This article first appeared in The Edge Financial Daily, on October 19, 2015.

Zhulian Corp Bhd
Oct 16 (RM1.69)
Maintain underperform with a target price (TP) of RM1.41 based on an unchanged 11.4 times financial year 2016 (FY16) price-earnings ratio: Zhulian Corp Bhd’s (Zhulian) nine-month FY15 (9MFY15) net profit of RM40.5 million (+13.1% year-on-year [y-o-y]) is within expectations, accounting for 77.1% of our full-year forecast. 

The group has proposed a dividend of 1.5 sen per share, bringing year-to-date (YTD) dividend per share (DPS) to 4.5 sen (9MFY14: 8 sen), in line with our forecast.

The group’s 9MFY15 y-o-y revenue declined 14.7% to RM161.2 million due to the sluggish local market demand on the back of weak consumer sentiment.

Profit before tax (PBT) grew 17.5% to RM52.8 million, which the group attributed to the strengthening US dollar. 

Net profit growth was slower at 13.1% to RM40.5 million due to a higher effective tax rate of 23.3% (9MFY14: 20.3%).

Zhulian’s third-quarter (3QFY15) quarter-on-quarter (q-o-q) revenue was lower by 8.3% at RM50.7 million due to the lower domestic sales.

However, PBT surged 42.5% to RM20.9 million due to the reason mentioned above. Net profit jumped by a greater quantum of 51.9% to RM16.9 million, thanks to the lower effective tax rate of 19.4% (2QFY15: 24.3%).

Going forward, the group is aiming to attract more distributors, particularly young entrepreneurs, who are looking for low-entry-cost ventures by adopting a small-ticket item strategy. 

The group is also aiming to attract new distributors and retain existing ones by enhancing the effectiveness of research and development efforts in developing new products, introducing more promotional campaigns and improving the quality of its customer service.

We maintain our cautious stance in view of the tough operating environment in Malaysia as consumer sentiment has succumbed to a six-year low in 2Q. 

With the goods and services tax being implemented, we do not expect consumer sentiment to recover quickly, particularly in the retail or multilevel marketing sector.

Meanwhile, the Thailand market is still weak due to the weak contribution from associates. — Kenanga Research, Oct 16