This article will serve as a follow-up to My Bull Case For Riverstone (AP4) albeit presented in a different manner. We spoke briefly with Riverstone’s IR Team to understand more about the insides of the company and we would like to share the findings with you. There are times when we as investors can become too blinded by findings that we fail to see things in a bigger picture, thus we thought it’ll be fun to see it from a S W.O.T Analysis point of view, which might help us to uncover a little bit more about the company than we already know. If you haven’t read our previous post, we highly recommend that you do to complete your understanding from our two different perspectives and approach towards analysing Riverstone.
- Product Differentiation
- Alignment Of Interest
- Strong Balance Sheet
- Flexible Production Lines
- High Margins Operation
- Catering To Growing Demand
Riverstone manufactures customised premium healthcare gloves based on usage such as hand-specific gloves for better comfort and fit. As Riverstone is a much smaller player compared to the likes of its Malaysian peers, Riverstone’s business strategy has always been on niche offerings such as customisation in order to maintain a relatively higher profit margin. Customisation ranges from thickness, tensile strength, to length and colour. They even do customisations such as hand-specific sized gloves (left and right hands), to ensure best fitting (as compared to the standard S,M,L sizes). These are but just some of the customisations available at Riverstone and not elsewhere.
Alignment Of Interest
The Founder, Wong Teek Son, owns half the company while maintaining a remuneration of <$250k. We like that Riverstone is founder-led, holds a significant shareholding, and pays himself a really low remuneration! Some owners see their own companies as a cash-cow and draw large remunerations that sometime isn’t justified.
Strong Balance Sheet
The expansion plans of increasing 1b glove output annually from 2014-2018 is funded internally. No debt was undertaken for the expansion. Even while the industry as a whole is undergoing a period of growth and ramping up productions, most have also increased their debt levels as well.
Flexible Production Lines
Apart from the already strong balance sheet, Riverstone’s financials is set to become even stronger by maintaining their competitive edge of customising gloves while introducing cost-cutting methods such as increased automation and having the ability to produce the different types of gloves with the same production line. Flexibility of it’s production lines allow Riverstone to save cost by not having to build a new line specific for cleanroom gloves or healthcare gloves. They share the same fixed asset! This maximises efficiency, reducing wastage.
High Margins Operation
Margins have improved tremendously over the years, increasing from 23% in 2011 to 32% in 2015 despite the competitive environment. This was the culmination of increasing automation in the facilities as well as additional margins via customisation.
This margin is important because it tremendously boosts the potential of Riverstone to grow. Higher margin means Riverstone can choose to put a lot of pressure on it’s prices to gobble up market share if it sees the need to. Even if it doesn’t want to go for market share, the business benefits by becoming more profitable, makes shareholders happier and raises share price as it’s EPS grows.
Catering To Growing Demand
According to Malaysian Rubber Export Promotion Council (MREPC) and Malaysian Rubber Glove Manufacturers Association (MARMA), the demand for gloves market is estimated at 190 billion pieces per annum with a CAGR of 8 – 10% through to 2020.
We like that Riverstone will enjoy tailwind on an industry level while it expands to capture some of that growth.
- Relatively Slow In Scaling Up
- Heavy Concentration On Nitrile Gloves
Relatively Slow In Scaling Up
Competitors are ramping up at a very fast pace compared to Riverstone’s growth in output of 1b glove annually.
Competitors like Top Glove is expanding 4-6b a year. In terms of economies of scale, bigger players will enjoy it to a certain degree. We spoke to their Investor Relations team recently. Riverstone understands it’s own size limitations and instead of fighting head-on to compete in size and output, they leverage on their strengths to increase efficiency and add customer satisfaction by looking into the fine details (ability to customise).
Heavy Concentration On Nitrile Gloves
We understand that the industry is shifting from latex to nitrite in recent years and thus the heavy concentration of nitrile gloves, but this also poses as a risk towards Riverstone because they become very exposed to the fluctuation of nitrile prices.
- Demand From New Sectors
- Reduction In Cost Of Raw Materials
Demand From New Sectors
Apart from the traditional healthcare sector and HDD sector, Riverstone is actively looking for new markets to cater it’s services to. We are glad to find new directions into the Flat panel, tablet, and mobile sector while they continue to serve it’s existing customers in the aforementioned sectors.
Not only are we talking about new demand for gloves, this move acts as diversification of customer base. We feel that it will further strengthen Riverstone’s financial position in the industry and begin to gain a foothold in a growing sector.
Reduction In Cost Of Raw Materials
Nitrile (Raw material for nitrile gloves) is a by-product of crude oil. With oil prices having fallen, nitrile prices naturally fell as well. We think this bodes well for Riverstone although they tend to pass on the cost-savings to their clients. Having to spend lesser on raw materials means money can be better spent elsewhere to improve earnings for it’s shareholders!
- Oversupply Of Gloves
- Currency Risk
- New Entrants
Oversupply Of Gloves
The main contributers of oversupply is coming from competitors like Top Glove and Hartalega. The growth in supply may potentially exceed the speed of the growth in demand for gloves. We see this as a potential threat as classic economics will teach us, when supply exceeds demand, prices fall, and this could hurt profits in the long run.
Having benefited from strengthening of USD/MYR. Should it reverse, earnings will be affected. Although we don’t see this as a big risk since most of the cost savings and increases are passed on to the consumers.
With the lucrative margins, it’s very possible to see new entrants who want to get a piece of the action as well. While we hope it doesn’t happen, we must anticipate the possibility.
Overall, we find that Riverstone is truly a solid company with good potential for further growth. The risks we have identified thus far do not seem to pose too much of a threat due to reasons such as barriers to entry (certification of approval needed for the gloves) and product differentiation (customisation).
Maybe it’s time to look at Riverstone for yourself if you’re not convinced. We’re open to learning more about the company on areas we have failed to identify so don’t shy away from leaving a comment if you know something that we don’t!