Riverstone Holdings - CIMB Research 2016-06-23: Expect a better 2H

Riverstone Holdings - CIMB Research 2016-06-23: Expect a better 2H RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings - Expect a better 2H 

  • The phase III expansion capacity (6 lines; totaling 1bn pieces p.a.) is slated to start contribution in 2H16.
  • After a slower 1Q16, demand for cleanroom gloves has shown signs of improvement in 2Q; management expects demand to pick up further in 2H16.
  • The healthcare glove segment should continue to face ASP and margin pressure due to stiff competition.
  • We upgrade Riverstone from Reduce to Hold, with an unchanged target price of S$0.91, still pegged to the peer average of 17x CY17 core P/E.

■ Phase III capacity expansion on track 

  • From our recent conversation with management, we understood that the completion of the group’s phase III capacity expansion should remain on schedule. 
  • To recap, Riverstone is undergoing a multi-year expansion programme, with its capacity slated to increase by 5bn pieces to 8.2bn pieces p.a. by end-FY18. 
  • Upon completion of phase III expansion by end-FY16, Riverstone’s production capacity would reach 6.2bn pieces p.a., representing a 19.2% increase yoy (end-FY15: 5.2bn). 

■ Securing new orders for the new lines 

  • The phase III expansion comprises 3 single lines and 3 double lines, with each single line able to produce c.10m pieces per month and each double line c.20m pieces per month. The first line (single) is slated to start commissioning by the end of June, and the second line (single) by July. 
  • We understand that the first two lines have already been filled up by new orders, and management is in talks with existing and potential new customers to take up the capacity of the remaining four lines. 

■ Expect improved demand for cleanroom gloves 

  • According to management, there have been signs of improvement in demand for cleanroom gloves in 2Q, following a subdued 1Q16 due to slower orders from the hard disk drive sector. 
  • Management expects demand for cleanroom gloves to pick up in the 2H, driven by the mobile phone and tablet sectors. 
  • We continue to like the prospects of the cleanroom segment for which Riverstone has an economic moat (c.60% global market share) to protect its margins. 

■ Pressure on healthcare glove ASP and margin would still be felt 

  • We expect the ASP and margins of the group’s healthcare gloves to continue facing downward pressure going forward. Unlike its niche cleanroom segment, the healthcare gloves are more generic in nature and hence, subject to much stiffer competition. 
  • We maintain our view that most, if not all, of the benefits of more favourable FX and raw material prices in this segment will have to be passed on to its customers. 

■ Upgrade from Reduce to Hold 

  • In anticipation of the fresh contribution from phase III capacity expansion and potentially improving demand for cleanroom gloves in 2H16, we upgrade our rating for Riverstone from Reduce to Hold. 
  • Smooth project execution and stronger-than-expected earnings growth are the key catalysts, while stiffer competition in the healthcare gloves segment is a key downside risk.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-23
CIMB Securities SGX Stock Analyst Report HOLD Upgrade REDUCE 0.91 Same 0.91