My Insights on Riverstone Holdings (AP4)

Riverstone Holdings (AP4) to-date is still by far one of the best companies I have encountered on SGX. This article serves as a follow-up and a deeper analysis into Riverstone Holding. Feel free to read My S.W.O.T Analysis For Riverstone Holdings (AP4) before proceeding with this article to gain an understanding of Riverstone Holdings.

Recent Updates & Insights

  1. Extended Expansion Plans Till 2019
  2. Spike and recovery of Butadiene prices
  3. 1Q to lead the charge

1. Extended Expansion Plans Till 2019

The recent move to ramp up productions even faster (From 1b per year to 1.4b per year), and extending it by another year (From 2018 to 2019) is big news. The heightened optimism of CEO Wong Teek Son gives us significant insights into the company and industry.

The key indicator of success, and of glove demand boils down to one figure: Utilisation Rate.

“In spite of the expanded capacity, our utilisation rate remains at approximately 90.0% owing to the overwhelming demand for our premium gloves.” – Annual Report 2016.

Despite doubling in production capacity increasing production capacity from 3.1b (Phase 0) to 6.2b (Phase 3), utilisation rate remains at a whopping 90%. To double productions yet remain at almost maximum utilisation rates must mean that demand is truly huge and Mr Wong had been conservative in his expansion plans.

As of 2Q17, what is exciting now is that Riverstone is now positioned to accelerate its growth by 40%, from 1b to 1.4b, with output reaching 10.4b in 2019. Given the conservative nature of Mr Wong, I am inclined to believe that despite increasing output, utilisation rates will remain high. This was confirmed by CEO Mr Wong, who remarked that “Our existing production lines are performing at close to full capacity utilisation and we continue to benefit from economies of scale as we scale up operations.” – Quarterly Report 2Q17


2. Spike and Recovery of Butadiene prices

Butadiene, the raw material required to make nitrile gloves went on a frenzy (USD1000/tonne to USD3000/tonne) as the “Closure of butadiene plants in the Middle East and Singapore has led to a global shortage and this has also contributed to the drastic jump in nitrile latex prices.” Following the development of Butadiene prices, the plants have since re-opened and news of further lowering of Butadiene prices from the increase in supply have since developed. This puts Riverstone in an excellent position to further increase gross profit margins.

2Q17 gross profit margins were disappointing (20%) largely due to the contracts being made in Q1 to secure Butadiene for Q2. I personally view this as a one-off event and margins should shoot back up to 4Q16 level (26%) and higher going forward, given the greater cost controls which have a sustainable impact. This can be observed in 2Q results, where greater cost controls have allowed Riverstone to maintain its net profit levels despite the margin compression.

Additionally, “British-based chemicals company Synthomer plc today announced that its project to expand the NitrileLatex manufacturing capacity at the Pasir Gudang plant is well underway. In a statement, the company said the facility is due to become the world’s largest nitrile polymerisation reactor upon its completion by July 2018.” – NST. This should continue to bring cost of producing nitrile gloves down, which is good news for Riverstone to further raise gross profit margins.


3. 1Q To Lead The Charge

Extrapolating the revenue figures from Quarterly reports, an interesting fact I found is that Q1 is always the weakest quarter for the year for Riverstone Holdings.

To make the numbers more meaningful, I then indexed them to draw more insights from the raw numbers.

Very clearly, we see that revenue climbs with every quarter. With the recent 1Q and 2Q results out, of 205.7m and 213.2m respectively, I thought it would be a good idea to make use of the seasonal index for forecasting full year revenue for 2017 rather than simply use CAGR to project the 2017 full year revenue.

Maintaining the ratios and with some normalisation, I was able to derive the forecasted full year revenue contributions:

While the revenue has been easy to forecast so far, fluctuations in the COGS due to the one-off spike have and will bring down the average net profit margin for 2017. The worst seem to be over as COGS for 3Q and 4Q should not be affected by the spike anymore and should pull gross profit margins up. While this year net profit margins may be lower than usual, going forward, I expect net profit margins to hover around 18-20%. This, coupled with the increase in revenue and the elimination of the impact of Butadiene spike prices, should see a drastic growth in EPS in the upcoming years.

Since the output is unlikely to be fluctuating in any volatile manner given the high absorption rate coupled with the high utilisation rate, I would expect revenue to follow a step-up increment until 2019 before plateauing and continue to watch for new developments for new factory expansion since they just bought a new piece of land as well. “The acquisition of the Property is to support the expansion of production capacity for cleanroom gloves and Group’s operations.” – 5 May 2017



Maintaining a conservative 18% Net Profit Margin, Riverstone could potentially be valued at $1.86 by 2019 representing a Holding Period Return of 78.8% or a CAGR of 21.38% assuming output of 10.4b gloves, without accounting for potential further expansion or speeding up plans beyond 2019.


Additional Reading

Butadiene (Raw Material Prices)


Disclaimer: I am vested.

Aloysius Lee

Aloysius has been investing in Singapore Equities from the age of 18 and is still madly enthusiastic about it. He strives to sharpen his edge while guiding others along the way to snowball their way to financial freedom!

9 thoughts on “My Insights on Riverstone Holdings (AP4)

  • August 5, 2017 at 9:30 PM

    Thanks, interesting analysis. However Q1 revenue is weakest not because of seasonalisation. Revenue has typically been increasing Q on Q, Y on Y, therefore Q1 is always weakest for each year.

    • August 6, 2017 at 7:42 AM

      Hi Bullsrus,

      I used the seasonality index as a technique, not to identify seasons but to identify trends. The year for Riverstone always start off weak, so I was pleasantly surprised when their Q1 revenue were so high because that meant that the year would likely go much higher as their weakest quarter already did 30% of last year’s full year results.

  • August 23, 2017 at 2:46 PM

    I understand how you compute the seasonal index but how do you apply the index to compute 2017 Q3 revenue forecast of RM240 mil and 2017 Q4 revenue forecast of RM250 mil? Hope to get your explanation soon. Thanks very much.

  • August 24, 2017 at 1:06 PM

    Hi, thanks for this informative analysis and your thoughts. I posted my query earlier but you may have missed it. So I am posting my query again as I do so want to learn from you. So appreciate if you could please reply to my query. Thanks.
    I understand how the seasonal index for Revenue is derived but could you please explain how you derive Q3/2017 & Q4/2017 forecast revenue of MYR240 & MYR250 respectively? Hope to hear from you soon. Thanks very much.

    • August 24, 2017 at 11:14 PM

      Hi there!
      Using the seasonal index, I worked backwards through trial and error to maintain the seasonal indices for Q3 and Q4. 240m and 250m respectively were able to maintain the index. Hope this helps to clarify!

      Best regards,
      Aloysius Lee

  • August 27, 2017 at 12:26 PM

    Definitely a good company but price seems high to enter at this level. What is your thoughts? What level did you enter at?

    • September 8, 2017 at 12:30 AM

      I believe ‘high’ is very much dependent on your timeframe and valuation of the company. My eyes are set on $1.86 for now.

  • August 27, 2017 at 12:45 PM

    its cashflow from ops is 100m RM where as valuation currently is 2400m RM…

  • January 5, 2018 at 11:46 PM

    Harta, kossan n Topglove are far more expensive then RS. But retailers only know how to chase and go after those counter regards of actual value. I sold my topglove n switch to RS with no regret. I believe my judgement and know what I am buying.


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