• Riverstone's orderbook full till next year, thanks to COVID-19.
• Expect ASP increase of 45% y-o-y for healthcare and 10% for cleanroom in FY20F; flat in FY21F.
• Higher margins, as the ASP hikes more than offset the slight increase in costs.
• Maintain BUY on Riverstone with higher Target Price of S$3.90.

Strong Demand + Tight Supply = Higher ASP and Margins

Orderbook full till next year, thanks to COVID-19.

• The number of COVID-19 cases has escalated in recent weeks, as the world gradually emerges from lockdowns. The surge in the number of cases has led to some countries implementing a second round of shutdowns. A second wave of COVID-19 infections could see glove demand sustained at high levels.
• Riverstone (SGX:AP4)’s business is thriving. Its ASP and margins have sky-rocketed to new territory amidst this pandemic outbreak. The group is running at full capacity of 95% utilisation currently. Its orderbook is fully locked in till June 2021.

Capacity expansion plans.

• The Phase 6 expansion plan to increase production capacity by 1.4bn (+15.6%) to 10.4bn pieces of gloves per annum is expected to be completed by November 2020.
• Moving beyond Phase 6, plans are already underway following the group’s acquisition of a 3.8-acre land bank in Taiping where Riverstone intends to construct a new plant. This should expand its capacity to close to 12bn gloves per annum by end-2021.

Continued Surge in ASP

• ASP has been on a rising trend since around May 2020, due to the strong demand and tight supply. The quantum of increase varies among the different players in the industry, and also among customers.
• Based on our channel checks, the Riverstone’s ASP has increased by about 10-20% m-o-m since May 2020 for its Class 1 customers, comprising mainly regulars. For Class 2 customers, which include new customers, e.g. the hospitals, the increase ranges from 20-40% per month. Meanwhile, Class 3 customers are charged based on spot prices, which could see > 50% increase in ASP.
• Class 1 customers account for 45% of total sales volume, Class 2 make up 40%, while the balance of 15% is from Class 3.

Expect further volatility in ASP.

• The ASP is still very volatile, changing every few weeks, especially for spot prices. We continue to expect the ASP to rise further, at least till September. Beyond that, ASP could stabilise, and the rate of increase is expected to plateau.

2H20 to Fully Reflect the Increase in ASP and Margins

• We expect 2H20 results to be much stronger than 1H20 as the full impact of the ASP increase and margin improvement are fully reflected. Beyond 2020, ASP could still remain high at least in 1H21 as orderbook is full till June 2021.
• Depending on the current pandemic situation, ASP could gradually normalise in 2022.

Higher margins, as the increase in ASP more than offset the slight increase in costs.

• On the back of the strong demand, there is a shortage of nitrile latex which has led to 5% price increase in July as compared to June, though the prices of butadiene, which is the key raw material, remain relatively stable. Labour costs are also higher, up about 10% per annum.

ASP increase of 45% for healthcare and 10% for cleanroom in FY20F; flat in FY21F.

• For the ASPs, we project an overall increase of 45% from FY19 for the healthcare segment, and 10% increase for the cleanroom gloves as the prices are locked in for about six months, vs a cost-plus model for the healthcare gloves. We expect prices to remain firm in FY21F.
• Overall, margins for FY20F and FY21F are projected to be much higher than in FY19 as the increase in ASP has more than offset the higher raw material and labour costs. Overall, we project a gross margin of 35% for both FY20F and FY21F, up from our previous estimate of 27.5%.

Raised Riverstone's FY20F/FY21F Earnings by 46%/48%

• As such, earnings for FY20F and FY21F are raised by 46% and 48% respectively. On the back of the higher earnings, our Target Price for Riverstone is revised up to S$3.90 (previously S$3.09), or PE of 24x, which is pegged to +2SD of its 5-year mean forward PE. We have switched our valuation methodology from relative valuation to peers, in order to be consistent with our valuation methodology for the rest of the glove manufacturers.
• At the current level, Riverstone is trading at 40% discount to peers. Riverstone Share Price has surged 50% since our last update in early June - Riverstone Holdings - DBS Research 2020-06-03: Positive Operating Environment Leading To Higher ASP & Margins.
• Maintain BUY.

Demand Expected to be Strong Post COVID-19

• In the longer term, post the pandemic, we expect the demand for healthcare gloves to remain strong, as hygiene will still be a keen concern going forward.
• For the cleanroom segment, new technologies like 5G, Artificial Intelligence, and Internet of Things should continue to drive demand for cleanroom gloves.

Source: DBS Research - 15 Jul 2020