Period  3Q13/9MFY13

Actual vs. Expectations  The 9M13 net profit (NP) of RM37.3m came in above both the street’s estimate and our forecast of RM39.8m, making up 93.7% of the estimates. This was mainly due to the higher-than-expected other income number. However, the revenue was in line with our forecast of RM259.3m, making up 75% of the number.

Dividends  No dividend was declared for the quarter.

Key Result Highlights  QoQ, the 3Q13 revenue edged higher by 5%, driven mainly by the improved sales from its wholesale division (+31% QoQ). The better performance was attributable to higher sales of Chinese medicated tonic. However, NP only grew by 2% QoQ due to the higher advertising and promotion expenses incurred prior to the Chinese New Year (“CNY”) festive season and also higher other operating costs, as well.

 YoY, the 3Q13 revenue and NP rose by 10% and 21%, respectively. This was mainly buoyed by the increase sales from wholesale (+20% YoY) and Multi-Level-Marketing (“MLM”, +16% YoY), which mitigated the decline in retail sales (-16% YoY). The decline was due to a timing issue only as the CNY festive season fell in 4Q13 this year as compared to last year when it fell in the company’s 3Q12 reporting period.

 YTD, the revenue registered double-digit growth of 15% as compared to 9M12’s YoY revenue growth of 3% only. As expected, this was mainly driven by the MLM segment, which recorded a 27% YoY growth. The better performance was mainly attributable to a 27% growth in membership. This led to higher sales of foundation garments, which is a series of health food and wellness products. Moreover, one of the company’s newly launched products has received good response and achieved 5% of the total revenue of the MLM division. In addition, the revenue of the company’s food and beverage consumable products also jumped by more than threefold YoY. The NP jumped by 51% YoY to RM37.3m, in tandem with the higher revenue and also boosted by the high other income number.

Outlook  We remain positive on Hai-O’s prospect going forward as we anticipate its MLM segment to continue to deliver a decent earnings growth from a lower base through its continuous effort to enhance its product mix and expand new market channels through the recruitment of more new members.

Change to Forecasts  We have revised up our FY13-14E NP estimates by +18% and +10% to RM47.3-RM49.6m respectively (from RM39.8-RM45.1m) on the back of the higher other income from its investment properties.

Rating Maintain OUTPERFORM

Valuation  We are maintaining our TP of RM2.90 for now, implying 11.8x Fwd. PER (representing a +1.0 standard deviation level above Hai-O’s 2-year average Fwd. PER) on its FY14E EPS of 24.5 sen. The lower implied PER vs. our previous target PER of 12.8x is to reflect (i) normalising trend in its Fwd. PER and (ii) our earnings upgrades are only attributed to non-core business.

Risks  A slowdown in the global economy, which will cut the purchasing power of consumers.

Source: Kenanga