Riverstone Holdings Ltd - Stock Valuation Report

RIVERSTONE HOLDINGS LIMITED
STOCK VALUATION REPORT
AUGUST 13, 2014
TO PROFESSOR DAVID DING
PRESENTED BY TEAM 4

1
EXECUTIVE SUMMARY
FUTURE PLANS
Riverstone is expanding. It plans to upgrade facilities in Malaysia by increasing the number of
cleanrooms for laundry and packaging of our products, install additional cleanroom plant and
equipment and an additional dipping line by adding additional floor space to house additional plant
and equipment in Thailand, and expend the production facilities of Riverstone Industrial Malaysia
and Riverstone China.
Riverstone intends to enhance current product processes, penetrate new industries, expand sales
network and enhance brand awareness. They are building relationships with existing customers in
the HDD and semiconductor sectors within the electronics industry through joint efforts in product
development, participating in exhibitions and publishing advertisements in trade publications.
Riverstone also intends to grow business through joint ventures and acquisitions. It is exploring
investment opportunities through acquisitions, investments, strategic alliances and/or joint
ventures with suitable strategic partners.
CURRENT SITUATION
Riverstone is in a promising industry. Riverstone manufacture, source and market mainly nitrile and
natural rubber gloves primarily for use in a class 10 and class 100 cleanroom environment, also
Market Price: 0.915
Target Price: 2.82
BUY

2
other cleanroom consumable products comprising cleanroom packaging materials and finger cots.
There will always be a stable demand rubber whether the whole economy is in growth or recession.
In our report, we calculated that beta is 0.1854, which means that riverstone is inelastic with the
market.
Also, riverstone is one of the main medical glove manufacturers in malaysia. It has the advantage
of sticky clients, technology for complex cleanroom and nitrile gloves as well as a good reputation
on the market.
What is more, riverstone has a healthy financial status. The efficient management of its asset leads
to have a relevant high roe. Riverstone is increasing their working capital efficiency. The company
has enough current assets to meet its current liability, which means that they have less liquidity
risk.
BACKGROUND
A PIONEER IN CLEANROOM AND NITRILE GLOVES
Riverstone Holdings is a rubber glove manufacturer and one of the pioneers in cleanroom and Nitrile
gloves. It possesses a niche in the electronics cleanroom industry and has been focusing on this
industry since 1991. Riverstone was first established in 1989 and by the end of 1994, it became the
first manufacturer of cleanroom gloves in Asia, possessing a fully integrated production process. It
also became the first manufacturer of nitrile gloves in Malaysia that very same year. Four years
ago, Riverstone expanded into manufacturing medical nitrile gloves for the healthcare sector.
Based on its past experience in manufacturing nitrile gloves, the Company managed to deliver
customized gloves and thus, differentiated itself from the competition.
Riverstone has two main consumers as a rubber glove manufacturer. They are cleanroom users in
the electronics industries and healthcare workers in hospitals and clinics. Their distribution

3
channels would be through RS Riverstone Resource brand for cleanroom products and medical
supplies vendors for healthcare products.

4
HISTORICAL ANALYSIS FOR RIVERSTONE (JAN 2009 – DEC 2013)
We can see the stock price performance in the last five years from the chart above and explain
below the reasons for the major ups and lows:-
Point 1 (July, 2009) Since the global economy
faced recession, the fall is the result of the
lower demand for the Group’s products.
Point 2 (Feb, 2010) After Riverstone announced
that EPS of 3.56 sen against 1.88 sen a year ago
during last three months, ROE jumped to 17.2%
against 15.8% a year ago and ROA to 15.1%
against 14.2% a year ago, resulting in the share
price jumping to SGD 0.65.
Point 3 (Aug, 2011) Stock markets in Asia and
Australia plunge, having an in turn effect on the
Company’s share price.
Point 4 (May, 2012) The share price of
Riverstone increased by 26.8% primarily due to
higher sales of healthcare gloves which led the
revenue to increase by 13.7%.
Point 5 (Nov, 2013) Riverstone expanded its
production capacity to meet the increasing
demand of products especially in healthcare
gloves industry.
1
2
4
5
3

