Recently, I attended Riverstone’s 2017 AGM on 23 April 2018 at Raffles City Convention Center. I have been a shareholder of the company since September 2016 but this is my first time attending its AGM (finally got to meet the good management in person). It’s held in a relatively small room, with about 60-70 shareholders attending I think.
Riverstone is one of the good companies in my portfolio that I feel very comfortable about holding long-term (and accumulating if the prices are fair), due to various reasons – high ROE, very conservative capital structure, good industry tailwind, good management with high stakes in the company, reasonably solid moat, well paved expansion plans for the next few years, etc.
Aloysius from the Little Snowball did a very good job covering the company, so I would recommend reading it here (although I have slightly more conservative assumptions than his), especially if you are not familiar with this company.
Before I attended the AGM, I have already intended to hold it for at least another two-three years, unless the fundamentals, the industry dynamics or operating environment changes. After the AGM, I felt even more comfortable with my shareholdings in it, as I feel that the management is honest and down-to-earth and will be there working diligently and smartly to protect the business and our money in it (I was a little bit surprised at how soft spoken and humble Mr Wong Teek Son, the executive chairman and CEO, is, which is quite different from what I expected).
Here are 8 things I took away from the AGM!
1. Riverstone has strong moats in certain cleanroom gloves (especially Class 100)
Cleanroom segment has performed well and better than healthcare last year, and will continue to be the focus for the next few years, given the higher margins and strong demand. Overall market demand for cleanroom gloves is expected to grow at 10% per year, but as the market continue to switch from natural rubber to nitrile rubber gloves (which Riverstone is in), the expected market growth would be higher than 10%. Riverstone’s plan is to grow cleanroom volume by 20% per year steadily, which means taking some market share from both natural and nitrile rubber players. Although the sales volume side should not face much pressure, Mr Wong expects there would be some pressure on both pricing squeeze (2%-3% per year) and costs.
According to management, Riverstone among the few strongest players in cleanroom, with the biggest competitor being Ansell and Kimberly Clark (but one of them focus more on the U.S. and the other on Europe, and less on SE Asia). Within cleanroom, there are many sub-categories, in terms of material (latex, nitrile, PVC coated) and class. Riverstone is especially strong, or probably the best, in Class 100 gloves, with about 50% market share worldwide in terms of volume. These Class 100 cleanroom gloves made up about 20% of total revenue last year. According to Mr Wong, within Class 100, Riverstone has the best technology in the world, where its gloves emit only a certain low amount of electrostatic particles (something like that), and the next best competitor is still very far behind in technology in terms of that measurement. In terms of competition in Malaysia, there are very limited players in Malaysia in cleanroom. Besides that, a barrier of entry for new competitors is that the process to become a cleanroom vendor is longer than healthcare gloves, as the criteria is much stricter.
Riverstone’s cleanroom gloves are also highly customised. We can’t really put a % to how much of its gloves are actually customised for certain customers, and how much % are non-customised standard gloves/ solutions. This is because almost the entire solution/process/product is sort of customised, where Riverstone’s team engages with and work closely with the customers’ engineers in their production sites, for long periods, figuring out the specifications/ solutions that best fit the customers’ situation/demands. Some of their customers have been with them for decades, and they are always constantly working together to continue customising the best solution. Every customer is different, for e.g. each requires gloves that can withstand certain chemicals differently, and therefore it is not a simple standard process. These are the reasons why its customers are very sticky, according to Mr Wong. Furthermore, Riverstone deals directly with most of these customers (instead of going through distributors), which is time and energy intensive, but resulting in a very close relationship with the customers, which Mr Wong sees is one of the competitive advantages Riverstone has over its competitors in the cleanroom segment.
Overall, Mr Wong thinks that the key issue that decides whether Riverstone can perform well in cleanroom in the long run is whether it can constantly catch up in terms of technology, and not capacity/demand issues, as technology is really important in this field.
A side point on cleanroom expansion plan is that Riverstone has set up new service centers in Shenzhen and will set up centers too in Vietnam soon.
2. Healthcare overall demand is still strong
Overall demand for healthcare gloves is now 270 billion units and is expected to be 8% per annum (i.e. about 20 billion units per year). Riverstone is expanding 1.0-1.5 billion units every year, so it’s only a small portion of the total market increase.
According to Mr Wong, it is not easy to develop good and cheap healthcare gloves. The management running the company are very important, and training to personnel is very important too. Given that Riverstone has executed well and is now well recognised by the customers, Mr Wong is confident that this business segment will be consistent, as long as he and the team manage it well.
