Riverstone Holdings

[Jacmar]

How do you view the fast declining MYR against SGD? This is something that always bug me.

Thanks.

This should be viewed as +ve. Their cost is in RM but their sales is mostly in USD. For years when USD was weak, they were suffering forex losses and one of the bugbear for performance. They were heavily criticised for not hedging. Now that the table has turn and they are enjoying this now. SGD is just reporting currency and no meaning to performance. SGD is also losing ground to USD too.

[GreedandFear]

My thoughts on Q4...the strong revenue growth was expected on the back of the capacity expansion and should continue in 2016 with the additional 1MM capacity addition planned by the end of this year. The FX tail wind is great but I was surprised that there was no mention of benefits from the continued lower rubber prices. Perhaps they are having to pass these benefits on to their customers given that all of their competitors are also ramping up capacity ?

The big question, to me, is the lower taxation. Presumably this is because of tax incentives for the new plant? Question is whether this is a one-off benefit or whether net income will continue to be boosted by a lower tax rate. If taxes are going to stay low, then the stock could easily continue to rise but if this was a one-off, then the valuation is starting to get a tad expensive (around 17.5x historical PE adjusted to a normal tax rate vs 16x based on reported earnings) and one has to question why margins are not shrinking more in the face of so much industry capacity addition. I buy that Riverstone tries to be a niche player and cater to special needs etc but, at the end of the day, we are talking about rubber gloves. How complex can it by for Riverstone's competitors to copy their products ? How unique are they really.....?

Vested

[CityFarmer]

My thoughts on Q4...the strong revenue growth was expected on the back of the capacity expansion and should continue in 2016 with the additional 1MM capacity addition planned by the end of this year. The FX tail wind is great but I was surprised that there was no mention of benefits from the continued lower rubber prices. Perhaps they are having to pass these benefits on to their customers given that all of their competitors are also ramping up capacity ?

The big question, to me, is the lower taxation. Presumably this is because of tax incentives for the new plant? Question is whether this is a one-off benefit or whether net income will continue to be boosted by a lower tax rate. If taxes are going to stay low, then the stock could easily continue to rise but if this was a one-off, then the valuation is starting to get a tad expensive (around 17.5x historical PE adjusted to a normal tax rate vs 16x based on reported earnings) and one has to question why margins are not shrinking more in the face of so much industry capacity addition. I buy that Riverstone tries to be a niche player and cater to special needs etc but, at the end of the day, we are talking about rubber gloves. How complex can it by for Riverstone's competitors to copy their products ? How unique are they really.....?

Vested

I am following Riverstone for a while. The company focuses on Nitrile Gloves (>90%), and only 6-7% on Latex Gloves. It may be reasonable not to mention the benefit of lower rubber price, I suppose.

Riverstone should be the most resilience amid the industry capacity expansion, with its unique biz model. I am yet to read the recent report, but major players in M'sia are having lower ASPs in their recent reports.

The moat of glove production, isn't on the product, but production process, or more correctly the biz processes.

(not vested, but closely monitoring)

[NTL]

How do you view the fast declining MYR against SGD? This is something that always bug me.

Thanks.

This should be viewed as +ve. Their cost is in RM but their sales is mostly in USD. For years when USD was weak, they were suffering forex losses and one of the bugbear for performance. They were heavily criticised for not hedging. Now that the table has turn and they are enjoying this now. SGD is just reporting currency and no meaning to performance. SGD is also losing ground to USD too.

I do get what you mean. And, they had been posting very strong growth over the years to offset the loss in MYR to SGD exchange.

Thanks.

[CityFarmer]

The current PE and PB are ~16 and 3.1 @ price of $1.18. A growth of 1 billion glove a year, means growth rate of 20-25% annually. If all goes well, is the current price too demanding?

The ultimate concern is always on rapid capacity expansion, and the likelihood of ASP price war...

(not vested, and monitoring)

Riverstone downgraded to "reduce" from "hold" by CIMB

SINGAPORE (Feb 27): CIMB ( Financial Dashboard) has downgraded Riverstone Holdings ( Financial Dashboard) to "reduce" from "hold", citing concerns over an increasingly tougher operating environment amid a potential overcapacity in the glove-making industry.

On its part, Riverstone's existing manufacturing capacity is full, even after it added new production lines last year.

