone, the output increased from 10 million at the end of February to 21.19 million in less than 20 days.

The math is simple: each medical mask costs 0.6-0.7 yuan to produce and the wholesale price goes for 1.6 yuan, resulting in a profit margin of 1 yuan apiece.  One production line can make nearly 40,000 yuan (about $5,634) a day. If you run five production lines, you can earn 200,000 yuan (about $28,000) and recoup your investment of 3 million yuan in about 20 days.

American Healthcare Workers Cry Out #GetMePPE

At the current "ground zero" of the COVID-19 outbreak, New York City medical professionals posted on social media desperate images of their reused N95 respirators (that is, if they are lucky to get one) and garbage bags improvised as protective garments, with a hashtag #GetMePPE (PPE standing for personal protective equipment).  

Everywhere in the U.S., front-line emergency caretakers and healthcare workers face a drastic shortage of medical supplies. In China and South Korea, doctors treating COVID-19 typically wear full-body hazmat jumpsuits and N95 masks. U.S. medical personnel, by contrast, are often left to treat highly infectious patients in standard cloth gowns and surgical masks. 

State health departments in Ohio and Minnesota are reporting that up to 20% of infected patients are healthcare professionals, a number that parallels Italy and other hard-hit regions of the world.

The situation in New York City could be considerably worse. Exacerbated by not testing symptomatic and/or potentially exposed staff, this lack of protection would suggest increased likelihood of cross-infection and medical professional casualty.

In a stark revelation about the risks American front-line medical professionals are facing, CDC's guideline titled "Strategies for Optimizing the Supply of Facemasks", issued on March 19, sounds apocalyptical: In settings where facemasks are not available, healthcare personnel might use homemade masks (e.g.,bandana, scarf) for care of patients with COVID-19 as a last resort.

In early March, the U.S. Department of Health and Human Services estimated that US health-care system would need up to 3.5 billion N95 respirators over a year to combat COVID-19.  The Strategic National Stockpile, the nation's emergency stockpile of drugs and medical supplies, held approximately 12 million N95 respirators and 30 million surgical masks, about 1% needed for medical professionals in case of a pandemic. Since then, the crisis has nearly drained the national stockpile.

Where are the "Make America Great Again" Masks?

It is amazing that while the federal agencies realized the severe shortage of medical equipment as early as in late February and early March, it did not immediately jump into action and order supplies.  The "Make America Great Again" plan touted by the Trump administration apparently did not include manufacture of basic medical protective equipment. It will take time to reestablish product lines as they were outsourced to other countries.

On March 5, Vice President Mike Pence visited surgical-mask maker 3M Co. to discuss ramping up mask production. Pence stated during a news briefing on March 19 that 3M was increasing output to 420 million masks per year and Honeywell was repurposing a factory to produce another 120 million masks per year.

But by timing and volume, these are surely not enough to plug the grotesque holes of the U.S. supply in the midst of a global shortage. And after dissuading the public from wearing face masks, the CDC is reconsidering its guideline.

As of March 28, the Czech Republic and neighboring Slovakia were the only two countries in Europe to impose mandatory mask-wearing.  The mandates have been credited for significantly slowing down the spread of the virus. In Asia where countries and regions, smarting from the SARS experience, from China, Japan, Korea, Hong Kong to Taiwan, wearing masks are part and parcel of the combat strategies against the coronavirus, especially when 25% to 50% of infected population could be asymptomatic while contagious. 

The Trump administration is therefore caught between a rock-and-hard place: How do you recommend that the general public wear masks while facing an extreme shortage in supply for medical professionals?  As the pandemic continues to worsen and toll continues to rise, Americans will surely heed the wake-up call to wear masks.

Then the question is: How to fulfill the market demands in a crunch? The Trump administration, loathe to evoke the 1950 Defense Production Act, should have compelled devastated businesses to move into mask and protective gear productions, while fulfilling the needs of medical workers and replenishing the national stockpile in real time from overseas markets.

In the interim, don't count on the expanding mask market to swing 3M's stock dramatically. According to Forbes, while the company is manufacturing coronavirus- related products, such as masks, the contribution of such products to the company's top line would likely stay below 1%

3M's stock closed on April 1 at $133.14, down 33% year-to-date, reflecting industrial companies' stocks generally moving in tandem with the broader market trend and economic growth trends.  But Forbes thinks 3M's stock would likely see at least a 15% upside after the current pandemic and economic crisis subside.

