• A leading global supplier of high-tech nitrile cleanroom gloves, Riverstone has a dominant share of the hard disk drive market. It also manufactures customised nitrile healthcare gloves. With consistent capacity expansion, Riverstone is set to benefit from favourable industry tailwinds from the COVID-19 pandemic and growing middle-income affluence.
• Given its attractive 48% discount to its peers’ FY20 PE, we initiate coverage on Riverstone with BUY.

Riverstone - Malaysian Glove Manufacturer Specialising in Cleanroom & Healthcare Gloves

• Riverstone Holdings (SGX:AP4) was listed on the Mainboard of the Singapore Stock Exchange in 2006.
• Riverstone was set up in the late-1980s as a sole proprietorship, T S Enterprise (TS), in Selangor, Malaysia. The company provided glove chlorination, laundry and packaging services to glove manufacturers in Malaysia. In 1991, Mr Wong Teek Son and Mr Lee Wai Keong established Riverstone Resources Sdn Bhd, taking over the business of TS and focusing on the manufacture of natural rubber cleanroom and nitrile cleanroom gloves.
• With the establishment of its 120m-capacity manufacturing facility in 1994, management believes Riverstone became the first nitrile cleanroom glove manufacturer in Asia, supported by a fully-integrated production process. The business expanded to the production of other cleanroom consumables. Its long-standing customers include Western Digital, Seagate and Hitachi.
• Over the past two decades, management has consistently expanded its production capacity via new production lines and facilities. Currently, manufacturing capacity stands at 10.4b/year. To date, it has five manufacturing facilities in Malaysia, Thailand and China and an established network of sales offices and strategic partners in Asia, the Americas and Europe. Within the cleanroom gloves space, Riverstone competes mainly with Ansell and Kimberly Clark.
• The group began manufacturing healthcare gloves in 2009, diversifying its revenue from the cyclical electronics industry. As an original equipment manufacturer (OEM), Riverstone supplies its healthcare gloves mainly to distributors in Southeast Asia, Europe and the US. These distributors market its products under different brands. However, manufacturing priority will still be given to its higher-margin cleanroom gloves. Riverstone’s production lines can be used interchangeably for cleanroom and healthcare gloves, with just 1-3 days of downtime required for the switch.
• For Riverstone’s corporate milestones, see appendix in attached PDF report.

Global Leader in Nitrile Cleanroom Glove Market…

• Riverstone specialises in the production of nitrile cleanroom gloves, capturing a 60% share of the hard disk drive market. Other users of cleanroom gloves include high-tech electronics manufacturing, medical devices manufacturing, semiconductors and pharmaceuticals.
• As the production of cleanroom gloves requires high levels of technical capabilities and research, Riverstone’s nitrile cleanroom gloves command ASPs that are 2.5-3.0x higher than that of nitrile healthcare gloves. Thus, Riverstone’s EBITDA and net margins of 20.8% and 13.2% are consistently among the top 2 among the top 3 glove manufacturers (Top Glove Corporation, Hartalega and Kossan Rubber Industries).
• Customers tend to stick to a sole supplier due to the sensitive nature of their manufacturing process, creating higher barriers of entry for competitors who seek to enter the cleanroom gloves market. According to management, Riverstone’s cleanroom segment has been growing at 15-20% per annum, due to strong demand growth from countries such as Japan, the Philippines, the US and Vietnam. No one customer accounts for more than 10% of its capacity, minimising concentration risks.
• With Riverstone’s proven track record in cleanroom glove production, we believe this trend will continue as more customers from various industries turn to Riverstone for its expertise in high-margin cleanroom gloves.

…set Apart From Top Healthcare Gloves Manufacturers…

• Aside from producing high-end cleanroom gloves, Riverstone diversified into customised healthcare gloves in 2009. Riverstone’s nitrile healthcare glove production capacity pales in comparison with that of the top 3 manufacturers. However, the company’s smaller size allows it to specialise in customised healthcare gloves that command higher ASPs.
• As the top 3 companies cannot cater to small specific orders, Riverstone is targeting a niche segment of the healthcare gloves industry, differentiating itself from the top 3. Backed by its strong reputation, Riverstone is expected to experience strong growth for its nitrile healthcare gloves segment.

…with COVID-19 Pandemic Boosting Its Nitrile Healthcare Gloves Sales

• With the ongoing COVID-19 pandemic, global demand for healthcare supplies has increased sharply. Medical gloves, essential for treating the infectious disease, have seen a surge in global demand. Several countries have begun stockpiling healthcare gloves in a bid to combat the pandemic.
• Malaysian glove makers, who are among the largest global healthcare glove suppliers, have seen more orders from new and existing customers for nitrile healthcare gloves. According to management, Riverstone has seen demand for its nitrile healthcare gloves increase by roughly 20% in 2020, with lead times increasing from 1-2 months to 3-4 months.
• With the ongoing pandemic as well as additional capacity from its phase 6 expansion coming on stream in 2020, Riverstone’s nitrile healthcare segment is expected to see a stellar year as worldwide demand for healthcare gloves outpaces global supply.

Capacity Expansion to Drive Revenue and Profits

• Riverstone has set in place phase 6 of its expansion plans, boosting production capacity to a total of 10.4b pieces/year by 1H20. Current utilisation rates stand at 90-92%. Additionally, management has already purchased land for phase 7 and 8 of its expansion plans. Phase 7 and 8 are expected to commence in 2020 and 2021 respectively, adding 1.4b pieces/year each time and increasing total capacity by 46.7% in 2022.
• In view of the higher capacity coupled with favourable tailwinds from the COVID-19 pandemic, we reckon that the commissioning of these new production lines would improve Riverstone’s top and bottom lines.

Changing Demographic and Macroeconomic Trends to Lift Nitrile Healthcare Gloves Demand

• Industry trends have created strong and resilient demand for nitrile healthcare gloves. Ageing populations, rising middle-income affluence and greater health awareness have contributed strongly to this increase. Developing countries such as China and India have low glove usage per capita ratios, implying a huge potential in these countries.
• As Southeast Asia contributes almost a third of Riverstone’s revenue, the company stands to benefit from the rising living standards of these highly-populated developing countries.

Initiate Coverage With BUY

• Initiate coverage with BUY and PE-based target price of S$1.46, pegged at 22x 2020F PE, pegged to a 38% discount to the sector’s 35.2x 2020F PE, based on Riverstone’s 5- year average historical PE discount to the sector’s (Top 3 glovemakers) 5-year average PE.
• Riverstone is currently trading at 18.2x 2020F PE, way below the sector’s 35.2x.
• In our view, our valuation is justified as Riverstone commands higher EBITDA margins, ROE and dividend yield than most of its peers (excluding Hartalega). We believe the valuation gap is primarily due to its listing outside of its home market of Malaysia. Malaysia-listed glove makers are more closely tracked and better understood due to their combined market size and clout.
• The commissioning of Riverstone’s new production lines, strong expected growth from the cleanroom segment and favourable industry tailwinds would help ramp up earnings. This, along with Riverstone’s strong balance sheet, would enable Riverstone to outperform from 2020 and narrow the PE valuation gap.

Source: UOB Kay Hian Research - 7 May 2020