KAREX (5247) - Karex AGM 2018 Highlights



Karex AGM 2018 Highlights

Difference Gloves vs Condom
Medical Classification
Class I Medical Devices
A Class I medical device are those devices that have a low to moderate risk to the patient and/or user. Today, 47% of medical devices fall under this category and 95% of these are exempt from the regulatory process. If a device falls into a generic category of exempted Class I devices, a premarket notification application and FDA clearance is not required before marketing the device in the U.S. However, the manufacturer is required to register their establishment and list their generic product with FDA. Examples include enema kits, elastic bandages, manual stethoscopes, and bedpans.
Class II Medical Devices
Class II medical devices are those devices that have a moderate to high risk to the patient and/or user. 43% of medical devices fall under this category. Most medical devices are considered Class II devices. Examples of Class II devices include powered wheelchairs and some pregnancy test kits.
Class III Medical Devices
Class III medical devices are those devices that have a high risk to the patient and/or user. These devices usually sustain or support life, are implanted, or present potential unreasonable risk of illness or injury. They represent 10% of medical devices regulated by the FDA. Examples of Class III devices include implantable pacemakers and breast implants

Gloves
Medical Classification – Class I
Manufacturing Process
1.       Dipping
2.       Boxing
-          Glove Manufacturers do not need to test all their products.
-          Instead, they do sampling to check for pinholes. If the glove passes the test, it can be used for medical purposes. Otherwise, it goes for general usage.
-          Glove Manufacturers can translate cost prices to customers every month.
Condom
Medical Classification – Class II
Manufacturing Process
1.       Dipping
2.       Testing
3.       Casing
4.       Boxing
-          For condoms, I can’t say that there are some holes on this one and the other is perfect, because there is only one usage for it. And you cannot say since the US is paying more, then I give them a better quality while for Africa, I give them all the rejects. So, each single condom must be tested and certified hole-free.
-          Because of its Medical Classification – Class II, any changes to the manufacturing process need to be validated.
-          Condom prices hardly change because of its competitiveness with other manufacturing player
-          Price Celling from certain countries

Competitive Advantage
Various Sizing
Bespoke “Perfect fit” condoms with variations of 10 lengths, nine widths and 60 sizes.
To make sure one fits, customers only need to download an online ruler called “FitKit”, measure and enter their size to the website to get the size code.
Other Player: 2-3 Sizes

Automation

2021 plan to switch 80% processes to Automation
20% is automated currently, 40% Manpower are from Testing Segment, had cut down approx. 300 employees, aim to cut down to approx. 1500 employees, currently stands at approx. 2800 employees.
Labour Cost 

21% Labour Cost are expecting a drop till 10-12% easily after 2021 automation
Other Player: 90% Manual Processes

Flexibility
Karex builds its own machines in order to have the flexibility advantages in production. Able to weld and build own machines in-house cope with customer demands.
Latex Compounding
Form Karex Polymers Limited (Thailand)

Karex is improving latex processes in-house to optimize latex volatile prices, storage of latex during wintering month.


Innovation

Ultra-thin technology able to compete with other players who having thin condoms.
Players in Industry
Guangzhou Daming United Rubber Products – World thinnest Latex Condom “Aoni” 0.035-0.039 millimeters
Sagami Rubber Industries – World thinnest Polyurethane condom “Sagami 001” 0.013-0.019 millimeters (yet to compete)

Yearly Capex: RM20million
Last 5 years, mainly on facilities, and automation.
Moving 5 years, mainly focusing on automation


Risk
USD Low
Brent Oil High
Latex Price High
Silicon Oil High
Licensing fees of OBM listing in new countries
Client need at least 1-2 Years for new product listing and certification
Challenge
2018 USD sliding from 4.3-3.9 vs MYR
2018 Brent Oil went up from USD 40-70 per barrel
2018 Latex Price volatile between RM6-RM4 per kg
2018 Silicon Oil USD 4.5-7.5
Tender
Tender to Institutional buyers such as United Nation Population Fund (UNFPA), United State Agency for International Development (USAID), Population Service International (PSI), Marie Stopes International (MSI), John Snow Inc (JSI) and Crown Agents International Limited




Currently Tender Business covering 50% of the business looking to continue slides in future mainly due to Global Government cutting spending on HIV Prevention, to reserve and invest in own country.
Commercial
Manufacture condoms for customers such as Ansell Limited (Lifestyle brand), Reckitt Benkiser, PLC (Durex brand), Line One Laboratories Inc, (Trustex brand)
Consolidation in the industry is being seen, as a lot small players are throwing condom prices to have healthy balance sheet and wait for big players acquiring.
OBM

Manufacture condoms under own brands namely “Carex”, “INNO” and “One”.
Current: 15% Revenue
Target: 30% Revenue by 2022
Main Market : US, UK
Current profit still breakeven, and will not have any in near 1-2 years, Karex is looking at branding, awareness, footprint across the world as the world is moving to discountal modal, supermarket tends to only reserve 2-3 Condom brands in their supermarkets.
Launched new flavor “Nasi Lemak”, “Teh Tarik” and etc past few months, and had been receive a lot of awareness, “Free Marketing with cheap cost”. The cost of “Nasi Lemak” flavor is only RM50,000 hence, it boost its brand awareness throughout social media, newspaper, blogs.
Karex is tapping on global social media trend to engage Social Media Influencer as ambassador such as “Jinnyboy”, “Namewee” and etc.
Karex own brand “One” is saving costing by using online platform by having own online store, and listed in Taobao.com, Amazon.com and coming up in Walmart.com

Opportunity

There are still many countries to penetrate into for their OBM.
Asian market has a focus on thickness, preferring their condoms to feel as au naturel as possible. But North American markets, don’t mind sacrificing a little thickness in the name of safety.

