SHAREHOLDERS of Hai-O Enterprise Bhd may remember seeing the counter nosedive and losing half of its value following the implementation of stricter multi-level marketing (MLM) rules in April 2010. If they had hung on to their shares, their patience would have paid off as the group’s fortunes improved.
Hai-O fell from a peak of RM3.44 in March 2010 to a low of RM1.23 in September 2011 as MLM earnings fell as a result of the amended Direct Sales Act. Net profit for its financial year ended April 2011 plunged 59.8% to RM28.4 million from the year before.
Earnings improved subsequently, rising to RM47.1 million in FY2013, and even though the trend reversed in FY2014 and FY2015, Hai-O registered net profit growth of 22.18% to RM36.36 million in FY2016. Its share price has been rising steadily, hitting an intra-day multi-year high of RM3.21 on Aug 10.
After building up its domestic business, managing director Tan Keng Kang, who took over from his father and group founder Tan Kai Hee in February, says Hai-O now aims to become a multinational company with diversified businesses.
The group aims to expand to the Middle East, China, India, Sri Lanka and Europe via partnerships to explore the market for products for women, such as fashion, accessories and cosmetics, he says.
“Our direction is clear — we want to be a multibillion international company. But we need to strengthen our footprint in Malaysia first, ” says Keng Kang. He adds that as long as the group is well-managed, having a diversified base should not be an issue for management to take it to the next level.
Today, foreign markets — mainly Southeast Asian countries such as Singapore and Brunei — account for less than 1% of the group’s revenue. Hai-O is mainly involved in the manufacture and distribution of complementary medicines, medicated tonic, wellness, beauty and healthcare products.
MLM contributes more than 60% of the group’s net profit. Ninety percent of its distributors are Malay, and 80% of them are women. The mass women’s market is the reason Keng Kang sees opportunity in women’s products.
He, however, recognises the need to improve the group’s branding, product range and international logistics.
Hai-O embarked on a rebranding exercise in 2015 and renamed its MLM arm Sahajidah Hai-O Marketing Sdn Bhd. It also came up with a new logo and tag line — “Go Global”.
“If we can achieve more volume, we will be able to set up more offices overseas to improve our logistics cost,” Keng Kang says.
He admits that the group’s retail segment, which used to be Chinese-centric, lost support among this community due to a failed branding strategy. However, he says Hai-O will not exit the retail segment, even as the MLM segment continues to grow.
Since it started its rebranding strategies last year, it has started to see some results. Keng Kang believes Hai-O will regain the support of the local Chinese community and grow its global footprint by investing more in rebranding.
Known as a Pu-erh tea investor, Keng Kang is looking for opportunities to build an offshore investment platform for Pu-erh tea in Macau or Singapore with a Chinese partner in the next 5 to 10 years. This is despite suffering a setback when a tea fund he jointly set up was liquidated in 2009.
The platform is intended for Pu-erh investors, buyers, merchants or consumers to trade in the tea, while Hai-O will earn a commission from trading and storage fees.
Investment in Pu-erh tea only contributes about RM1 million to the group’s profit a year.
In Oct 2007, Hai-O partnered Kumpulan Sentiasa Cemerlang SB (KSC), a licensed fund management company, to set up Pu-Er Tea Investment Co Ltd (PTI) to invest in the tea. Hai-O was appointed the marketing agent. However, the fund was liquidated in less than 18 months when the tea bubble burst.
Keng Kang says the earnings impact was minor at that time as the cost was low, but based on the take-up rates and return at that time, he believes the platform is still feasible.
While he shares his father’s business management style, Keng Kang — who joined Hai-O in 1998 as an operations executive —has a slightly different view when it comes to cash management.
He aims to stick to the group’s dividend policy of a 50% payout ratio but also plans to conserve cash to acquire more land for business expansion.
“Finance-wise, I am still conservative, but I hope to adopt a more balanced strategy [in terms of rewarding shareholders and ensuring the company’s business growth],” he explains.
Although Hai-O has a set dividend payout ratio of 50%, it paid out 70% and 100% of net profit for FY2014 and FY2015 respectively.
As at April 30, the group had cash and cash equivalents of RM54.37 million, with only RM1.11 million in borrowings.
Amid a softening property market, Keng Kang believes it is now a good time to acquire properties to relocate the group’s MLM and retail outlets, and for storage of Pu-erh tea in the future.
Since Keng Kang took over in February, Hai-O’s share price has jumped 32%.
“I think he has come up with various expansion plans to drive group earnings going forward. Investors are trying to accumulate the stock as they expect Hai-O to post a better quarterly earnings next month, and its share price will likely turn more expensive,” says analyst Norsyafina Mohamad Zubir of JF Apex Securities Bhd.
She is positive about the expansion plans as the rebranding could help the group grow beyond Malaysia over the longer term, while the Pu-erh tea investment platform will also support group earnings.
Nonetheless, as the share price has run ahead of Norsyafina’s target of RM2.85, she expects Hai-O to see some correction due to the absence of a near-term catalyst. She still reckons the group will continue to grow in FY2017 and sustain its share price, underpinned by the MLM division’s resilient performance.
Kenanga Research analyst Soong Wei Siang says it has been more than six months since the new management took over and during that period, earnings have grown tremendously. He sees Hai-O as a growth stock, supported by commendable earnings amid the weak consumer sentiment.