Riverstone Holdings (SGX: AP4)

Recommendation BUY
Current Price: S$1.00
Target Price: S$1.50
Upside: +50%

Arohi Stock Challenge 2020

Presented by: Kenny Chia
7th February 2020
 Company Overview
Core Business Segments, Geographical Presence

Business Description Revenue Breakdown By Segments

Company • Riverstone manufactures & distributes cleanroom & healthcare

Overview gloves in Malaysia.

• It sells its products under the RS brand for use in the hard disk drive,
Industry semiconductor, and healthcare industries.
Analysis
• The company also exports its products to Asia, Europe, and the
Americas.
Investment
Thesis • Riverstone was founded in 1989 & listed on the SGX in 2006.
Source: Annual Report 2018
Financial
Analysis Key Management Revenue & Gross Profit Attribution

100%
Valuation 80%

60%
Cleanroom
Risk 40%
Lee Wai Keong Wong Teek Son Wong Teck Choon Healthcare
Analysis
Executive Director Executive Chairman Executive Director 20%
COO & CEO Group BD Manager
Co-Founder Founder 3% stake 0%
Key 11% stake 51% stake Revenue Gross Profit
Catalysts Source: CGSCIMB

While the healthcare glove business is commoditized, the cleanroom

Riverstone has a founder-led management with an aggregate 65%
glove business is highly differentiated. Riverstone has a 60% global
stake in the business
market share of Class 10 & 100 cleanroom gloves.
 Industry Analysis – Disposable Healthcare & Cleanroom Gloves
Riverstone is well-positioned to benefit from the growth of both markets

Disposable Medical Gloves Market Size Disposable Cleanroom Gloves Market Size

Company
Overview USD billion
USD billion

Industry 12 2.5
Analysis

+9.1% CAGR +8.6% CAGR

10
2
Investment
Thesis
8
1.5
Financial
Analysis 6

1
4
Valuation
0.5
2

Risk
Analysis 0 0
2018 2019 2020 2021 2022 2023 2024 2025 2026 2018 2019 2020 2021 2022 2023 2024 2025 2026

Key
Catalysts Source: Fortune Business Insights Source: Verified Market Research

Rising awareness pertaining to health safety, and an accelerating Growth and expansion of healthcare, chemical, food &
number of surgeries globally expected to drive demand during the pharmaceutical industry are expected to propel demand of
forecast period. cleanroom gloves.
 Investment Thesis #1 – Recession – Proof Business Model
Riverstone has a robust operating track record with superior ROICs

Financial Performance from FY2006 – FY2010 Key Milestones in 2008

Company RM million Revenue Gross Profit Net Profit • Increased annual production capacity by 120 million (+15.4%) to
Overview 250
900 million gloves.

200 • Acquired Sinetimed Consumables Sdn Bhd to manufacture

Industry cleanroom gloves and finger cots.
Analysis 150
• Completed construction of 3 storey new factory canteen and
100
office building in Malaysia.
Investment
Thesis 50
• Completed construction of 1.5 storey new factory in Malaysia.
Recession-Proof 0
Business
2006 2007 2008 2009 2010
Excellent
Management

Clear Expansion
Plans
Historical ROIC since IPO Personal Observations & Comments

Financial 40% • Riverstone not only survived the 2008 recession, but it also thrived.
Analysis
30% • In 2008, Riverstone achieved record revenue (+12% y/y) & profits
(+7% y/y).
20%
Valuation
10%
• Given that we are in the later innings of the business cycle, the
probability of a recession occurring soon is not insignificant.
0%
Risk 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 • Considering the current macroeconomic backdrop, the decision
Analysis to go “all-in” in a company whose growth & profitability are not
heavily reliant on the business cycle is a prudent one.
ROICs consistently remained in excess of 20% & well above the cost
Key of equity (4.72%)
Catalysts
 Investment Thesis #2 – Excellent Founder-Led Management
Astute capital allocators with integrity

Remuneration Matters Production Capacity Growth

Company Billion
Overview 10

8
Industry +20.7% CAGR
Analysis 6

4
Investment
Thesis 2
Recession-Proof
Business
0
Excellent Source: Annual Report 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F
Management

Clear Expansion
Plans
Personal Observations & Comments Dividends Per Share Growth

Financial • In FY2018, Riverstone made a net profit of RM151.1m (S$50.77m).

