1Q18 core net profit of RM18m came in above expectations driven by stronger contribution from the multi-level marketing (MLM) segment spurred by a strong membership drive and contribution from fashion wear. We believe the MLM segment still has further room for growth and reiterate our BUY call with a higher TP of RM5.50 as we increase earnings by 11%, to assume higher growth in MLM sales.

1Q18 Started Off Strongly

Hai-O’s 1Q18 revenue and core net profit increased by 58.3% and 83% yoy to RM124.5m and RM17.9m respectively. 1Q18 EBIT margin increased by 2.4 ppts yoy to 18.3% as margins improved across all 3 segments (MLM: +1.2 ppts yoy to 18.4%, Wholesale: +9.8 ppts yoy to 22.7%, and Retail: +1ppts yoy to -6.5%). Core net profit was ahead of expectations, accounting for 24% and 25% of our and consensus FY18E estimates. Traditionally 1Q is the weakest quarter contributing only to 15%-20% of full year earnings, but it came as a pleasant surprise that 40% yoy increase in the number of distributors in 1Q18 negated the seasonality effect.

MLM Division’s Strong Momentum Continues

Hai-O’s strong earnings growth continues to be underpinned by its growing distributor force, which is currently growing at an average of 5,000 distributors/mth. Sales per distributor have also increased due to higher recurring sales of “small ticket” items (F&B, personal care products and skincare series). “Big ticket” items - fashion & garments (such as Hijabs) which were introduced early this year also contributed to higher sales. Wholesale division (10% of revenue) recorded a decrease in revenue of 8% yoy due to higher one-off export sales of RM2m of Chinese liquor in 1Q17, but PBT rose strongly by 60% due to higher sales margin from patented medicines and Chinese medicated tonics.

Maintain BUY With Higher TP of RM5.50

We revise up Hai-O’s core net profit by 11% for FY18-20E, assuming higher distributors of 188,000 in FY18 (vs 159,000 previously). We are fairly positive that more of Hai-O’s product launches and contributions from fashion wear can sustain its sales momentum. TP is raised to RM5.50 (from RM4.92) based on an unchanged PE of 18x on 2018E EPS. We like Hai-O’s management quality and its ability to deliver growth going forward, and we reiterate our BUY call on the stock. Key risks to our call: i) loss of distributors in the MLM division; ii) lack of new exciting products to enhance growth; and iii) further weakness in the wholesale/retail division.

Source: Affin Hwang Research - 21 Sept 2017