Fighting to maintain pole position
Ho Chung Teng 
Goh says the company’s IPO was a catalyst to consolidate the market and make it the world's largest condom manufacturer

WHILE it was tough for Karex Bhd to become the world’s one number condom maker, it’s even tougher for it to hold on to the top spot.

Besides having to fend off competitors, the company is facing rising raw material costs, shifting consumer preferences and changing national health policies by overseas governments.

There have also been significant changes in the global condom industry, especially during H2 last year and early this year.

Apart from shifts in consumer preferences, the US dollar strengthened against major currencies, increasing condom prices.

Tender orders also fell drastically due to a shortfall in humanitarian budgets caused partly by a change in national health policies.

With the global industry not looking rosy, some players are getting out entirely. In May, Australian-based Ansell sold its sexual wellness division to a Chinese consortium for US$600 mil (RM2.53 bil).

Ansell is the world’s second-largest player by market position while Karex is the world’s largest producing five billion condoms per annum.

Despite the “flaccid” business outlook, Karex CEO Goh Miah Kiat expresses confidence and says the company will sail through the current headwinds.

It is banking on expanding its original brand manufacturer (OBM) business to offset its tender sales which supported the company’s past earnings.

He says Karex’s move to launch its initial public offering (IPO) in 2013 was a catalyst to consolidate the market and make it the largest condom manufacturer in the world.

Being larger also helped it to engage in price wars to capture market share.

Karex’s five-year financial performance (year-end June 30)

Benefiting from volatility

“We will see a more volatile tender market. So when customers want large quantities and short-term deliveries, that is good for us.

“Because we are already the largest condom player, we are definitely at the forefront to benefit from the volatility, which is why we need larger capacity.

“This is the strategy we have adopted, but unfortunately, strategy being strategy, you still have headwinds in various markets.

“Rubber prices this year went up by 50%. Last year, it was at an average of RM4.50 per kg. This year we are looking at about RM6.50 – an increase of over 30%,” Goh tells FocusM.

The Malaysian Rubber Board’s monthly sellers’ offer price says bulk latex achieved a year-high of RM7.98 per kg, in February. Last year, prices of bulk latex averaged RM4.57 per kg.

Goh says the volatile tender market is felt by all players, including its Thai-listed competitor, Thai Nippon Rubber Industry Plc. Thai Nippon saw contribution from its tender segment falling from 40% to below 20%.

“Karex has captured most of the market. If you compare the two companies’ quarterly reports, it’s very clear that Thai Nippon has not captured the tender segment while we got most of it,” he says.

Goh says subsidies in the condom industry might be at its tail end, as governments allocate budgets for other areas instead of healthcare. And this is why it needs to build its OBM business.

“This push started a few years back. For me, building a brand is not just about whether we want it or not. It’s also a matter of Karex’s long-term survival,” Goh says.

At the time of its IPO in 2013, OBM contribution was only about 3%. It rose to 15% in its latest quarter.

This compares with past years when Karex benefited from the macroeconomy as rubber prices were low and the US dollar stable.

Also, most orders were from African countries and transacted in US dollars.

“If I were to fast forward five years ahead. You will say ‘wow’ because part of the subsidised condom business is going through a change and we are starting to see a bit of ground shaking,” Goh says.

Analysts and fund managers say Karex’s move to embrace the OBM business is the right one.

An analyst with a local investment bank says it is a good strategy as the company will get payback in the long run.

“It is going to be a brand owner instead of just manufacturing for other brands. The margins are significantly higher this way.

“If it manufactures for other brands, it earns three US cents a piece (12.66 sen).

“A brand owner can sell for US$1 a piece, so the difference is high,” the analyst says.

Vong agrees with Karex’s entry into the OBM segment

Equities Tracker International director Alvin Vong agrees with Karex’s move into the OBM segment.

“As it is playing the long-term game, when it goes into the OBM segment it will become brand owners, ” Vong says.

He says it is a correct strategy for Karex to create its own brand as it can then differentiate itself from other manufacturers.

