• From our recent conversation with management, we gather that MLM distributor base had largely sustained at c.114,000
• Looking ahead, the group strives to intensify marketing campaigns: (i) to retain and attract new members and (ii) to sustain buying interest.
• We lift our earnings forecasts by 3.3-3.5% for FY21-22E to account for better MLM sales. TP is revised to RM2.02, based on 16x PER. Maintain HOLD.

MLM Distributor Base Steadied at C.114,000

Hai-O’s distributor base sustained at around 114,000, largely on par with end-FY20. Recall, its distributor force has been on a downtrend since peaking at 153,000 in FY18, owing to lower renewals and a slowdown in recruitment. Near term, the management has put in place various measures to regain members, amongst others, by launching a free-member fees campaign. As such, we now expect the number of distributors to see a smaller attrition to 110,000 in FY21 (vs 105,000 previously).

Intensifying Marketing Campaigns to Drive Sales

We observed that sales per distributor hovered at c.RM1,339/annum for FY20, down from the highs of RM2,922/annum in FY16 – likely on a ramp-up in distribution base and higher focus on smaller-ticker items. Nonetheless, we believe attrition in the past years has weeded out less active members, leaving the more loyal and productive ones. As such, we estimate sales/agent to see an uptick to c.RM1,600 for FY21 backed by a suite of intensified promotional campaigns to sustain buying interest.

Wholesale and Retail Segments Likely to Remain Soft

Elsewhere, Hai-O wholesale and retail divisions were both noticeably affected by the lockdowns. We envisage continued softness in both divisions, as certain endretailers for the wholesale segment (Chinese medical halls, restaurants, etc) may face continued suppressed sales whereas Hai-O’s 57 physical retail outlets continue to remain susceptible to uncertainties of pandemic disruptions.

Maintain HOLD

We raise our earnings estimates by 3.3-3.5% for FY21-22E, accounting for higher MLM sales on the back of its sustained recruitment drive. Post revision, our TP is revised higher to RM2.02, based 16x PER. While MLM had a fairly resilient performance amid pandemic disruptions, we are of the view that near-term consumer sentiment remains subdued, with macro conditions remain volatile. Maintain HOLD.

Source: Affin Hwang Research - 12 Oct 2020