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SWOT ANALYSIS
INDUSTRIAL OUTLOOK
ENVIRONMENT
Malaysia is currently one of the largest rubber products exporter in the world and the world leader
in producing natural rubber and nitrile rubber gloves. Malaysian producers fulfill almost 50% of the
Strengths
•Established and reputable brand
•Ability and wilingness to meet customers' needs
for customisation
•Niche business provides a wide moat
•Sound management ensures solid financial health
•Enlarging capacity provides growth opportunities
and economies of scale
•Strong financial position and no long term debt
Weaknesses
•Expansion in healthcare gloves capacity may
exert pricing pressure
•Inability to pass on full impact of any cost
increase
Opportunities
•Demand for cleanroom gloves to stay healthy due to
company’s niche in the premium market
•Demand for healthcare gloves to grow exponentially,
driven by European customers diversifying their
supplier base
•Wider opportunities from tablet and mobile device
manufacturing
•Customised medical gloves to provide growth driver
Threats
•Upstream price fluctuations may lead to higher
costs
•Exposure to forex volatility
•Slowdown in economy and semiconductor
related manufacturing
•Higher raw material costs
•Foreign exchange risk
Rubber Product (in Thousand tonnes) 2008 2009 2010 2011 2012 2013
Other Gloves 5,991.92 6,279.86 7,930.10 8,817.02 9,489.20 9,363.22
Surgical Gloves 916.34 866.21 985.38 1,074.51 1,070.63 1,170.30

6
global demand of medical gloves. Last year, Malaysia exported RM10.5 billion worth of medical-
related gloves and is globally renowned for its high quality and competitively priced rubber products.
POLITICAL AND LEGAL
Comparing Malaysia to her surrounding countries of Thailand and Indonesia; Malaysia has a more
stable political system as well as better R&D. The logistic infrastructure is also better in Malaysia
compared to her neighboring countries.
Next, there is an Economic Transformation Program (ETP) Malaysian government to transform their
economy by 2020. Under ETP, Malaysian rubber sector will not only maintain its hectares at one
million hectares but there will be additional zones of one million hectares by exploiting appropriate
land bank in Sabah and Sarawak. There are also replanting activities, which increased to 40,000ha
from 20,000ha per year.
This ensures that companies in Malaysia that produce rubber products will have continual access to
good local rubber supplies at competitive prices. The low logistical cost of transportation will also
be maintained.
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
8,000.00
9,000.00
10,000.00
Other Gloves
Gloves
Malaysian rubber products manufacturers
include MNCs and joint ventures from
numerous countries including the USA,
Europe and Japan and local small medium
enterprises (SMEs). On the left is a chart
showing the sales from Malaysia from 2008
to 2013.

7
ECONOMIC FACTORS
In addition, according to the McIlvaine Company’s report World Cleanroom Markets, Asia is
projected to be the largest buyers’ hub by 2015 for cleanroom consumables. The region is currently
the fastest growing across the globe in both consumables and hardware segments. It is forecasted
that cleanrooms consumables sales will surpass $8 billion through 2015 with
biotechnology/pharmaceutical sectors being the third largest consumers of cleanroom products.
What this means is that there will be continual demand for the products that Riverstone produces.
TECHNOLOGY
Due to the expansion of technology, more companies will be experiencing a greater demand for
high technologic gloves such as Nitrile gloves, which forms a large part of RIverstone’s business.
The barrier to entry is high, as manufacturing such gloves requires a three-step process that
competitors might not have the expertise in.
The raise in demand for smart phones and tablets in turn increases the demands for Nitrile /
Cleanroom gloves which leads us to believe that in the next five years, Riverstone will have a
healthy growth rate.
COMPETITORS
The major competitors of Riverstone include Supermax Corporation Berhad and Kossan Rubber
Industries Berhad. We provide slight background of these competitors below.
Supermax Corporation Berhad
Supermax Corporation Berhad was founded in 1987. It manufactures, distributes, and markets
medical gloves in Malaysia. It provides powdered and powder free latex examination gloves, powder
free nitrile examination gloves, and latex surgical gloves. The company is also involved in the
trading of gloves. The company, listed on the Main Board of Bursa Malaysia Securities, sells its

