$SGX-AP4 RIVERSTONE - Diversified, Niche & One of the Best Run Malaysian Glovemakers

Readers of my posts in Stockbit would know that Riverstone is a favourite stock. Whilst holding on to the company caused big losses in 2021 and returned a big chunk of the 2020 gains for my portfolios, the company remains fundamentally strong and should still be able to excel in the fast changing landscape of the glove industry.

Last week, some stockbitors and I were at their Taiping facilities, visited their plant 2 and new plant 3. This is my takeaway from the trip, combined along with the quarterly briefing takeaways post Q4 result in late Feb.


** Q4 2021 Briefing Notes **

1) Volume
- Quantity sold in Q4 2021 amounts to 1.83b pieces of glove. Down from 1.95b pieces of glove in Q3 2021. In terms of Q4 volume split, cleanroom comrprise to 19% of revenue while healthcare 81%. For the full year, total glove sold in 2021 was 8.3b pieces of glove, a 15% drop from 9.85b pieces of glove sold in 2020 (-15%). For 2022, management reckon that volume sold should be back to 2020 levels of around 10b pieces or more. Volume split for 2021 was 20% cleanroom / 80% medical. Q1 volume have seen improvement.

2) Utilisation
- Q4 and 2H 2021 sale slowed down as utilisation dropped to 70%. This was due to customer overstocking situation as well as some challenges such as labour shortage. Currently in Q1 2022, utilisation is up to 85% as demand situation is improving slowly back to normal. If this utilisation rate is maintained until end of the year, with capacity expansion, they will be able to produce 10-11b pieces of glove or more.
- Riverstone thinks they can achieve 85% to 90% utilisation in FY2022. This is due to Riverstone having relatively smaller scale if compared to its peers and having made automation up to 80% of their manufacturing line

3) Revenue, Gross Profit, ASP
- Revenue in Q4 Drop due to the drop in ASP for medical glove. Medical / healthcare glove ASP in Q4 for Riverstone was at USD37 per carton. In March 2022, the price is now USD25-30 with gross profit margin down to 20%. Management believe there's more room to trend durther down from USD25 but that depends on raw mat prices as well as competition from China. Management highlights that at these prices, distributors are returning and buying.
- Management did say that China are selling at USD20-21 in March but ASP at that level currently, it'll be hard to breakeven.
- Pre Covid, the lowest gross profit margin for medical glove Riverstone used to do was 17%.
- For cleanroom glove, there's not much diff in ASP and it is still trading at more than usd 110.
- Practice of ASP revision for cleanroom glove normally happen quarterly. There's room for it to trend down along with the reducing raw mat (Butadiene) cost.
** Q4 Split revenue, Gross Profit, GP Margin:
Revenue - Cleanroom 40% medical 60%.
Gross Profit - Cleanroom 62% Medical 38%
Margin - Cleanroom 57%, Medical 25%
** Full year split revenue n Gross Profit:
Revenue - cleanroom 25%, medical 75%.
Gross Profit - cleanroom 23% medical 77%.

4) Cleanroom Glove
- Riverstone is a market leader in this space especially class 10 and 100. Margin should be able to be kept at high level. Currently there's order backlog due to labour shortage
- Riverstone will try to switch more lines to cleanroom. Max capacity right now 2b – 2.5b pieces per annum, depending on class of cleanroom glove / product
- Barriers to entry is high as cleanroom glove needs 3 processes instead of 1, requires more labour, customisation on formulation, consistency in supply, etc
- In 2020 / 2021 - many cleanroom manufacturers switched their lines to take advantage of high medical glove prices. Riverstone was one which remained their cleanroom operations. This enable them to get new clients
- On main drivers of cleanroom glove going forward: they will try to get new clients; new products within the cleanroom segment; more markets within the same client i.e. TI Philipines..


** Site Visit **

A) We visited Eco Medi Glove, the healthcare division and found that almost the entire glovemaking process is automated. Only packaging part needs more manual labour.

b) We went to the foreign labor dormitory - it was impressive. The dorm was equipped with gym, canteen, first aid centre, football / futsal / basket ball / badminton court, groceries. Every house was equipped with 2 toilets and max capacity of 6-9 people. Staff are able to leave in and out of the compound freely. The best thing is - these was built n provided for years before Andy Hall and foreign labour issues lingers in the industry! Another impressive thing was - nearby there was a dormitory for local teachers, it did not look as good as Riverstone's foreign worker's dormitory! Talk about best practices and respect for foreign labour - Riverstone definitely showcase this.

c) Another thing to note is Riverstone focuses on long term relationship with suppliers and customers. Early Covid period, Riverstone didn't deal with spot buyers but continued to supply to their long term customers at fair prices. This caused their ASP to be lower than the likes of $SUPERMX / 7106 (SUPERMAX CORPORATION BERHAD) or $TOPGLOV / 7113 (TOP GLOVE CORPORATION BHD) leading to lower top and bottom line, but now that role is reversed, customers are now sticking to the company and some even let Riverstone sell at higher than market prices. This is why Riverstone is selling at higher than peer prices of medical glove.

d) Riverstone actually started with cleanroom glove first, before they diversified into medical glove. Now that medical glove dynamics are changing, they will focus on clean room glove once more. Interestingly, Riverstone from since they were listed (close to 15 years), ALWAYS received questions about the barriers to entry to cleanroom - about competition coming into the space and disrupting them but until now, are still holding market leadership in this segment.

e) We visited to plant 3 - there will be 3 facilities for expansion of 21 lines in total. This would be sufficient to help Riverstone's planned capacity growth until 2024 to a total of 15b pieces of growth - realistic and not too ambitious / spoil the market.

** Conclusion **

All in all, 2022 will see many glovemakers struggle. Riverstone is no exception - their profit will be lower than the highs of 2020 and 2021 but I believe they will remain profitable due to their diversity and position in the cleanroom glove segment. Not many glovemakers will be. They will also have a sound balance sheet - strong enough to overcome what potentially could be market downturn in the next few years. They are and will continue to be a cash cow - allowing the company to pay good dividend, especially if earnings are good. If the latest dividend is of any signal - the management is a generous one.

I think Riverstone could challenge getting RM300-400m net profit for FY2022. It's currently trading at 10-15x PE of FY22, potentially paying at least 4% yield from current level.

The stock had gone up 10% alone today - on the day RM0.10 dividend goes ex (another big one coming in May). It could be due to increasing Covid case in China, it could be some technical trades - but underneath it all, Riverstone is a fundamentally sound stock, run by honest, great & fanatic management who focus on delivering value and quality to all stakeholders from foreign employees to suppliers to shareholders.

Tagging: @Jasonsum @FIRLGuys @leonjakelim @maxtan @Jinnsern @mengteck @wsk20 @zhexiangxd @mikeleong