The company, he says, is not only creating a local brand but a global one. If it succeeds, it will add value to shareholders.

Vong believes investments in its own brand will benefit earnings as the original equipment manufacturers (OEM) segment has narrow margins.

“Especially in its industry, entering the OBM segment can increase margins by many folds. At the end of the day, investors prefer [profit] margins over revenue,” Vong says.

On the tender market segment, he says historically, it has been choppy as they mainly come from the government and are affected by the political climate and other factors.

“This industry is driven by government policies. The government buys condoms under its health policy, so Karex entering the OBM segment will give it a nice balance between OEM and brand owner,” Vong says.

Post IPO, Karex acquired a number of companies such as Global Protection Corp (ONE), TheyFit LLC, Pasante Healthcare Ltd, Line One Laboratories Inc (Trustex) and Medical-Latex Sdn Bhd (Dua).


Price adjustments

However, its share price slumped to a 52-week low of RM1.37 on Aug 30 after its Q4 FY17 profit declined 76.06% to RM2.9 mil from RM12.11 mil a year earlier. This was despite reporting higher revenues of RM91.63 mil.

The company was listed on Nov 6, 2013, with an IPO of RM1.85.

Karex attributes the lower profits to higher distribution and administrative expenses as it expanded and launched its products in new markets.

Goh says the lower profits were also caused by the global tender market volatility, which he says the company has never previously experienced.

To help overcome the turbulence and remain competitive, Karex reduced its average selling price to maintain its market share.

“We are telling shareholders that the [net profit] reduction is short-term. We need to realign and observe the market.

“We readjusted our price, so hopefully in the months and quarters to come, we should see a recovery,” Goh says.

The good news for the company comes mainly from rubber prices, which is lower than it was in H1. In addition, US dollar rates have weakened against major currencies.

Goh says Karex’s business operations remain healthy at current levels and the OBM business is starting to grow.

“The tender segment is clearly returning as we have recaptured this market, so prices are still quite good now,” he says.

Goh says globally, in the last two to three years, the US dollar has seen a huge rally.

In the case of Malaysia, the ringgit fell from RM3.20 to RM4.50 to the dollar. In Africa, where the largest tender orders come from, currencies were significantly devalued.

“Nobody wants to take that currency loss, so what happens is, everybody holds back.

“There was a lot of orders that were stalled as budgets couldn’t match the quantities they needed to buy,” Goh says.

Also, a series of unfortunate events unfolded globally causing supranationals and governments to review their budget allocations. This forced cutbacks on humanitarian budgets.

For instance, Goh says European countries are major funders of HIV/AIDS programmes around the world. But with millions of refugees crossing into Europe, they have to reallocate funds to deal with the refugee crisis.

This apart, half the world’s condoms are purchased by governments and supranationals such as the United Nations which is tasked to purchase condoms for African countries.

Goh says supranationals reallocated its funds last year to support the refugee crisis in Europe due to the war in Syria.

The US too is cutting its healthcare budgets, especially with the repeal of Obamacare.

However, he says the biggest impact was when Donald Trump became US president and the Republican party pushed its pro-life agenda.

“When Trump entered the US presidential race, he became very vocal about anti-abortion issues,” says Goh. As a consequence, US-based NGOs which distribute condoms in Africa were affected.

Clinics that deal with abortion (such as Marie Stopes International, which runs abortion clinics) will not receive funding from the US government.

There is a shift in consumer preference for branded condoms as opposed to government-subsidised ones

PrEP introduction

Advances in medicine, such as the introduction of pre-exposure prophylaxis (PrEP) medication to reduce the risk of HIV transmission is also a threat.

The medication is widely consumed by men who have sex with men and those who participate in “chem-sex”, which is drug-induced sexual intercourse.

As a generic version of PrEP is on the horizon, its usage is expected to rise and lead to lower numbers of condoms being used.

“So in a way, there are multiple disruptions happening around the world, which directly affect the condom business,” Goh says.

He says while PrEP is a threat to condom use, he is unfazed over its popularity as it is only an alternative to contraception. It cannot reduce sexually transmitted infections (STI).

