Highlights 

Being the world’s largest condom manufacturer with  annual manufacturing  capacity  of  4bn  piec es,  Karex  is  poised  to capture the snowballing  global condom demand.

Karex’s growth  is solid going  forward  given  its :

1. Reputation  backed by proven  track record;
2. Strong in-house  R&D capabilities ;
3. Licenses to export to >110 countries ; and
4. Improving  economies of scale.

Global  condom  demand  is  projected  to  grow  at   9.0% annually over the next 6 years.  This projection is supported by  robust  growth  in  tender  market,  which  made  up  48%  of global  market.  Given  the  ongoing  c ondoms  shortage situation,  institutional  buyers  will  beef  up  their  demand  and thus, benefiting  the world’s  largest manufacturer,  Karex.

Average  condom  usage  of  4.9  condoms  per  pers on  eac h year,  is  a  fairly  low  usage  rate,  signifying  ample  room  for demand  growth.

Sexually transmitted infection (STI) continues to spread like wildfire with 1m cases worldwide  every day. The presenc e of untreated STI increases the odds of HIV acquisition  leading to  AIDS  transmission  by  up  to  10  times.  Over  the  years, resistance  to  AIDS  drugs  has  been  observed.  Thus, condoms will continue to play its essential role in preventing STI and HIV transmissions.

With  the  rec ent  proposed  move  of  acquiring  Global Protection Corp (GP), the leading  distributor of ONE ® brand condom,  Karex  is  poised  for  a  strong  growth  in  the  own brand  manufacturing  (OBM)  segment.  The  acquisition  of ONE ® brand  is  a  strategic  play,  diversifying  their  target market,  expanding  the  list  of  distribution  countries  and paving  the  way into distribution business.  More importantly, OBM  products  deliver  better  margins  than  original equipment  manufacturer  (OEM) products.

Lately,  the  tumbling  latex  prices  and  appreciating  USD  vs. MYR also reinforce  the positive  view  on Karex.

Catalysts 

Strong  global  condom  demand  growth,  low  condom  usage rate,  rising  STI  incidences ,  expanding  OBM  market,  low latex prices, appreciation  of USD vs. MYR.

Risks 

• Surge in raw  material prices, forex risks, revision  on foreign labour policy, successful invention of HIV/AIDS cure, product substitutions for condoms.

Rating  BUY,  TP: RM3.43

• Positives  –  World’s  largest  condom  manufacturer;  everincreasing  global  condom  demand,  strong  in-house  R&D, licensed  to  export  to  major  part  of  the  world;  successful acquisition of Global Protection Corp.
• Negatives  –  High  dependency  on  foreign  labour,  lack  of long-term  contracts with customers.

Valuation 

• We initiate coverage on  the company with a BUY rating and TP of RM3.43, based on P/E multiple of 19x CY15 EPS.
• This  multiple  is  pegged  to  the  average  P/E  multiple  of  its international  peers

Source: Hong Leong Investment Bank Research - 30 Sep 2014