Moving into 4QCY13, ZHULIAN is our TOP PICK for the consumer sector. Since our initiation on 5th Sept, the stock price increased by 23.2%. We continue to like ZHULIAN and believe that this home-grown MLM giant is now poised for another round of valuation re-rating, underpinned by these factors: (i) positive mid-to-long term MLM sector outlook, (ii) sizeable regional exposure advantage compared to its peers, (iii) offers the highest earnings visibility in terms of EPS growth (FY13E:+11%, FY14E: +15%), (iv) a decent net dividend yield of 5.1%, and (v) its FY14E PER is still trading at undemanding 11.7x vs. the sector weighted average FY14E PER of 14.3x. We reaffirm our OUTPERFORM rating on the stock and raised our TP to RM4.30 (from RM4.05 previously). In fact, we have tactically raised our implied target PER from the previous 12.5x to 13.4x, which is still a 6% discount to the MLM sector average, accounting for the recovering domestic sales and the estimated potential expansion into the Myanmar market.

Expecting minimal impact for potential GST implementation/ subsidies rationalisation in the coming Budget. We expect the subsidy rationalisation programme and the potential GST implementation in the upcoming budget to be positive on the MLM sector. This is because we foresee that the higher cost inflationary pressure environment may encourage more involvement by the low-middle income group within MLM activities in search of higher return on spending as well as additional side-income.

We may see a possible shift of investors’ preference for MLM. Given the weaker outlook in the broader consumer sector, we expect investor interest to gradually shift towards the, thus far, under-appreciated MLM subsector. Even during the last financial down-cycle during 2008-2009, both Amway and Zhulian revenue growth rates remained intact (refer overleaf for “Defensive Stocks” Table). We anticipate Zhulian’s group revenue and core distributor force in the domestic market will catch up from a slow start in 1H13, in view of: (i) the possible shift of consumer spending behaviour towards the MLM segment due to the reasons mentioned above; (ii) positive effect seen by the management’s continuous effort in holding road show along Malaysia starting from 2H13, and (iii) more campaigns and programmes in the pipeline to attract Gen Y age group as well as the Chinese and Indian segments. These parameters make our FY13-FY14 earnings estimates quite achievable.

Sizable regional exposure advantage. We postulate that Zhulian deserves a higher PER re-rating than its peers due to its regional exposure advantage – 88% of Zhulian’s core distributor forces are from overseas (85% from Thailand, 3% from Indonesia + Singapore) vs. Amway’s distributors who just confined to the Malaysian and Brunei markets while Hai-O is still relatively small (having just a few hundred distributors) in the Indonesia market. In addition to that, we believe that Zhulian’s planned expansion into the Myanmar market at end-CY13/early-CY14 could be another re-rating catalyst for the stock. Based on a back-of-the-envelope calculation, we estimated that based on a successful expansion, the export revenue would be boosted by at least RM1-2m p.a. As a result, Zhulian FY13-14E earnings growth rate of 11%-15% is more outstanding than its MLM peers of 8%-7%.

Prospects for valuation re-rating given its current undemanding valuation. Despite the recent run-up in the Group’s share price, we believe there is still potential for further growth as Zhulian’s is currently trading at an undemanding 11.7x PER vs. the sector weighted average PER of 14.3x for FY14E. While Amway is still the current market leader of the MLM business in terms of market cap, the gap is narrowing with Zhulian’s current market cap of RM1.75b vs. Amway’s RM2.0b (refer overleaf for “Amway vs. Zhulian head-to-head comparison” ). In line with our consumer strategy report, we are bullish regarding Zhulian’s regional expansion growth. We believe that the company could offer us the highest earnings visibility in term of EPS growth (FY13E: +11%, FY14E:+15%) and a decent net dividend yield of 5.1%, which is in line with all the other MLM counters.

In view of all the factors mentioned above, we reaffirm our OUTPERFORM rating on ZHULIAN and raised our TP to RM4.30 (previously RM4.05), based on a higher targeted Fwd PER of 13.4x (previously 12.5x) over its FY14 EPS of 32.4sen. Our applied Fwd PER is still a 26% discount to AMWAY’s 18.0x FY14 targeted PER considering that it has similar market capitalisation. 

Source: Kenanga