Friday, September 6, 2013


30 JEWELS 2013 Edition

Target: MYR3.28
Price: MYR2.71
Ready For Takeoff Again

Investment Merits
•Riding on the recovery of its multi-level marketing (MLM) division
•Healthy balance sheet with a net cash position
•Offers a decent dividend yield of > 5%

Company Profile
Hai-O Enterprise (HAIO) is a household name that has been providing a wide range of Chinese medicine, medicated wines and healthcare products since 1975. The well-diversified group has principal businesses in wholesaling, retailing and MLM. It also operates a pharmaceutical factory and modern Chinese medicinal clinics. Over the past three decades, HAIO has honed its expertise by developing an extensive and efficient distribution network, and strong marketing strategies. The Company was listed on the Second Board of Bursa Malaysia in 1996 and was transferred to the Main Board in October 2007, making it the first traditional healthcare company to be listed on the stock exchange.

Back in action. After suffering a hefty fall in earnings in FY11, due to poor showing from its MLM division, the Group has picked itself up and has slowly regained its earnings momentum. The huge drop in MLM sales and profitability was mainly attributed to slower membership growth after the company tightened its rules and procedures – relating to purchasing and other documentation – to comply with new regulations introduced in 2010. Learning from the past, HAIO turned to more proactive strategies to attract new members/distributors and improve its performance. The Company also shifted its focus from bigticket items, such as water filters, to consumer-centric products, such as beauty and health products, for which sales have been largely consistent and repeated.

MLM bounces back. The MLM division, which contributes > 60% of the total revenue and ~50% of the group’s PBT, has been picking up gradually over the last two financial years. Y-o-y, the MLM segment recorded solid revenue and EBIT growth of 18.4% and 24.7% respectively in FY13. This was largely driven by: i) aggressive strategies to recruit new members and distributors, ii) introduction of new products, and iii) better sales from its health food and personal care products. The division now has around 140,000 registered members, with around 2,500 new members coming on board each month. We believe that this division’s growth momentum is sustainable in view of the company’s improved marketing strategy and its more balanced product mix.

New businesses to drive earnings. In April 2012, HAIO signed a global distributorship agreement with South Korea’s KAEAM Food Corp, the pioneer manufacturer of “bamboo salt”. The Company brought in KAEAM bamboo salt four years ago via an exclusive collaboration, which proved to be timely because the product is gaining a strong following. This has allowed it to expand into new markets. Meanwhile, HAIO’s new subsidiary, Yan Ou Holdings SB (Yan Ou), will be tasked with sourcing, processing, trading and distributing bird’s nest.  Once it obtains the licence to export this delicacy, this will provide a good revenue stream – given the popularity of bird’s nest in Asia, especially China. We are unable to quantify the contribution from these two new businesses at this juncture, as they are still in the early stages.

Company Report Card
Latest results. HAIO’s FY13 revenue and core earnings expanded by 11.9% and 31% y-o-y respectively, largely bolstered by better performance of its MLM and wholesale divisions.

Balance sheet / Cashflow. The Group’s balance sheet is solid with a net cash pile of MYR52m as of April 2013.

ROE. HAIO’s ROE has been improving steadily, from 13.4% in FY11 to 20.5% in FY13. We believe the ROE is sustainable at ~20% for FY14F with stable earnings.

Dividend. The Company is committed to an at-least 50% payout ratio and has, in fact, been paying more than 50% of its net profit as dividends over the last five years. Management said the group does not see any reason to reduce the payout going forward unless major capital needs for expansion arise.

Management. Managing director Mr Tan Kai Hee, one of HAIO’s founders, has over 38 years of commercial experience in the traditional health food business. Under his leadership, the Company has won numerous awards. One of the most notable awards is the Forbes Asia Under USD1 Billion List for consistent growth in sales and profits over three years, which HAIO has won four times in a row between 2007 and 2010.

Maintain BUY. In view of the strong recovery in its MLM segment, coupled with its lucrative dividend yield of > 5%, we maintain our BUY call on HAIO, with a MYR3.28 valuation, based on 12x CY14 EPS.

Source/Extract/Excerpts/来源/转贴/摘录: RHB-Research,
Publish date:30/07/13

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