8
products to laboratories, hospitals, pharmacists, doctors, and surgeons under the Supermax, Aurelia,
Maxter, Medic-dent, and Supergloves brands. Similar to Riverstone, Supermax Corporation Berhad
also exports its products to approximately 145 countries in the regions of the United States, Europe,
the Middle East, Asia, and the South Pacific.
Kossan Rubber Industries Bhd
Kossan Rubber Industries Bhd was established in 1979. With a growing market demand for its
products, the company continued to progress rapidly and was one of the first companies in Malaysia
to venture into glove manufacturing. The company introduced the first glove production line in
August 1988 and is able to make 16 billion pieces of gloves per annum today.
While Riverstone focuses on the specialized cleanroom products, Kossan has two main product
categories that are latex gloves and technical rubber products. Similar with Riverstone, Kossan has
a business network that extends to the world. The market of Kossan extends to various places,
including the USA, Canada, Europe, Asia Pacific, Latin America, Middle East and Australia. This year,
Kossan’s earnings outperformed its peers. Results reflected its ability in passing on higher
electricity cost and the result of its ongoing automation effort. Elsewhere, higher pretax profit
from its cleanroom division partly offset the lower profit of its technical rubber product division.

9
HISTORICAL PERFORMANCE RATIOS
PROFITABILITY ANALYSIS
Gross Profit Margin
As shown in the chart, gross profit
margins of Riverstone kept constant at
about 30% from 2009 to 2013, except
the lowest of 22.6% in 2011 in the past
five years. Kossan enjoyed the highest
gross profit margin, at about 40% among
these three companies during the past
five years, followed by Supermax at about 31%, slighter higher than Riverstone. Riverstone has the
lowest gross profit margin. All three companies experienced the lowest gross profit margin in 2011,
which is because of weaker US Dollar against Malaysian Ringgit, high raw materials prices and the
delay in passing on the higher costs to customers.
Return on Equity (ROE) and Return on Asset (ROA)
0
10
20
30
40
50
Dec-31-2009 Dec-31-2010 Dec-31-2011 Dec-31-2012 Dec-31-2013
Gross Profit Margin
Riverstone Kossan Supermax
0
5
10
15
20
25
30
ROE
0
2
4
6
8
10
12
14
ROA

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As shown above, Riverstone’s ROE was higher than Supermax’s after 2010. Also, its ROE was almost
constant at about 20% during the past five years, while both Kossan’s and Supermax’s ROE had big
fluctuations from 18% to 28% and from 13% to 26% respectively. This is mainly due to Riverstone’s
zero debt and efficient management. Also, as seen in Dupont analysis, ROE can be decomposed into
ROE = Profit Margin x Total Asset Turnover x Equity Multiplier = ROA x Equity Multiplier
Riverstone has highest ROA at about 11% compared to Kossan’s 10% and Supermax’s 7%, which
contributes to its high and stable ROE.
Although Riverstone’s gross profit margin is not the highest among the three companies, its ROE
still exceeds Supermax, ranking second. This mainly comes from its zero debt, efficient
management and high return in assets. Furthermore, in the rubber glove manufacturing industry,
the market needs are relatively stable and are not affected too much by an economic slowdown
and thus, the profits stay stable. So we have full confidence in forecasting Riverstone’s earnings in
following years due to its stable ROE.
TURNOVER RATIOS
0
10
20
30
40
50
60
70
80
90
Receivable Conversion Period
0
20
40
60
80
100
120
140
Inventory Conversion Period

