We visited KAREX’s plant in Hat Yai, Thailand, which has access to labour and input latex at lower costs and enjoys attractive investment allowances and a lower corporate tax, as compared to its three plants in Malaysia. KAREX’s plan to put onto the market a new product, i.e. synthetic condoms, is on track. We maintain our forecasts, TP of RM1.06 and OUTPERFORM call.

We recently visited Karex’s manufacturing plant in Hat Yai, Thailand, which reinforces our optimism on its outlook. The key takeaways are as follows:

1. Background. The plant is the largest of KAREX's total four plants with the remaining in Port Klang, Pontian, and Senai, Malaysia. This Thai plant boasts 25 manufacturing lines with a capacity of 2.5 billion pieces annually. It employs approximately 1.5k Thai workers, making up about 44% of KAREX's total workforce. Note that, the group has zero migrant worker in both its Thai and Malaysian plants, which will spare it from forced labour issues that plagued certain glove producers in recent years. In addition to its core products of condoms and personal lubricants, the plant has also initiated two nitrile glove lines, being part of its plan to eventually boast an annual capacity of 500 million pieces. KAREX does not intend to produce mass-market gloves but specialised ones to complement the needs of its existing clients.

KAREX’s rationales for setting up this plant include access to labour and input latex at lower costs, a lower corporate tax rate of 20% (vs. 24% in Malaysia) and attractive investment allowances.

2. Synthetic condoms pending CE certification. KARE remains upbeat on its high-margin new product, i.e. synthetic condoms, which is thinner (and thus require less material to produce) with improved heat sensitivity (which may boost customer satisfaction resulting in repeat purchases). It is currently engaging with key OEM clients with a product launch targeted in FY25. It plans to add five more dipping lines in its Thai plant (from only two lines for the entire group at present), boosting its an annual capacity by 2.5x from c.200 million pieces at present to c.700 million pieces by CY24. It remains hopeful to secure CE certification (compliance with EU safety, health and environmental protection requirements) by June 2024, followed by US FDA approval in 1HFY25.

3. Enhancing operational efficiency. KAREX is enhancing efficiency in its tender business (which accounted for c.16% to the group’s 1HFY24 turnover) by automating testing process to handle standardized client orders. The firm has already deployed five automated electronic testing machines (see Exhibit 4) in its plants in Thailand and Klang, with a testing rate of exceeding 200 pieces per minute (vs. 40 pieces per minute if done manually, see Exhibit 5). Additionally, a planned 2.5MW solar installation at its Thai plant, accounting for 45% of its total manufacturing capacity, is expected to reduce the plant’s energy bills by 30% to 50% over the long- term.

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.06 based on an unchanged FY25F targeted PER of 25x, at a 20% premium to the average historical 5- year forward PER of its international peers to reflect its dominant market position and strong growth prospect. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. We continue to like KAREX for: (i) its leading market position and global reach in the rapidly growing condom industry, projected by industry experts at a CAGR of 8% to 9% over the immediate term; (ii) its strong R&D and product innovation; (iii) its adherence to international standards and certifications, (iv) its strategic shift in moving up higher the value chain, and (v) post- pandemic market recovery and changing consumer preferences, especially in markets like China, and growing preference for high quality innovative condom products. Maintain OUTPERFORM.

Risks to our call include: (i) reduced spending by governments around the world on birth control, (ii) lower acceptance rate for its new synthetic rubber condoms, (iii) less favourable product mix, and (iv) inability to raise prices to safeguard profit margins.

Source: Kenanga Research - 2 Apr 2024