fundamental anlysis department gloves industry report fundamental analysis department rubber gloves...

Research Analysts:

Ong Zi Hao

Woo Kai Mun Dennis

Wu Yuchen

Xu Chen

FUNDAMENTAL ANALYSIS DEPARTMENT RUBBER GLOVES INDUSTRY REPORT

Fundamental Analysis Department Rubber Gloves Industry

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Contents

Industry Overview .................................................................................................................................................. 2

Demand Analysis ................................................................................................................................................ 2

Supply Analysis ................................................................................................................................................... 3

Rubber Gloves Products Analysis ....................................................................................................................... 3

Natural Latex Rubber Gloves ......................................................................................................................... 3

Synthetic Rubber Gloves ................................................................................................................................ 4

Market Dynamics ................................................................................................................................................... 5

Barriers to Entry ................................................................................................................................................. 5

Shifting of Demand ............................................................................................................................................. 5

Key Drivers ............................................................................................................................................................. 6

Overview ............................................................................................................................................................ 6

Short Run Drivers ............................................................................................................................................... 6

Disease Outbreak ........................................................................................................................................... 6

Currency Depreciation ................................................................................................................................... 6

Long Run Drivers ................................................................................................................................................ 7

Aging Population ............................................................................................................................................ 7

Healthcare Reforms ....................................................................................................................................... 8

Electronic Manufacturing Boom .................................................................................................................... 8

Case Study – Riverstone Holdings Ltd (SGX: AP4.SI) ............................................................................................. 9

Company Description ......................................................................................................................................... 9

Qualitative Analysis ............................................................................................................................................ 9

Dominance in the Cleanroom Business ......................................................................................................... 9

Growth Opportunities in the Cleanroom Business ........................................................................................ 9

Well-Positioned to Face Increased Competition in Healthcare Business .................................................... 10

Gradual Expansion of Production Capacity to Meet Rising Demand ........................................................... 10

Improved Operational Efficiency and Productivity ...................................................................................... 10

Quantitative Analysis ....................................................................................................................................... 11

Valuation ...................................................................................................................................................... 11

References ............................................................................................................................................................ 12

Appendix A – Full Discounted Cashflow Model .................................................................................................. 13

Page 1: Output Page ......................................................................................................................................... 13

: Assumptions Page................................................................................................................................ 14

Page 3: Net Working Capital Projections Page ................................................................................................. 15

Page 4: Weighted Average Cost of Capital Calculation Page ........................................................................... 16


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Industry Overview

The rubber gloves industry is a submarket of the rubber products industry. Industries which share the

same raw materials with the rubber gloves industry include tire industry, general rubber product

industry, and footwear industry. Rubber gloves are commonly used in industries such as healthcare,

cleanroom manufacturing, and food industry. Most of the major players in the industry own their own

distribution channels while some also rely on third-party distributors. The industry can be further

classified as Natural Rubber (NR) and Synthetic Rubber (SR). One of the essential raw materials of

SR is crude oil, so price of SR is also positively related to the price of oil.

Demand Analysis

The rubber gloves market is a submarket under the rubber product market, which includes

other submarkets such as tires, footwear, and general rubber manufacturing products. It is definitely

not the biggest market among the other sub industries of rubber, but it has been growing at an average

rate of 8% to 10%. Driven by the global annual consumption of medical examination and surgical

gloves from the healthcare industries, as well as the greater demand of cleanroom gloves from

manufacturing industries, more than 180million pairs of rubber gloves are consumed globally in 2015,

which means 25 pairs of gloves used by one person in average. The market is expected to grow

further at the current rate despite the slowdown of world economy.

Even though the developed countries, such as US, Europe and Japan only make up around 10% of the

world total population, they consume more than 60% of the rubber gloves. So the demand of rubber

gloves is largely concentrated in the developed countries. And in recent years, China, India, and

Brazil, and other developing countries are catching up, as their populations grow rapidly and

expenditure on healthcare also sees an upward trend. It is thus believed that the future growth of the

market will be mostly driven by the developing countries.

Figure 1: Global Demand Break-Down of Rubber Gloves Industry


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Supply Analysis

The supply of the rubber gloves is concentrated in the Southeast Asia, such as Malaysia, Indonesia,

and Thailand. These three countries produce more than 60% of the total rubber gloves. The oligopoly

market structure is contributed by a few reasons: firstly, the long learning curve required for new

rubber glove manufacturers increase the barriers to entry for new competition. Stringent regulations in

the US and Europe have to be met for production, and such amendments are usually capital

consuming. It is unlikely for firms producing other rubber products to shift to rubber gloves

easily. Therefore, the major firms are able to retain substantial amount of market share.

