• DXN Holdings Berhad is an integrated global direct-selling company, with an established track record of 28 years and 4.6m active members as of FY23.

• We initiate coverage on DXN with an Add call with a GGM-based TP of RM0.85 (undemanding 11.1x CY24F P/E) with attractive div. yield of 5-6%.

• We project a 3-year EPS CAGR of 15% (FY23-26F), driven by: i) strong membership growth, ii) new product launches, and iii) new market expansion.

Initiate Coverage on DXN With An Add Call and TP of RM0.85

We initiate coverage on DXN Holdings Berhad (DXN) with an Add call and a GGM-based TP of RM0.85 (FY26F ROE of 27%, COE of 12% and 4% long-term growth). We like DXN for its i) globally diversified operating markets, with a solid 4.6m direct-selling active member base, ii) integrated supply chain with superior scale economies and margins, as well as iii) extensive product portfolio, driving our strong 3-year EPS CAGR of 15% (FY23- 26F). At our TP, DXN trades at an undemanding 11.1x CY24F P/E, a 20% discount to its peers, which we think is justified given its higher frontier markets exposure that generally carry a higher country risk premium, while offering attractive dividend yields of 5-6%.

Superior Profit Margins Driven by Its Vertically Integrated Structure

In our view, DXN’s competitive edge is its highly vertically integrated business model, allowing it to conduct key operations in-house vs. its peers (Fig 25). Thus, DXN was able to manufacture 327 own brand products (72% of total stock-keeping units) in-house that accounted for 90% of its direct-selling products sold as at FY23 (vs. peers’ c.23-70%). Hence, DXN was able to achieve superior gross margins of 82.9-85.7% in FY19-23 (vs. peers’ average of 20-74%, Figs 36 and 37) as it benefitted from operational synergies.

Backed by Its Robust Global Network and Scalable Incentive Model

DXN also has a vast network of 4.6m active members in over 180 countries as at Aug 23, with its member base growing at a CAGR of 14% over FY19-23, far outpacing its peers. We believe this illustrates the scalability of DXN’s direct-selling model. This is powered by its one-of-a-kind “One World One Market” incentive scheme (no upfront or annual fees, product sales-driven model across all markets) and digital infrastructure that integrates its physical, online and back-end global operations (sales ordering, tracking and commission pay-out, Fig 35). We view this as a differentiating factor for DXN, as it is able to operate on a global scale with low capex and low marketing costs (2-4% of its annual revenue budget).

Growth Strategies Driving Its Strong 3-year EPS CAGR of 15%

We project DXN posting a 13% revenue and 15% EPS CAGR over FY23-26F, driven by: i) our active member CAGR forecast of 4.2% and revenue per active member CAGR of 8.1%, ii) its high-growth markets expansion, iii) new high-margin product launches, and iv) price hike exercises, resulting in a recovery in EBITDA margins in FY24-26F (31.3-31.7%), from FY23 (31.0%). Key re-rating catalysts are higher membership growth and margin expansion on lower input costs. Key downside risks are adverse regulatory changes affecting product sales and profit repatriation, and weaker consumer sentiment.

Source: CGS-CIMB Research - 10 Nov 2023