Riverstone Holdings - RHB Invest 2016-11-11: Stiff Competition Puts Downward Pressure On ASPs

Riverstone Holdings - RHB Invest 2016-11-11: Stiff Competition Puts Downward Pressure On ASPs RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Stiff Competition Puts Downward Pressure On ASPs

  • We expect competition to remain tough amid expansion plans by peers. 
  • Riverstone’s 3Q16 margins were hit by stiff competition, lower ASPs, and higher labour costs. The higher sales mix of lower-margin healthcare gloves also brought down profitability, despite an increase in production capacity. 
  • We expect pressure on ASPs to continue going forward. As a result, we lower our FY16F NPAT estimates by 4%, resulting in lower DCF- backed TP of SGD0.93 (from SGD1.02, 3% upside). 
  • Downgrading our call to NEUTRAL from Buy.


Higher sales mix of healthcare gloves. 

  • Sales from the cleanroom segment increased by 15% QoQ in 3Q16, with the company gaining new customers from the Automotive and Pharmaceutical sectors. However, that was not enough to maintain the sales mix for the additional capacity of 1bn pa. 
  • While demand from the healthcare segment remains relatively strong, it resulted in a higher sales mix of healthcare gloves, which yield lower margins.


Downward pressure on ASPs. 

  • Despite the strong demand in the healthcare space, ASP has declined by 2.5% QoQ in 3Q16, on the back of increasing pressure to lower prices from customers due to stiff competition. 
  • Gross margins are likely to fluctuate around the 15% level, and we expect the downward pressure on ASPs to continue in the near future as competitors continue with their expansion plans to boost capacity. 
  • Key risks include volatile movements in the USD, rubber prices, as well as labour costs.


Dimmer outlook, downgrade to NEUTRAL. 

  • Going forward, we expect competition to remain tough amid expansion plans by peers and we expect pressure on ASPs to continue. As a result, we lower our FY16F NPAT estimates by 4%, resulting in lower DCF-backed TP of SGD0.93.




Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-11
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.93 Down 1.020




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