• Hai-O posted a net profit of RM7.3m during 2QFY20, which was down by 5.7% qoq and 46.3% yoy. Meanwhile, the Group recorded a quarterly revenue of RM68.4m, which improved 3.5% qoq but depleted 25.8% yoy.
• As for 1HFY20, the Group registered a net profit of RM15m, which dropped 38.8% yoy on the back of subdued revenue of RM134.5m, -21.9% yoy. The subdued results were dented by discouraging performances from the all of its segments mainly Multi-Level Marketing (MLM) segment.
• Below expectations. 1HFY20 net profit of RM15m is below our and consensus expectation, only accounting for 34.3%/35% of our/consensus full year estimates.

• Lackluster margin from Wholesale division dragged down QoQ earnings despite stellar revenue. The Group PBT slid 6.4% qoq due to slower Wholesale PBT margin (down 41.2% qoq) which offset higher margin in MLM division (up 4.1% qoq) following disappointing sales mix coupled with higher cost. However, the Group’s revenue increased 3.5% qoq, thanks to higher big-ticket items sales from MLM division, stellar sales in Chinese medicated tonic and bird nest products under Wholesale division as well sales promotional campaign from Retail division.
• Disappointing YoY performance. Hai-O’s revenue tumbled 25.8% yoy during 2QFY20 due to high base effect coupled with lower consumer sentiment which resulted in lower revenue in all of its segments (MLM: -32.6% yoy; Wholesale: -11.7% yoy and Retail: -10.2% yoy). On the same note, PBT also depleted 47.7% yoy following higher import cost and unfavourable change in sales mix under Retail segment which led to PBT margin dropped by 5.9ppts.
• Subdued 1HFY20. Cumulatively, Hai-O’s 1HFY20 revenue and PBT dropped 21.9% yoy and 39.6% yoy respectively due to lower contributions from MLM, Wholesale and Retail segments on the back of slower consumer spending and higher cost incurred.
• Unattractive outlook ahead. Looking forward, the Group will continue to emphasis on several strategies for MLM division to reinforce its distributor base and continue to reward it members with variety of rewards and incentives. Besides, the Group will also put in massive promotional campaigns for its Wholesale and Retails divisional products for the upcoming Chinese New Year festival. However, we foresee that Hai-O’s operating outlook will be challenging in the immediate term and might be further bogged down by MLM division on the back of lower new member recruitment coupled with lower member renewal as bogged down by disappointing consumer demand towards its core products (i.e. Chinese medicated tonic and other health and wellness products).
• Dividend declared. The Group has declared a single tier interim dividend of 3sen/share for FY20, representing 27.3% of our full year FY20 dividend forecast.

• We cuts our earnings forecasts for FY20F and FY21F by 24% and 15.8% to RM33.2m and RM41.5m respectively, after lowering our sales assumptions for MLM division to better reflect its lower new member recruitment and lower PBT margin pursuant to higher marketing and branding expenses.

• Maintained HOLD with a lower target price of RM1.93(previous target price: RM2.30) following our earnings cut. Our revised target price is now based on P/E multiple of 17.5x FY20F EPS of 11 sen which is below its +1 SD of 3- year historical mean of 19.3x.
• Risks include: 1) Higher-than-expected operating expenses (i.e. higher marketing and branding expenses) and 2) Lower-than-expected domestic spending due to higher cost of living

Source: JF Apex Securities Research - 19 Dec 2019