6. INFORMATION ON OUR GROUP 6. INFORMATION ON OUR GROUP 6.1 Our history Our Group’s history started in the late-1980s following from the boom in the Malaysian rubber glove industry with many manufacturers in operation as a result of the AIDS outbreak and the subsequent implementation of a mandatory policy for the use of latex gloves to prevent blood borne infections such as AIDS. Our Group was formed in 1988 when Mr Goh Huang Chiat and his sons, namely Goh Phon, Goh Siang and Goh Leng Kian (collectively, known as the “Goh family”) decided to venture into manufacturing rubber-based medical devices. Prior to this, Mr. Goh Huang Chiat was primarily involved in the business of processing natural rubber. The Goh family decided to venture into the condom manufacturing industry, which is a more obscure and niche segment of the rubber-based medical device manufacturing industry as the natural rubber glove manufacturing industry was facing heavy competition then. Hence, we incorporated Banrub in 1988 (in Johor Bahru) and commenced operations in a factory located at Larkin Industrial Estate with a manufacturing capacity of approximately 60 million pieces of condoms per annum. Goh Phon, Goh Siang and Goh Leng Kian assisted Goh Huang Chiat in the marketing, operations and R&D aspects of our business. During the initial stage, we started as an OBM whereby several brand names of condoms such as “Carex”, “Passion”, “Mega”, “Skin Love” and “Mandom” were marketed in the Malaysian and Singaporean market. Our distributors were mainly convenience shops and pharmacies. Our condoms under the Carex brand were well accepted in the Singaporean market, and thus, in order to safeguard our interests, in 1990, we trademarked the “Carex” brand name in Singapore. At the same time, we established an R&D division to focus on product innovations and manufacturing efficiency. In-line with our business expansion, we decided to increase our product offerings to include probe covers in 1992. Goh Yen Yen joined our Group in 1993 to oversee the finance and administration department. In 1994, Banrub changed its name to KISB. The condom industry became a highly regulated industry in the mid-1990s as a result of the severity of the global HIV/AIDS outbreak. The newly implemented regulations, amongst others, the introduction of air burst tests and more stringent pinhole tests, whereby the maximum failure rate of condoms allowed is 10 and 2 pieces of condoms, respectively, based on a sample size of 315 has minimised competition as industry players who were unable to comply were eliminated. This drove us to grow further as we continuously emphasised the quality of our condoms to meet the stringent requirements and specifications set by regulatory authorities and customers. Furthermore, in order to control the outbreak of HIV/AIDS cases globally many institutional buyers were actively involved in prevention programmes to prevent the spreading of HIV/AIDS. Subsequently, we seized this opportunity to participate in the tender market involving these institutional buyers. Due to the increased demands from the tender market, we expanded our operations to Pontian in 1994. In 1998, Goh Yin joined our Group as our QA Director. UTSB was incorporated in 1998 as our Group ventured into the catheter manufacturing business as we foresee a growing market for catheters. As our condoms manufacturing business grew, HMSB and ISB were incorporated in 1999 to expand our condom manufacturing capacity. HMSB and ISB commenced its operations in Pontian, Johor and Sungai Buloh, Selangor respectively. In 1999, Goh Miah Kiat joined our Group to take charge of the marketing and business development of our Group. We also started participating in international medical exhibitions to market our products and services to customers at the international level. Through these medical exhibitions, we have been able to improve the sales of our products and increase our customer base. 6. INFORMATiON ON OUR GROUP (Cont’d) In 2000, we started to supply lubricating jelly to our customers via outsourcing. In 2005, we started manufacturing our own lubricating jelly in-house at our Pontian Besar factory. In 2003, business opportunities in the Thai market as well as the tax incentive and attractive land leasing rates offered by the Board of Investment of Thailand led to the establishment of ITL and the construction of a manufacturing facility in Hat Yai, Thailand. In addition, the availability of skilled and unskilled labour at a lower wage rate compared to the wage rate in Malaysia was also factor of the establishment of our Thai manufacturing facility. ITL commenced operations in 2006 to manufacture condoms for customers both in Thailand and overseas. At the same time, we were granted a tax incentive by the Board of Investment of Thailand which allows us to enjoy 13 years of tax incentives for condoms manufactured by ITL’s current manufacturing facilities (100% tax exemption for the first eight (8) years (i.e. from 2006 to 2013) and 50% tax exemption for the subsequent five (5) years (i.e. from 2014 to 2018)). In addition, a similar tax incentive will be granted for the condoms to be manufactured by ITL’s new manufacturing facilities (expected to be completed by the end of 2013) for the same duration (13 years from completion). For more details on ITL, please refer to Section 6.4.1 (ii) of this Prospectus. In early 2004, we rented a larger factory in Pontian Besar to expand and increase the manufacturing capacity of KISB. Subsequently, we relocated the manufacturing operations of KISB, HMSB and UTSB on a gradual basis to this new Pontian Besar factory. As at the LPD, Pontian Jaya remains as our Group’s finance office as well as packaging centre and warehouse. In 2004, due to capacity limitation, ISB’s entire operations in Sungai Buloh were relocated to a larger factory located in Port Klang. In 2010, we acquired a piece of vacant land with a land area of approximately 7.259 hectares in Pontian for the construction of a centralised manufacturing facility in the future. In 2012, we acquired a vacant factory adjacent to our current Port Klang factory for our future expansion. Please refer to Section 12.3 of this Prospectus for more information on our expansion plans.
6.2 Information on our Company Our Company was incorporated in Malaysia under the Act as a private limited company on 27 September 2012 with the name Karex Sdn Bhd. Subsequently, on 5 October 2012, our Company was converted into a public limited company. Our Company is an investment holding company whilst our Subsidiaries are principally involved in the manufacturing and sale of condoms, sterile catheters, latex probe covers latex sleeves and rubber products. Prior to the IPO, our Company had undertaken a pre-IPO restructuring which comprised the following: (i) Establishment of Karex as a special purpose acquisition vehicle for our IPO on 27 September 2012; (The rest of this page has been intentionally left blank)
6. INFORMATION ON OUR GROUP (Gont’d) (ii) The acquisitions of KISB, ITl, ISB and HMSB by us and UTSB by KISB, for an aggregated consideration of approximately RM57.4 million to be settled via the issuance of approximately 229.5 million Shares to their respective shareholders on 23 September 2013. Details of the Acquisitions are as follows: (a) We acquired the entire issued and paid-up share capital of KISB from Lam Jiuan Jiuan, Goh Siang, Goh leng Kian, Goh Yen Yen, Goh Yin, Goh Miah Kiat, lam Yiu Pang Albert, Goh Ai Noi, Shaari bin Haron, Dato’ Mohamed Suhaimi bin Sulaiman, Hamidon bin Abdullah and Abu Talib bin Abdul Rahman (collectively known as “Vendors I”) for a purchase consideration of RM35,474,998 to be satisfied via the issuance of 141,899,992 Shares. The purchase consideration of RM35,474,998 was arrived on a “willing-buyer willing-seller» basis and represents approximately a.66 times of the consolidated NA of KISB for the FYE 2012 of approximately RM53.9 million. We had on 30 November 2012 entered into the KISB SSA with Vendors I for the acquisition of KISB;
(b) We acquired the entire issued and paid-up share capital of ITl from Innolatex Limited, Goh Siang, Goh leng Kian and Goh Miah Kiat (collectively known as “Vendors II”) for a purchase consideration of RM 12,500,000 to be satisfied via the issuance of 50,000,000 Shares. The purchase consideration of RM12,500,000 was arrived on a “willing-buyer willing-seller” basis and represents approximately 1.61 times of the NA of ITl for the FYE 2012 of approximately RM7.8 million. We had on 30 November 2012 entered into the ITl SSA with Vendors II for the acquisition of ITL.
