• We reiterate our positive view on Riverstone, as we believe the quantum of its ASP hike in 3Q20F could be higher than we previously expected.
• Riverstone will release its 2QFY20 results by early-Aug; we project a strong net profit of RM72m (+54% q-o-q, +102% y-o-y).
• FY20-22F EPS raised by 1.6-25.1%; Target Price lifted to S$3.90.

Quantum of ASP Hike Likely to be Higher Than Expected

• Based on our latest channel checks, we believe Riverstone (SGX:AP4)'s average selling prices (ASPs) could be higher than our current forecasts. We estimate that selling prices for its healthcare gloves could grow 20%/8% m-o-m in Jul/Aug. On top of that, capacity allocation for spot orders likely increased to 15% in Jul (from our previous forecast of 10%). We believe this reflects the urgent demand for gloves, as the number of daily new Covid-19 cases worldwide continues to be on an uptrend.
• We forecast Riverstone's current ASPs to hold up till 1Q21F, before a gradual normalisation of prices as more industry supply kicks in.

Gradual Commissioning of New Lines in 2H20

• After a pause in its capacity expansion in 2Q20 (due to Malaysia’s movement control order), we expect Riverstone to commission new production lines gradually starting Jul. We estimate Riverstone’s total annual production capacity will grow 8% in 2H20F to 10.6bn pcs. Additional capacity from the new lines would be sold at spot prices, in our view.

Stronger Sequential Earnings Ahead

• Going into 2Q20F, we expect Riverstone to record sequentially stronger net profit of RM72m (+54% q-o-q, +102% y-o-y). This will mainly be driven by
  1. stronger sales volume,
  2. higher ASPs, and
  3. higher margins (due to economies of scale).
• We raise our FY20-22F EPS by 1.6-25.1%, mainly to account for higher ASPs, and now expect Riverstone to achieve a record net profit of RM370m in FY20F (+184% y-o-y).

Reiterate ADD, With Higher Target Price of S$3.90

• Our Target Price for Riverstone is lifted to S$3.90, still pegged to 22.7x CY21F P/E (+2 s.d. from its 5-year mean) to reflect the current favourable operating environment for glove players.
• We continue to like Riverstone for its attractive valuations (40% discount to Malaysia-listed glove sector average CY21F P/E of 24.7x).
• Potential re-rating catalysts include better-than-expected demand for gloves and higher-than-expected increase in selling prices.
• Downside risks include earlier-than-expected availability of vaccine for Covid-19.

Source: CGS-CIMB Research - 8 Jul 2020