$KAREX / 5247 (KAREX BERHAD) – 2019 AGM Highlight
• Business: Sexual health (condom, lubricant), medical (probe cover/catheter/test kit/pregnancy test stick), others
• The world's largest condom producer
• Brand: ONE/Carex; TheyFit/Pasante
• Competitors: Durex/Trojan/Ansell SKYN/Cupid/ kamoto
Karex 2019 AGM mostly highlighted about their performance last year. Karex’s condom business currently comprises three market segments namely OEM, tender (supplied mainly to governments and non-governmental organisations) and own-brand manufacturing (OBM). Their CEO stated that 50% of the condom has been purchased by the government around the world. The US government and the UK government are purchasing condoms and are giving out to the students.
The challenges that is faced by Karex is their raw materials in respect of the exchanges rates, global volatile, oil prices, latex prices, trade war between China & USA and UK with Brexit.
Government tender side has also been a challenging factor to Karex. This is where Donald Trump changed some of America’s policy in terms of “America First” wherein he is only emphasizing about America. The United Nation (UN) together with Europe countries are also battling other problems like refuges crises because of the war with Syria. Hence, more money has to be channelled in such countries.
Today the world is not looking into HIV/AIDS but other problems as well such as global warming where money are channelling into other areas. Coming closer to Asia, China also has some policy changes over the last one year wherein China has abandoned one child policy because due to a future demographic crisis and aging society.
China used to be the largest buyers of condom and has been giving out for free to their citizens. However, they have now decentralized by reducing their purchase which causes a supply chain destruction. Now suddenly the government decentralized their buying to small companies. What has happened is that the large companies went to international market to find market to dump some of their condoms. A lot of companies are dumping prices in condom which have impact Karex profitability.
Karex also has challenges where the labour cost continues to increase on manufacturing side whereby the labour cost has increased in Malaysia, Thailand and China which caused labours problems. Karex is also experiencing Erratic raw material prices which to exert pressure on profitability. Karex was impacted by Social Compliance audit and other rubber industry as well which are moving towards the social compliance which generally have push their cost up higher in Asia. Since they are manufacturing to US market, they also need to comply with the American law. The rising cost of social compliance is a major factor that is expected to challenge condom manufacturers around the world.
Overall
The company will continue to invest more in automation, improve stability, production efficiency, product testing efficiency and reduce its dependence on labour in the future. The company needs to implement various measures to improve operation management, with an innovative and modern operating environment, economies of scale and a wide range of product varieties and combinations, giving priority to the development of ultra-thin condoms and upgrading automation in the industry will have certain advantages, and will also open up a certain distance of advantages/stand out in the future competitive environment and gain a larger market share.
Although there are challenges, management is confident about the company's development trajectory (growing to become a global manufacturer of sexual health products), and remain optimistic about the long-term prospects of the industry.
Q: In the financial position the balance sheet indicated the group and company statement of P&S until 30th June 2019 is 65mil. This 65mil distribution expenses and administrative expenses are still high the distribution has come to 36,590mil and the administrative 49,315mil which I am of the view that these expenses are very high.
A: The distribution expenses are normally maintained. Last year expenses were 11.1%, this year we manage to reduce to about 9.6% over our revenue. The administrative expenses which consist of what our staff cost on tender and our online expense. Said - CFO
A: The distribution expenses (DE) also includes the delivery of the product to the customer as well as places like US or Europe and now we are also looking into the online business so those areas in the past example who are doing tender business obviously it is very different , when you do a tender business you deliver to a port of multiple containers and when you go into more e-commerce businesses where you’re looking into some of our major businesses in US we delivering the products to a consumer so the cost of the product shipping come into involve into DE. While we are definitely going through some challenging moments in regards to the environment but we believe that this a short term period. To see a brighter future, you need to invest as we also cannot cut off workers who are building brands. Said - CEO
Q: Since the company financial health is still very healthy, I propose on behalf of the shareholders that 1.0 one dividend to 2.0sen.