Subsequently, we had on 28 June 2013 entered into a letter of variation with Vendors II to vary the ITl SSA by increasing the number of ITl shares to be acquired to 1,620,000 of THB100 each in ITl as ITl were required to increase its registered share capital from THB120,000,000 to THB162,000,000 in order for ITl to derive, amongst others, taxation relief under the Promotion Investment Act 2520. We have nominated KISB and ISB to hold one (1) share each in ITl to comply with the requirement under Thai law that a private company must be held by a minimum of three (3) shareholders. (c) We acquired the entire issued and paid-up share capital of ISB from AJNA, Goh leng Kian, Lim Poh Chuan, Goh Yen Yen, Goh Yin, Goh Miah Kiat and Goh Ai Noi (collectively known as “Vendors III”) for a purchase consideration of RM4,750,000 to be satisfied via the issuance of 19,000,000 Shares. The purchase consideration of RM4,750,000 was arrived on a “willing-buyer willing-seller” basis and represents approximately 0.61 times of the NA of ISB for the FYE 2012 of approximately RM7.8 million. We had on 30 November 2012 entered into the ISB SSA with Vendors III for the acquisition of ISB;
(d) We acquired the entire issued and paid-up share capital of HIVISB from Cil for a purchase consideration of RM3,300,000 to be satisfied via the issuance of 13,200,000 Shares. The purchase consideration of RM3,300,000 was arrived on a “willing-buyer willing-seller” basis and represents approximately
0.50 times of the NA of HMSB for the FYE 2012 of approximately RM6.6 million. We had on 30 November 2012 entered into the HMSB SSA with Cil for the acquisition of HMSB; and 6. INFORMATION ON OUR GROUP (Cont’d) (e) We acquired the remaining 40% equity interest in UTSB not already owned by KISB through KISB from Goh Siang, Goh leng Kian, Chew Cheng Chuan and the Estate of Abdul Rahman bin Rashid (collectively known as “Vendors IV”) for a purchase consideration of RM1,350,000 to be satisfied via the issuance of 5,400,000 Shares. The purchase consideration of RM1 ,350,000 was arrived on a “willing-buyer willing-seller” basis and represents approximately 0.71 times based on 40% of the NA of UTSB for the FYE 2012 of approximately RM1.9 million. We and KISB had on 30 November 2012 entered into the UTSB SSA with Vendors IV for the acquisition of UTSB. The Acquisitions are interdependent on each other and are satisfied via issuance of Shares. Our consolidated NA upon completion of the Acquisitions will approximate the sum of all individual Subsidiary’s NA. The cost of investment in the Subsidiaries will also be based on the respective individual Subsidiary’s NA upon completion of the Acquisitions. Therefore, our Company and Subsidiaries will be able to pay dividends out of post-acquisition profits of these Subsidiaries. The purchase consideration for ITl is higher than its NA, however there will be no impact of impairment of investments in the entity as the cost of investment at our Company level is the same as the NA of ITl as explained in the preceding paragraph. (iii) The rationalisation of our Promoters’ shareholding structure via the Transfer of Shares which shall comprise: (a) the transfer of Shares held by Innolatex Limited pursuant to the Acquisitions to Innolatex Limited’s shareholders;
(b) the transfer of Shares held by Cil pursuant to the Acquisitions to Cil’s shareholders; and
(c) the transfer of 13,500,000 Shares each held by lam Jiuan Jiuan, Goh Siang, Goh leng Kian, Goh Yen Yen, Goh Yin, Goh Miah Kiat and Goh Ai Noi pursuant to the Acquisitions to KOl,
after the registration of this Prospectus and would result in KOl holding 94,500,000 Shares, representing 35.0% equity interest in our Group upon our Listing. Please refer to Section 9.1.1 of this Prospectus for details of KOl’s shareholders. (The rest of this page has been intentionally left blank)
6. INFORMATION ON OUR GROUP (Cont’d) 6.3 Share capital Our authorised share capital upon Listing will be RM500,OOO,000 comprising 2,000,000,000 Shares whilst our issued and paid-up share capital upon Listing will be RM67,500,000 comprising 270,000,000 Shares. As at the LPD, our Company does not have any outstanding warrants, options, convertible securities or uncalled capital. The changes in our issued and paid-up share capital since incorporation are as follows: Cumulative
No. of issued and Date of shares Par paid-up share allotment allotted value Consideration Purpose capital (RM) (RM)
27 September 4 0.50 Cash, at RMO.50 Subscriber Shares 2 2012 per share 30 November 8 0.25 Other than cash Subdivision of 2 2012 Shares 23 September 141,899,992 0.25 Other than cash, Consideration for 35,475,000 2013 at RMO.25 per the acquisition of share KISB 23 September 50,000,000 0.25 Other than cash, Consideration for 47,975,000 2013 at RMO.25 per the acquisition of share ITL 23 September 19,000,000 0.25 Other than cash, Consideration for 52,725,000 2013 at RM0.25 per the acquisition of share ISB 23 September 13,200,000 0.25 Other than cash, Consideration for 56,025,000 2013 at RMO.25 per the acquisition of share HMSB 23 September 5,400,000 0.25 Other than cash, Consideration for 57,375,000 2013 at RM0.25 per the acquisition of share UTSB
Upon Listing, our Group structure is as follows:
Note: KISa and Isa hold one (1) share each in ITL 47
6. INFORMATION ON OUR GROUP (Cont’d)
6.4 Our subsidiaries and associated companies As at the LPD, our Subsidiaries are: Our direct Our subsidiaries / Date / Place of Issued and paideffective Company no. incorporation Par value up share capital interest Principal activities (%)
KISB 4 May 1988/ RM1.00 RM2.500,000 100 Manufacturing and (170363-X) Malaysia sale of condoms ITL 7 August 2003 THB100.00 Registered capital 100 Manufacturing of (0905546001692) / Thailand of all types of THB162,000,000 condoms, rubber of which finger gloves, hand THB130,500,000 gloves and/or is paid-up as at the products from LPD rubber
ISB 2 December RM1.00 RM250,000 100 Manufacturing and (500319-M) 1999/ sale of condoms Malaysia HMSB 13 April 1999 / RM1.00 RM1,000,000 100 Manufacturing of (480951-X) Malaysia condoms, latex probe covers and latex sleeves Our indirect Our subsidiary / Date / Place of Issued and paid-effective Company no. incorporation Par value up share capital interest Principal activities Subsidiary of KISB (%) UTSB 16 November RM1.00 RM500,000 100 Manufacturing of (472154-X) 1998/ sterile catheters Malaysia 6.4.1 Our direct subsidiaries (i) KISS (a) History and business KISB was incorporated in Malaysia under the name of Banrub Sdn Bhd as a private limited company under the Act on 4 May 1988 and commenced operations in 1989, KISB assumed its present name on 5 February 1994 and is principally involved in the manufacturing and sale of condoms. 6. INFORMATION ON OUR GROUP (Cont’d) (b) Share capital As at the LPD, the authorised share capital of KISB is RM5,000,000 comprising 5,000,000 shares in KISB, of which RM2,500,000 comprising 2,500,000 shares in KISB have been issued and fully paid-up. There were no changes in the issued and paid-up share capital of KISB for the last four (4) years preceding the LPD. As at the LPD, KISB does not have any outstanding warrants, options, convertible securities or uncalled capital. (c) Subsidiary and associated companies As at the LPD, KISB has a subsidiary, UTSB. Further details on UTSB are disclosed in Section 6.4.2 of this Prospectus. KISB does not have any associated companies as at the LPD. (ii) ITL (a) History and business ITL was incorporated in Thailand as a private company under the Civil and Commercial Code of Thailand on 7 August 2003 and commenced operations in 2006. ITL is principally involved in the manufacturing of all types of condoms, rubber finger gloves, hand gloves and/or products from rubber. (b) Share capital
As at the LPD, the registered share capital of ITL is THB162,000,000 comprising 1,620,000 shares of which THB130,500,000 have been paid-up. There were no changes in the registered and paid-up share capital of ITL for the last four (4) years preceding the LPD except in the FYE 2013 where ITL’s registered and paid-up share capital was increased from THB120,000,000 comprising 1,200,000 shares to a registered capital of THB162,000,000 comprising 1,620,000 shares of which THB130,500,000 have been paid-up. As at the LPD, ITL does not have any outstanding warrants, options, convertible securities or uncalled capital. (c) Subsidiary and associated companies As at the LPD, ITL does not have any subsidiary or associated companies. 6. INFORMATION ON OUR GROUP (Cont’d) (iii) ISB (a) History and business ISB was incorporated in Malaysia as a private limited company under the Act on 2 December 1999 and commenced operations in 2000. ISB is principally involved in the manufacturing and sale of condoms. (b) Share capital As at the LPD, the authorised share capital of ISB is RM500,000 comprising 500,000 shares in ISB of which RM250,000 comprising 250,000 shares in ISB have been issued and fully paid-up. There were no changes in the issued and paid-up share capital of ISB for the last four (4) years preceding the LPD. As at the LPD, ISB does not have any outstanding warrants, options, convertible securities or uncalled capital. (c) Subsidiary and associated companies As at the LPD, ISB does not have any subsidiary or associated companies. (iv) HMSB (a) History and business HMSB was incorporated in Malaysia as a private limited company under the Act on 13 April 1999 and commenced operations in 2000. HMSB is principally involved in the manufacturing of condoms, latex probe covers and latex sleeves. (b) Share capital As at the LPD, the authorised and issued and paid-up share capital of HMSB is RM1 ,000,000 comprising 1,000,000 shares in HMSB. There were no changes in the issued and paid-up share capital of HMSB for the last four (4) years preceding the LPD. As at the LPD, HMSB does not have any outstanding warrants, options, convertible securities or uncalled capital. (c) Subsidiary and associated companies As at the LPD, HMSB does not have any subsidiary or associated companies.
