TP for RS   
From DBS Research
Leader in high-end CR gloves sets it apart from peers on the back of the significant drop in the ASP for HC. As the market leader in the high-end CR gloves segment with a c.50% market share, Riverstone stands out among its peers with the recent plunge in the ASP for the HC gloves while the prices for the CR segment remain relatively stable. From FY22F onwards, earnings contribution from the CR segment is expected to normalise to > 50% of total earnings from c.20% in 1H21. Pre-COVID, earnings from the CR segment accounted for c.70% of total earnings. The current c.20% drop in the share price over the past two weeks presents a buying opportunity. Reiterate BUY with a revised TP of S$1.28. 

Recent drop in price presents buying opportunity. The share price for Riverstone has dropped c.20% over the past two weeks. We believe this could be due to 1) the steeper-than-expected drop in ASP, 2) lockdown in Malaysia impacting upcoming quarterly results. We are expecting a weaker set of 3Q21 results, as compared to 1Q and 2Q21 and 3) the ex-dividend for 10sen DPS on 20 Sep 2021.

Steep drop in ASP for HC gloves. Based on our channel checks, the ASP for HC gloves has plunged to about US$40 per 1,000 pieces for delivery in October 2021, from about US$90-100 during the April to June 2021 period, and the high of slightly over US$100 in 1Q21. Key reasons for the significant drop include: 1) distributors holding high-cost inventory (hence they would need to reduce their stockpile before they can replenish their stocks), 2) new entrants into the industry selling at lower ASPs in an attempt to gain market share, and 3) a drop in raw material prices. The key raw material for nitrile glove, butadiene, is now below US$1,000 per metric tonne. 

How low can the HC ASP go? Based on the current estimated cost of slightly below US$30 per 1,000 pieces of gloves, the ASP is likely to be maintained at above the US$30 level in the near term in order to have a decent gross profit margin of about 20%. Furthermore, demand is still expected to be firm and supply is limited, especially with the recent movement restrictions in Malaysia. In the longer term, the ASP for HC could normalise to near the pre-COVID level of about US$20+ per 1,000 pieces.  We are projecting average ASP for HC at US$32.1 for FY22F and US$25.7 for FY23F. 

ASP for CR remains firm. The ASP for CR gloves is still relatively stable, hovering around the US$100-US$120 range since the beginning of this year, based on our channel checks. This could be due to the tight supply and also higher barriers of entry. The lock-in period for the CR ASP is also longer, as prices are negotiated quarterly or half-yearly, as compared to the monthly negotiation for HC gloves. 

Competitors switched out of CR to HC. Furthermore, during the pandemic, some of Riverstone&rsquo s competitors in the CR space have switched to the production of HC gloves due to the strong surge in the ASP for HC. Before the pandemic, the ASP for CR was about 3x that of HC but in 1Q21, the ASP for HC jumped to above US$100, just slightly lower than CR. But Riverstone remained committed to its existing customers and also managed to gain new customers. 

Significant exposure to the cleanroom space a key differentiating factor among peers. With the significant drop in the ASP for HC but stable CR price, Riverstone stands out among its peers as the market leader in the high-end cleanroom space. CR gloves currently accounts for c.25% in terms of production volume and about 40% out of the total revenue and > 50% in terms of earnings. Earnings from the CR segment accounted for c.70% of total earnings pre-COVID.

CR to provide earnings resiliency for sustainable growth. As the market leader in the high-end CR glove space with about 50% market share, Riverstone is poised to benefit from the diversified income streams that allow the group to ensure earnings resiliency for sustainable growth beyond the pandemic situation. CR gloves are mainly used in the semiconductor and electronics industry, for manufacturing of gadgets like the hard disk drive, mobile phone, tablets, camera lens, and batteries. 

Cut in production and slowdown in expansion pace due to MCO. The recent lockdown in Malaysia due to the spike in the COVID cases has affected the supply of gloves. Malaysia is the world&rsquo s largest rubber glove producer and contributes nearly 63% of global supply. As a result of the lockdown, Riverstone&rsquo s production has fallen by about 20%. The industry is now running at a utilisation rate of about 70%, down from c.90% as a result of the workers&rsquo restriction rule in Malaysia. Expansion plans for some players were also delayed due to the restriction. 

Earnings & Recommendation

Cut earnings mainly to account for lower ASP assumptions. We have cut FY21F/22F/23F earnings by 16%/22%/10% mainly to account for our lower ASP assumptions and also the expected delay in expansion plans, partly due to the movement restrictions in Malaysia. We have adjusted our ASP assumptions down by 5% to 18% for both the HC and CR ASPs. We are now expecting US$71.4/US$32.1/US$25.7 per 1,000 gloves for HC and US$111.7/US$106.1/US$97.6 for CR for the FY21F/FY22F/FY23F period. The reduction in earnings was partly offset by a higher assumption of CR glove production, which commands higher margins.

Forecast earnings is still 5x above pre-COVID level. Despite the cut in earnings, earnings projections for FY22F and FY23F is still almost 5x higher than the pre-COVID levels of about RM130m per year. 

Maintain BUY TP lowered to S$1.28. On the back of the cut in earnings, our TP is lowered to S$1.28, from S$1.77 previously, still pegged to its four-year average PE of c.10x, on blended FY22F and FY23F earnings to reflect a more normalised environment. Maintain BUY.