DuPont (NYSE: DD), a premiere maker of PPE (such as Tyvek protective garment) in exceedingly high demand due to the pandemic, is in spotlight as the husband of Georgia Senator Kelly Loeffler reportedly acquired as much as $415,000 of its stock in late February and early March when Loeffler had access to privileged briefings about the threat of the coronavirus.

Dupont's stock has underperformed the broader markets: based on the closing price of April 2, it lost 49% of its value year-to-date, compared with Dow Jones' 26.17% and S&P's 21.38% losses. According to Forbes' analysis, the underperformance can be attributed to fears of recession in the global economy, and the impact of the current crisis on DuPont's business. But once the current crisis concludes, DuPont will likely outperform the broader market as in the case of the 2007-08 crisis.

Lakeland Industries (NASDAQ: LAKE), a $135 million cap company specializing protective gear business, gained 36% in stock price as of April 2.  The stock reached its five-year high at $21.11 on February 28.  But analysts cautioned the sustainability of this momentum because Lakeland's stock fizzled after it rallied on past pandemics.

China Comes to the Rescue

New York governor Cuomo said it was the "cruelest irony" that China, where the pandemic began, is the leading producer of critically needed PPE. The State of New York would provide assistance and incentives to New York businesses manufacturing protective gear, face masks, medical gowns, face shields and gloves.

While the U.S. is scrambling to address the urgently needed medical equipment, it has to turn to China. A commercial aircraft carrying 80 tons of gloves, masks, gowns and other medical supplies from Shanghai landed in New York on March 29, the first of 22 scheduled flights to funnel much-needed goods to the United States by early April. The Patriots sent a team-owned 767 airplane to Shenzen to pick up more than 1.2 million N95 surgical masks for relief in Massachusetts and New York.

China is the world's largest mask producer and exporter, accounting for approximately 50% of the global annual output before the crisis. According to the Ministry of Industry and Information Technology, immediately prior to the outbreak, its maximum production capacity could reach more than 20 million pieces daily. But the production was cut due to many factory closings during the Spring Festival, and the supply was strained after the virus-induced explosive domestic demands.

China's National Development and Reform Commission announced on March 2 that the country's daily output of masks has now caught up to exceed 100 million pieces. 3M, one of the main suppliers of N95 respirators and protective gears, is subject to Chinese government's export ban, according to White House trade adviser Peter Navarro.

At long last, 3M said on April 3 that the Trump administration had used the Defense Production Act to request that the company increase the number of respirators that it imports into the United States from its overseas operations. 3M said has secured approval from China to export 10 million N95 respirators in produces in the country to the United States. 

Equally important, China is also set to benefit from the global demands for protective garments. The Ministry of Industry and Information Technology of China stated on March 4 that protective materials are also in short supply while the pandemic worsens in many regions of the world. 

According to Fortune Business Insights, the global PPE Market size is projected to reach USD 85.72 billion by 2026, growing at a CAGR of 7.3% during the period.

As the demand for medical supplies surges while other consumer clothing lines slow, many Chinese textile and apparel companies have switched to producing protective garments. From February 1 to March 5, China added a total of 826 new companies with "protective garments" in their business scope. Compared with the same period of last year, the growth rate of protective clothing companies was 2,565%.

According to the China Garment Association, due to the shifting business lines of many garment factories, the production capacity of domestic protective clothing is increasing, reaching about 975,000 pieces per day.

Mask and PPE Stock Rally

Just before the health crisis hit, Chinese institutional investors had generally reduced their exposure to mask, ventilator, and protective clothing-related concept stocks in the fourth quarter of 2019. According to Finance First's data, as of March 24 PPE A-share stocks have soared by more than 20% this year. Chinese financial institutions held a total of 43 concept stocks related to masks, respirators, and protective clothing, with a total market value of 69.9 billion yuan (about $9.9 billion).

Popular stocks in the mask and PPE sector include Shangrong Medical (002551; production of protective clothing); KraussMaffei Group (600579; a subsidiary of ChemChina with a full set of technology for the production of medical melt-blown polypropylene, 90% market share); Souyute Group (002503, R&D and production of medical masks and protective garments); Gon Technology (002768, mask melt-blown polypropylene technology); Zisun Technology (603601; N95 / N99 production line), Shandong Dawn Polymer (002838; polypropylene melt-blown material); and Nanjing Julong (300644; melt-blown polypropylene technology).  