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As shown above, Riverstone’s cash conversion cycle shows a downwards trend, reaching the lowest
point of 83.1 days in 2013. However, Kossan’s cash conversion cycle keeps constant at about 85
days and Supermax experiences a growing cash conversion cycle, even reaching the highest point
of 155.6 days in 2012. Riverstone can convert resource into cash within less days. This is because
of the constant downwards inventory conversion period, constant downwards receivable conversion
period and constant upwards payable conversion period. In recent years, Riverstone’s management
is an experienced, diligent yet conservative one, its working capital is getting increasingly used.
LIQUIDITY ANALYSIS
0
50
100
150
200
Cash Conversion Cycle
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Quick Ratio
0
10
20
30
40
50
60
Payable Conversion Period
0
1
2
3
4
5
6
Current Ratio

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Compared to Kossan’s and Supermax’s stable current ratio and quick ratio, Riverstone has a U-
shape current ratio pattern and quick ratio pattern. Riverstone has the highest current ratio and
quick ratio mainly because of its high inventory and receivables. Also, with its expansion, it got
more inventories. Riverstone’s receivables kept accumulating because of its policy that customers
who are regular and prove to be creditworthy will be assigned a favourable credit term approved
by management.
In 2010, Riverstone expanded into the manufacturing of medical nitrile gloves for the healthcare
segment. The payables increased as a result of longer credit term granted by a few main suppliers
and contractors causing current liability to increase by 81.82%. So there was a sharp drop in both
current ratio and quick ratio in 2010 from 2009.
In 2011 and 2012, bigger increases in payables than in receivables led to both current ratio and
quick ratio to stay at a low position. However, the case was different in 2013. Current ratios
increased by almost 55% due to increase in sales activities and higher production volume, leading
to an increase in inventories and total receivables, while current liabilities dropped only by 10.69%
mainly due to lower payables which offset with the increase in derivatives and the increase in
provision of taxation. So both current ratio and quick ratio went back to about 4.8% and 4%
respectively.
As described, Riverstone has probably less exposure to liquidity risk. But high current ratio and
quick ratios are not necessarily good as it ties too much working capital in the current asset, which
could have been put to better used.
SOLVENCY ANALYSIS
As shown in the charts below, compared to Kossan’s and Supermax’s high long-term D/E or total
D/E, Riverstone has almost negligible debt. In 2010, it stopped borrowing or issuing bonds. Also, its
common stock increased in last 5 years indicating its high use of equity to finance its growth.

13
Common Stock
(in millions MYR)
Dec-31-2009 Dec-31-2010 Dec-31-2011 Dec-31-2012 Dec-31-2013
Riverstone 106.8 110.1 113.2 123.8 156.3
Without debt, Riverstone has a strong liquidity ability and has no interest expenses. Also, it is easier
for Riverstone to borrow from banks because of its financial stength. But zero debt is not necessarily
good. Zero debt means that Riverstone doesn’t use the leverage benefit.
RISK ANALYSIS
Riverstone Supermax Kossan
Beta 0.1854 0.2776 0.1232
Average rate of return (%) 0.2225 0.6943 0.3764
Standard deviation 0.0330 0.0669 0.0597
To evaluate the market risk of the stock of Riverstone, we used the MSCI World Index as the
market benchmark as Riverstone, Supermax and Kossan are all serving global clients. We used the
weekly rate of returns of Riverstone, Supermax and Kossan against MSCI World Index over a five-
year period and attained the beta of the three companies as shown on the table above. The below-
0
10
20
30
40
50
60
70
Total D/E
0
5
10
15
20
25
30
35
Long-term D/E