The company intends to add capacity for another one billion units by end-2015, bringing total production capacity to 5.2 billion gloves annually.

Meanwhile, its healthcare segment is unlikely to benefit from the stronger US dollar and lower raw material prices, according to CIMB analysts Roy Chen and William Tng, who have a price target of $1.11 on the stock.

"Benefits will be passed through to end-users given the stiff price competition in the segment," they wrote in a note.

That said, they believe gross profit margins for Riverstone's clean-room gloves could "swell" in the near term as competition in that segment is still "benign" and it has a longer-term production contract.

"Nevertheless, we think the current share price has fully priced in the positives," they said. "The potential overcapacity in the healthcare segment remains an overhang."

Riverstone shares were down 0.8% at $1.175 at 3:33pm (0733 GMT).
http://www.theedgemarkets.com/sg/article...-hold-cimb

[BlueKelah]

The current PE and PB are ~16 and 3.1 @ price of $1.18. A growth of 1 billion glove a year, means growth rate of 20-25% annually. If all goes well, is the current price too demanding?

The ultimate concern is always on rapid capacity expansion, and the likelihood of ASP price war...

(not vested, and monitoring)

Riverstone downgraded to "reduce" from "hold" by CIMB

SINGAPORE (Feb 27): CIMB ( Financial Dashboard) has downgraded Riverstone Holdings ( Financial Dashboard) to "reduce" from "hold", citing concerns over an increasingly tougher operating environment amid a potential overcapacity in the glove-making industry.

On its part, Riverstone's existing manufacturing capacity is full, even after it added new production lines last year.

The company intends to add capacity for another one billion units by end-2015, bringing total production capacity to 5.2 billion gloves annually.

Meanwhile, its healthcare segment is unlikely to benefit from the stronger US dollar and lower raw material prices, according to CIMB analysts Roy Chen and William Tng, who have a price target of $1.11 on the stock.

"Benefits will be passed through to end-users given the stiff price competition in the segment," they wrote in a note.

That said, they believe gross profit margins for Riverstone's clean-room gloves could "swell" in the near term as competition in that segment is still "benign" and it has a longer-term production contract.

"Nevertheless, we think the current share price has fully priced in the positives," they said. "The potential overcapacity in the healthcare segment remains an overhang."

Riverstone shares were down 0.8% at $1.175 at 3:33pm (0733 GMT).
http://www.theedgemarkets.com/sg/article...-hold-cimb

The main factor IMHO benefiting Riverstone expansion and profits is that rubber price has been crashing past few years. It will be interesting to see what happens with Riverstone when the rubber prices rebound.

GMG would be a good and opposite investment at the moment rather than buying Riverstone.

[Jacmar]

I buy that Riverstone tries to be a niche player and cater to special needs etc but, at the end of the day, we are talking about rubber gloves. How complex can it by for Riverstone's competitors to copy their products ? How unique are they really.....?

Vested

Yes you can copy gloves(actually it is nitrile and not rubber) even for clean room but getting your customers to buy from you is a totally different ball game. In the clean room the cost of gloves is so insignificant as compared to the products that they are making. No engineer in their sane mind would, even want to look for a replacement. How much can you save vs what the cost(1 wafer/Hard disk can cost tens of thousands of dollars) if you screw up in trying to save pennies. The engineer has more impt things to tackle. So the engineer will make the safest decision and use proven source.

Another thing that most people don't realised is that RS sells direct to customer and not go through distributors. This partly explains the higher margins that they get but more impt is that they have a good understanding of the mkt place of what customer needs and able to develop products per what customer needs without the filter loss.

To CF, this rapid capacity expansion was a concern of mind when I first invested many yrs ago. Over the yrs as I understand more about their biz model(as explained above), it is not such a big issue. take the recent capacity expansion as another example. they have customer commitment of the capacity before they build it. Sure when the contract expires customer will pressure you or they go next door. However this demo that their biz model is different from the others which just builds, builds and builds and use distributors and price/vol to capture mkt. RS is about working with direct customers and customisation to each individual needs. These kind of customers just won't hit and run and stay with you for the long term.

[CityFarmer]

Yes you can copy gloves(actually it is nitrile and not rubber) even for clean room but getting your customers to buy from you is a totally different ball game. In the clean room the cost of gloves is so insignificant as compared to the products that they are making. No engineer in their sane mind would, even want to look for a replacement. How much can you save vs what the cost(1 wafer/Hard disk can cost tens of thousands of dollars) if you screw up in trying to save pennies. The engineer has more impt things to tackle. So the engineer will make the safest decision and use proven source.

