• Price hike momentum remains strong in 4Q20 amid the worsening pandemic crisis and higher raw material prices. Riverstone targets healthcare/cleanroom segment ASPs to grow by 40%/30% q-o-q respectively, and thinks that prices can continue to trend higher in 1Q21F.
• We expect GPM to further expand in 4Q20, as selling prices are rising at a faster pace compared to cost increases. With higher sales volume (as new production lines start commissioning) and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM275m (+54% q-o-q, +760% y-o-y) in 4Q20. On the back of higher ASPs, we lift our FY20-22F EPS forecasts by 39%-112%.

Healthcare segment outlook

• With the resurgence of COVID-19 cases in several countries, there remains an urgent need for gloves. Customers are willing to pay a premium to secure a steady supply of gloves. We understand that Riverstone has been able to raise prices by 15% monthly in 4Q20 on the back of the global glove shortage and rising raw material costs.
• We estimate that healthcare glove ASPs could reach US$70 per thousand pieces by end-Dec 2020. Management thinks that selling prices can continue to grow in 1Q21, and stay high through 2021 as glove demand remains strong.

Cleanroom segment outlook

• Riverstone has seen strong orders in the cleanroom segment, and 3Q sales volume grew by 30% y-o-y. This was attributable to
  1. increased usage from existing customers (due to strong performance in the semiconductor/tech industries), and
  2. customer wins as other cleanroom suppliers/distributors choose to focus on the healthcare industry.
• Currently, Riverstone’s cleanroom processing facilities are running at close to full capacity. As the cleanroom segment has stronger customer stickiness (Riverstone can provide customised offerings to tailor to individual customer needs) and typically commands higher ASP and GPM, management plans to emphasise sustainable growth in this segment.
• Riverstone will further grow its cleanroom processing capacity, and targets sales volume mix for the cleanroom segment to reach 20% by 1Q21F (3Q20: 15%).
• Cleanroom glove selling prices have also been on the rise. We estimate ASPs to grow by 30% q-o-q in 4Q20F, reaching US$90 per thousand pieces by end-Dec 2020.

Rising raw material costs not a major concern

• Due to supply shortages, we understand that raw material prices have been rising in recent months. According to the management, nitrile butadiene (NBR) prices have seen 20-25% increase monthly in Oct and Nov.
• As some of Riverstone’s key suppliers are currently carrying out periodic maintenance works, management believes NBR could be in short supply till Apr 2021.
• We understand that Riverstone’s new capacity addition this year (Phase 6) are currently producing latex gloves. Although the latex gloves are typically priced at a discount to nitrile gloves, Riverstone was able to sell the gloves at a premium, reinforcing our view that customers are willing to pay a premium to secure capacity.
• Despite the rising costs, we continue to see margin expansion in 4Q20 as we believe the ASP hikes will be more than sufficient to offset the higher raw material prices. With higher sales volume (as new production lines start commissioning) and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM275m (+54% q-o-q, +760% y-o-y) in 4Q20.
• On the back of higher ASPs, we lift our Riverstone's FY20-22F EPS forecasts by 39%-112%.