Analysis 8
• Aggregate key management remuneration was only S$1.5m, or
+14.8% CAGR
3% of net profits. 6
Valuation
• Furthermore, most of their remuneration is based on performance- 4
related profit-sharing which further aligns their interests with
minority shareholders.
Risk 2
Analysis • Management also redistributes any excess cash back to
shareholders in the form of dividends. 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Key
Dividends Declared (RM Sen/Share)
Catalysts
 Investment Thesis #3 – Clear Production Expansion Plans
Riverstone is not done with capacity expansion yet

Forecasted Production Capacity Growth Acquisition of Industrial Land to Support Expansion

Company Year Phase Added Final Capacity Growth (%)

Overview Capacity
2013 - - 3.1 billion -
2014 1 +1.1 billion 4.2 billion +35.5%
Industry 2015 2 +1 billion 5.2 billion +23.8%
Analysis
2016 3 +1 billion 6.2 billion +19.2%
2017 4 +1.4 billion 7.6 billion +22.6%
Investment 2018 5 +1.4 billion 9.0 billion +18.4%
Thesis 2019 - - 9.0 billion -
Recession-Proof 2020F 6 +1.4 billion 10.4 billion +15.6%
Business
2021F 7 +1.4 billion 11.8 billion +13.5%
Excellent 2022F 8 +1.4 billion 13.2 billion +11.9%
Management
*Forecasted added capacity are mine.
Clear Expansion
Plans

Financial Personal Observations & Comments Personal Observations & Comments

Analysis
• I expect Riverstone to continue to add 1.4 billion in capacity each • In November 2018, Riverstone acquired 14.64 acres of land in
year till at least 2022. Taiping, Malaysia for RM18.75 million.
Valuation • This represents a 46.7% increase in production capacity over a 3- • In December 2019, it acquired 3.80 acres of land in Perak,
year time horizon. Malaysia for RM4.2 million.

Risk • Estimated CAPEX is RM80 million per phase per year. • The acquisition of industrial lands is to support the business
Analysis expansion with the construction of new factories which houses
• Riverstone will be able to fund this internally as it generates additional production dipping lines.
operating cash flows in excess of RM140 million annually.
Key
Catalysts
 Financial Analysis
While margins have softened over time, Riverstone continues to be cash flow positive

Profitability Margins Under Pressure… Growing Operating Cash Flows & Free Cash Flows

Company Gross Margin Operating Margin Net Profit Margin

RM million Net cash flow from operations Free cash flow
Overview 40% 200

Industry
Analysis 30% 150

Investment
20% 100
Thesis

Financial 10% 50
Analysis

0% -
Valuation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(50)
Risk
Analysis
Due to changes in sales mix towards healthcare gloves & Riverstone has been operating cash flow positive every year since its
Key decreasing ASPs for healthcare gloves partially offset by economies IPO in 2006, its free cash flow was only negative in 2014 due to the
Catalysts of scale commencement of Phase 1 expansion
 Valuation
Riverstone trades at a discount to Malaysian peers despite superior financial performance

Riverstone’s 5-Year Historical Forward P/E Historical Forward P/E Against Malaysian Peers
49.00x
Company
24.00x 44.00x
Overview 39.00x

22.00x 34.00x

29.00x

Industry 20.00x
24.00x

Analysis 18.00x
19.00x

14.00x

16.00x 9.00x

Investment 4.00x

Thesis 14.00x
Riverstone Holdings Limited (SGX:AP4) - Forward P/E
12.00x Kossan Rubber Industries Bhd (KLSE:KOSSAN) - Forward P/E
Hartalega Holdings Berhad (KLSE:HARTA) - Forward P/E
9/2/2015 9/2/2016 9/2/2017 9/2/2018 9/2/2019 Supermax Corporation Berhad (KLSE:SUPERMX) - Forward P/E
Financial
Analysis
At 15.6x, Riverstone is currently trading close to -1 standard Compared to its Malaysian peers, Riverstone is trading at a 38%
deviation (15x) its 5Y average forward P/E of 16.3x discount in terms of forward P/E (15.6x vs 25x)
Valuation

