Comprehensive Analysis of Selected Companies in the Market

OCBC Investment Research – Market Pulse – 4 Dec 2024

In this detailed analysis, we delve into the current market performance and projections for a selection of prominent companies, as identified by OCBC Investment Research. This report covers Riverstone Holdings Ltd, China Longyuan Power, and offers insights into various market indices, providing a comprehensive understanding of investment opportunities and risks.

Riverstone Holdings Ltd: Harnessing Cleanroom Expertise

Harnessing Expertise for Long-term Value

Riverstone Holdings Ltd (RSTON SP) is leveraging its cleanroom glove expertise to create long-term value. With a positive macroeconomic backdrop, the company anticipates pleasant surprises in earnings and valuation. The recommendation is a BUY rating, with a fair value estimate of SGD1.16.

Earnings Growth Post-Pandemic Boom

Riverstone Holdings experienced a revenue growth of 33.9% year-over-year (YoY) and 20.9% quarter-over-quarter (QoQ) in 3Q24, reaching MYR298.4 million. This growth was driven by increased demand for cleanroom and healthcare gloves. Cleanroom glove volumes rose approximately 10% QoQ, largely driven by demand from electronics and pharmaceutical sectors, while healthcare gloves saw frontloaded orders due to anticipated US tariffs. However, gross margins saw a contraction from 40.2% to 34.7% QoQ, attributed to rising raw material and labor costs.

Favorable Macroeconomic Backdrop

The expanding electronics industry, driven by the rise of artificial intelligence (AI) and its applications, is expected to boost demand for high-end cleanroom gloves. Additionally, the “China Plus One” strategy, propelled by US tariffs on China-made medical gloves, presents significant opportunities for Malaysian manufacturers like Riverstone.

Valuation and Prospects

Despite a 16.9% rally in share price following positive 3Q24 earnings results, Riverstone remains optimistic about its long-term prospects. The company is focused on cleanroom gloves, working closely with customers to develop customized solutions, fostering strong, long-lasting relationships. Riverstone’s capacity to meet high-volume, lower-margin healthcare glove demands ensures balanced contributions and diversified returns, enhancing growth potential.

Recommendation

The fair value estimate is derived from a target price-to-earnings (P/E) multiple of 18x to forecasted FY25 earnings per share (EPS) of 6.46 Singapore cents. This adjustment reflects a premium due to favorable market conditions for Malaysian glove manufacturers and the resilient growth in the electronics sector. Riverstone is currently trading at a 70% discount to its peer average, suggesting it may be undervalued, presenting a compelling opportunity for investors.

China Longyuan Power: Balancing Solar Growth and Wind Efficiency

Fast-Growing Renewable Capacity

China Longyuan Power (916 HK / 001289 CH) is witnessing rapid growth in its renewable capacity. In the first nine months, the company added 2,650MW of renewable capacity, primarily solar (2,030MW) over wind (626MW). Additionally, Longyuan is set to acquire 4GW of renewable assets from its parent company, CHN Energy. The firm aims to add 30GW of renewable energy capacity by 2025, as outlined in its 14th Five-Year Plan.

Subsidy Collections and Earnings Growth

China Longyuan reported approximately 30% earnings growth in 3Q24, supported by disposal gains, despite a larger-than-expected fall in wind tariffs. The group received renewable tariff subsidies of CNY3.5 billion in 9M24, an 8.3% YoY increase, leaving around CNY37.7 billion uncollected by the end of 9M24. The firm is estimated to collect about CNY5 billion annually.

Opportunities and Risks

China Longyuan’s future capacity growth will be driven by a mix of wind power and photovoltaic projects. The firm has potential to improve efficiency by replacing smaller wind turbines with larger ones in older wind farms. The digital transformation of assets should reduce labor needs and improve utilization hours. However, risks include slow subsidy receivables and unfavorable tariff policy changes.

Valuation and Recommendation

Following updated assumptions, the fair value estimate has been adjusted from HKD9.60 to HKD8.40 (916 HK) / CNY20.50 to CNY18.00 (001289 CH). The firm fares below the industry average in governance and human capital but excels in renewable energy opportunities and carbon emissions. The recommendation is a BUY for 916 HK and HOLD for 001289 CH.

Conclusion

This analysis highlights the investment potential of Riverstone Holdings and China Longyuan Power amidst evolving market dynamics. Investors are encouraged to consider the detailed insights and recommendations provided by OCBC Investment Research as they navigate the complexities of the financial markets.