RIVERSTONE: 2H16 will be better because....

Excerpts from RHB Research report

Analyst: Jarick Seet

Riverstone’s additional 1bn expansion in capacity has already fully been taken up by existing and new customers in the healthcare space from the US and Japan. In July, two lines already started, and another in August.

The remaining three will be fully operational by November. With cleanroom segment revenue expected to grow 10% this year, we continue to favour Riverstone, as they are well-positioned and more defensive than its peers. Maintain BUY and DCF-derived SGD1.02 TP (15% upside).

Maintain BUY and SGD1.02 DCF-backed TP, implying 17x FY17F P/E. 2Q16 results were well ahead of its peers, and Riverstone is holding steady, despite stiff competition. Despite a cloudy outlook for the glove sector, we believe Riverstone is well-positioned and more defensive than its peers.

Margins should stay around this level after recent price reductions. Key risks are further weakness in the USD, higher rubber prices and increases in labour costs.

“Cost of gas has increased by 6% starting from July 2016. In addition, minimum wage has also risen, resulting in an approximately 11% increase in our labour costs. While we continue to experience uncertainty in USD/MYR fluctuation, our new capacity has all been taken up. Barring any surprises, we expect 2H2016 to be fairly stable, with gross margins maintaining at about 17%." -- Wong Teek Son, executive chairman and CEO of Riverstone. (NextInsight file photo)

 
The following are from the Q&A session with Riverstone CEO Wong Teek Son took place at the 2Q results briefing recently. (Notes by Stephanie Chong) 

Q: May I know the volume and sales breakdown for 2Q2016?

A: The volume ratio between cleanroom and healthcare gloves is 20:80 and sales ratio is 35:65.

Q: How about gross profit margins?

A: Overall gross profit margin dropped from 30% to 24.6% qoq. This was mainly due to a few factors: foreign exchange fluctuation, change in product mix and increasing competition. In 1Q2016, average USD/MYR was 4.21, while in 2Q2016 there was a 5% drop to 3.98. In addition, our product mix proportionally has more healthcare gloves than cleanroom gloves. Coupled with growing competition, these factors have been eroding gross margins, resulting in a drop from 22% in 1Q2016 to 17% in 2Q2016 (a 5 percentage point decline q-o-q).

Q: What about ASP?

A: Healthcare glove ASPs dropped about 5%. On the other hand, cleanroom glove maintained the same ASP, but growth for this segment is relatively flat yoy and qoq.

Q: What is the utilisation rate?

A: 90%

Q: Do you still see some downward pressure on healthcare glove ASPs?

A: Currently ASPs are quite stable. We experienced the most pressure in the months of March, April and May but we should expect ASPs to be quite stable from now onwards. This is because raw material prices are stable and the increase in capacity from Phase 3 will allow us to enjoy economies of scale.

Gloves being stripped off the production line at Riverstone's factory in Taiping. NextInsight file photo.

Q: What are the new segments for cleanroom gloves?

A: We started marketing aggressively to the pharmaceutical industry, especially drug manufacturers. Currently we are marketing our products through distributors. This segment is completely new for the company but presents a lot of potential.

Q: Is Phase 3 of your factory expansion on track?

A: Yes it is. We have already finished commissioning the first two lines in July and this month we begin commissioning the third line. All the new capacity has been taken up. At this moment, we are currently facing delivery issues because of over demand from our customers. After August, the remaining three lines will be commissioned progressively and expected to be completed by Nov 2016.

Q: Is the demand for healthcare gloves much stronger than cleanroom gloves?

A: Yes.

Q: Is this the same for competitors as well?

A: It is hard to compare with our peers. Currently, we are conducting market research on why we have delivery issues yet ASP is still under pressure.

Q: Where are your new market segments located?

A: In Japan and USA.

Q: Is the new capacity mostly healthcare gloves?

A: Our new capacity expansion is for healthcare gloves but our lines are interchangeable. We will always give priority to our cleanroom gloves and expect this segment to pick up in 2H2016.

Q: What is the growth rate for cleanroom gloves, and is this growth sustainable?

A: We see a 10% increase in our cleanroom glove segment. Yes this growth is sustainable going forward.

Q: What was the capacity volume for 2Q2016?

A: For both 1Q2016 and 2Q2016, capacity was about 200 million. Last year 2Q2015 was better while this year growth has been relatively flat.

Q: I understand that the US is becoming more important for Riverstone. What proportion of the new capacity is dedicated to US clients?

A: Almost 50% of our total healthcare glove segment was dedicated to US customers for 2Q2016. In 1Q2016, this proportion was not as high (consisting of less than 20%). Going forward, we see our growth coming mainly from US and Japan.

Q: Can you tell us more about the growth in Japan?

A: We have noticed growth in demand for our zinc-free gloves. The Japanese market for these gloves is growing and going forward we can expect more contribution from this segment. However Japanese distributors are different; they order gloves in small batches and not by large quantities.

Q: Any updates on Phase 4 of Riverstone’s expansion plan?

A: We have just awarded the contract to build Phase 4 factory. If everything goes smoothly, we expect the factory’s completion in July or August 2017

Q: Could you comment on your competitors’ capacity expansion plans?

A: From what is announced, it seems like they are slowing down their expansion plans.

Q: Does your plant now have a lot of automation in its processes?
A: Yes and no. The automation part lies in the stripping and packaging of the gloves. However we are unable to automate the stacking process that is required for packaging. If we can overcome this issue we can reduce labour costs further.

The Powerpoint material for the results briefing is here.