6. INFORMATION ON OUR GROUP (Cont’d) 6.4.2 Our indirect sUbsidiary company (i) UTSB (a) History and business UTSB was incorporated in Malaysia as a private limited company under the Act on 16 November 1998 and commenced operations in 1999. UTSB is principally involved in the manufacturing of sterile catheters. (b) Share capital As at the LPD, the authorised and issued and paid-up share capital of UTSB is RM500,000 comprising 500,000 shares in UTSB. There were no changes in the issued and paid-up share capital of UTSB for the last four (4) years preceding the LPD. As at the LPD, UTSB does not have any outstanding warrants, options, convertible securities or uncalled capital. (c) Subsidiary and associated companies As at the LPD, UTSB does not have any subsidiary or associated companies. 6.4.3 Our associated companies As at the LPD, our Group does not have any associated companies. 6.5 Capital expenditures and divestures The details of material capital expenditures for the past four (4) FYEs are as follows: Method of financing FYE 2010 FYE2011 FYE 2012 FYE 2013 (RM’OOO) (RM’OOO) (RM’OOO) (RM’OOO) Capital expenditures Malaysia Machinery a mix generated fborrowings of unds internally 10,141 and bank 4,469 3,508 2,276 Land a mix generated fborrowings of unds internally and bank 8,373 1,074 5,500
Thailand Machinery a mix of internally 1,655 256 1,031 1,696 generated funds and bank borrowings 51 6. INFORMATION ON OUR GROUP (Cont’d) Method of financing FYE 2010 FYE 2011 FYE 2012 FYE 2013 (RM’OOO) (RM’OOO) (RM’OOO) (RM’OOO) Thailand Renovations a mix of internally 23 71 18 998 generated funds and bank borrowings Total capital 11,819 13,169 5,631 10,470 expenditures Capital divestures Malaysia Sale of 783 properties Total capital 783 divestures As at the LPD, our Group does not have any material expenditures and divestures currently in progress. (i) Malaysia Capital expenditure for the FYE 2010 is mainly for installation of two (2) condom dipping lines, 13 manual ET machines and seven (7) foiling machines, upgrades of four (4) condom dipping lines and purchase of six (6) automated ET machines, to increase our manufacturing capacity. Capital expenditure for the FYE 2011 is mainly for installation of two (2) condom dipping lines, six (6) ET machines and seven (7) foiling machines to increase our manufacturing capacity. Further, our Group has acquired a piece of land measuring approximately 18 acres located in Pontian for the future expansion of our Group. Capital expenditure for the FYE 2012 is mainly for installation of one (1) condom dipping line and ten (10) foiling machines to increase our manufacturing capacity. In addition, during the same financial year, our Group sold three (3) residential properties to relatedparties (disclosed in Section 11.1.1 of this Prospectus) as the said properties are noncore assets of our Group and they are non-revenue generating. Capital expenditure for the FYE 2013 is mainly for the acquisition of a factory building for ISS in Port Klang and replacement parts for the machineries. (ii) Thailand Capital expenditure for the FYE 2010 is mainly for installation of two (2) condom dipping lines and six (6) foiling machines to increase our manufacturing capacity. Capital expenditure for the FYE 2011 is mainly for installation of two (2) foiling machines to increase our foiling capacity. Capital expenditure for the FYE 2012 is mainly for installation of five (5) manual ET machines to increase our testing capacity. Capital expenditure for the FYE 2013 is mainly for the upgrade of the existing machineries and renovation work performed. 6. INFORMATION ON OUR GROUP (Cont’d) 6.6 Key milestones and achievements Our key milestones and achievements since our incorporation are as follows: Year 1988 We incorporated Banrub to venture into the condom industry. 1989 We marketed and distributed our brand of condoms in the Malaysian and Singaporean market. This marked our first foray in the OBM market. 1990 KISB registered the trademark “Carex” in Singapore. We established an R&D team to focus on the design manufacturing machinery starting with our own dipping line. and development of We secured our first contract to manufacture and supply semi-finished condoms which signified our venture into the commercial market. 1992 We ventured into the probe covers manufacturing business. 1993 Banrub secured an order from Gem Plaza LLC from UAE, to supply them with our Carex condoms to the Middle Eastern countries. Since then, we started to market and distribute our Carex condoms via intermediaries such as distributors and traders. 1994 We successfully secured in our first tender offers by institutional buyers such as international agencies. NGOs and government which mark a significant milestone of venturing into the tender market. 1998 UTSB was catheters. incorporated and cornmenced operations in the manufacturing of sterile 1999 We started participating and attending international exhibitions and market and promote our products and services. tradeshows to We received ISO certifications (IS013485, certifications from SGS United Kingdom Ltd.). IS09001 and Directive93/42/EEC 2005 We ventured into the business of manufacturing of lubricating jelly. 2006 We expanded our condoms manufacturing business into Thailand. 2009 We succeeded in developing Polyisoprene probe covers. (The rest of this page has been intentionally left blank)
7. BUSINESS OVERVIEW 7.1 Overview Our Group became the world’s largest condom manufacturer in terms of annual manufacturing capacity in the FYE 2012 with an annual manufacturing capacity of approximately three (3) billion pieces. Our global market sales cover more than 110 countries. During the FYE 2013, we manufactured approximately 2.4 billion pieces of condoms. According to the IMR Executive Summary, our leading position is further reflected by our export market share of 60.8% (export volume from Malaysia was approximately 7.6 million kg) amongst condom manufacturers in Malaysia for the year 2012. In addition to our core business, we also manufacture other rubber-based medical devices and complementary products such as probe covers, catheters and lubricating jelly. In terms of revenue break down, condom sales have contributed approximately 90% to our total revenue for the FYE 2010, FYE 2011, FYE 2012 and FYE 2013. For further details on our Group’s products and the segmentation of revenue by product, please refer to Section 13.2.1 (i) of this Prospectus. Our products are principally sold in the commercial, tender and OBM markets. For the FYE 2013, commercial, tender and OBM market constituted approximately 59.7%, 36.1% and 4.2%, respectively to our Group’s total revenue. For further details on these markets, please refer to Section 7.1 O(ii) of this Prospectus. The commercial market is where we manufacture condoms for brand owners. This includes customers such as Ansell Limited (Lifestyle brand), Reckitt Benckiser PLC (Durex brand), Line One Laboratories Inc (Trustex brand) and Global Protection Corp (One brand). The tender market is where we tender to institutional buyers to manufacture condoms for them. Institutional buyers consist of NGOs and government agencies such as UNFPA, USAID, PSI and MSI and may also include international purchasing agents such as JSI and Crown Agents. Lastly, we also manufacture condoms under our own brands, namely Carex and INNO. These condoms are distributed in countries such as UAE, South Africa, India, Nigeria and Bangladesh. Our business model is illustrated in the diagram below: Principal Market Target Products Customers Commercial Brand Owners Condoms ~ Catheters Tender
Institutional Buyers Probe covers
OBM Distributors and Lubricating
,—-+ Traders jelly
7. BUSINESS OVERVIEW (Cont’d) Our competitive advantages and key strengths provide us with a strong platform to compete against other business operators, as well as to facilitate business sustenance and growth. Our competitive advantages and key strengths are as follows: (i) Established market reputation with proven track record;
(ii) Strong in-house R&D capabilities driven by continuous innovation;
(iii) Recognition as a pre-qualified manufacturer; (iv) Ability to manufacture high quality condoms;
(v) Ability to handle large volume with minimal interruptions; and
(vi) Wide market coverage supported by extensive product mix.
Please refer to Section 7.18 of this Prospectus for further details of our Group’s competitive advantages and key strengths.
7.2 Principal place of business and location of principal assets Our operational facilities and factories are currently located in Malaysia and Thailand. Please refer to Annexure A of this Prospectus for further details on our Group’s properties.
7.3 Principal activities and products Our Group is principally involved in the manufacturing of the following products: (i) condoms;
(iii) probe covers; and (iv) lubricating jelly.
(i) Manufacturing of condoms
Our core business is the manufacturing of condoms, which is a protection device most commonly used during sexual intercourse to reduce the possibility of pregnancy as well as the spreading of STls and HIV. Currently, the manufacturing of condoms is undertaken by KISB, ITL, ISB and HMSB. Condom sales contribute approximately 90.0% to our Group’s total revenue for the FYE 2013. Our condoms are available in diverse types including: No. Types of condoms Description 1. Basic shapes
(/”1. \. \! \I L.! Baggy Baggy ribbed Contoured I Anatomic Thick head Flared 2. Basic sizes (a) (b) (c) (d) (e) (f) 49 mm +/-2 mm; 52 mm +/-2 mm; 53 mm +/-2 mm; 54 mm +/-2 mm; 56 mm +/-2 mm; and 60 mm +/-2 mm.
7. BUSINESS OVERVIEW (Cont’d) No. Types of condoms Description 3. Basic colours (a) black; (b) brown; (c) blue; (d) green; (e) orange; (f) pink; (g) purple; (h) red; (i) gold; (j) silver; (k) yellow; (I) duo-coloured; and (m) tri-coloured. 4. Basic textures I surfaces
Dotted / Ribbed Contoured Contoured, Super Studded ribbed ribbed, dotted dotted (3 in (rough & 1) tough) 5. Basic flavours I fragrances (a) durian; (b) Iychee; (c) pineapple; (d) apple; (e) lemon; (f) strawberry; (g) chocolate; (h) vanilla; (i) banana; (j) raspberry; (k) coffee; (I) perfume; (m) passion fruit; (n) blackcurrant; (0) grape; and (p) peppermint. 6. Foil packaging (a) square; (b) rectangular; (c) round; (d) blister pack; and (e) twin pack including lubricants. 7. Consumer packaging (a) box packaging; (b) flow pack; (c) blister pack; (d) tin pack; and (e) wallet pack.
Customisation of other shapes, sizes, colours, textures I surfaces and flavours I fragrances are available upon request from customers. 7. BUSINESS OVERVIEW (Cont’d) Below are examples of condoms manufactured by our Group:
Super thin Baggy Powershot Dotted X large Gold
Assorted Collection Classic flavour
(ii) Manufacturing of catheters We are also involved in the manufacturing of urethral catheters, which is a flexible tube commonly made from silicone rubber or natural rubber that can be inserted into the urinary bladder creating a channel for the passage of fluid or for continuous irrigation of the bladder. It is commonly use for the drainage of fluid from the bladder. Currently, the manufacturing of catheters is being carried out by UTSB. We market our catheters to the tender and OBM markets under three (3) brands: (a) CHROMA;
(b) ProCare; and
For the FYE 2013, approximately 5.4% of our Group’s total revenue were attributed to catheters. Our catheters are available in different sizes, balloon capacities and functions, including: No. Types of catheters Description 1. Features (a) seamless; (b) form fitting;
(c) flexible and safe; and
(d) leakage resistance.
2. Types (a) one way; (b) short-term;
(d) post-operation; and
(e) bladder drainage
3. Tips (a) Nelaton; (b) Tiemann;
(d) Mercier; and
7. BUSINESS OVERVIEW (Cont’d) No. Types of catheters Description 4. Length (a) (b) (c) 22 em; 30 em; and 40 em.
5. Balloon capacity (a) 3 ml; (b) 5 ml;
(c) 10 ml;
(d) 30 ml; and
(e) 60 ml.
Below is example of catheters manufactured by our Group:
Balloon catheters (iii) Manufacturing of probe covers We are also involved in the manufacturing of probe covers, which is a type of hygienic protection for patients during ultrasonic examinations. Currently, the manufacturing of probe covers is undertaken by KISB and ISB. As at the LPD, we supply probe covers only to the commercial market. Our probe covers are available in different features and types as follows: No. Types of probe covers .:e-D–=e.:e-s-=-cr’-‘-iLPt=-io::….:n-‘—–_ 1. Features (a) seamless; (b) form fitting;
(c) flexible and safe; and’
(d) leakage resistance.
7. BUSINESS OVERVIEW (Cont’d) No. Types of probe covers 2. Types
Probe covers are also available in natural rubber latex and Polyisoprene. (iv) Manufacturing of lubricating jelly Lubricating jelly is a complementary product to our condoms manufacturing business that is undertaken by KISB, to cater for the commercial, tender and OBM markets. Lubricating jelly is used to reduce friction between body parts, or between body parts and other objects. Our lubricating jelly is greaseless, non-toxic and water soluble, thus, making them suitable for gynaecological use or when additional lubrication is needed. No. Types of lubricating jelly Description 1. Features (a) water based; (b) long lasting;
(c) clear and non-staining;
(d) silky smooth; and
(e) latex friendly.