14
1 beta of Riverstone showed that Riverstone tended to be less volatile than the market and thus a
relative low market risk. Both Supermax and Kossan had a below-1 beta as well.
Riverstone now is one of the major integrated manufacturers of cleanroom gloves in Asia. It
has established a stable business transaction record in the sector. Concurrently Riverstone is going
on an expansion spree, with planned production upgrades taking its capacity far above current
levels. Although this activity might increase the operating risk of Riverstone, but we feel that
Riverstone still had quite low risk because of its niche position in the cleanroom segment and has
room for growth.
However, comparing beta with the market benchmark is not enough to evaluate risk. We
obtained three companies’ average rate of return and the corresponding standard deviation using
a 5-year period. We found that Riverstone has the lowest rate of return and the lowest standard
deviation, which meant that Riverstone had the lowest risk associated with price-fluctuations in
the market.
Hence, we feel that Riverstone is an attractive investment for risk adverse investors.
COMPUTATION OF WEIGHTED AVERAGE COST OF CAPITAL (WACC)
To compute the WACC, we have assumed the risk free rate to be the Singapore government 10-year
bond yield of 2.46% and the market return of 13.56% by analysing the MSCI World Index past returns.
Thus, the required rate of return for Riverstone stock, using the Capital Asset Pricing Model, comes
out to be 4.5179%.
Rs = 2.46 + 0.1854 x (13.56 – 2.46) = 4.5179%
As the company has zero debt, the WACC is equal to the required return on stock, i.e. 4.5179%.

15
VALUATION
DIVIDEND DISCOUNT MODEL (DDM)
V0 = D0(1+g)/(rs-g)
One of the methods we used was dividend discount model or the Gordon Growth Model as the
Company had been paying dividends for more than the last 5 years.
Year 2009 2010 2011 2012 2013
Dividend per share (MYR) 0.0430 0.0590 0.0590 0.0600 0.0680
Using the above dividends per share, the CAGR, g was computed as 6.43% per annum. Further, as
determined previously, the required return on stock is 4.5179%. However, these figures give us a
negative denominator in the dividend discount model and stocks don't have a negative value.
We have thus realized that DDM is not suitable for high growth companies such as Riverstone. Its
use is limited to firms that are growing at a stable rate. Also, DDM assumes that futures dividends
will grow at a stable rate in perpetuity, taking no account of the possibility that rapid near-term,
growth could be offset by slower further into the future. Due to all these limitations, DDM is not
suitable for valuation purposes.
P/E RATIO METHOD
* based on Yahoo Finance
** Forecast income statement
We got 0.89 using P/E ratio model but we do
not believe the intrinsic value is 0.89. This
model is suitable companies with a
comparable benchmark. Before exploring
more limitations about P/E ratio method, here
P/E ratio of industry* is 13.17.
Earnings per share** is MYR0.17
Share price (MYR)=13.17 x 0.17 = 2.29
Share price (SGD)=2.29 x 0.39 = 0.89
P/E= Share Price/ EPS
10
11
12
13
14
15
16
P/E Ratio

16
we introduce P/E ratio. P/E ratio is the price an investor is paying for $1 of a company's earnings.
Acknowledging that earnings is after interest and is the residual used for dividends and retained
earnings, meaning P/E ratio does not take into account capital structure. As we know, debt has a
leverage effect on the company. The stock price of non-zero debt company would have higher
volatility than that of zero debt company. Riverstone has a special capital structure- zero debt.
Considering this, we can’t compare Riverstone with Kossan, Supermax even the whole market.
P/E ratio assumes that the company have a stable earnings multiple and is thus more suitable for
mature companies. But Riverstone is in its developing stage. As below shown, Riverstone has a
fluctuating P/E ratio from 11 to 14.4 making this a not so reliable method of valuation.
FREE CASH FLOWS TO FIRM (FCFF) METHOD
The third method used to estimate the share price of the firm is FCFF method. In this method, we
have forecasted the income statement and the relevant balance sheet items to arrive at the free
cash flows for the next five years. Please refer to Appendices I to IV for the actual and forecast
financial statements. In computing the FCFF, we have made the following mjor assumptions:-
1. We have assumed the sales to grow for the next 5 years at the Compounded Annual Growth
Rate (CAGR) from the year 2009 to year 2013 of 23.13% p.a. Thereafter, from the 6th year
onwards, we have assumed the Company to grow at the economic growth rate and have
assumed it to be the US treasury 10-year bonds risk-free rate of 2.43%.
2. For the operating expenses/income items and working capital & other operating assets, we
have used the historical average of their respective percentages of sales from 2009 to 2013.
3. We have assumed the capital expenditure to grow at 17% p.a. which is the historical average
annual growth rate for the last five years.