“There are those who never use condoms and when they are on drugs, they are unlikely to use protection. PrEP helps to reduce HIV transmission, but the STI risk is still present,” he says.

Goh says China and India, which are among the world’s biggest condom purchasers, are shifting to branded products rather than subsidised ones.

Compared with 20 years ago, he says major Chinese cities (first, second and third-tier) are now wealthy, and Karex notices a preference away from government supported condoms to consumer-driven brand purchases.

“It’s actually very good because this is where we see value creation within the condom market,” Goh says.

While China has several condom manufacturers, Goh feels they will consolidate due to declining government orders. China’s condom manufacturers also don’t have a marketing team for the OBM business.

“When these manufacturers start to lose orders, they will participate in international tenders,” he says.

Karex, he says, plans to expand its hold on the OBM segment as tenders have a certain level of volatility which requires the company to support and balance the business.

“Sometimes when you have no tender or you lose one, what are your 3,000 workers going to do?

“You need to balance your orders, which is why I plan for three segments – tenders, OEMs and OBMs,” Goh says.

Unfazed by new kids on the block

IN June, the world’s preeminent glove manufacturer Top Glove Corp Bhd announced plans to expand into the condom business. But it was not the first to do so.

 Lim says Top Glove will be revisiting plans to enter the condom market

The managing director and CEO of Kossan Rubber Industries Bhd, Tan Sri Lim Kuang Sia is also involved in condom manufacturing via Pleasure Latex Products Sdn Bhd, which he started in 1996.

Kossan is among the top four glove makers in the country.

Karex Bhd CEO Goh Miah Kiat is unfazed that having new competitors will lead to market disruption.

Karex is already competing with Durex, the best-known global brand owned by UK-based Reckitt Benckiser Group Plc.

But not all rubber-based companies which ventured into the condom business have seen fruitful results.

Many have sold their condom business units. Among them are Ipoh-based Rubberrex Corp (M) Bhd, the Sime Darby Group, Australia-based Ansell and Korea-based Samsung Group.

Goh says there are many large companies in the glove business that have been unsuccessful in condoms.

“Even Ansell, which has a glove brand was not successful in building a condom brand,” he says, because manufacturing gloves and condoms are different, mainly due to product classification.

Condoms are classified under consumer products where brand names are vital, while gloves come under industrial products, which are price driven.

Unlike the condom business, branding in gloves will not lead to a significant increase in margins as consumers do not purchase gloves based on brands.

“In the condom business, we have the opportunity to grow revenue from three US cents (12.66 sen) to a US$1, whereas this is not possible in the glove industry. This is due to the disparity in brand perception between the two products,” Goh says.

With 50% or more of the global condom sales made through tenders, he says the segment is not an easy one due to stringent regulatory approvals.

To be a government contract supplier, Goh says condom manufacturers will be evaluated based on experience and quality.

“The most basic thing buyers ask is if your condom has a five-year shelf life, and if you can prove it will last longer,” Goh says.

On the original equipment manufacturer (OEM) segment, he says while players may gain market share by lowering prices, that itself will not have an immediate impact due to low margins.

The challenge for OEM markets is to gain trust as the manufacturer’s reputation will be at stake if quality is not up to par, especially since condoms have a high-risk perspective compared with gloves.

“If Durex buys from me today, do you think it will move to another player or will a big brand just switch over to another OEM that is cheaper? Unlikely,” Goh says.

Furthermore, OEM business challenges are such that condom manufacturers have to provide a variety of products.

Karex itself has more than 100 variants of condoms in terms of colour, texture, size and flavour.

“We are not glove manufacturers with huge volumes. They can run very efficiently on one machine while we need a scalable business. Our customers also tend to be smaller and fragmented.

“Relationships with customers and regulatory approvals will take a long time. So any new players coming into the market will find it difficult,” Goh says.

In June, Top Glove Bhd executive chairman Tan Sri Lim Wee Chai said the Klang Valley-based company was revisiting plans to enter the condom market.

