We  gather from  our visit  to  Hai-O  last  week  that  its  MLM  division  is  on  track  for recovery, mainly driven by  an improved marketing strategy and a more balanced product  mix.  With  its  new  tie-up  in  bamboo  salt  distribution,  the  potentialresumption of bird's nest exports and its Chinese medical centre coming  on-stream,  the  company  may  be  poised  for  strong  expansion.  Maintain  NEUTRAL, with a FV of RM2.16, based on a 12x FY13 EPS. 
 
MLM  bounces  back.  As  we  highlighted  in  our  previous  updates  on  Hai-O,  the  multi-level marketing (MLM) division picked up gradually in the last financial year. The better FY12 core net profit was boosted by the encouraging 7.2% y-o-y earnings growth from
the  MLM  division,  backed  by  aggressive  strategies  to  recruit  new  members  and distributors.  In  Hai-O's latest financial quarter,  the  MLM  business  delivered  strong turnover  (+39.3%  y-o-y)  and  earnings  (+68.2%  y-o-y)  growth,  bolstered  by  better demand for its high-margin foundation garments and health food products. The division has  around  140,000  registered  members,  with  around  2,500  new  members coming  on board  each  month.  We  believe  that this division's growth  momentum  is  sustainable  in view of the company's improved marketing strategy and more balanced product mix.

New  collaborations  to  spice  things  up.  Aside  from  its  global  distributorship agreement  with  South Korea's KAEAM Food Corp to market 'bamboo salt' (garam buloh) in early April, Hai-O has also formed a joint venture with a local partner, Yan Zhi Enterprise SB, to set up a new subsidiary Yan Ou Holdings SB (Yan Ou). This unit will source, process, trade and distribute bird's nests and related products. In July last year, China - the main importer of bird's nest - banned Malaysia's bird's nest exports due to the purportedly high levels of nitrates. The Malaysian Government hopes to iron out the issue and resume exports of bird's nest to China in December. Assuming that this makes  good  progress,  we  believe  the  collaboration  will  provide  Hai-O  a  good opportunity since the Asian bird's nest market, especially in China, is highly  lucrative. Some 250 tonnes of Malaysian bird's nests were exported to China before the ban. Together with Tong Ren Tang Chinese Medicine (Tong Ren Tang CM), the group plans to  inject  RM31m  more  into  Peking  Tong  Ren  Tang  (M)  SB  (PTRT)  for  the  purpose  of establishing a 'Beijing Tong Ren Tang (M) Chinese Medicine Healthcare and Wellness Centre.'
 
Maintain  NEUTRAL.  Given  the  MLM  recovery  and  the  promising  tie-ups,  we  expect Hai-O  to  possibly  deliver  decent  future  performance.  Nonetheless,  we  maintain NEUTRAL,  with our FV unchanged at RM2.16, due to the limited upside to the current share price level.

 Source: OSK