Corporate: Riverstone expands to meet rising glove demand

Swelling demand from the hard disk drive (HDD) and semiconductor sectors for better quality clean-room gloves has driven Riverstone Holdings, a clean-room glove manufacturer, to expand its production capacity aggressively in the past nine months.

This year, Riverstone plans to spend a further RM26 million ($11.2 million) to expand its factories, production lines and its range of clean-room consumables, bringing the Malaysian-based company a step closer to its dream of becoming an end-to-end supplier.

Mainboard-listed Riverstone makes clean-room gloves and finger cots from synthetic polymers, a by-product of crude oil, and natural rubber in its factories in Malaysia, Thailand and China. It also manufactures clean-room consumables like packaging bags and facemasks.

The demand for clean-room nitrile gloves has been steadily rising from the HDD and semiconductor industries as manufacturers switch from natural rubber gloves given stricter clean-room requirements, says Wong Teek Son, executive chairman and CEO of Riverstone, in an interview with The Edge Singapore. Nitrile gloves have better anti-static properties and are more resistant to scratches compared with those made of natural rubber, contributing fewer dust particles and less static electricity in clean rooms, which can damage precision electronic components.

Last year, the company spent RM12 million building and completing a new factory in Thailand to boost production from 60 million pieces per annum to 780 million pieces per annum. This year, Riverstone plans to add two more production lines in its Malaysia factory to boost its glove-making capacity to 900 million pieces per annum. One of the lines will start this month, while the other will start in September. Globally, the clean-room glove market is worth $1US billion ($1.4 billion), says Wong, with nitrile gloves making up 10% of the market.

Cyclical industry

Riverstone is a leading supplier to the HDD industry, having captured a 60% share of the market. The company counts the top-five HDD makers - Seagate, Western Digital, Hitachi, Samsung and Fujitsu - among its customers, with three of them buying all their gloves from Riverstone, says Wong. Depending on quality, the prices of nitrile gloves range from $70US to $90US per 1,000 pieces.

Although the HDD industry is expected to grow 10% each year, Riverstone understands the cyclical nature of the business. "Second quarter demand is always lower compared to the second half of the year," says Wong. To overcome this, Wong says the company needs to diversify its range of products and expand its market segment.

"We started with the hard disk drive industry and we're very strong in that industry. That provides us with a platform to penetrate the semiconductor industry, which is another big industry that uses a lot of clean-room gloves," says Wong.

The semiconductor industry currently uses about 40% of the clean-room gloves produced globally and will be another big growth area when it switches to nitrile clean-room gloves. As such, Riverstone expects its market share in the semiconductor industry to rise, says Wong. It now counts leading semiconductor companies such as Infineon Technologies and Texas Instruments among its clients.

Besides breaking into the semiconductor market, the company also wants to be an end-to-end supplier by diversifying its product range.

Last August, the company started construction on a new plant in Selangor state, in Malaysia, which will be completed by year-end. The new facility will allow Riverstone to expand its range of clean-room products to face masks, wipes and swabs.

"Gloves, face masks, wipes and swabs are considered very important consumables in the clean-room industry," says Wong. "In order to become a reputable clean-room consumables supplier, we need to have all these main products."

Wong says the company also intends to expand into Vietnam, Eastern Europe and Korea and will work with local partners to market its products. The bulk of Riverstone's revenue last year came from Asia, with 51.2% from Southeast Asia and 38% from China.

To mitigate the rise in the price of raw materials, Riverstone provides extra services like customising gloves to suit the requirements of individual customers as well as recycling used gloves, says Wong. "We managed to maintain the gross profit, because we keep developing new products [and services]," he explains.

While Wong says the weakening US and Hong Kong dollars (USD and HKD) have impacted the company as half of its sales are made in those currencies, the effect is nullified by the other half sold in currencies that are strengthening.

Analyst coverage

For its 1Q2008 ended March 31, Riverstone reported that its y-o-y revenue was up 28% to RM35.8 million, boosted by strong demand from the HDD industry, which accounted for a 34% growth in its glove sales. Its net profit was up 40% to RM5.6 million.

Despite gross margins declining 4.3 percentage points to 29.4% due to the weaker USD and higher raw material costs, the company has managed to report positive earnings due to "the lower than proportionate increase in operating expenses", says Johnny Teo, analyst from Kim Eng Research, in his research note dated April 25.

Teo says strong and stable demand for nitrile gloves from the HDD industry has boosted Riverstone's glove sales by 33.8%. And he foresees more orders flowing in from the semi­conductor sector as potential new customers from that area have been auditing the company's facility. "Our optimism about the stock is underpinned by the company's solid earnings visibility, its market dominance and operating margins," says Teo.

Jimmy Tan King Boon, analyst from Phillip Securities Research, in his research note dated Feb 27, is projecting a 20% growth on his top line estimate as the company revises its average selling price in USD and HKD upwards, coupled with "strong demand from Greater China and new markets like Japan and Korea".

For FY2008, Kim Eng projects Riverstone's revenue to increase by 26% to RM162.8 million, with net profit going up 21% to RM27.5 million. Phillips Securities is forecasting Riverstone's FY2008 revenue to increase 20% to RM152 million, with net profit going up 24% to RM28.2 million. For 2009, Kim Eng is forecasting a 24% increase in revenue to RM201.1 million, with net profit rising by 32% to RM36.2 million.

Both Kim Eng and Phillips Securities have "buy" calls on Riverstone with target prices of 62 cents and 60 cents respectively.

Since reaching a 52-week high of 54.5 cents on April 24, shares of Riverstone has fallen 3% to close last Wednesday at 53 cents.