Behappyalways Wrote:This glove manufacturer is the APPROVED source for big manufacturing companies so small time contractors working for those big manufacturing plants are asked to buy gloves from them. The gloves are much more expensive than those outside. So the contractors got a way out of this. They bought a little bit from Riverstone and buy the rest from the cheaper sources. They mixed it up and 'claimed' that all their gloves are from the Approved source.....
This assumes that:
1. Riverstone is the approved glove supplier to contractors serving big manufacturing companies; and
2. The contractors can obtain equivalent gloves elsewhere at a lower price
From my understanding of Riverstone's business model:
#1. It does not sell to contractors. It sells directly to the manufacturing plants of big companies and to distributors.
#2. If there are competing gloves of equivalent quality at a lower price, Riverstone would have to lower its prices to match. Its gloves are high-specification commodities. If the customers can get them cheaper elsewhere they will.
The end customers of Riverstone cleanroom gloves are manufacturing HDDs, TFT LCDs, semiconductors etc. Cost is important, but saving money on gloves that cost a few cents each is not a good tradeoff if it results in contamination and loss of a US$50 HDD.
You need to save money on a LOT of gloves to offset the loss of even one HDD. Better to squeeze the suppliers of more expensive items, like the HDD base plate or LCD plastic frame.
Which supplier is being squeezed can probably be deduced by looking at their respective financial statements. Riverstone carries almost no debt but achieved 20% ROE in 2010. Such numbers are not characteristic of a supplier who is being squeezed on price. Either TS Wong is one heck of a manager, or Riverstone's business has a meaningful competitive edge. Maybe both. Or the numbers are fake.
As for the big glove companies, they get 15-20% ROEs too, but they have debt-to-equity ratios of 40-70%. Clearly they are playing a different game from Riverstone.
Is Riverstone for real, then?
So far they have paid out a meaningful proportion of earnings each year. Those who work in companies that use Riverstone gloves can probably make some discreet enquiries as to whether their products are truly up to the mark. Anyone who lives in KL can easily pop by the plants and do his own checks.
To
prove a fraud is tough. Red flags are easier to spot and are usually adequate warning signs. In the case of Riverstone, one red flag would be the unusually good profitability compared to other glovemakers. But this can be verified by channel checks on whether their products are indeed high-spec with fewer substitutes.
Another test would be the cash outflow versus the cash inflow. Post-IPO the total cash inflow was 47m (42m IPO + 5m warrants). Capex outflow was 100m. Dividends paid totalled 47m, but 60% went to the 2 insiders, so outflow to minority shareholders was 17m. So we have inflows of 47m against outflows to 3rd parties of 117m.
If the numbers are fake the insiders would have to subsidize up to 70m in order to pay for equipment and dividends. Given that neither insider has sold any shares nor pledged them for borrowing (the shares are held in personal name), it seems unlikely that the insiders are subsidizing the company. Of course, the amounts paid for equipment could be fake too, but that would mean that Riverstone is not actually manufacturing gloves but buying them from elsewhere. The customer audits should spot this if it was occurring. Again, anyone who works in a company that uses Riverstone gloves can check with the person who audits Riverstone's facilities as to how real/fake the facilities are.
As usual, YMMV.
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