Hai-O Enterprise Bhd
(Jan 14, RM2.99)
Downgrade to underperform with a lower target price (TP) of RM2.20 per share: With the limited growth in physical distributors’ recruitment strategy, Hai-O Enterprise Bhd continued promoting its new Bizumer Digital App, which now accounts for 50% of total multilevel marketing (MLM) sales, and to recruit new distributors. Additionally, Hai-O plans to penetrate the kid and infant market with a new brand (undisclosed) and expand its Indonesian market (currently, less than 10,000 distributors) by organising the Jakarta Business Summit. Furthermore, Hai-O will be launching several new products in the second half of financial year 2019 (FY19), including the line extension for its popular brands of Infinence (women’s fashion) and Conzuma (beauty products) as well as upgrading its shake and shape products for the slimming and nutritional markets. On the other hand, Hai-O has completed an incentive trip campaign (for the September 2018 to December 2018 period) to Kunming, China with a targeted 700 qualifiers at an estimated cost of RM3 million to RM4 million, and has initiated another campaign (January 2019 to March 2019 period) featuring the Bonanza Spring Draw (with total prizes of up to RM170,000). We believe these marketing strategies will be able to sustain Hai-O’s sales for the current financial year, albeit with limited growth in the number of distributors (currently at 140,000, plunging from highest in FY18 at 160,000 distributors).
Both the wholesale and retail segments (about 20% of revenue) are vulnerable to currency risk (weakening ringgit against the yuan) which in turn is limiting its earnings growth. Nevertheless, Hai-O’s focus on high-margin, in-house brands (about 40% for retail sales) has been able to sustain the profitability, and the group expects to maintain the momentum with the support of 140,000 card members in its retail segment. Additionally, Hai-O has added one more exclusive dealership under its retail segment for the traditional Chinese medicines line-up to sustain the sales momentum.
We expect to see additional cost pressure coming from the new sales and service tax (SST) implementation as well as from the weakening ringgit against the yuan, and further pressure from minimal distributors’ growth. Note that, Hai-O absorbed the SST of 6%, while maintaining its sales price, pending further talks with suppliers. Hai-O expects its Indonesian MLM market to break even this year, but is withholding its Vietnam expansion due to weak market conditions. The group’s wholesale division will continue promoting premium Chinese medicated tonics and non-alcoholic products while expanding its neighbourhood medical halls network in particular. The half yearly members’ sales campaign will be carried out for the retail division during the Chinese New Year festive season.
We cut both our FY19E (estimate) and FY20E net profits by 15% each on expectations of minimal distributors’ growth, and factoring higher cost pressure from imported products. Note that, Hai-O absorbed the SST of 6%, while maintaining selling prices.
As such, we cut our TP to RM2.20, from RM2.60, based on an unchanged 12 times FY19E earning per share at its five-year forward historical mean. Downgrade to “underperform” from “market perform”.
Risks to our call include higher-than-expected sales, and lower-than-expected cost of sales. — Kenanga Research, Jan 14