What’s New

• We are positive on Hai-O’s prospects following our company visit lately. We acknowledge that the Group’s resilient earnings growth is still intact underpinned by impressive performance of its key revenue driver, MLM division which contributes more than 75% of the Group’s topline, particularly on its aggressiveness of new members recruitment with an average of 5000-6000 members/month.

Comment

• MLM continues to render stellar growth. To recap, the Group has launched two new products during the financial year. These two products, i.e. “N’licious” and “Infinence” have contributed to the topline growth in addition to the existing “small-ticket” items that have been the major contributor to MLM division over the past few years. In addition, the Group’s successful rebranding campaign activities have rendered 58.6% topline and 80.3% bottom line growths for its MLM division for 9MFY17.

• MLM growth trajectory is expected to be sustainable. The rising number of new members which are mostly young, energetic and tech-savvy generation has boosted the MLM sales with their creative marketing strategies especially in digital marketing and e-commerce platform. The success of the strong surge in new members was mainly attributable to: a) growing entrepreneurship among the youngster especially under prevalent youth unemployment; b) attractive commission scheme, incentive trips, member retention programme and lower entry cost; as well as c) higher marketability and turnover of its ‘small ticket’ items in the likes of health supplements and personal care products.

• Launch of new product to boost the MLM’s topline and bottomline. Last month, the Group has launched its new product, Hijab and other accessories during its overseas incentive trip. Management highlighted that, in a short period of time, it has already received orders from its members. We are extremely positive on this new product which could contribute double-digit growth to its sales in the coming financial year.

• Expected recovery in wholesale division. The Group will further explore its business opportunities with its suppliers in China or locally to widen its product distribution channels. Moreover, the Group will be aggressively adopting E-commerce platform with regular updates and promotional activities from social media, due to the changing buying patterns of customers. Management expects to see some recovery in this segment of business with the new agencies secured from Taiwan and China for its Kavalan whiskies and Yanghe Blue Classic Series. However, the outlook remains challenging due to reduction in consumer spending arising from higher cost of living as well as uncertainty in economic conditions.

Earnings Outlook/Revision

• We raise our earnings forecast for FY17F and FY18F by 10.4% and 17.8% respectively as we foresee the Group to chalk up another better result for its MLM division in coming quarters amid continued growth in its recruited members coupled with a few new products being launched.

Valuation & Recommendation

• Maintain HOLD call on Hai-O with a higher target price of RM3.91 (previous: RM3.21) as we revised upwards our earnings forecast. We now peg our target price at 17x (+2std above mean) FY2018F PE based on EPS of 23 sen. While we like the Group for its strong prospects, our target price renders a meager 3.4% upside to the current share price.

• MLM division as a core growth driver will continue to underpin Hai-O’s earnings. We believe the strong performance of MLM division with the frequent innovation of new products could contribute to higher sales and earnings amid prevailing softer consumer sentiment and cushion the sluggish performance from its lackluster wholesale and retail divisions.

Source: JF Apex Securities Research - 11 Apr 2017