Secondly, being located centrally in a latex producing region (from Malaysia itself, Thailand and

Indonesia) reduces plenty of operational cost for the firms in these countries. They could spend less

on distribution and have a greater influence in the region. These advantages will translate

to price competitiveness, as they are able to produce at a lower variable cost. Thirdly, many rubber

gloves firms receive substantial support from the local government with cheap natural gas, water and

foreign labor.

Figure 2: Global Supply Break-Down of Rubber Gloves Industry

Rubber Gloves Products Analysis

There are few types of gloves that are most commonly demanded in the industry, with their respective

pros and cons.

Natural Latex Rubber Gloves

Latex rubber gloves are made out of natural rubber, which are the traditionally most common type of

rubber gloves in various industries, especially for protection in medical or industrial usage. Latex

rubber gloves are usually very elastic and string, and they can be stretched like nothing else and snap

back to the original shapes instantly. It is chosen by the customers for its high sensitivity due to the

fitting and thin design.

However, the only drawback of the latex rubber gloves is that some people are allergic to natural latex.

Research has found that for every 100 people, there are around 14 people who are allergic to it. The

symptoms can range from minor ones like itchy skin, to deadly ones like essential organs failure. In

the past, although uncommon, there are cases of deaths due to rubber allergy in the US hospitals,

where doctors and nurses use latex rubber gloves to perform surgical operations on latex-sensitive


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patient.

Synthetic Rubber Gloves

A popular substitute for the latex rubber gloves is the synthetic rubber gloves, which can be further

classified into many categories based on its major component. Nitrile rubber gloves are one of the

common synthetic rubber gloves. It is superior in terms of puncture resistance and chemical resistance.

Just like the latex rubber gloves, nitrile gloves also have high sensitivity and great resistance against

chemicals, so they are popular in the current healthcare industries as well. Use of these gloves when

working with nitric acid or other strong oxidizers can be hazardous; the sample may spontaneously

oxidize the gloves on contact, resulting in thermal and chemical burns from both the heat of oxidation

and the caustic sample.

Other common synthetic rubber gloves include Vinyl gloves and Neoprene gloves. Vinyl gloves are

made of poly vinyl chloride, (PVC). They are a popular choice for the food industry and situations

where high levels of durability and protection are less of a priority. Even though they are less durable,

they are the most economic choice. Neoprene gloves another kind of synthetic rubber gloves; they are

common choice for industrial productions, because they are resistant to most of the chemicals.


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Market Dynamics

Barriers to Entry

Even though producing rubber gloves doesn’t require sophisticated technology, the stringent

regulations in major markets such as US and Europe make the production methodologies not

easily transferable for other rubber products manufacturers. For example, U.S. only allows limited

amount of latex used and it plans to tighten its regulation on the rubber gloves in the future; most of

the European countries have multi-tiered regulations on the rubber gloves based on different sectors.

Every glove must meet few criteria for the shape, the weight, the thickness and the resistance level

before it can be sold in the country.

As around 60% rubber gloves globally are supplied by only a few players in the market, such as Top

Gloves, SuperMax, and Kossan. Those firms have greater market power with stable relation with the

retailers from long-term contracts. In addition, the economics of scale they enjoy will allow them to

practice competitive pricing in order to drive new entrants out of the market. In addition, those firms

are expanding their capacity rapidly with a rate of more than 10% every year, gaining greater

advantage comparing to those new entrants.

Shifting of Demand

Latex rubber gloves were once the most popular type of rubber gloves in the market. However, they

have been gradually substituted by different types of synthetic rubber gloves because people

get allergic to latex rubber, and consequences of that can be fatal. On the other hand, synthetic rubber

is equally resilient and protective to latex rubber gloves even though they are slightly more expensive

than the latex rubber gloves. However, the constantly low price of oil, an essential ingredient for

synthetic rubber production, has driven the price of synthetic rubber gloves low as well. The shifting

of demand ratio was rather prevalent between NR and SR, from 49:41 in 2013 to 53:47 in 2014. In

Europe, the synthetic rubber contributes more than three quarters of the demand.

Figure 3: Rubber Gloves Demand Break-Down in Europe


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Key Drivers

Overview

The rubber gloves industry is driven in the short run by disease outbreak and currency depreciation. In

the long run, it is driven by aging population, healthcare reforms and cleanroom manufacturing

growth.

