Hai-O reported a 1H18 core net profit of RM39.3m (+53%yoy), coming in slightly above our expectation but in line with consensus expectations. The strong growth was mainly driven by contribution from the multilevel marketing (MLM) segment and wholesale segment. We reiterate our BUY rating with a higher TP of RM6.44 as we increase earnings by 3- 7% for FY18-20E assuming higher growth from MLM.

1H18 Better Than Our Expectations

Hai-O reported an increase in 1H18 revenue by 39% yoy to RM248m whereas core net profit increased by 53% yoy to RM39.3m. This was slightly above our our expectation but in line with consensus expectations, accounting for 48% and 46% of full-year estimates respectively. 1H18 EBIT margin was 20.3%, showing an improvement of 1.9 ppts yoy. MLM’s margin expanded marginally by 0.4 ppts to 19.4% but wholesale division’s margin improved significantly from 17.5% in 1H17 to 32.6% in 1H18. 6 sen interim dividend was declared vs 5 sen in FY17.

Strong Growth in MLM and Wholesale Division in 2Q18

Hai-O’s revenue increased by 24% yoy to RM123.5m on the back of 23% yoy and 41% yoy increase in MLM and wholesale revenue to RM96m and RM16m respectively. MLM’s growth was attributable to higher recurring sales/distributor and positive effect of the recent 25th year anniversary grand sales promotion, resulting in higher sales of “small ticket” items. The wholesale division saw higher sales generated from Chinese medicated tonic due to positive response of its promotional campaign. As a result, MLM’s EBIT increased 25% yoy to Rm19.5m and wholesale’s EBIT increased by more than double from RM2.7m to RM6.7m. The retail division’s revenue increased by 12% yoy to RM10.4m but the EBIT was only RM0.5m due to higher sales discount given out during the promotion campaign.

Maintain BUY With Higher TP of RM6.44

We revise up Hai-O’s core net profit by 3-7% in FY18-20E assuming higher sales/distributors that help to improve net profit margin. Hai-O intends to develop more new products, and launch fashion and garment products in 2H18. We believe it will improve sales productivity/distributor growth and expand profit margin. We raise TP to RM6.44 based on an unchanged target FY18E PER. We like Hai-O’s management quality and its ability to deliver growth going forward, and reiterate our BUY call. 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 - 19 Dec 2017