After a recent meeting with management, we make adjustments to our distributorship growth forecast as we see a tapering off of that growth but foresee potentially higher revenue per distributor, which will likely be further spurred by the introduction of new fashion and lifestyle products. While we expect the slowdown seen in 4QFY18 to linger into 1QFY19, we believe sales will pick up in the subsequent quarters. As valuations appear undemanding, we maintain our BUY rating albeit with a lower TP of RM5.39 based on 17x CY19E earnings.

Striking a Balance Between Quality and Quantity of Distributors

Despite recording a slower growth in the number of distributors in FY18 (+10k compared to +57k in FY17 and +30k in FY16), we estimate that revenue per agent improved by 6% yoy (vis-à-vis declines of 6% and 8% in FY16 and FY17 respectively). We believe this indicates a more stable and higher quality distributor base. We are forecasting Hai-O’s MLM distributor force to grow to 160,000 by end of FY19 (vs. 150,000 as of end-FY18).

Direct Selling of Fashion Products Still Relatively Small in Malaysia

We believe that the ramping up of fashion product launches by Hai-O is timely given the fact that sales of such products are a relatively small proportion of total direct selling sales in Malaysia. This also ties in well with their distributor base which is predominantly female and in the Bumiputra community. This should spur higher sales/distributor as new product launches provide new revenue generators to the existing distributor base.

Softness Likely to Continue Into 1Q19, Should Normalise Sequentially

To recap, Hai-O recorded weaker-than-expected 4Q18 results due to a slowdown in MLM activities as members turned cautious prior to the general election (GE). We believe that the slowdown continued to linger in the few months post-GE, which coincides with 1Q19 despite the extension of the deadline of the incentive trip to May 2018. Nonetheless, we foresee a pick-up in the subsequent quarters.

Maintain BUY With Revised TP of RM5.39

After adjusting our distributor growth assumptions, we are revising down our earnings forecasts by c.15%-2% for FY19-21. Nonetheless, we are still seeing sustainable earnings growth for 2019E supported by new product launches and attractive incentive programs. We believe that the recent share price weakness provides an opportunity for entry into this stock and thus retain our BUY call with a revised TP of RM5.39 based on a lower 17x CY19E PER (from 18x previously). Key risks to our call include loss of distributors in the MLM division and weak take-up of new products.

Source: Affin Hwang Research - 8 Aug 2018