This article first appeared in The Edge Malaysia Weekly on May 8, 2017 - May 14, 2017

WHEN Supermax Corp Bhd ventured into contact lens manufacturing in 2014, investors feared that it would be distracted by the new business — one that would take years to make it to market.

But RM100 million and almost three years later, Supermax is hoping to prove the naysayers wrong, especially when glove makers are facing intense competition that has driven average selling prices and margins down. At the same time, volatile raw material prices and constant labour shortages are putting a strain on the industry.

Contact lens manufacturing, by contrast, is a high value-add industry with big margins, requires no foreign labour and has relatively stable raw material costs.

“We only hire engineers for our contact lens production. Not a single foreign worker is needed for production. Only a handful is required for duties like cleaning,” group managing director Datuk Seri Stanley Thai Kim Sim tells The Edge.

Supermax is Malaysia’s first home-grown contact lens manufacturer via its 98%-owned subsidiary SuperVision Optimax Sdn Bhd, having successfully commissioned its local production facility early last year.

The group has been aggressive in its bid to tap the global contact lens market, which is dominated by the Big Four — Johnson & Johnson’s Acuvue, CIBA Vision-Alcon, CooperVision and Bausch+Lomb. The market was estimated to be worth US$7.8 billion last year, and is expected to hit US$10 billion by 2022.

With its growing worldwide distribution network, Supermax has started exporting its contact lenses under its Aveo Vision brand, first to Hong Kong in September last year and then to Brazil, South Korea and Singapore in January, February and April this year respectively.

The company is launching Aveo Vision in Malaysia next month.

Elsewhere, the group will be bringing the brand to the UK, Canada, the US and Mexico later this year and Japan in the first quarter of 2018 (1Q2018).

“The contact lens industry is [worth] about US$2 billion more than the rubber glove industry. We think the value will continue to grow with the rise of emerging markets such as China, Latin America and India,” says Thai, adding that China will eventually overtake the US as the largest consumer market for contact lenses. Ireland, meanwhile, is the largest contact lens manufacturer in the world.

Supermax’s contact lenses will be available in daily, bi-weekly and monthly packages, which will be sold according to market prices.

Situated on its premises in Sungai Buloh, Supermax’s contact lens production facility, which generates 70 million lenses per year, boasts state-of-the-art equipment. Its four production lines are capable of running 24 hours a day, supervised by in-house engineers.

In fact, Thai says, all four production lines are running at full capacity at present and the group will soon receive backorders.

While he declines to forecast any figure, Thai opines that the group — despite being a new player — will be able to keep up with its Asian competitors, for example Taiwan company St Shine Optical Co Ltd.

“To give you an idea, St Shine [produces about] 250 million lenses a year. We think we will catch up or even [go beyond that] but we cannot give a timeline, though,” Thai says. “We just want to be one of the top five [largest contact lens manufacturers]. [Demand] from the world market will ramp up our capacity. What we are producing today is easily sold and very soon, we will have backorders.”

Outside Malaysia, Supermax owns a six-acre (2.43ha) parcel in the US that could be developed into a contact lens manufacturing site, provided US President Donald Trump’s tax reform presents the group with a good deal.

Asked if the unorthodox business venture means having greater control over its margins compared with running a glove manufacturing business, Thai simply says positive margins can be assured with repeat orders, which the group is already experiencing. He also claims that Supermax started recording positive margins in the early stages of the contact lens business.

“We don’t sell at a loss. Of course, we [will incur overheads] as our wholesale margins will go into advertising and promotions. We make money with every shipment — the manufacturing margin has been good,” he says.

“In the contact lens segment, we are ahead of the curve. We invested in new technology from the very beginning. As a marketer, we want maximum value as the supply chain is totally different from that of glove making,” he says. “Gloves are about ‘price, price, price’ whereas contact lenses are about marketing.”

Although Thai would not forecast the margins going forward, he says Supermax is benchmarking itself against other players like CooperVision, St Shine and Ginko International.

Based on publicly available data, from 2013 to 2016, gross margins for CooperVision and Ginko were between 60% and 65% while for St Shine they were between 37% and 44%.

The next phase of expansion for Supermax’s contact lens business will only happen in about two to three years, says Thai, adding that the group does not have room to build new production lines. However, he is planning to set up a “contact lens headquarters” in one of the company’s smallest and oldest glove factories. Relocating and repurposing the factory will take up to three years, which means capital expenditure for the contact lens business will not be substantial in the near future.

That said, there will not be substantial contribution from the business either. The group will have to channel the bulk of the business’ operational profit into marketing, advertising and promoting its Aveo Vision brand.

Still, this does not mean the group will neglect its core business. As one of the largest glove manufacturers in the world, it faces pressure to keep its earnings growth intact despite the escalating raw material, labour and gas costs as well as uncertain currency movements.

In its second quarter ended Dec 31, 2016 (2QFY2017), Supermax’s net profit grew 15.5% quarter on quarter (q-o-q) to RM22.57 million while revenue declined 12% to RM236.74 million. There is no comparative year-on-year comparison because Supermax changed its year-end from December to June.

For the cumulative six months to Dec 31, 2016 (1HFY2017), the group’s net profit stood at RM42.11 million on revenue of RM505.74 million.

Supermax will be rebuilding several of its older plants to include new machinery and the bulk of its capital expenditure for the next two to three years will be spent on the glove business.

“We don’t expect a big jump in our production capacity but to increase it, we need to rebuild our factories, which would help increase our Ebitda margins,” Thai says.

“Several of our factories are efficient and can give us Ebitda margins of over 20%. But the margins have been pulled down by the older, less efficient factories and production lines.”

Supermax expects its profit margin to be maintained at between 9% and 11% amid the challenging business environment.

In the past, the glove maker had dealt with repeated delays in rolling out its new production lines at Plants 10 & 11 in Meru, Klang, due to poor access to proper infrastructure.

“We just need to manage the currency fluctuations, which have gone against our favour, as well as raw material costs. Price pressure is high as raw material prices are on a downward trend,” Thai says.

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