Summary
We took a trip to Karex’s plant in Thailand located in the heart of Rubber City, at Hat Yai’s Special Economic Zone with an annual capacity of 2.65 bn condoms and came away feeling slightly upbeat with the new synthetic condom contribution will kick in from 2QFY25.
Synthetic condom being developed in collaboration with Durex is set to launch in early Dec 24, could command GP margin of up to c.50%, as the ASP is expected to be 3-4x higher than latex condoms.
Maintain BUY recommendation on Karex, but with a slightly lower target price of RM1.04 by pegging revised FY26F EPS of RM0.04 to 26x after adjusting for the revision of minimum wages that will offset the 5-year tax exemption from new projects and expansions.
Company Update
Located in the heart of Rubber City, at Hat Yai’s Special Economic Zone. Special Economic Zones (SEZs) in Thailand span 10 provinces including Tak, Mukdahan, and Songkhla. The strategic location leverage on local resources to boost trade and economic connectivity with neighboring countries. Rubber City is located in Southern Thailand, and benefits from its proximity to numerous latex plantations and has the necessary infrastructure for exports. The Central Rubber Market in Hat Yai is also one of the largest rubber-growing regions globally. It accounts for c.60% of Thailand's natural rubber production. As one of Thailand’s SEZ provinces, Songkhla provides investors with significant tax incentives, such as corporate tax exemptions for up to 8 years, as well as deductions for different operational expenditures and import duty exemptions.
Rise in customer demand for non-latex condoms. We gather that the non-latex condom market is expected to be boosted by rising awareness of latex allergies and the demand for alternatives like polyurethane (PU) and polyisoprene (PI). Growth will be driven by increasing rates of STIs and improved awareness on sexual health. PI condoms are gaining popularity for its elasticity and comfort, while PU is valued for its strength and thinness. Karex's collaboration with Durex revolves around the production of nitrile rubber condom, which offers a cost-effective alternative with similar benefits to PU and PI materials.
Cost efficiency with a better margin. Intensity synthetic condom will be the first nitrile male condom in the world. It is slated to launch in early December. Nitrile is cheaper than PU and PI; nitrile costs less than USD1/kg; PU and PI are c.USD 15/kg. Nitrile has been in the industry since 1990s, but is only used for female condoms. This new type of condom could provide GP margins of up to c.50%, as the ASP is expected to be 3-4x higher than latex condoms.
Sufficient capacity to meet market demand. Karex currently has 5.50bn annual capacity. By July 2025, Karex will operates 6 synthetic condom lines, translating to 5.65bn annual capacity, comprising 2.65bn capacity from Hat Yai plant. Karex is also looking for another plot of land close to its Hat Yai plant, as the Group aims to construct another manufacturing plant, should demand for the synthetic condom garners strong response.
Revision of Malaysia’s labour minimum wage impact. In the Budget 2025, the minimum monthly wage in Malaysia is set to rise from RM1,500 to RM1,700. The upward revision is expected to negatively impact Karex that employs c.1,500 Malaysian employees in the Malaysia operations. Increase in minimum wage is projected to bump up in personnel costs by RM1.0m/quarter. Consequently, we are tweaking our administrative expenses forecasts to account for 14.2% of total revenue (from 12%) for FY25F/FY26F.
Impact from MYR strengthening. USD has depreciated by c.6% against the MYR year-to-date. Karex expects the trend to negatively impact its bottomline, given that c.90-95% of total revenue are denominated in USD. On a brighter note, the Group's borrowings are also denominated in USD, which provides some cushion. For every 10% rise in MYR, we gather that Karex's bottomline will be impacted by around c.16%. However, the Group’s ability to adopt the cost-pass-through mechanism may mitigate most of the impact of forex fluctuation. Our assumptions for the USD/MYR exchange rate for FY25F and FY26F are both set at 1.00/4.30. We expect subsequent quarters will may see some qoq weakness before potentially stabilising in 2QFY25F, after USD appreciated in Oct 2024.
Introducing a revolutionary personal lubricant. In FY24, we saw that the personal lubricant revenue contributes c.16.5% of the total revenue (from c.3.4% in FY19) representing a c.46% 5-year CAGR. This highlights demand for the personal lubricant is gathering pace. In the tender market, government authorities are buying more personal lubricants as World Health Organisation is attempting to bring down the number of HIV cases by encouraging the practice of condoms usage. Two major contributing factors of HIV cases include (i) humans at risk (female sex workers), and (ii) MSM (men have sex with men)—describe an act. These high-risk categories population may require to use condoms and lube as part of the protection. In the past, WHO prescribed 100m condoms purchased with c.10% personal lube, which has now grown to c.30%. The move bodes well for Karex personal lubricant segment. Looking ahead, most players may increase the ratio to 1 condom per 1 personal lube. This aligns with our personal lubricant’s market forecast of c.10% growth each year (FY24 recorded c.39.2% growth).
Valuation. We trimmed our core net earnings for FY25F to RM29.4m (from RM37.3m) and FY26F to RM36.4m (from RM44.3m) to account for the revision of minimum wage that will negatively impact onto Karex’s bottom line as well as the tax rate reduction from 22% to 20% in FY26F lifted by the 5-year tax exemption from new projects and expansions. We believe the synthetic condom contribution will start kicking in the 2QFY25F, while stronger growth trend will be noticeable from FY26F.
Recommendation. We maintain our BUY recommendation on Karex with a target price of RM1.04 by pegging revised FY26F EPS of RM0.04.
Risk. Decline in global government spending on birth control, (ii) Slow uptake of new synthetic rubber condoms, (iii) Less favorable product mix, and (iv) Challenges in raising prices to maintain profit margins.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.455268 | 4.488135 |
EUR | 4.716585 | 4.723137 |
CNY | 0.616518 | 0.616862 |
HKD | 0.572409 | 0.576643 |
SGD | 3.318330 | 3.343262 |