Short Run Drivers

Disease Outbreak

Figure 4: Disease Outbreak Trend (Source: Smith et al, 2014)

Demand for rubber gloves is driven by big impact, one-off events like disease outbreak. For instance,

the recent MERS outbreak in South Korea has greatly boosted the demand for healthcare gloves.

SARS in 2003 have also created spike in demand for healthcare gloves. According to the Journal of

the Royal Society Interface 2014, the trend in disease outbreak is on the rise. While this is not good

for health, it is good for business.

Currency Depreciation

0.22

0.23

0.24

0.25

0.26

0.27

0.28

0.29

Jan 11,2015

Mar 08,2015

May 03,2015

Jun 28,2015

Aug 23,2015

Oct 18,2015

Dec 13,2015


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Figure 5: MYR/USD Chart (Source: XE Currency, 2016)

Malaysia accounts for 63% of global rubber glove exports. A weaker ringgit will boost exports of

rubber and nitrile gloves in Malaysia. The ringgit is still on a depreciation trend according to figure 5.

Rubber gloves exports are expected to benefit from this short term trend.

Long Run Drivers

Aging Population

Figure 6: Age Ratio Heat Map (Source: VanderMey, 2015)

As the population ages, healthcare services will be in higher demand. Given that gloves are used as

part of many surgical and other medical procedures, there is a positive correlation between aging

population and demand for gloves. According to the United Nations estimates, by 2060 there will be

30 people who are above 65 for every 100 people of working age. This figure is more than two times

the current ratio.


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Healthcare Reforms

Figure 7: Healthcare Spending as Percentage of GDP (Source: Veronique De Rugy, 2013)

Globally, there is a rise in more stringent healthcare laws. These new protocols include the usage of

gloves to increase hygiene levels in the medical and healthcare industry. Additionally, the healthcare

spending as percentage of GDP is increasing as shown in figure 7. This means that spending on

healthcare is increasing at an increasing rate since GDP have grown in absolute terms and the

percentage of healthcare spending has grown as well.

Electronic Manufacturing Boom

Figure 8: Rare Earth Demand (Source: Seeking Alpha, 2008)

On top of the healthcare industry, cleanroom electronics manufacturing is another industry that drives

the consumption of rubber gloves. Cleanroom electronics typically manufacture diverse, sensitive

electronic components found in smartphones, fighter jets, luxury cars etc. One thing these sensitive

electronic components usually have in common is some form of rare earth metal. Therefore, there is a

positive correlation between rare earth production and cleanroom electronic manufacturing growth,

albeit less accurate.


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Case Study – Riverstone Holdings Ltd (SGX: AP4.SI)

Current Price: $2.31 (as of 24 Dec 2015)

Company Description

Riverstone Holdings Limited; one of the leading manufacturers in the cleanroom and medical industry,

is involved in the production, sale and distribution of nitrile and natural rubber cleanroom gloves and

premium nitrile healthcare gloves internationally. The customers of its proprietary RS Riverstone

Resources branded gloves include leaders in the hard-disk drive, semiconductor, and healthcare

industries. The company operates through two key business segments: Gloves Manufacturing, and

Other Non-Gloves Consumables.

Table 1: Key Financial Ratios of Riverstone Holdings

Key Financials (USD mil) FY13A FY14A FY15E FY16E

Market Capitalization (mil) 856 SGD P/E (x) 11.76 13.49 17.86 15.18

Shares Outstanding (mil) 370.54 P/B (x) 2.16 2.40 3.95 3.33

Free Float (%) 29.32 ROE (%) 20.09 19.70 24.24 23.32

52-Wk High 2.60 SGD Div Yield (%) 3.61 2.68 1.96 -

52-Wk Low 0.955 SGD Net D/E - - - -

P/E (ttm) 23.727 EBITDA (mil) 88.5 96.7 145.6 166.2

Source: Bloomberg

Qualitative Analysis

Dominance in the Cleanroom Business

Customers in the cleanroom gloves market have gradually shifted their preferences from traditional

natural rubber gloves to nitrile gloves in the past few years. With its first-mover advantage in the

nitrile gloves market, Riverstone Holdings has been able to benefit tremendously from this shift in

demand. Currently, Riverstone Holdings is the dominant player in the niche sub-segment of high tech

Class 10 and Class 100 cleanroom gloves with a global market share of 60%. Apart from its solid

branding, Riverstone Holdings also has strong relationships with its end-customers in the cleanroom

business since it sells cleanroom gloves directly to them. Riverstone Holdings’ competitive advantage

is that its engineers are able to work hand-in-hand with its end-customers to provide tailor-made

products which are suited to their changing needs.