Lubricants

Karex is transforming from a condom-centric business into a broader sector called “sexual wellness”.
While condoms remain as the company’s main revenue generator, Karex is expanding into other medical products such as lubrication gels, probe covers and catheters.

Manufacturing

Current production: 5 Billion
To produce six billion condoms by next year and one key element to achieving that is automation in its manufacturing plants.

Some Questions and Answers from Shareholders
Why “One” Brand?
Unique young brand, young customer based, they never go to advertisement and newspaper for marketing, we are using crowd sourcing strategy on our online platform to allow customers to vote, request their flavors, size and etc. We had our own marketing and designer hence we save a lot cost from marketing perspective, it is more costly when entering new market (licensing, certification and listing). We are tapping into online shopping platform like Taobao, Amazon and Walmart in near future.
Plans to improve OBM Bottomline
Currently no profits and breaking even, it’s the tender business pulling the profits down, for the last 25 years we are doing great in OEM and Tender but the trend is OBM in the next 10 years, supermarkets are using discountal modal, which means 20,000 skus they are shrinking to 5,000 SKU’s only 2-3 brands of condom they are allow in the supermarkets. We will not see any profit for the next 1-2 years from the OBM, for short term profit boost, maybe with our latex operational efficiency, USD higher, Brent Oil are going down, Latex price are sliding, more automation from our end, new ultra-thin products, we can produce same 003 as okamoto, these might see our profit increase for short term. In fact, only Karex is able to produce up to 60 sizes of condom while the others are normally 3, with the ultra-thin production, we can sell up to USD 0.06c / condom.
Any share buyback plans for company? As seen some shareholder had done some share buy back and some had also sold, can elaborate further on how CEO see about the company future is it under or over value currently and with current price will the company do some share buyback, also seen your cash is considerable.
We do not have any share buyback plans in fact, most of the cash is for expansion plan as we are still yet to utilizes, those funds will be mad at us why not using for expansion but a share buyback.
How the company spends the cash, there is significant decrease of 40m vs last year 86m?
Our yearly capex is at approx. 20m a year, we spend on upgrading to automation and setting new facilities like Thailand, Karex Polymer, our R&D a year is at 1.5-2m, we paid dividends 0.05 cents, and we bought another 20% of global protection for 7.5m, however we are still at healthy state as our company loans gearing are at 0.07 which is super low, there is still a lot banks facilities which are yet to be used, we have approx. 150m ready, and there is still 120m yet to be used. Some of the cash are actually at inventory as there is 1 large shipment is still at the ports awaiting government to check and will shipped out, this also affect why our Q1 profits are less, because this shipment hasn’t been shipped out. Karex results actually cannot be judge by quarterly Q1 and Q2 sales are normally higher, shipment delays do happen sometime due for government checking and also because some government spends before year end December when our financial end at June.
Side Information
-          Condom Material
Polyurethane – is less flexible than latex, it’s going to be more prone to breakage
Polyisoprene – ultra-thin, allergy-free, natural rubber, stretch much more, recover their original shape after being stretched, soft feeling.
Latex – Normal condom material
-          Results
Q1 (July-Sept) and Q2 (Oct-Dec) is higher compare to Q3 (Jan-Mar) and Q4 (Apr-Jun), government normally buys before year end December to utilize their remaining funds.
Karex results is not Recommend to view as quarterly, due to timing of product listing, licensing, shipment and certification.
-          Cost /condom
Normal Condom USD 0.03
Ultra-Thin (0.035-0.039 millimeters) USD 0.06
-          Acquisitions market
The company has made five acquisitions — US-based Line One Laboratories Inc and the UK’s Pasante Healthcare Ltd, among others, for US$8 million and £6 million (RM33.66 million) respectively.
These companies were bought not only for the condom brands, but for their distribution advantages as well. For instance, Pasante has a strong presence in retail and tender via its distribution system in every National Health Service (NHS) in the UK.
“Distribution is very important. You need to knock on their store and have a relationship with any particular NHS clinics to buy products from them,” he said.
For Line One, Karex acquired intellectual properties including the trademarks, patents and Food and Drug Administration approvals to market and distribute condoms under the established brands of Trustex, Kameleon and Fantasy in the US.
The company will buy the balanced 30% of Global Protection Corporation before June 2020, they are suggesting share swap in between.
-          Impressions on CEO
CEO presented an impressive presentation without any stress after results are declining for the past 1-2 years, in fact, more than 3 shareholders actually praise his attitude, calmness and confidence in his presentation to let shareholder know the company is in right track and CEO knowing the company well. 


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