Another thing that most people don't realised is that RS sells direct to customer and not go through distributors. This partly explains the higher margins that they get but more impt is that they have a good understanding of the mkt place of what customer needs and able to develop products per what customer needs without the filter loss.

To CF, this rapid capacity expansion was a concern of mind when I first invested many yrs ago. Over the yrs as I understand more about their biz model(as explained above), it is not such a big issue. take the recent capacity expansion as another example. they have customer commitment of the capacity before they build it. Sure when the contract expires customer will pressure you or they go next door. However this demo that their biz model is different from the others which just builds, builds and builds and use distributors and price/vol to capture mkt. RS is about working with direct customers and customisation to each individual needs. These kind of customers just won't hit and run and stay with you for the long term.

Jacmar, I do agree with most of your point, except the following minor points

Riverstone strategy didn't bring better margin, but better customer retention. It is an important strategy amid the competition. The strategy required higher admin and sales and distribution (S&D) expenses, due to its direct customer interfaces. As e.g. S&D of Riverstone is around 2.8% of revenue, while Hartalega is 1.2% of revenue. The average ASP for both are around RM 10 cents per piece.

I am yet to invest, because the price isn't right, with the MOS required.

Wish you all the best, and so far I am wrong with the price appreciation lately.

(not vested)

[Bubbachuck]

Found this recent article from nextinsight. A wonderful company at a fair price.

http://www.nextinsight.net/index.php/sto...rs-darling

[GreedandFear]

My thoughts on Q4...the strong revenue growth was expected on the back of the capacity expansion and should continue in 2016 with the additional 1MM capacity addition planned by the end of this year. The FX tail wind is great but I was surprised that there was no mention of benefits from the continued lower rubber prices. Perhaps they are having to pass these benefits on to their customers given that all of their competitors are also ramping up capacity ?

The big question, to me, is the lower taxation. Presumably this is because of tax incentives for the new plant? Question is whether this is a one-off benefit or whether net income will continue to be boosted by a lower tax rate. If taxes are going to stay low, then the stock could easily continue to rise but if this was a one-off, then the valuation is starting to get a tad expensive (around 17.5x historical PE adjusted to a normal tax rate vs 16x based on reported earnings) and one has to question why margins are not shrinking more in the face of so much industry capacity addition. I buy that Riverstone tries to be a niche player and cater to special needs etc but, at the end of the day, we are talking about rubber gloves. How complex can it by for Riverstone's competitors to copy their products ? How unique are they really.....?

Vested

I am following Riverstone for a while. The company focuses on Nitrile Gloves (>90%), and only 6-7% on Latex Gloves. It may be reasonable not to mention the benefit of lower rubber price, I suppose.

Riverstone should be the most resilience amid the industry capacity expansion, with its unique biz model. I am yet to read the recent report, but major players in M'sia are having lower ASPs in their recent reports.

The moat of glove production, isn't on the product, but production process, or more correctly the biz processes.

(not vested, but closely monitoring)

Per the company, the low tax rate for Q4 (essentially zero) was due to :

"...we benefited from Reinvestment Allowance which is a function of the CAPEX invested for FY2014. We recorded the total CAPEX invested in FY2014 mostly in the fourth quarter as a prudent measure to ensure that the incentives are claimed only when the new production facilities are in place. The Reinvestment Allowance is in addition to the ongoing Capital Allowance that we benefit.

We are expecting further CAPEX for FY2015 as part of our expansion plans (Phase 2) which will add another 1 billion gloves to our total production capacity by the end of 2015. As a result, we will continue to benefit from Reinvestment Allowance for FY2015. In particular for 1Q2015, we should‎ see our tax rates normalise but continue to enjoy the ongoing Capital Allowance as per the previous preceding quarters."

2014 full year tax rate (as a percentage of PBT) was only 12.5% versus 20.2% in 2013 and 17.9% in 2012, so significant. The good news, per the the above, is that 2015 should also benefit from a low tax rate given the next phase of the capacity expansion although the first 3 quarters will, again, see higher taxes until they recognise the Capital Allowance in Q4 again...