In addition, with the cleanroom space being seen as a niche segment, there is presently low

competition and it is also unlikely that other firms, especially volume players, will enter in the near

future. As such, Riverstone Holdings is able to keep the benefits of favourable foreign exchange rates

and high operating margins in the cleanroom segment.

Growth Opportunities in the Cleanroom Business

With a focus on the higher margin cleanroom gloves, the management of Riverstone Holdings is

looking to expand its market leadership position by exploring more opportunities in the cleanroom

business. Firstly, as opposed to a focus on the HDD market segment previously, Riverstone Holdings

will shift its attention towards the flat panels, tablets and mobile sectors. Furthermore, due to a


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slowdown in the demand for cleanroom gloves in China, Riverstone Holdings is moving into new,

relatively untapped markets like Vietnam in search of better prospects to compensate for the

lackluster demand.

Well-Positioned to Face Increased Competition in Healthcare Business

As compared to the cleanroom business segment, the outlook in the healthcare business segment is

more challenging. Due to increased competition, firms have to settle for a lower average selling price.

To stand out from its peers in the healthcare glove segment, Riverstone Holdings will focus on

providing differentiated quality products to its quality-conscious customers. So far, Riverstone

Holdings customizes 50% of its healthcare gloves for customers who value quality more important

than costs. This is done so by partnering its customers and dedicating production lines for their orders

on a long-term basis.

Gradual Expansion of Production Capacity to Meet Rising Demand

To meet the rising demand in the rapidly growing nitrile gloves market, Riverstone Holdings started

on expansion plans to develop its production facilities in Taiping, Malaysia. The entire project will be

conducted in several phases from 2014 to 2018, with each completed phase adding a capacity of 1

billion pieces per annum. When fully developed, Riverstone Holdings’ total capacity will be more

than doubled from 3.2 billion pieces to 8.2 billion pieces p.a.

Presently, Phase I and II have been completed in FY14 and FY15 respectively, bringing Riverstone

Holdings’ current capacity to 5.2 billion pieces p.a. The management of Riverstone Holdings

highlighted that the additional capacity of 2 billion pieces from both Phase I and II have already been

fully taken up by orders from its existing and new customers. As such, the company has decided to

proceed with its Phase III expansion plan earlier than projected. The factory building is now due to be

completed in Mar 2016 and Phase III would commence production in 3Q16.

Improved Operational Efficiency and Productivity

For the development project in Taiping, Riverstone Holdings is able to build on its experience and

incorporate the use of advanced technology into its newly-designed production lines. As such, the

company is able to integrate automation processes such as glove-stripping and packing in a more

conducive environment. This in turn has helped Riverstone Holdings reduce its reliance on labour,

bringing the number of workers per production line down from six to two.


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Quantitative Analysis

Valuation

Figure 9: Discounted Cashflow Model of Riverstone Holdings Ltd Output Page

Based on a very conservative estimate of 5 year revenue CAGR of 6%, an exit multiple of 10 times

and a WACC of 6.7%, the base intrinsic value of Riverstone is $2.50 (remaining assumptions in

appendix A). This value is reverse engineered to calculate the implied perpetuity growth rate of 2.4%.

This is approximately in line with the long term economic growth of Malaysia hence creating more

confidence in our assumptions. Also, the implied EV/EBITDA at $2.50 is 10.8x. This value is also

realistic, as the current EV/EBITDA is 13x. Overall, we are comfortable with the valuation output as

it is quite realistic.

However, to factor in real world uncertainty, key inputs like WACC and exit multiple are sensitized to

produce a range of intrinsic value. This intrinsic value ranges from $2.23 to $2.79. This range of

intrinsic value creates a larger margin of safety when investing.

At the time of writing, the stock price is at $2.31 where there is still room for growth, albeit marginal.

Being already in the lower levels of the range of intrinsic values calculated, it is safer to recommend a

HOLD rather than a buy.


