Riverstone Holdings - 2Q21 Strong Results But There Are Headwinds for Healthcare Gloves

Date: 10/08/2021

Source  :  UOB KayHian
Stock  :  Riverstone       Price Target  :  1.32      |      Price Call  :  HOLD
        Last Price  :  0.905      |      Upside/Downside  :  +0.415 (45.86%)

  • Riverstone's 2Q21 net profit of RM517m (+469% y-o-y/-1% q-o-q) beat our estimate by around 30%, due to higher-than-expected ASP and net margin. However, ASP for healthcare gloves declined significantly from July onwards due to demand and imbalances.
  • Although Riverstone's cleanroom gloves should continue to enjoy healthy ASP, earnings should decline significantly. We reduce our 2021 and 2022 earnings forecasts by 10% and 25% respectively.
  • Downgrade Riverstone to HOLD with a lower target price of S$1.32.

Riverstone's 2q21 Results

  • Strong beat in 2Q21 results as ASP remained favourable. Riverstone (SGX:AP4) reported robust 2Q21 results as both revenue and net profit surged on higher ASPs and overwhelming demand. 2Q21 revenue and net profit soared 184% y-o-y and 469% y-o-y respectively, 1H21 net profit formed 66% of our 2021 forecasts. Gross profit rose by 426% y-o-y as ASPs have risen sharply due to overwhelming demand. ASP for healthcare gloves increased by around 10-20% to US$105/’000pc, while cleanroom gloves’ ASP remained stable at US$130/’000pc.
  • Challenging outlook for healthcare gloves in 2H21. ASP for healthcare gloves is expected to decline US$10/’000pc every month from July to September due to reduced demand from buyers as well as more supply coming into the market especially from China. Overall, we expect ASP for healthcare gloves to decline to around US$60/’000pc in 2H21. For 2021, we expect the ASP to increase by around 83% y-o-y before declining by 40% y-o-y in 2022. On the other hand, we expect ASP for cleanroom gloves to increase approximately 41% y-o-y in 2021 before dropping 5% y-o-y in 2022. We expect 2H21 and 2022 earnings to decline by 64% h-o-h and 56% y-o-y.
  • Riverstone’s cleanroom gloves stand a chance of maintaining a favourable ASP beyond the pandemic, given its unique selling points which include:
    1. high barrier of entry given the technological know-how, especially the low electrostatic discharge (ESD) requirement for the high-end cleanroom gloves;
    2. niche market that is too small for competitors to enter; and
    3. cleanroom gloves make up a small % of overall production cost for end-users.

Stock Impact

  • Riverstone has already set its sights 7 on the way. New capacity of 1.5b pcs from phase 6 expansion was fully commissioned in Dec 20, expanding total capacity to 10.5b pcs/year. Management has also guided that plans for phase 7 are being ramped up, with two double lines set to be commissioned in Sept 21 and one double line every month until Feb 22. This will bring total capacity to 12b pieces by 1Q22.

Earnings Revision / Risk

  • We reduce our 2021/22/23 earnings forecasts for Riverstone by 10%/25%/12% respectively, especially from China.

Valuation / Recommendation

  • Downgrade Riverstone to HOLD after 9.6x 2022F P/E. We based our valuation at -1 standard deviation of Riverstone’s long-term forward P/E.
  • The supernormal earnings from the current upcycle is normalising in 2H21.

Share Price Catalyst

  • Multiple waves of COVID-19 infections.
  • Better-than-expected ASP hike and operating leverage.

Source: UOB Kay Hian Research - 10 Aug 2021

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Riverstone 0.905 +0.01 (1.12%) 1,575,400 

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