17
4. We have assumed the tax rate of 20% of Earnings before Tax (EBT) for the next 5 years.
Although corporate income tax rate in Malaysia is 25%, the historical average of the tax rates
for Riverstone has been a low of 12.81% of EBT and increased to 18% to 20% in 2012 and 2013.
Acknowledging that the Company will likely have tax reliefs given its capital expenditure
and for prudence, we have assumed the tax rate to be a high of 20% of EBT for next 5 years.
Using the above assumptions and necessary calculations, the results arrived at are summarized in
the table below. For detailed computation of the FCFF, please refer to Appendix V of the report.
* This value of PV is at beginning of Year 1 which is 31 December 2013. We have grown it back to 8 August 2014 by
multiplying by (1+0.045179)0.6027
.
** 1MYR = S$0.3899 (Obtained from Monetary Authority of Singapore website)
As derived above, the share price of the Company should be S$2.82 using the FCFF method.
Compared to the PE ratio method and the Dividend Discount Model, we believe that the FCFF
method is most suited to companies such as Riverstone because it takes into consideration the high
growth in the short term and stable and slow growth in the long term. Therefore, we recommend
the share price of the Company to go up to $2.82 and thus, recommend a buy position.
Sensitivity Analysis
We have done a sensitivity analysis analysis to determine the impact on the shareprice due to
changes in a few key input variables.
2014 2015 2016 2017 2018
Currency (in millions) MYR MYR MYR MYR MYR
Free cash flow to firm (FCFF) 4.89 25.85 34.99 46.75 61.86
Discount factor (at 4.5179% WACC) 1.0452 1.0924 1.1418 1.1934 1.2473
Present value (PV) of FCFF 4.68 23.66 30.64 39.17 49.60
Total PV of five year FCFF 147.75
Terminal value 3,079.92
PV of terminal value 2,469.27
PV of total FCFF* (in millions MYR) 2,617.02
Total PV on 8 August 2014 (MYR) 2,687,653,401.53
Number of shares 371,226,025.00
Share Price (MYR) 7.24
Share Price (in SGD)** 2.82

18
We have done 2 scenarios, in one of them we increase the long term growth rate by 1% and in
second case, we increase the market return by 1%. The detailed Calculations are shown in
Appendix VII.
Scenario 1:- Using the FCFF method, our current share price is $2.82. If we increase the long term
growth rate of the free cash flows by 1% to 3.46% keeping all the other variables constant, the
share price increases by 91% to $5.39. This implies a high sensitivity of the share price to the long
term growth rate. However, this is understood as 1% increase in long term growth rate is very
significant as it impacts the cash flows till infinity.
Scenario 2:- If we increase the market return by 1%, keeping all other variables constant, the
required return on stock increases to 4.70334% from the current 4.5179%. Thus, the WACC, which
is the same as required return on stock in Riverstone’s case, increases. This leads to the share
price falling to $2.58 by 8.5%.
Therefore, we do realize the limitations in our computations as the assumptions used in the FCFF
method and to calculate the WACC affect the share price of the Company and there is no right
answer for the share price. However, given our assumptions, we believe the share price of the
Company to be at $2.82.

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