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References

Riverstone Holdings Limited. (2015, April 1). Annual Report 2014. Retrieved January 3, 2016, from

http://riverstone.listedcompany.com/misc/ar2014.pdf

Seeking Alpha. (2008). Rare Earth Metals not so Rare but Valuable. Retrieved January 3, 2016, from

http://seekingalpha.com/article/103972-rare-earth-metals-not-so-rare-but-valuable

Smith, K.F.; Goldberg, M.; Rosenthal, S.; Carlson, L.; Chen, J.; Chen, C.; Ramachandran, S. “Global

Rise in Human Infectious Disease Outbreaks,” Journal of the Royal Society Interface, October

2014. doi: 10.1098/rsif.2014.0950

S. Puspadevi. (2015). Glovemakers optimistic of global demand growth. Retrieved January 1, 2016,

from http://www.thestar.com.my/business/business-news/2015/02/12/glovemakers-

optimistic-of-global-demand-growth/?style=biz

U.S. Food and Drug Administration (2015). Regulation of Natural Rubber Latex Gloves. Retrieved 2

January, 2016, from: http://www.fda.gov/NewsEvents/Testimony/ucm115083.htm

VanderMey, A., & Rapp, N. (2015, September 28). Chart of the day: The first world is aging.

Retrieved January 3, 2016, from http://fortune.com/2015/09/28/aging-first-world

chart/?xid=soc_socialflow_facebook_FORTUNE

Veronique de Rugy. (2013). US Healthcare Spending more than Twice the average for Developed

Countries. Retrieved January 3, 2016, from http://mercatus.org/publication/us-health-care

spending-more-twice-average-developed-countries

XE Currency. (2016). Retrieved January 3, 2016, from

http://www.xe.com/currencycharts/?from=MYR&to=USD&view=1Y

Yvonne Tuah. (2014). Glove sector to benefit from fluctuating US dollar-ringgit. Retrieved January 3,

2016, from http://www.theborneopost.com/2014/12/20/glove-sector-to-benefit-from

fluctuating-us-dollar-ringgit/

http://riverstone.listedcompany.com/misc/ar2014.pdf

http://www.thestar.com.my/business/business-news/2015/02/12/glovemakers-optimistic-of-global-demand-growth/?style=biz

http://www.thestar.com.my/business/business-news/2015/02/12/glovemakers-optimistic-of-global-demand-growth/?style=biz

http://www.fda.gov/NewsEvents/Testimony/ucm115083.htm

http://fortune.com/2015/09/28/aging-first-world-chart/?xid=soc_socialflow_facebook_FORTUNE

http://fortune.com/2015/09/28/aging-first-world-chart/?xid=soc_socialflow_facebook_FORTUNE

http://mercatus.org/publication/us-health-care-spending-more-twice-average-developed-countries

http://mercatus.org/publication/us-health-care-spending-more-twice-average-developed-countries

http://www.xe.com/currencycharts/?from=MYR&to=USD&view=1Y

http://www.theborneopost.com/2014/12/20/glove-sector-to-benefit-from-fluctuating-us-dollar-ringgit/

http://www.theborneopost.com/2014/12/20/glove-sector-to-benefit-from-fluctuating-us-dollar-ringgit/


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Appendix A – Full Discounted Cashflow Model

Page 1: Output Page


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Page 2: Assumptions Page

Revenue assumptions are driven by (a) Management’s guidance, (b) Industry and Economic Outlook,

(c) Analysts’ Consensus. Overall, we are cautiously optimistic about the rubber gloves industry and

Riverstone. This is reflected by our 9% revenue growth projection in the first year. Subsequent

revenue growth rates are stepped down by 1% per year to reflect a less bullish business outlook and

uncertainty.

Other components of the financial statements are simply a direct adaptation from the 3-year historical

averages as we believe it is in line with future expectations.


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Page 3: Net Working Capital Projections Page

The historical average of individual components of Current Assets and Current liabilities are used as a

basis for projection. The purpose is to calculate the change in net working capital, which will then be

subtracted from EBIAT to derive the unlevered free cashflow in the output page.


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Page 4: Weighted Average Cost of Capital Calculation Page

One of the key attractiveness of Riverstone is the lack of debt. Growth is funded organically due to

high margin nitrile gloves and positive cashflow. This means that the WACC solely depends on the

equity structure; independent of debt.

The risk free rate of 3% is used as it represents the yield of 30 year treasury bonds. Market risk

premium of 6.62% is based on Ibbotson Associates (a Morningstar Company) research estimates.

Levered beta is taken from Phillip Capital POEMS 2.0 Stock Analytics.

Size premium of 2% is chosen as it is a relatively small company and we require a larger discount

factor to factor in the relative lack of economies of scale and other size-related advantages.


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Research Analysts:

Ong Zi Hao [email protected]

Woo Kai Mun Dennis [email protected]

Wu Yuchen [email protected]

Xu Chen [email protected]

This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice.

©2015 NUS Invest

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