A: In regards to the dividends obviously we like to give as much but you also see that our policy is only 25% but even though this is tough period, when we look into our profit we are actually giving 180% of profit. I think this is an indicator that we are very confident with our future that’s why we believe that this year is a tough time we also taken the liberty to propose a much higher dividend even though profit are not there, we look at our balance sheet and cashflow are generating more cash that’s why we came to a decision to propose the shareholders to 1sen. Said – CEO
A: if do very well in the first quarter and second quarter, we would consider the dividend. I will propose – Chairman
Q: Regarding to dividend you see the proposal ruling that the amount distributed given to the shareholders must be subjected to the profit. If you look at the balance sheet of the Karex company still got a lot of cash balance. Can use the cash balance to distributed to the shareholders?
A: We would love to but however there is also expansion in the business we also need to look into as you see what we are going through right now is challenging but we are comfortable where we are and we think that we need to continue to upgrade our facilities, we need to look into investments more into automation. This is eventually the area where we are putting money for shareholders hopefully better return in the future. Said - CEO
Q: The price of Karex now 43sen in comparing years ago 4.30$ now it has dropped almost 90%. Can price of Kares raise up to 1rm if the company try to reduce their expenses for their company and try raise to the shareholders divided, I believe that the price of Karex can raise up. People are refusing to buy Karex because of the price is low and the dividend is little.
A: To the regards of the price you said from 4$ to 40sen well you actually got to see Karex started from IPO at the 1.85rm and that was pay share of 300mill share we were at the market cap of 500mill. We were very lucky that the price of the share went up due to a lot of profits coming from exchange rates. There was Definity gains from some of these forex gains which obviously not sustainable for the long term. When we did our IPO price in 2013 November 185, we were only 3mill of market capacity wise, today we are in 5mil capacity and IPO people were saying you don’t have a brand. 4% of our revenue comes from brand and now 20% revenue comes from our brand. Back then in IPO we were doing around 130mil revenue and now our revenue has much increase from then 230 to now close 380mil we didn’t have our plants in US or in the UK. We have bulk so much beyond IPO. Valuation is how shareholders value this. Also a lot of foreign keen to be part of this business because if you still look into this business it’s not going to go off but there’s still risk if there’s a cure for HIV there will be no condom that was a risk that we registered in IPO 2014 quite some time already there isn’t still a cure, HIV, STDI or STD and pregnancy problem still there and condom is still a choice of prevention for a lot of this developing countries. So that is how valuation is seen and how shareholders invest in this company. Said - CEO
Q: Why is the condom pack is bigger and looks different than the other competitors in Malaysia. The people are shy to buy it from the outlet because everyone is looking at you?
A: The retailers prefer bigger pack than smaller pack. Why? Because condom is one of the theft product people like to steal. 1. They are shy to pay so they steal so the smaller your pack most likely it will be stolen by shoplifter. Said - CEO
A: Why the condom looks different? Because we cannot advertise condom in the newspaper and magazines in Malaysia. The only way it can advertised is on our pack for others to notice and shelf spacing. The more and wider shelf space is taken on the shelf the bigger it is. Said - CEO
Q: Where there are Nasi Lemak and Redang flavour? Normally this is not for man.
A: The strategy behind launching the flavours is all about marketing. It is not about people using it but it’s about the controversy to allow people talk about the product. This is where the society will advertise free for the company without the company advertising it on social media. It has somehow assisted in promoting the condoms for with 0 cent for advertising as people remember the condom brand which has the nasi lemak or redang flavour. Said – CEO
References:
1. http://bit.ly/34GcoLM (Trump Budget Proposes Largest Ever Cuts to Global HIV Programs)
2. http://bit.ly/2OG8JrR (China's Leaders Want More Babies)
3. http://bit.ly/35UvKNr (The Condom Collective members give out 1,000,000 condoms on college campuses across the United States.)