Hai-O reported a 9M18 core net profit of RM58.6m (+43%yoy), broadly in line with our and consensus expectations. The strong growth was mainly driven by contribution from the multi-level marketing (MLM) segment and wholesale segment. 3Q18 revenue declined marginally by 4% yoy, its first decline after 11 consecutive quarters of growth, due to the timing of an incentive trip in FY17. But, we believe growth should return as 4Q18 tends to be seasonally stronger. Reiterate BUY rating with an unchanged TP of RM6.44.

9M18 Earnings Within Expectations

Hai-O reported an increase in 9M18 revenue by 23% yoy to RM351m whereas core net profit increased by 43% yoy to RM58.6m. This was broadly in line with our and street forecasts. Sales from the MLM division grew by 28% to RM273m due to additional contribution of new products launched in 1H18 and the 25th year anniversary grand sales promotion. The wholesale division’s sales increased by 16% yoy to RM46.6m on the back of higher sales from premium Chinese medicated tonic and Chinese tea. 9M18 EBIT margin improved 2.4ppts yoy to 21.3% mainly as the wholesale’s EBIT margin expanded to 40% (vs. 17.4% in 9M17) arising from higher sales of high margin products.

MLM Affected by Timing of Incentive Trip

In 3Q18, MLM revenue decreased by 5% yoy to RM75.5m after the completion of the overseas incentive trip promotion campaign and 25th year anniversary grand sales promotion in 2Q18. The incentive trip campaign which ended in 3Q17 also formed a high revenue base. Nevertheless, the weakness was offset by the wholesale division which saw PBT more than double to RM8.9m, mainly generated from sales of premium medicate tonic and vintage Puer tea. Management is positive that new lifestyle products and fashion wear will contribute positively in the next quarter. The recent strength in the Ringgit should also contribute to better margins in 4Q18.

Maintain BUY With Unchanged TP of RM6.44

We maintain our FY18-20E earnings forecast. HaiO intends to develop new products, and launch fashion and garment items. We believe this will sustain its MLM division’s growth and expand profit margin. Hence, we maintain our TP at RM6.44 based on an unchanged target of 20x FY18E PER. We continue to like Hai-O’s management quality and the company’s strong earnings delivery, and thus 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 - 26 Mar 2018