2. Types (a) regular; (b) flavoured;
(d) warming gel; and
(e) cooling gel.
3. Flavour (a) aloe vera; (b) strawberry;
(e) chocolate; and
(f) tutti fruiti.
7. BUSINESS OVERVIEW (Cont’d) No. Types of lubricating jelly Description 4. Packaging (a) (b) (c) sachet -3 ml, 4 ml, 5 ml or 10 ml; tube -20 ml, 50 ml, 60 ml, 100 ml or 120 ml; and pump bottle -150 ml, 200 ml, 250 ml, 300 ml or 500 ml.
Customisation of other flavours, fragrances and packaging are available upon request from customers. Below are examples of lubricating jelly manufactured by our Group:
Cooling lubricating jelly Warming lUbricating jelly Water based lubricating jelly (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (Cont’d) 7.4 Process flow (i) Manufacturing of condoms In general, the process flow for our manufacture of condoms is illustrated in the diagram below: Primary Process Secondary Process Latex Mixing / Preparation I Electronic Testing Former Cleaning
-… I I Foiling / Packing First Dipping
-… I Second Dipping I Storage and Delivery ____t _ I Beading
7. BUSINESS OVERVIEW (Cont’d) Latex mixing and preparation Majority of our condoms are manufactured using Pre-vulcanised latex. Pre-vulcanised latex is a form of compounded latex supplied ready for use, requiring only dilution with deionised water. We source the Pre-vulcanised latex from our approved suppliers. A series of stringent inspections and testing are conducted prior to the Prevulcanised latex being accepted and stored in our storage tanks. All Pre-vulcanised latex are marked and recorded for efficient tracking and monitoring. The purpose of tracking and monitoring the Pre-vulcanised latex is to ensure that the quality of the Pre-vulcanised latex is not compromised and meet the required specification. The said batch of Pre-vulcanised latex will be isolated and recalled if it is found to be compromised and non-conformity of the required specification. The Pre-vulcanised latex are then mixed evenly before being transferred to the dipping machines to commence the dipping process. Former cleaning Condom formers are washed thoroughly and brush dried before they are dipped into the first latex tank to begin the condom dipping process. Dipping process The dipped condom formers are then withdrawn slowly so that a thin, smooth and uniformed film is achieved. The first dipped layer on the condom formers is dried in the first oven before it is dipped in the second latex tank. Our Group’s dipping technology utilises a double dipping process (a commonly and widely used technology in the rubber industry) to minimise defects of our condoms. After the second dip, the condom films are dried again in the second oven before being beaded. Beading The condom formers are then moved to the beading station where the open end of the condom is beaded. The condoms are then dried and fully vulcanized in the third (3rd) oven. Leaching The condoms are then leached in the leaching tank containing diluted ammonia solution. This leaching process removes excess protein and soluble chemicals from the condoms. Stripping The leached condoms are stripped by water jet before being collected in the collection baskets. Subsequently, the condom formers are rinsed with fresh water before brush dried, thus completing the dipping cycle. Wet powdering Powdering solution is added into the mixer together with the condoms from the collection baskets. It is later drained and transferred to the hydro-extractor to remove excess powder solution. Tumbling / drying The condoms are later placed into a tumble dryer. 62
7. BUSINESS OVERVIEW (Cont’d) Electronic testing The dried condoms are 100% electronically tested in a high voltage pin-hole testing machine (also referred as ET machines) for pinholes. The testing principle is based on the following procedures: (a) The condoms are loaded either manually or automatically over a stainless steel mandrel and subjected to be tested by a rotating conductive rubber brush;
(b) A high voltage electrical current is applied between the mandrel and the test brush;
(c) Condoms with pinholes will allow electricity to pass from the rubber brush to the mandrel and this will divert the condoms to the reject bin; and
(d) The accepted condoms are rolled automatically and randomly collected for another round of laboratory testing before sending them to be foiled.
Foiling / Packing After the condoms passed the sampling and acceptance level tests, they will be sent for foiling. The condoms are placed on the feeding belt, transported and lubricated by an automatic lubricant dispenser before hermetically (airtight and sterile) sealed into foils. A lot number and expiry date will be ink printed onto the foils as the condoms roll out of the foiling machines. Subsequently, the condoms are packed according to the packaging specifications set by the customers. Storage and delivery Packed condoms are stored in a cool and dry place and ready for shipment. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (Cont’d) (ii) Manufacturing of catheters The process flow for the manufacturing of catheters is illustrated in the diagram below: Preparation of Raw Materials
Methcell Dipping •
Latex Dipping Coagulant Dipping Oven Dry
Thread Assembly Clipping Code Marking Balloon Assembly Gum Dipping Oven Dry Clipping
Sleeving ~ Leak Test -Brand Marking Inner bag Final Latex Dipping Oven Dry
Pouch..Stripping Light Test ~ Eye Making Sealing… Leaching Boxing … Chlorination Carton ..Drying Sterilisation ~ Trimming Delivery The manufacturing of catheters starts from the collection and preparation of raw materials. Catheters are generally made from either silicone or latex rubber, depending on the use. A catheter can either have two or three outlets. In a two-way catheter, one outlet acts as a urine output and the other inflates the balloon. A threeway catheter has the same function as a two-way catheter, but uses the third (3rd) outlet for bladder irrigation. Catheters vary in sizes from 2 mm to 10 mm in diameter. The balloon itself varies in sizes from 5 cc to 60 cc, depending on the intended use. The balloon is normally filled with sterile water. Catheter can also be attached to a drainage bag. 64 7. BUSINESS OVERVIEW (Cont’d) In the preparation of the raw materials, we will conduct an inspection on the raw materials to ensure the specifications are in accordance with our manufacturing requirement. The following are the basic catheters manufacturing processes. (a) The first step in the manufacturing of a catheter is the manufacturing of the long, thin tube that will be inserted into the bladder.
(b) A thin band of cured latex is then slipped over the tube by hand to form a sheath around the tube. It is positioned so that the latex covers the inflation eye that has been punched in the tube.
(c) The entire length of the tube is dipped in latex, which creates an overcoat layer and bonds the edges of the band to the tube, to form a balloon. This adds to the thickness of the balloon and is used to adjust the outer diameter of the tube to the desired size.
(d) A small opening is then punched in the distal end of the tube furthest end of the tube to form the drainage eye.
(e) The catheter is then transported to the packaging centre for 100% functional, visual and size gauge tests.
(f) Thereafter, we will send the catheters to brand marking followed by packaging into inner bag, pouch, sealing, boxing and cartoning. After completing the packaging process, all packed catheters will be sterilised before delivery.
(The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (Cont’d) (iii) Manufacturing of probe covers The process flow for the manufacture of probe covers is illustrated in the diagram below: Primary Process Secondary Process Latex Mixing / Preparation I Electronic Testing Former Cleaning
—. I Foiling / Packing First Dipping Second Dipping __–,-_t _ —. I Storage and Delivery 1 I Beading
Continue to secondary process The manufacturing process for probe covers is similar to that of condoms with the exception of different formers being used. Please refer to Section 7.4(i) of this Prospectus for further details of the condoms manufacturing process. 7. BUSINESS OVERVIEW (Cont’d) (iv) Manufacturing of lubricating jelly The process flow for the manufacturing of lubricating jelly is illustrated in the diagram below: Tank Cleaning
[ Rework or Reject J [ Rework or Reject J Packing into Boxes ~[ Rework or Reject J r—–….L.——-, Delivery Tank cleaning Prior to the manufacturing process, the mixing tank is cleaned thoroughly to remove unwanted residuals which may contaminate the mixing process. Preparation of raw materials For the preparation of raw materials / ingredients, our manufacturing staff will gather the relevant raw materials / ingredients and weigh them based on a pre-set formula.
After all the relevant raw materials / ingredients are gathered, it will be mixed in the mixing tank. Jelly foiling, tube and pump bottle filling A portion of the mixed jellies will be taken from the mixing tank for testing in terms of pH, viscosity and specific gravity. After passing the test, the mixed lubricating jelly will be released for foiling, tube and pump bottle filling.
7. BUSINESS OVERVIEW (Cont’d) Packing into boxes Upon completing the foiling, tube and pump bottle filling processes, we will conduct a second set of QC inspection on the packaging quality. Foil sealing, tube and pump bottle quality, lubricant leakages, labelling and lubricant amount will be checked during this QC inspection. Subsequently, the packed lubricating jelly will be released for final box packaging. Delivery After all the packed lubricating jelly is boxed, it will be stored in the warehouse. Prior to delivery, we will carry out a third (3rd ) set of QC inspection involving checking of shipment and verifying it against a sales review to ascertain whether all boxes are labelled properly with customer particulars, carton number, quantity, lot number and expiry date. 7.5 Technology used Our key technologies are represented by the condoms dipping machines, ET machines and foil sealing machines. Our R&D team continuously strives to develop, manufacture, improve and customise our machineries. As condoms are our Group’s core product, the major technologies utilised in our condoms manufacturing operations include the following: (i) Condoms dipping machines We have successfully designed, developed and improved efficient condom dipping lines which are able to manufacture more condoms per manufacturing cycle. For example, we have manufactured double-former dipping lines with tighter gap between the condom formers to increase the number of pieces manufactured without compromising the quality of the final products. This system is adopted by all the condom dipping machines in our factories in Port Klang, Johor and Thailand. In recent years, we have successfully developed new dipping lines with greater flexibility in terms of different length, texture and colour. As at the LPD, we have 32 dipping lines in various sizes with the capacity to manufacture approximately three (3) billion pieces of condoms annually. (ii) ET machines All condoms are electronically tested for pinholes with the ET machines by subjecting them to a high-voltage test that rejects condoms with pinhole(s). As at the LPD, most of our manual ET machines are developed in-house. Through our continuous R&D effort, we managed to develop twin-station ET machines, which saves manufacturing space and energy cost per any given manufacturing area. Since 2010, we have invested in six (6) automated ET machines in our Pontian factory. SUbsequently, we also conduct customisation work on these automated ET machines to improve their efficiency. Currently, our automated ET machines can test up to 300 pieces of condoms per minute as compared to 40 pieces per minute under the manual system. One (1) automated ET machine can reduce the manual labour required to operate a manual ET machine of seven (7) workers, therefore reducing our dependence on labour. ICompany No.1 018]!9=DJ 7. BUSINESS OVERVIEW (Cont’d) (iii) Condom foil sealing machines We also design and develop our own condom foil sealing machines. By developing our own machines, we can ensure consistency of quality during the manufacturing process. As a result, we have better control on the final product finishing. Overall, we have single lane and double lanes condom foil sealing machines which can manufacture square, rectangular and round shaped foils. Currently, we have two (2) blister pack foiling machines. Our innovation in designing and developing new styles of packaging gives us a competitive advantage over other players in the industry as attractive packaging enable our products to attract more consumers.