In terms of distribution strategy, Riverstone relies on distributors for big orders for large companies, which comprise a large portion of its sales. At the same time, Riverstone also specifically allocate some of its sales to small customers, in which it deals with them directly to establish a direct relationship (like its cleanroom segment) and performs some customisation solutions to build the business together with the customers. In short, Riverstone is trying to use its advantage of being a relatively smaller company and craft out some niche and competitive advantage here, instead of just mainly competing on costs and quality.
On issue of potential over-supply and excess capacities in the market, Mr Wong said that he is not concerned. He said that what you hear in the market is only companies/people telling you how much new capacities are coming in, but what you don’t hear is that how much of the existing capacities are old capacities that have to be retired or not being used.
On the recent problems faced by Chinese healthcare glove players due to pollution issues, the extra demand provided to non-Chinese players were taken up by Riverstone competitors, which is why we see Top Glove, etc doing very well in the last quarter. However, given that Riverstone has always been operating at almost full capacity (~90%), it does not have excess capacity to benefit from this situation.
And on R&D, the 20-strong R&D team used to be all doing R&D on cleanroom gloves, but now some of them are working on healthcare gloves to work on innovative products and some upgrading of existing products.
3. Continued efforts in automation will help to drive operating costs down
Mr Wong shared that although they have been implementing automation in the production processes for a few years, there are still much more room for automation. This is because the technology is always changing, and there are always new and better machines/technology that they can adopt. For e.g. two main areas with automation opportunities are stripping and packing, where the expected financial benefits of those automation are to drive the unit costs of that activity (per glove) down by almost 50%.
4. The current expansion plans will last until 2019
The current expansion plans entail building dipping lines (which are interchangeable between cleanroom and healthcare) of 1-1.2b units per year. The expansion plans are until 2019 only, because after that, the company will run out of land and has to find new land.
5. China sales are still doing well
The company has been getting more sales from China, but are not reflected as such in the annual report. This is because when the China orders become big, they would ship the orders from Malaysia instead of from China for various reasons (e.g. tax). Thus, they would be captured under Malaysia’s sales.
6. Mr Wong thinks that the greatest risks/concerns are not on the demand/revenue side, but on the cost side
Mr Wong mentioned that the next few years should be stable growing business, but the key risks (including for the long-term) would not be on the demand/revenue side, but on the cost side. In particular, two points, i.e.:
- the supply of latex raw material, where the suppliers (like companies XX and XX – I forgot the name, but I mentioned Synthomer which Mr Wong acknowledged too) may not be able to supply sufficient volume (which will also result in increasing prices); and
- the supply of resources, in particular water (and electric), as the gloves production processes consume massive amounts of water, and any shortage/disruption of water supply can be quite detrimental to the operations.
7. Other points
- The recent take-up of borrowing is for Ecomedical Gloves for expansion into Vietnam (which is easier in terms of cash management across different geographies).
- Receivable days for cleanroom are generally longer, at around 90 days, versus 0-60 days for healthcare.
- Lim Sing Poew, who joined Riverstone as Group general manager in 2017, is actually the company’s ex-CFO last time. He went to work for a competitor Top Glove for 1.5 years, but came back in the end. (Note: I personally think that this shows something).
- The company hedges 50% of its sales revenue every month (by selling forwards), and won’t change this hedging strategy because it’s hard to predict the changes. It prefers to focus on the business side, instead of the FX side.
- The company’s remuneration is highly performance based, both for management and also for all employees to some extent. The staff costs in FY2017 increased by 20%, from RM80m to RM97m, due partly to increase in base salary (which happens every year) and partly to higher incentives for the year (all the employees, including general workers, got a 1-week incentive as the company achieved 10% growth in terms of profit over the previous year). Besides that, the management’s remuneration has a large portion based on performance too, where there is a minimum hurdle in terms of net profit to cross to start getting the profit sharing component, which increases as it crosses higher tier hurdles.
8. Last but not least, Mr Wong will still be here to run the business for the foreseeable future
Mr Wong thinks that the overall outlook for the company is still looking good. When asked whether he would sell out if approached by interested parties (e.g. the bigger glove companies which can benefit from its strong cleanroom segment), his answer for now is no. He said that his health conditions are still okay (although it’s very energy-intensive to run a glove company, due to the high level of focus needed – a disruption or an issue in operations for a few hours can lose a lot of production volumes), he is not in need of those finances too, and he is still passionate about the business, and therefore he wants to continue to run it as long as health conditions permit.
I personally am very reassured by this, by his passion/energy for the company (while adopting a conservative approach to grow the business – which protects the downside), which makes me feel comfortable handing my money to these diligent, honest and down-to-earth management for them to take care of it and compound it well (together with the growth of the business).
The Nomad Investor 