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This article first appeared in The Edge Financial Daily on September 30, 2019

KUALA LUMPUR: Hai-O Enterprise Bhd remains committed to its generous dividend policy although it expects the current financial year ending April 30, 2020 (FY20) to be another challenging year.

The group announced last Thursday a 30% drop in net profit to RM7.74 million for the first quarter ended July 31, 2019 (1QFY20), from RM11 million in the year-ago quarter, on lower contribution from its multilevel marketing (MLM) division.

This resulted in its share price plunging as much as 49 sen or 18% to a low of RM2.24 the following day. At its last price of RM2.26 per share before proprietary day trading and intraday short selling in its securities were suspended, Hai-O was valued at RM656.23 million.

The weak 1QFY20 performance follows the group’s first annual earnings drop in FY19, after four consecutive years of growth. This came about as the group’s MLM members continued to cut back spending in view of the weak market sentiment, while distributors also slowed down activities.

For FY19, the group suffered a 34.6% year-on-year fall in annual net profit to RM47.75 million from RM72.52 million, against a nearly 30% lower revenue at RM328.41 million. Distributor force fell 21.6% to 120,000 members and the number of active members declined by 20% due to a lower renewal rate and a slowdown in new recruitments.

Notwithstanding the sharp reversal in its fortunes, Hai-O paid its shareholders 13 sen dividend per share (DPS) or a total of RM37.7 million.

Although the DPS is lower compared with what was paid during the group’s heyday, it still represented 80% of its profit after tax (PAT). The requirement under the group’s formal dividend policy is a minimum of 50%.

This could be attributed to the group’s strong balance sheet position and funding flexibility, in line with Hai-O’s mainly cash-based businesses. As at end-FY19, Hai-O’s closing cash and cash equivalents and other investments in the form of financial assets stood at RM95.1 million while borrowings were minimal, incurred mainly for trade financing purposes.

Commenting on FY20, Hai-O chief financial officer Hew Von Kin said the group acknowledged the challenging business environment as a result of dented consumer sentiment from changes and turbulence in the domestic and global landscape.

“We view this current financial year a definitely challenging year. The company does not expect an immediate uplift in the business environment. We foresee that the high cost of living will continue. This will be a constraint to the consumers’ ability and willingness to spend.

“However, because of our strong foundation, good brand equity, and good distributors ... we foresee that we will continue to deliver a good set of results for the year … We have stated our dividend policy as 50% of PAT and will have no problem in maintaining it,” Hew stressed.

Meanwhile, commenting on the upcoming Budget 2020, Hew told The Edge Financial Daily that the group hopes the government would consider stimulus measures to help improve wages of the low-income earners.

“The stubbornly high household debt, high costs of living, and stagnant wages have resulted in weak consumer spending. Given the weak market, any stimulus measures that could help increase income are therefore very important,” he said.

“We also hope that the duty on medicated liquor products, which are not for drinking but for health, will not be increased, so that we can maintain our prices to our consumers who are mostly from the low-income group,” he said.

 

Firm pinning hopes on Chinese market for two reasons

In view of the lack of spending power of the people in this country, Hai-O is pinning its hopes on the Chinese market, for two reasons.

First, the group is banking on the government’s 2020 Visit Malaysia Year campaign, which targets an increase in the number of tourist arrivals to 30 million, to help boost the tourism industry and economy.

Hai-O managing director Tan Keng Kang said the campaign is expected to enhance bilateral relations with China, which will in turn help with Hai-O’s business.

Hew, meanwhile, said the group is also expecting a positive maiden contribution of several million ringgit in FY20 from a new channel and market under its wholesale segment, namely the export of bird’s nest products to China by its subsidiary Yan Ou Holdings (M) Sdn Bhd, which obtained the export permit last year.

Another measure Hai-O has taken is to broaden its product base to focus on small-ticket items.

“While it is the company’s strategy to focus on small-ticket items, products distributed by the company have been prioritised with emphasis on cost optimisation. Hence, the focus on small-ticket items would not affect the overall profit margin of the company,” said Tan.

However, Affin Hwang Capital, in a note on Hai-O last Friday, said there was “no reprieve in sight for its MLM business” and characterised the group’s earnings outlook as “bearish”.

“We remain wary of its MLM segment’s prospects due to a less favourable range of product offerings following management’s pivot into the highly competitive fashion and apparel space,” said Affin Hwang research analyst Lester Siew.

The research house maintained a “sell” call on the stock.

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