Risk
Analysis

Key
Catalysts

Source: S&P Capital IQ

 Key Investment Risks
Mitigating factors limit downside risks

1
Company Healthcare ASP Compression
Overview Focus on products that contain lesser chemical residues which has
- Malaysian peers expanding
already garnered increasing interest from food industries
aggressively as well
Industry
Analysis

2
Investment Cleanroom Cyclicality Management is looking to procure new customers from
Thesis - Mainly due to customers in the pharmaceutical & high-tech electronics industries that manufacture
hard-disk drive industry products such as mobile phones, tablets, lenses & sensors.

Financial
Analysis

3
Labor Shortages Management has implemented automation initiatives that they are
Valuation - Affects input costs & limits gradually rolling out. E.g. 40% of Riverstone’s healthcare gloves are
ability to scale further now directly packed after being stripped from the mould.

Risk
Analysis
FX Volatility Risk

Key
Catalysts
4 - Any significant depreciation of
the USD against the RM will
cause FX losses
Riverstone uses forward currency contracts to hedge the Group’s
sales & purchases denominated in USD

Source: Annual Report 2018, Media Reports

 Share Price Catalysts
Foresee three high probability events that would drive share price higher

Company
Overview

Industry
Analysis 1QFY2020 Earnings Surprise Wuhan nCov Escalation Potential Privatization
• Phase 6 expansion is on track to add • Since end 2019, total confirmed cases • Founder, Exec Chairman & CEO Wong
Investment up to 1.4 billion pieces (+15.6%) by & deaths at 28,280 and 565 Teek Son is currently 58 years old and
Thesis 1QFY2020 to a total of up to 10.4 billion respectively. has no succession plan.
pieces in annual production capacity.
• In 2003, SARS infected ~8,000 and • Riverstone is primed for a takeover
Financial • ASPs & margins to improve due to the killed 774. either by existing competitors or PE
Analysis reacceleration of cleanroom segment firms.
growth & elevated healthcare glove • According to WHO, nCoV has a higher
demand from Wuhan virus outbreak. transmission rate but lower fatality rate • Riverstone is a suitable LBO candidate
Valuation (2.1%) relative to SARS (9.6%). given its unlevered capital structure
• 1QFY19 net profit growth was -2.8% and stable operating cash flows.
due to lower ASPs & higher inputs costs, • Following SARS’ trajectory, nCoV
providing a low base for earnings expected to peak in April-May & • A takeover offer of S$1.50 would be
Risk
surprise. deescalate by end-2020. enough to gain shareholder approvals.
Analysis
• Demand for healthcare gloves • This values Riverstone at a forward P/E
Key expected to remain elevated in of 23x, below Malaysian peer average
Catalysts FY2020. of 25x.

Timeline: May 2020 Timeline: End 2020 Timeline: NIL

Probability: High Probability: High Probability: High
Impact: Significant (>20%) EPS growth Impact: Higher ASPs & Volume Impact: Immediate re-rating (~+50%)
 Riverstone Holdings (SGX: AP4)
Recommendation BUY
Current Price: S$1.00
Target Price: S$1.50
Upside: +50%

Arohi Stock Challenge 2020

Presented by: Kenny Chia
7th February 2020
 Directors’ Profile
Backup Slide

Appendix

Source: Annual Report 2018

 Credit Risk Concentration Profile
Backup Slide

Appendix
 Coronavirus 2019-nCoV Global Cases by John Hopkins CSSE
Backup Slide

Appendix

Source: https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
 Malaysia’s glove makers get urgent request from China
Backup Slide

Appendix

Source: https://www.thestar.com.my/business/business-news/2020/01/28/malaysias-glove-makers-get-urgent-request-from-china
 The world wants Malaysia’s rubber gloves, but not enough people are making them
Backup Slide

Appendix

Source: https://www.straitstimes.com/asia/se-asia/the-world-wants-malaysias-rubber-gloves-but-not-enough-people-are-making-them
 Malaysian Peer Comparables
Backup Slide

Appendix