7.6 Manufacturing capacity Our Group’s approximate manufacturing output, capacity and utilisation for the FYE 2010 to FYE 2013 are as follows: FYE 2010 FYE 2011 (2)Company Installed capacity(1) Manufacturingoutput(2] Utilisation rate Installed capacity(1) Manufacturing outputUtilisation rate (million pieces) (million pieces) (%) (million pieces) (million pieces) (%) KISS 1,562.6 1,272.7 81.5% 1,867.8 1,613.0 86.4% ISS 189.0 158.4 83.8% 189.0 159.3 84.31% HMSS(3) 48.3 25.4 52.5% 48.3 23.2 48.0% ITL _____—-=6~04…:..:.c::.8 491.0 81.2% _____-‘-7.::::25~.8~ 603.0 83.1% Total 2,404.7 1,947.5 81.0% 84.7%=====~2,=83=0~.9~ 2,398.5~=====~~ FYE 2012 FYE 2013 Company Installed capacity!’) Manufacturing outpuf’J Utilisation rate Installed capacityl’) Manufacturing OlltPut(2) Utilisation rate (million pieces) (million pieces) (%) (million pieces) (million pieces) (%) KISS 1,998.3 1,317.2 65.9% 1,998.3 1,637.0 81.9% ISS 217.7 151.3 69.5% 217.7 173.8 79.8% HMSS(3) 48.3 14.3 29.6% 48.3 24.2 50.1% ITL _____~7.::::25~.:::…8 464.9 64.1% 725.8 ——- 582.7 80.3% Total 2,990.1 1,947.7 65.1% 2,990.1 2,417.7 80.9% ~=====~= =====~=~ Notes:
(1) Annual capacity is calculated based on machinery and equipment installed capacity and operating 15 hours per day for an average of 26 days per month, adjusted for festive and holiday periods. .
(2) Manufacturing output is calculated based on number of lines, average manufacturing capacity per line per day and the number of days operational.
(3) Lower utilisation rate as this manufacturing line is predominantly used for customised condoms.
69 7. BUSINESS OVERVIEW (Cont’d) Due to time needed for maintenance of equipment, changing of formers and latex in the dipping lines to accommodate different orders, our maximum utilisation rate attainable based on our manufacturing mix is around 80% of our installed capacity. There are minimal idle workers as workers are required even during machine downtime for maintenance work, changing of formers, cleaning of latex tanks and other chores. For the FYE 2011 compared to the previous financial year, our Group’s manufacturing output increased by 0.5 billion pieces of condoms, or 23.2%, from 1.9 billion to 2.4 billion pieces of condoms. The increase in manufacturing was mainly due to the increase in sales/demand of condoms in the FYE 2011. For the FYE 2012 com pared to the previous financial year, our Group’s manufacturing output decreased by 0.5 billion pieces, or 18.8%, from 2.4 billion to 1.9 billion pieces of condoms. This was attributed to the higher frequency in changing of formers which resulted in our dipping line downtime to increase by 47.6% from the FYE 2011 to FYE 2012 to cater for the unusual sequence of orders received during the financial year. In addition, the suspension of foreign workers application process by the relevant authorities during the 6P programme (process of legalising illegal foreign workers) also affected our capacity utilisation as the replacement of expiring foreign workers was delayed. For the FYE 2013 compared to the previous financial year, our Group’s manufacturing output increased by 0.5 billion pieces, or 24.1 %, from 1.9 billion pieces of condoms to approximately
2.4 billion pieces of condoms. Our manufacturing utilisation rate also increased to 80.9% from 65.1 %. This was attributed to the increase in sales/demand of condoms and lower frequency in changing of formers due to favourable timing of order sequences received and the types of condoms manufactured during the financial year. 7.7 R&D Our R&D team consisting of nine (9) personnel lead by our Technical and R&D Director, Mr. Goh Leng Kian focuses on optimising the productivity in our manufacturing processes. We continuously identify prospective technology and expedient adaptations to refine our manufacturing processes via the machinery customisation or conversion of manual motions into automated sequences. This enables us to reduce human errors that may impact our product quality. Furthermore, the improved manufacturing processes enhance our cost and efficiency. In addition to the above, R&D on product development is constantly on-going to ensure that we have the flexibility to cater to our customers’ varying demands such as the tattoo condoms, glow in the dark condoms, super thin condoms as well as Polyisoprene condoms. We are in a position to leverage on the amassment of product knowledge over the years and understanding of product usage circumstances, to design and develop products, that increases our product offering and continue to improve product quality that meet international standards. (i) Productivity improvement Over the years, we have consistently installed advanced machinery in line with the latest technology, as well as machinery modification innovations, to improve our manufacturing processes. In addition, we have also successfully customise our condom dipping machines and condom foiling machines to cater to our customers’ demands. In terms of dipping lines, we have customised our dipping machines to manufacture super thin condoms, custom fit condoms as well as Polyisoprene condoms and probe covers. 7. BUSINESS OVERVIEW (Cont’d) In terms of foiling machines, we have customised our foiling machines to manufacture round shape condom foils, twin pack condoms (one (1) condom and one (1) lubricant in the same foil) as well as condoms packed in buttercups. We strive to improve our productivity by leveraging on our accumulated experience throughout the years as well as upgrading our knowledge base by researching and studying relevant technical information and publications. The combination of the above enables us to make informed decisions to construction, modification and purchase of relevant machineries. Furthermore, we endeavour to understand the machinery mechanisms in order to maximise its practical and optimum usage. We are currently focusing on introducing further automation in our manufacturing process. A fUlly automated system will reduce our reliance on manual labour for the same process as well as increasing efficiency. Productivity improvement efforts Our past productivity improvement efforts include the following: (a) Reduced the gap between the condom formers in our condoms ‘dipping lines to increase condoms output by approximately 16% with the same amount of energy consumption;
(b) Enhanced our condoms dipping machines to manufacture ultra-thin condoms at a thickness of approximately 0.05 mm as compared to a regular thickness of 0.07 mm;
(c) Customised ET machines and improved their testing efficiency from a single station to a twin-station ET machine by using the same indexing table. As such, this would enable us to have more ET machines in one (1) place, thus reducing our energy consumption and results in cost saving for us;
(d) Increased the length of our condoms dipping machines to manufacture additional condoms per cycle. With a longer dipping line, the space between the first and second dipping process is longer, hence allowing the dipping process to run at a faster pace. Consequently, it increases our manufacturing output; and
(e) Replacement of our low energy consumption heaters with infrared heaters which reduce energy consumption from 2 kW to 1.5 kW per heater, resulting in approximately 25% reduction in power consumption.
(ii) Product development We are constantly in discussion with our clients in regards to product specifications based on the latest trends and market needs, upon which we rely on our R&D capabilities to develop prototypes, prior to commencement of manufacturing and commercialisation. The idea of new prototypes may be generated in-house or provided to us by our customers. New prototypes revolve around product enhancements in size, texture, colour, flavour, shapes and lubricant coupled with packaging concept. Based on the combination of material formulation, former specifications, QA assessment and modification of machines, we conceptualise the manufacturing process to determine the optimum method of developing the prototypes. 71 7. BUSINESS OVERVIEW (Cont’d) Upon the development of these prototypes, we will conduct comprehensive quality assessments and tests as well as stability study on these prototypes to ensure that they meet all regulatory standards. We will then commercialise the new prototype and conduct full scale manufacturing upon receiving customer confirmation of orders based satisfactory design, quality and pricing. Product development efforts Through our in-house R&D efforts, we have successfully manufactured a range of products including: No. Products Description Condoms • glow in the dark; • duo-coloured;
• metallic coloured (gold and silver colour);
• 95 condom sizes for Theyfit branded condoms;
• supe~~udded;and • ultra-thin and super-thin. 2 Probe covers • using Polyisoprene as a raw material 3 Packaging • round foil packaging; • blister pack packaging; and
• tWin-pack (combination of condoms and lubricating jelly).
Furthermore, we have successfully compounded our own formulated post-vulcanised latex for the manufacturing of our condoms. This will enable us to control our cost of manufacturing as well as improve the quality of our product. (iii) R&D expenditure Description FYE 2010 FYE 2011 FYE 2012 FYE 2013 R&D expenditure (RM’OOO) 1,591 1,862 2,530 2,980 Revenue (RM’OOO) 157,444 181,753 188,751 231,389 R&D expenditure / Revenue (%) 1.01 1.02 1.34 1.29 7.8 Product quality and QA QA Activities Our QA department is an independent department whereby approved procedures and working instructions are being carried out here. Implementation of these procedures is the responsibility of the respective area owners with assistance from trained QA personnel. Specifications are maintained for each product and the raw materials used. QA is responsible to monitor the conformity of the product from raw materials to finished goods. Compounded Latex Test We analyse the quality of the compounded latex in which only good quality latex is used in the manufacturing of our condoms. 7. BUSINESS OVERVIEW (Cont’d) Pinhole Testing In various stages of the manufacturing process, condoms are randomly collected for pinhole test in accordance to various international standards. Air Burst Test The air burst test is used to determine the overall strength of a condom. Condoms, placed in the air burst chamber, are filled with air at a regulated rate until they burst. The minimum airburst volume and pressure is 18 Iitres of air and 1kPa. Packaging Integrity Test Foil condoms are randomly sampled for packaged integrity test to ensure that they are hermetically (airtight and sterile) sealed to prevent leakage and cross contamination. Dimensional Test Dimension of condoms, such as thickness, width and length are checked by specific equipment such as thickness gauge, ruler and length gauge respectively. We carry out sampling inspection to ensure our condoms meet the stringent quality requirements set by our customers, regulatory authorities and accredited bodies. These inspections include, and not limited to the following: • Water test;
• Visual test;
Quality • Dimensional check; and Inspection 1
• Water test; and Visual test.
