• We remain positive on DXN post our visit to its facilities in China, which comprise its large-scale raw material cultivation and manufacturing sites.

• DXN’s China operations are gearing up to enter China’s growing FMCG markets, while laying the groundwork for a local direct-selling licence.

• Retain Add with a TP of RM0.85 (undemanding 11.1x CY24F P/E) with attractive div. yields of 6% and strong 3-year EPS CAGR of 15% (FY23-26F).

A Strategic Location That Would Help Drive the Next Leg of Growth

In Nov 23, we participated in an investor tour to DXN Holdings Bhd’s (DXN) manufacturing (Fig 1) and cultivation facilities (Fig 2) in Ningxia, China (DXN Ningxia). The event provided us with an on-the-ground perspective on DXN’s operational backbone, which is critical to its global direct-selling business. As a key raw material (i.e. Spirulina and Mycelium) production base and an export hub, DXN Ningxia houses its largest Spirulina farm (60% capacity for export) and its manufactured own products (Fig 3) are already exported to up to 20 operating countries (with 30 more in the pipeline), according to management. In addition to generous subsidies and incentives from the local government, DXN Ningxia has access to cheap raw materials and a favourable climate for its Spirulina farming yields. Its customised equipment for mass production of Mycelium liquid spawn (key to its cultivation) and biotechnology innovations to advance its Mycelium variant could help to boost yields and operational efficiency, in our view. While the facility is not operating at full capacity, we believe this represents a strategic readiness for future growth phases and would drive margin expansion once it scales up (FY24-26F GP margin: 83%).

Future Growth Plans to Further Penetrate Into China Market

Management said DXN established its presence in China in 2015 with an aim to secure a local direct-selling licence, which has stringent requirements, including at least 3 years of track record of domestic trading business (DXN China is currently in its third year). It expects to file the licence application in the next 2-3 years. According to TMO Group (a global ecommerce agency), the size of China’s direct sales market is expected to exceed c.RM200bn in 2023F. Meanwhile, with the completion of its liquid beverage factory in Jul 2023, DXN Ningxia has started to produce its high-margin ready-to-drink health product series (Figs 8-11) to venture into China’s fast-moving consumer goods market in 2024F (launching in Hangzhou, Chengdu and Xinyang cities) as a means to build initial brand awareness and subsequently export to its other operating countries, management said.

Reiterate Add With An Unchanged GGM-based TP of RM0.85

We retain our Add call on DXN, with a TP of RM0.85 (FY26F ROE of 27%, COE of 12% and 4% long-term growth). We believe DXN’s current valuation is undemanding at 8.5x CY24F P/E (38% discount to its overall peers’ 10-year average mean; Fig 4) given its superior scale economies and margins driving a strong 3-year EPS CAGR of 15% (FY23- 26F; Fig 5), while offering attractive dividend yields of 5-6%. Re-rating catalysts are higher membership growth and margin expansion. Key downside risks are adverse regulatory changes affecting sales and profit repatriation, and weaker consumer sentiment.

Source: CGS-CIMB Research - 6 Dec 2023