INVESTMENT MERIT

- A well-known multilevel marketing (“MLM”) giant. Zhulian is one of the leading home-grown direct selling companies in Malaysia with 320 authorised agencies and 674k distributors throughout the major cities in Malaysia, Thailand, Indonesia and Singapore. The competitive edge is that it takes pride in manufacturing and marketing its own brand of widely-diversified products that include its highly popular gold-plated jewellery, food & beverage, nutritional supplements and etc.

- Going places. After building a firm footing in Malaysia, Zhulian plans to raise its overseas market revenue contribution to 70% from 58% currently within the next 3 to 5 years. Strategies wise, management intends to increase its core distributor force as well as establishing a new warehouse in Korat, Thailand to cater for the strong demand from Thailand and the Indo-China’s market.

- Squeezing efficiency. Apart from growing its revenue, the expansion also allows the group to neutralise currency fluctuation. The group also plans to implement a low operating cost model via setting up in-house mobile distributors to strengthen its presence in Indonesia market.

- Higher than industry peer's margin. The group has recorded an average EBIT margin of 21.9% during the past three financial years in contrast to Amway (15.8%) and Hai-O (17.1%). This was mainly due to its full exposure of products value chain as compared to the pure MLM business model in Amway and Hai-O’s diversified healthcare as well as retail businesses business model.

- Expecting double digits PAT growth in FY13. The group’s PAT has surged by 23% YoY to RM117m in FY12 mainly driven by higher core distribution force (+17% YoY). Moving forward, we are projecting the group to record 13% YoY PAT growth in FY13 mainly underpinned by 1) a conservative 6% YoY growth in its core distributor force and 2) higher product's selling price.

- Highest dividend yield among the MLM sector. We expect Zhulian to distribute 17.3 sen DPS in FY13 based on its 60% payout policy. This implied an attractive dividend yield of 6.0% as compared to its closest competitors – Amway (5.5%) and Hai-O (5.4%).

- Undemanding valuation. Zhulian is currently trading at an undemanding 10.1x FY13 PER, on par with Hai-o’s 9.6x FY13 PER, but a 42% discount to Amway FY13 PER of 17.3x. In view of the group’s higher than industry margin and an attractive dividend yield of 6.0%, we believe Zhulian should worth at least RM3.40 based on targeted FY13 PER of 11.8x (on par with our targeted PER for Hai-O). TRADING BUY.

SWOT ANALYSIS

- Strength: Wide distributors network across SEA region.

- Weaknesses: Operating margin decline as a result of escalating distribution costs.

- Opportunities: Target Indo-China market e.g. Myanmar, Cambodia through Thailand’s trades

- Threats: Currency exchange risk as export products are traded in USD currency.

TECHNICALS

- Resistance: RM2.92 (R1), RM3.29 (R2)

- Support: RM2.68 (S1), RM2.55 (S2)

- Comments: ZHULIAN is in the midst of retesting a bullish “Cup & Handle” resistance level. Should this RM2.92 trigger level be taken out in a decisive manner, the share price could potentially advance another 35 sen to RM3.27. Watch for a breakout.

BUSINESS OVERVIEW

Zhulian Corporation Berhad (“ZHULIAN”), listed in the Main Board of Bursa Malaysia since Apr-07, is one of the leading Direct Selling Companies in Malaysia. The group has more than 80 authorised agencies throughout the major cities and approximately 100,000 Distributors in Malaysia. ZHULIAN was founded in Penang by Mr. Teoh Beng Seng in 1989 with initial core business in distributing gold-plated jewellery through the Multi-Level Marketing channel and evolved to become MLM operator in manufacturing and marketing its own brand of widely-diversified products under the Group. Currently, the group have diverse range of product lines e.g. Home Care, Food and Beverage, Nutritional Supplements, Personal Care, Cosmetics, Air Treatment, Water Treatment, Sleep Enhancement Products and Disposable Hygiene products. The group has regional business exposure in Thailand, Indonesia, and Singapore with nearly 300 agencies and more than half a million Distributors in the South-East Asia region.

BUSINESS SEGMENTS

The Group is principally confined to the manufacture and sale of costume jewellery and consumer products on a direct sales basis which are principally carried out in Malaysia, Thailand, Indonesia and Singapore. No specific business segment breakdown is provided.

Source: Kenanga