• Dimensional check;
• Freedom from holes check;
• Packaging integrity check;
• Bursting test;
• Visual test;
• Colour flatness test; and
• Tensile test.
Quality Inspection 1 Condom samples are collected from the dipping process right after they are tumble-dried. 130 to 165 samples are collected depending on the characteristic of the condoms, from each batch for the following tests: (i) Water test (pinholes) -80 samples;
(ii) Visual -125 sam pies;
(iii) Width and Length -10 samples; (iv) Thickness -5 samples;
(v) Bursting test -10 samples; and
(vi) Tensile test -5 samples.
7. BUSINESS OVERVIEW (Cont’d) Quality Inspection 2 All condom batches will be 100% electronically tested after they have passed Quality Inspection I. After the ET process, 200 samples will be collected for visual and water test. If they fail the acceptable quality level, the batch will be put on hold for disposition. Upon passing the tests, the batches will be transferred to the warehouse. Quality Inspection 3 At Quality Inspection 3, samples are taken progressively during foiling and tested as per customers’ requirement before product release. Our QC inspector shall take samples according to the required tests for the whole shipment lot. An additional 200 samples will be retained by our QA department. These samples will be tested if there is any future dispute. They will be kept in a clean and dry location with a temperature of 30 ± 5°C. The products that failed the test will not be released for shipment and will be on hold pending disposal. There are no incidents whereby entire batches of condoms are disposed of for the financial years under review. As a result of the aforementioned stringent QA and QC processes, our Group has had a low rate of rejected condoms (i.e. 2% to 3% of our total manufacturing) for the last four (4) FYEs. As at the LPO, we have a team of approximately 183 personnel, led by our QA Oirector, involved in QA and QC. 7.9 Principal markets As at the LPO, our principal markets are depicted in the diagram below: Asia
Africa America L( Europe] For the FYE 2013, the export market contributed approximately 91.2% whilst the local market contributed approximately 8.8% of our Group’s total revenue. 7. BUSINESS OVERVIEW (Cont’d) For the FYE 2013, our revenue contributions segmented by countries are as follows: Revenue for the FYE 2013 RM’OOO % PRINCIPAL MARKETS Asia* 85,177 36.8 Africa 71,234 30.8 America 42,210 18.2 Europe 32,768 14.2
231,389 100.0TOTAL Note: Includes Malaysia and Thailand Our largest export market was the Asian region (China, Vietnam, Philippines, Myanmar and Bangladesh) which accounted for approximately 36.8% of our Group’s total revenue for the FYE 2013. This was followed by the African region (South Africa, Tanzania, Zimbabwe and Nigeria), which represented approximately 30.8% of our Group’s total revenue. The Malaysian market contributed approximately RM19.0 million, 8.2% of our Group’s total revenue for the FYE 2013, whereby our products are sold to the commercial market. The remaining two (2) regions (Brazil, US, Germany and Italy) contributed a total of 32.4% of our Group’s total revenue for the FYE 2013. We continuously strive to have a balance mix between the tender and commercial markets. For the FYE 2010 to FYE 2013, these two (2) markets have been consistently between approximately 40% to 50% each. For the past four (4) FYEs, the increase of revenue from the commercial market is a reflection of our success in increased marketing efforts and continuous R&D in this segment. Revenue from the OBM market was maintained at an average 3% to 5% of our total revenue. Revenue from the tender market decreased marginally by 4% in the FYE 2011 and 5% in the FYE 2012 as a result of timing differences between the new tenders and the deliveries of our tender projects. For more details, please refer to Section 13.2.1 (iii) of this Prospectus. 7.10 Marketing and distribution (i) Marketing strategies Our sales and marketing team adopts the following marketing strategies to sustain and expand our business: (a) actively participate in various medical exhibitions and related trade shows;
(b) expanding our market presence and developing new business opportunities by conducting sales calls and product demonstrations as well as working closely with potential and existing customers to help us plan and allocate sufficient manufacturing capacity to meet their requirements;
7. BUSINESS OVERVIEW (Cont’d) (c) creating awareness for our Group and products via manufacturing directories such Federation of Malaysian Manufacturers directory which is distributed locally and globally; and
(d) continuously updating our corporate website and to leverage on our listing on the Malaysian Rubber Export Promotion Council MARKETPLACE website, to provide better access and convenience for existing and potential customers.
As at the LPD, we have a sales and marketing team led by our Chief Executive Officer together with 16 sales and marketing personnel, focusing on sales, marketing and business development functions. As part of our marketing and promotional methods to create awareness with the aim of increasing sales, we have participated in various medical exhibitions and trade shows including the following: Year Name of events Location 2010 (i) Private Label Manufacturer Association Amsterdam, the Netherlands (UPLMAU) Trade Show 2010 (ii) MEDICA Expo 2010 Dusseldorf, Germany 2011 (i) Arab Health 2011 Dubai, UAE (ii) PLMA Trade Show 2011 Amsterdam, the Netherlands (iii) FIME International Medical Expo 2011 Florida, US (iv) MEDICA Expo 2011 Dusseldorf, Germany 2012 (i) Arab Heath 2012 Dubai, UAE (ii) PLMA Trade Show 2012 Amsterdam, the Netherlands (iii) FIME International Medical Expo 2012 Florida, USA (iv) MEDICA Expo 2012 Dusseldorf, Germany (v) Malaysian Rubber Glove Manufacturers Kuala Lumpur, Malaysia Association Expo 2012 (vi) Expo Medical 2012 Buenos Aires, Argentina (vii) Public Health Trade Fair 2012 Kiev, Ukraine 2013 (i) PLMA Trade Show 2013 Amsterdam, the Netherlands (ii) Arab Health 2013 Dubai, UAE (iii) Women Delivers 2013 Conference Kuala Lumpur, Malaysia
7. BUSINESS OVERVIEW (Cont’d) (ii) Distribution channels We market our products through three (3) distribution channels as depicted below: (a) commercial market through brand owners such as multinational corporations which distribute to consumers;
(b) tender market through institutional buyers such as NGOs, government and procurement agencies (multilateral and bilateral organisation); and
(c) OBM market through intermediaries such as our distributors and traders.
Brand owners market Institutional buyers
DistributorsOBM market and traders For the FYE 2013, commercial, tender and OBM markets accounted for 59.7%, 36.1 % and 4.2% of our total revenue respectively. (a) Commercial market Our products are sold to brand owners in the commercial market which is our Group’s core revenue contributor. As at the LPD, we manufacture and supply condoms, catheters, probe covers and lubricating jelly to brand owners which are mainly located in the US, UK, Germany, Netherlands and Russia. Under the commercial market segment, we manufacture their products which will then be marketed under their brands. We have long standing relationships with our brand owners, the longest being 19 years. In the past and including the LPD, we have commercial orders from the respective parties below: Length of Notable relationship Brand Owners Products Country brand (years) Line One Condoms and US Trustex 19 Laboratories Inc. lubricating jelly Global Protection Condoms and US ONE 11 Corp lubricating jelly Ansell Limited Condoms and US Lifestyles 8 lubricating jelly BSN Medical Catheters Germany Norta 8 Bolear Medical Probe covers Russia Viva 7 Limited 77 7. BUSINESS OVERVIEW (Cont’d) Length of Notable relationship Brand Owners Products Country brand (years) M.P.I. Condoms and Germany Masculan 7 Pharmaceutica lubricating jelly GmbH Sheating Probe covers US Not 7 Technology available Reckitt Benckiser Condoms and UK Durex 2 Group PLC lubricating jelly (b) Tender market In the tender market segment, we participate in tender projects by international agencies, NGOs and government. As at the LPD, products supplied to this market includes condoms and lubricating jelly only. It is tougher to secure a customer in the tender market as compared to the commercial market due to its stringent requirements. In order to be able to supply to this market, we have to be a pre-qualified manufacturer. For further details on the criteria of a pre-qualified manufacturer, please refer to Section 7.18(iii) of this Prospectus. In the past and including the LPD, we have successfully secured orders from the respective parties below: Institutional Length of buyers Products Country relationship (years) PSI Condoms and US 19 lubricating jelly Crown Agents Condoms and UK 12 lubricating jelly UNFPA Condoms and Denmark 10 lubricating jelly MSI Condoms UK 9 JSI / USAID Condoms US 5 (c) OBM market Our products are sold to distributors and traders in the OBM market, whereby these products are marketed under our own brand name. As at the LPD, products supplied to this market includes condoms, catheters and lubricating jelly. Our products are marketed under the brand name “Carex” and “INNO” for condoms, whilst “CHROMA”, “UroCare” and “ProCare” for catheters. As at the LPD, we have 75 distributors and traders globally to distribute our products to, amongst others, UAE, Hong Kong, India, Singapore, Bangladesh, South Africa and Nigeria. 7. BUSINESS OVERVIEW (Cont’d) Our major distributors and traders are shown in the table below: Distributors and Length of traders Products Country relationship (years) Gem Plaza LLC Condoms UAE 21 Life Link Condoms Bangladesh 19 International Coral Healthcare Condoms India 12 Pte Ltd Coralatex Condoms and Singapore 10 Marketing lubricating jelly Pharcomedic Condoms Morocco 7 SAR.L. Elecare Condoms Africa 4 Pharmaceuticals By tapping into our respective distributors’ and traders’ network, we are able to expand our market coverage without significant investment in marketing and logistics. These distributors and traders would rely on their own distribution networks to sell our Group’s products to consumers. 7.11 Major customers Our major customers (being those contributed 10% or more of total our Group’s total revenue) for the FYE 2010, FYE 2011, FYE 2012 and FYE 2013 are as follows: Major customers and our products purchased FYE 2010 FYE 2011 FYE 2012 FYE 2013 (RM’OOO) (%) (RM’OOO) (%) (RM’OOO) (%) (RM’OOO) (%) JSI / USAID (5 22,711 14.4 35,949(1) 19.8 17,311 (2) 9.2 19,775 8.5 year relationship) . condoms Crown Agents (3) 16,433 10.4 13,417 7.4 3,937 2.1 576 0.2 (12-year relationship) condoms -lubricating jelly 39,144 24.9 49,366 27.2 21,248 11.3 20,351 8.7 Others 118,300 75.1 132,387 72.8 167,503 88.7 211,038 91.3 - - – – Revenue 157,444 100.0 181,753 100.0 188,751 100.0 231,389 100.0
For the FYE 2013, none of our customers individually contributed more than 10% of our Group’s total revenue. Notes: (1) Revenue from JSI/USAID increased was mainly due to an increase in the condom orders by JSI/USAID in the FYE 2011.