Lim previously told FocusM that Top Glove needed to diversify into other businesses and set itself higher targets to grow in size.

“For an operation of our size and scale, we have to diversify our business to expand, and this is the right time for us to do so,” Lim said.

Condoms are particularly attractive for Lim as they share similarities with gloves in terms of marketing, production and raw materials.

Some RM75 mil will be allocated to set up a manufacturing plant which will, on completion by the end of next year, churn out two billion pieces of condoms per annum.

Besides OEM, Top Glove also aims to target the retail sector by formulating a different marketing and branding strategy.

On a personal capacity, Lim acquired a 10.24% stake in Tropicana Corp Bhd and was recently appointed deputy chairman. 

Expansion to Thailand and Singapore

MORE than 18 months after it launched its ONE brand in Malaysia, Karex plans to implement what it has learnt in Thailand and Singapore.

Karex Bhd CEO Goh Miah Kiat says its strategy in the two countries will be price-driven.

“We are looking at potentially reducing the price a bit. Looking at Malaysia, we see our model in this part of the world is price sensitive,” Goh tells Focus M.

He says Karex will use a model where prices will closely follow the brand leader, Durex.

“We believe if you can bring down [the retail price] a little, it could potentially be more effective,” Goh says.

He says that based on the experience of launching its ONE brand, Karex has a better understanding of the Asian market.

“We know what products Asians want.The strategy we adopt in Singapore and Thailand will be more fine-tuned,” he says.

Besides the pricing strategy, Karex will also be looking at its distribution and marketing strategies, which is why it is taking a little longer to launch in Singapore.

Nonetheless, it will be completed by the end of the year, followed by Thailand next year.

“We have learnt a lot, especially with consolidation in the US, UK and Malaysia.

“We are sharing more of our services within the group, so there is a lot of cost savings when we launch in new markets,” Goh says.

As for the impact on earnings with the price-driven strategy, Goh says it will be limited.

“We are talking about three US cents (12.66 sen) a piece. When the margin is 15-20 US cents, it doesn’t make much of a difference.

“More importantly, the 15-20 US cents margin already has a positive impact on target earnings anyway,” Goh says.

Karex will also be taking a multi-brand strategy to penetrate more markets as it continues to grow as a global brand.

The company will continue with brand acquisitions, following in the footsteps of UK-based Reckitt Benckiser Group Plc.

However, unlike Reckitt Benckiser, Karex will keep its brands as it wants to expand into the premium, mid- and lower-end brands.

“Reckitt Benckiser is very focused on the Durex brand. It doesn’t have any brands below it, so it is only capturing the premium market,” Goh says.

Reckitt Benckiser has, in the past, acquired well-known brands in the Asian region such as Mr003 in Malaysia, Kingtex in Thailand and Saturn in Australia.

However, the brands were subsequently removed from the market.

Karex’s premium segment includes the ONE brand. It’s mid- to lower-end brands encompass those like Trustex, Fantasy and Atlas. Others include INNO, Kameleon and Trustex 360.

Goh expects growth from the premium segment to take longer as Karex’s competitors built their brands over many years.

“You cannot expect the brands to hit the market in quick succession, but an area that we definitely see opportunity is the mass market.

“That’s why we have been buying other brands as well,” he says.

An analyst with a local investment bank feels Karex’s expansion into Singapore and Thailand will not yield a significant contribution to the group in the short-term as the launch in both countries is “purely” to improve the ONE’s branding within Asean.

“In terms of earnings, I don’t think it’s a major contributor in the near term in this region,” the analyst says.

Even in Malaysia where demand for the ONE brand is improving, its contribution is not meaningful for now.

Despite limited earnings contribution, the analyst says Karex is moving towards the right path, which is to get prospective customers to try the product.

On Karex’s multi-brand strategy, the analyst says the company’s other brands contribute to the group despite being insignificant.

This is because they have sizeable portfolios in other markets.

“In their respective markets, the other brands are doing well. The bigger brand portfolio is not a bad thing as it can be used to target different market requirements,” the analyst adds.

This article first appeared in Focus Malaysia Issue 257.