The high-flying mask and PPE rally in China, started during China's own virus crisis, does not always stand on steady legs. KraussMaffei's stock fell to earth from its recent high at ¥9.81, resulting in a paltry of 2% year-to-date appreciation as of April 2.  At its high on March 10, Nanjing Julong staged a 43% pop from January 1, but it closed at ¥32.75 with a modest 10% YTD return.  

Jihua Group (601718), a company dominating China's military uniform market, quickly switched to production of protective gear after the epidemic. As of March 1, the company produced 140,000 medical grade protective suits, accounting for 40% of China's output.  With a foothold in Italy, Jihua is the only listed company in the A-share market selling protective garments and masks in Italy. After shooting up 36% from the beginning of the year to March 6, Jihua's stock closed on April 2 with a 15% pop year-to-date.

On the other side of the spectrum, Dawn Polymer has generated a 253% YTD return despite a recent retreat from its high on March 10. Similarly, Gon Technology took home a 48% YTD return, only slightly off the 52% appreciation that it hit on March 12. Generally the upstream material makers appear to have a longer tail in stock rally than downstream makers of masks and protective garments.

Upstream Materials: Non-Woven Fabrics

Generally the structure of a non-woven face mask consists of three parts: an outer layer made of  polypropylene spun bond non-woven fabric; polypropylene melt-blown non-woven fabric and active carbon non-woven fabric are used as a filter in the interlayer; and the inner layer is made of polypropylene spun bond non-woven fabric.

The dislocation of the mask market has also created a surge in demand for the polymer-based fabrics used in the protective coverings. Competition for polypropylene melt-blown material, reflecting the technical threshold and production process requirements, has led to the soaring price.

One ton of melt-blown cloth has soared by more than 400,000 yuan (about 56,000 US dollars), compared with only 20,000 yuan before the crisis, a 20-fold increase.

With an estimated market share of 40% for the specialty fabrics used in masks in China, shares in Shenzhen-listed Dawn Polymer soared by 417% in the six weeks following January 20, when the Chinese were alerted to the person-to-person transmission of the virus, sending the net worth of its founder Yu Xiaoning and his wife to Rmb 16.8 billion yuan (about $2.38 billion), at least on paper.

Medical grade non-woven makers such as Jiangnan High Fiber (600527), Xinlong Holdings (000955), Jihua Group (601718), Huamao (000850) and Mida (000782) have also enjoyed the ride. In addition, Sinopec (NYSE: SNP; 0386.HK; 600028.SH), one of China's leading petroleum and petrochemical companies, indicated on February 25 that it would invest in 10 melt-blown cloth production lines.

An Overheated Market with Uneven Quality

Minsheng Securities' recent research report estimates that to support a work resumption rate at 70%, based on one mask per person per day, China would need 390 million masks per day. As the domestic outbreak came under control, overseas demands could give the mask rally a second wind, 

Many industry players believe that the current demands in Europe and the United States are accelerating, and China can still export a meaningful amount after meeting its own needs.  But once the global epidemic situation improves in the next few months, the surge in production capacity could lead to a huge surplus, and many companies will face the risk of failure.

In addition, quality issues abound as Chinese companies tried to flood the global market with face masks. The Netherlands recently imported 1.3 million FFP2 masks (equivalent to the N95 specification) from China, of which 600,000 were found defective, forcing the government to urgently recall them after distributions. Reportedly these masks not only failed the FFP2 criteria, but also the less stringent FFP1 standard.

China-made masks are not the only virus-fighting products that report quality problems. Following the Czech Republic and the Philippines, the Spanish authorities also announced last week that hundreds of thousands of virus test kits from China had problems with reliability.

In response, beginning on April 1 China has banned manufacturers of coronavirus test kits and related medical supplies from exporting their products unless they also have the relevant licenses to sell their products in the domestic market and meet the importing countries' quality standards.

The COVID-19 outbreak in China coincided with the Chinese New Year. This year's "red envelope" gift messages were replete of references to masks, as the hard-to-find masks became the "reserve currency". 

In the U.S., the administration and general public have been too slow to embrace masks in fighting the disease.  But in hard-hit New York City, before the city government urged residents to wear face coverings in public, people on the street were already starting protect themselves. This could signal a change in the way Americans view wearing masks across the nation. 

So, is it smarter to buy a mask or a mask stock? Both, probably. One might save your life, and the other might save your dwindling pocketbook. 

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