(2) In the FYE 2012, revenue from JSI/USAID decreased was mainly due to the spill-over inventories as a result of large orders placed in the previous year.
(3) The decrease over the last three (3) FYEs was due to manufacturing schedule mismatch as the timing of requisition of orders/tenders, quantity required as well as condoms’ specifications from Crown Agents do not coincide with our overall manufacturing schedule.
79 7. BUSINESS OVERVIEW (Cont’d) We have enjoyed long-term business relationships with our customers. As at the LPD, 60% of our top 10 customers have established strong relationship with us for over six (6) years. This provides us with a stable customer base to sustain and grow the business. 7.12 Raw materials The major types of raw materials that we purchased for our manufacturing operations for the FYE 2010, FYE 2011, FYE 2012 and FYE 2013 are as follows: FYE 2010 FYE 2011 FYE 2012 FYE 2013 (RM’OOO) (%) (RM’OOO) (%) (RM’OOO) (%) (RM’OOO) (%) Raw material for manufacturing Pre-vulcanised 34,240 34.7 65,475 52.1 51,580 48.1 49,305 42.8 latex Foil 18,863 19.1 19,047 15.1 19,042 17.8 21,858 19.0 Inner box, outer 10,170 10.3 10,631 8.5 10,140 9.5 9,775 8.5 box and leaflet Silicone oil 5,880 6.0 6,059 4.8 5,354 5.0 8,373 7.3 Others (1) 29,498 29.9 24,564 19.5 15,054 19.6 25,850 22.4 Total purchases of 98,652 100.0 125,775 100.0 107,170 100.0 115,161 100.0 raw material Note: (1) Including ammonia, corn starch, magnesium carbonate, silicone emulsions, flavouring and colour pigments For the FYE 2013, our purchases of raw materials and other input materials from local sources accounted for 94.3% whilst the remaining 5.7% were sourced directly from imports. The majority of our raw material costs are made up of Pre-vulcanised latex (also known as compounded latex), foil, packaging materials such as inner box, outer box, leaflets and silicone oil. The price of Pre-vulcanised latex is subject to demand and supply forces and any fluctuation of raw material costs will have an impact on our profit margin. Apart from Prevulcanised latex, the prices of other raw materials have remained relatively stable over the last four (4) FYEs. For more details on the fluctuation of the price of Pre-vulcanised latex, please refer to Section 5.1 (i) of this Prospectus. For more details of the historical impact of this fluctuation of raw material cost, please refer to Section 13.2.2(i) of this Prospectus. As at the LPD, we have not faced any shortages in the availability of raw materials and any other inputs required by our Group in the last 12 months. Please refer to Section 1.6.2 of the IMR Executive Summary for the reliance and vulnerability of natural rubber latex. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (Cont’d) 7.13 Major suppliers The table below lists our Group’s suppliers that represented 10% or more of total Group purchases over the last four (4) financial years: Description of Length of Major products supplied relationship suppliers to our Group (years) FYE 2010 FYE 2011 (RM’OOO) % (RM’OOO) % Revertex Pre-vulcanised latex 24 26,597 27.0 44,188 35.1 Getahindus Pre-vulcanised latex 5 7,643 7.8 21,287 16.9 MPIB Foil 17 14,169 14.4 12,404 9.9 Total purchases from major suppliers 48,409 49.2 77,879 61.9 Total purchases (RM’OOO) 98,652 125,775 Description of Length of Major products supplied relationship suppliers to our Group (years) FYE 2012 FYE 2013 (RM’OOO) % (RM’OOO) % Revertex Pre-vulcanised latex 24 32,269 30.1 29,157 25.3 Getahindus Pre-vulcanised latex 5 19,311 18.0 20,148 17.5 MPIB Foil 17 11,209 10.5 15,880 13.8 Total purchases from major suppliers 62,789 58.6 65,185 56.6 Total purchases (RM’OOO) 107,170 115,160 Our business is dependent on our major suppliers, Revertex, Getahindus and MPIB from Malaysia, which represented 25.3%, 17.5% and 13.8% respectively of our Group’s total purchases for the FYE 2013. For the FYE 2010, FYE 2011, FYE 2012 and FYE 2013, Revertex represented 27.0%, 35.1 %, 30.1 % and 25.3% of our Group’s total purchases respectively. Revertex is one of our suppliers of Pre-vulcanised latex and we have been dealing with them for approximately 24 years. Nevertheless, our dependency on Revertex is mitigated by availability of alternative sources for Pre-vulcanised latex that we are currently purchasing from Getahindus, represented 7.8%, 16.9%,18.0% and 17.5% of our Group’s total purchases for the FYE 2010, FYE 2011, FYE 2012 and FYE 2013 respectively. Similar to Revertex, Getahindus has been our supplier of Pre-vulcanised latex for approximately five (5) years. 7.14 Approvals, major licenses and permits For details on our approvals, major licenses and permits, please refer to Annexure B of this Prospectus. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (Cont’d) 7.15 Intellectual property rights We have taken steps to protect our trademarks. As at the LPD, we have registered the following trademarks: Trademarks No. 2 Trademark i CAREX I Carex Registered owner KISS ISS Country Singapore Malaysia Class 10 10 Trademark no. T90103927E 06013419 Date of registration 8 March 2007 31 July 2006 Expiry date 30 May 2017 31 July 2016 3 INNO ITL Thailand 10 239610 14 September 2005 13 September 2015 4 Carex KISS Malaysia 10 2010011529 28 June 2010 28 June 2020 5 Carex KISS Malaysia 5 2010011528 28 June 2010 28 June 2020 Carex
7. BUSINESS OVERVIEW (Cont’d) Class 5 and 10 classification for the respective countries, Malaysia and Thailand are as follows: Class 5 Class 10 Malaysia Pharmaceutical, veterinary and sanitary Surgical, medical, dental and preparations; dietetic substances veterinary apparatus and adapted for medical use, food for babies; instruments, artificial limbs, eyes plasters, material for dressings; material and teeth; orthopaedic articles and for stopping teeth, dental wax; suture materials disinfectants; preparations for destroying vermin; fungicides, herbicides Thailand Surgical, medical, dental and veterinary apparatus and instruments, artificial limbs, eyes and teeth; orthopaedic articles; suture materials 7.16 Interruptions to business There has been no material interruption to our business operations in the past 12 months. 7.17 Seasonality Generally, there are no sharp contrasts in seasonality as our products are for general applications that are not tied to any seasonality factors. 7.18 Competitive advantages and key strengths Our com petitive advantages and key strengths provide us with a strong platform to compete against other business operators, as well as to facilitate business sustenance and growth. Our competitive advantages and key strengths are as follows: (i) Established market reputation and proven track record We have an established market reputation and proven track record in the industry, in particular as a condom manufacturer. This is substantiated as follows: (a) we have been in operation since 1988 and this long history gives us a business and market track record to supply our products to internationally recognised brands and institutional buyers;
(b) we are the world’s largest condom manufacturer with an annual manufacturing capacity of approximately three (3) billion pieces for the FYE 2012. For more details, please refer to Section 1.9 of the IMR Executive Summary;
(c) we have expanded into the commercial, tender and OBM markets throughout the years and the long standing relationships we share with our customers are a testament of customers’ satisfaction and loyalty to us. For more details, please refer to Section 7.1 O(ii) of this Prospectus; and
(d) our products are exported to more than 110 countries, which cover the Africa, Asia, America and Europe region. For more details, please refer to Section 7.9 of this Prospectus.
7. BUSINESS OVERVIEW (Cont’d) In addition, our in-house condom brands, both “Carex” and “INNO” are distributed in the Middle Eastern countries. As at the LPD, there are no negative feedback and product liability claims made against our Group. Our established market reputation and proven track record will continue to provide us with the platform to capitalise on the potential growth of the global condom industry. According to the IMR Executive Summary, the sales of condoms globally is expected to grow at a CAGR of 7.5% from 22.8 billion pieces in 2012 to 30.4 billion pieces in 2016. (ii) Strong in-house R&D capabilities driven by continuous innovation We have our own in-house expertise to design and develop various types of condoms. Over the years, we have successfully developed a variety of condoms which differ in terms of shapes, sizes, textures / surfaces, colours, flavours and fragrances. One of the more notable efforts of our R&D team was the success of our thinner condoms. Our R&D team’s continuous effort in developing thinner condoms paid off as the thinner condoms delivered a better all-round value proposition to our customers as well as consumers. For further details, please refer to Section 7.7 of this Prospectus. In addition to the development of condoms, our R&D team also develops new packaging concepts, including round condom foils and blister packed condoms. Our in-house capabilities to develop new products will continue to provide us the platform to expand our product range, which are aligned to latest trends and our customers’ product design requirements. Besides product development, our R&D team has the capability to design, develop, re-engineer and customise machines. We designed and developed majority of our primary manufacturing machines, namely dipping machines, ET machines and foiling machines. This has given us a competitive advantage as we are able to operate more cost effectively. (iii) Recognition as a pre-qualified manufacturer Due to the stringent nature of the tender market, in order to supply to institutional buyers, we have to receive certain certifications from and be registered as a prequalified manufacturer with the respective agencies. In order to be a pre-qualified manufacturer, we must have a proven track record supported by a five (5)-year real time stability report to demonstrate our manufacturing capability and product quality that meets international standards as well as customers’ specific requirements. Further, we must also furnish three (3)-years of our financial results to our customers for their consideration in addition to the relevant ISO certifications such as ISO 9001, IS013485 and Directive 93/42/EEC. We have been registered as one of the pre-qualified manufacturers for PSI, UNFPA, JSI / USAID and Crown Agents since 1994. Being recognised as a pre-qualified manufacturer has enabled our Group to derive consistent stream of income from the tender market. For more details on certifications, please refer to Annexure C of this Prospectus. 7. BUSINESS OVERVIEW (Cont’d) (iv) Ability to manufacture high quality condoms We have an established OMS and all of our factories have equipped laboratories to monitor and conduct quality inspection on our products as well as our manufacturing processes in a systematic and comprehensive manner. Since our inception, we have obtained various certifications such as ISOIIEC 17025, CE mark, BSI Kitemark, TISI Standard, FDA 510(k), CMDCAS and SABS mark for our manufactured products. Such certifications, approvals, licenses or permits are required by the relevant authority of the respective countries to where we export our products. Our compliance with these international standards and requirements demonstrates our ability to continually manufacture products that can meet our customers’ differing needs and specifications. Over the last four (4) years, our condoms have passed tests conducted by independent third (3rd) party laboratories and achieved a passing rate of over 99%. In addition, we also place significant emphasis on quality and this is reflected through our accreditation of ISO 9001 quality management system and ISO 13485 medical device-quality management system. Product quality is not only critical in helping us to maintain customer loyalty through customer satisfaction and continuing business patronage but also serve as a reference site for new customers. For more details on certifications, please refer to Annexure C of this Prospectus. (v) Ability to handle large volumes with minimal interruptions We manage to achieve economies of scale through our large volumes of manufacturing, which has lowered our average cost per unit. For the FYE 2013, we manufactured approximately 2.4 billion pieces of condoms. Our ability to undertake large volumes of orders provides us with an additional advantage over other manufacturers that are limited in terms of capacity. This is particularly pertinent when large quantity orders are required in a tender process or over a short period of time. Moreover, our ability of ensuring uninterrupted supply of condoms is important for our customers as they would have difficulty in searching for new or existing manufacturers to address the shortage of supply. In order to minimise interruptions, we match our manufacturing forecast to customers’ demand schedule. In the last 12 months, our factories in Malaysia and Thailand have not experienced any material business interruption. (vi) Wide market coverage supported by extensive product mix Over the years, we have expanded our market coverage to more than 110 countries. This has allowed us to reduce our reliance on one (1) single market and mitigate single customer risk by haVing such a diverse market. In addition, the coverage of different markets provides us with the platform to optimise business opportunities in various countries. 7. BUSINESS OVERVIEW (Cont’d) Furthermore, we are capable to manufacture and supply a wide range of condoms which are distinguished in terms of shapes, sizes, colours, textures / surfaces and flavours / fragrances. This will distinguish us from other manufacturers as we are able to cater to our customers’ varying demands. 7.19 Dependency on patents, licences, industrial, commercial or financial contracts or new manufacturing processes (i) Dependency on registrations, patents and intellectual rights Our Group is not dependent on any registrations, patents and intellectual rights for our business operations. (ii) Dependency on major licences Save for the major licences disclosed in Annexure B of this Prospectus, our Group is not dependent on any other major licences. (iii) Dependency on industrial, commercial and financial contracts There are no material agreements or contracts (including informal arrangement or understanding or understandings), as at the LPD, which have been entered into by our Group and which our Group is highly dependent upon. 7.20 Awards, accreditations and recognition Please refer to Annexure C for the details of our Group’s accreditations and recognition. 7.21 Future plans and strategies Our future plans are focused in four (4) key areas as depicted in the diagram below: Expansion of manufacturing facilities
Introduction of automation systems Continuous development of new products Expansion of OBM market
7. BUSINESS OVERVIEW (Conf’d) (i) Expansion of manufacturing facilities Part of our plans includes the expansion of our manufacturing facilities to cater for our business expansion particularly in the manufacturing of condoms. (a) Expansion of manufacturing facilities in Pandamaran, Port Klang We have acquired a new factory adjacent to our existing Port Klang factory, with a built-up area of 25,038 sq. ft. We have renovated the new factory and will complete installing the additional condom dipping lines, ET machines and foiling machines.by the end of 2013. As at the LPD, we have installed four (4) out of the five (5) planned condom dipping lines in our Port Klang factory. Please refer to Section 12.3 of this Prospectus for further details of the expansion of manufacturing facilities in Pandamaran, Port Klang. (b) Expansion of manufacturing facility in Haadyai, Thailand We also plan to expand our Thailand’s factory manufacturing capacity by adding new condom dipping lines, ET machines and foiling machines which is expected to be completed by the end of 2013. As at the LPD, we have completed building a new warehouse to cater for this expansion. Please refer to Section 12.3 of this Prospectus for further details of the expansion of manufacturing facility in Haadyai, Thailand. (c) Construction of a new manufacturing facility in Pontian Currently, our main factory and warehouses are located in Pontian. We intend to move these facilities to a newly constructed manufacturing facility in Pontian. For this purpose, we have acquired a piece of land measuring approximately 18 acres (781,335 sq. ft.) in Pontian. We intend to construct this new manufacturing facility in the first (1 st) quarter of 2014 and expect completion by the first (1 SI) quarter of 2015. Please refer to Section 12.3 of this Prospectus for further details of the construction of a new manufacturing facility in Pontian. (ii) Introduction of automation systems As part of our future plans, we intend to introduce further automation in our manufacturing process. A fully automated system will reduce our reliance on manual labour for the same process as well as increasing efficiency. We have purchased an automatic condom testing machine, fully integrated with ET and foiling functions, with a testing capacity up to 200 pieces of condom per minute. The cost of the capital expenditure will be financed via bank borrowings and internally generated funds. This new machine also has an auto loading system into the foiling machines which further eliminates labour involvement. As at the LPD, the machine is pending delivery to our manufacturing facility in Pontian. This machine will be installed at our Pontian factory by the end of 2013. 7. BUSINESS OVERVIEW (Cont’d) (iii) Continuous development of new products We will continue our emphasis on R&D with the aim of developing new and improved products to widen our existing range of products for our eXisting customers by focusing on technical areas such as research, formulation, testing and the condom manufacturing processes. The development of new products will be financed through our Group’s annual R&D budget. As part of our future plans, we intend to expand on our existing range of products to cover the following: (a) manufacturing thinner condoms;
(b) manufacturing condoms using synthetic materials;
(c) introducing newly designed urological catheters; and
(d) expanding the range of lubricating jelly.
(iv) Expansion of OBM market As part of our future plan, we intend to venture into new OBM markets, including South East Asian countries and India. This is because OBM market enables us to enjoy better profitability as compared to contract manufacturing and it reduces our reliance on commercial and tender markets. The cost our OBM market expansion will be financed through our Group’s annual marketing budget. As part of our strategy to achieve this, we plan to leverage on the distribution networks of our established and long-term distributors and traders to help us market our products in the new venture countries. 7.22 Prospects We believe the prospects of the Group are favourable based on the following: (i) The growing demand for our product With the growing world population, the demand for condoms is expected to grow in tandem. The global sex ratio is approximately 1.01 males to one (1) female, with 66.0% aged between 15 years old and 64 years old. China, the most populous country in the world, reported that 37.8% of its population or approximately 507.7 million are males between the ages of 15 years old and 64 years old, while India contributes 406.1 million (33.7% of its population) followed by the US 104.2 million (33.2% of its population). Such global demographic naturally presents a huge potential market for our products especially condoms. (Source: IMR Executive Summary) (ii) No substitution presently for our products As discussed in Section 1.1 of the IMR Executive Summary, the condom is a key enabler used in prevention of STI, HIV as well as for family planning purposes. With the rising number of reported STI cases and HIV infections, condoms remain the leading choice to prevent the transmission of both diseases. In both instances, there is no substitute product for prevention other than abstinence. 7. BUSINESS OVERVIEW (Cont’d) In South Africa, one of the countries with the highest HIV/AIDS infected incidences, survey has shown that awareness and knowledge of HIV prevention method have improved in recent years. Studies have shown that 75% of adults above 15 years of age actually used condoms in 2009 as compared to 27% in 2002. The South African government, via its HIV prevention campaigns is distributing 450 million condoms per annum. For family planning, while there are several substitute products such as oral contraceptive pills and female condoms, condoms remain a popular choice due to its economical and easy to use nature. (iii) Evolution of our product Over the years, condoms have evolved from a simple family planning product to a generally accepted lifestyle product. This is evident with the introduction of colours, flavours, textures to the condoms as well as various innovative forms of packaging. Condoms are today widely marketed amongst social media and are being marketed together with many forms of lUbricating jelly and adult toys. In addition to the safety aspects, consumers today are looking at experiencing enhanced pleasure derived from our products. Therefore, we are focused in launching more products with such features to cater for this growing demand. (iv) Our expansion plans As discussed in Section 12.3, we plan to increase our dipping lines by an additional 30 by the end of 2015. Our expansion programmes are expected to double our annual manufacturing capacity of approximately three (3) billion pieces presently to six (6) billion pieces by the end of 2015. Our growth opportunity will increase significantly with this improved capacity and economies of scale. (v) Our favourable industry outlook “The global condom market is expected to expand at a healthy rate over the near future. Globally, the condom market is anticipated to increase from 22.8 billion pieces in 2012 to 30.4 billion pieces in 2016, registering a CAGR of 7.5%.” (Extracted from the IMR Executive Summary appended in Section 8) The increase in demand for condoms is anticipated to drive the global sales of condom manufacturers, including our products, in tandem. For further details on our industry outlook, please refer to Section 1.10 of the IMR Executive Summary. (The rest of this page has been intentionally left blank)