Period  3Q13/ 9M13

Actual vs. Expectations  The group’s 9M13 net profit (NP) of RM107.3m came in above expectations, accounted for 82.6% of our and 80.5% of the consensus’ FY13 forecast.

Dividends  Similar to 3Q12, it declared an interim NDPS of 3 sen. As at 9M13, Zhulian has declared NDPS of 9 sen. We are expecting another 8.9 sen in 4Q13, based on a conservative 60% payout ratio calculation (Zhulian’s dividend policy).

Key Result Highlights  QoQ, 3Q13 NP improved by 4.4% on the back of a 17% revenue increase. We reckon that the growth was contributed by both domestic and overseas sales. Domestic sales were mainly boosted by the Hari Raya festive season which is historically the strongest quarter. Meanwhile, the overseas sales were driven by the increase of export revenue to Thailand coupled with the strengthening of USD against MYR. On the average, the USD has strengthened by 5.2% QoQ against MYR (3Q13: 3.22 vs. 2Q13: 3.06).

 We believe that the higher EBIT (+103% QoQ), was due to a general price increase in Thailand. The price adjustment effect has led to a huge EBIT margin improvement (+12ppt) from 17% to 29% in 3Q13.

 While showing a strong revenue improvement, NP growth was diluted by the drop of associate contribution (-51% QoQ) and a higher tax paid (+107% QoQ). The share of profit from associate dipped to RM11.4m vs. RM23.2m in 2Q13, due to the high base effect in 2Q13 and also a slight impact on the price increase sensitivity.

 YTD, the NP increased by 25.1% YoY despite the low single digit revenue growth of 1.8%. The slower growth was due to the high base effect on Thailand market in 9M12 and a similar USD/MYR currency rate (average 3.12 in 9M13 vs. 3.11 in 9M12). The higher 9M13’s NP was driven by the strong boost in the share of profit from associate (+40.4% YoY) and a lower operating cost.

Outlook    We remain positive on Zhulian and believe that our FY13-FY14 earnings estimates are achievable, backed by:

 A higher cost inflationary pressure environment which 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.

 A recovery in domestic sales in 2H13

 Sizeable regional exposure advantage compared to its peers, with an expansion plan to the Myanmar market at end-CY13/early-CY14 to be a re-rating catalyst.

Change to Forecasts  We have revised our FY13-FY14 NP estimates by +5.6% and +5.5% to RM137.0m-RM157.4m after assuming a lower operating cost and a higher net profit margin in the Thailand associate (from the previous 16% to 17%). The increase of net profit margin was mainly to account for the selling price adjustment in Thailand market.

Rating Maintain OUTPERFORM

Valuation  We have also revised up our TP on Zhulian to RM4.60 (from RM4.30 previously) based on an unchanged PER of 13.4x over a higher FY14E EPS of 34.2sen (from 32.4 sen previously).

 Our applied Fwd PER is reasonable, as it is still at a 26% discount to Amway’s 18.0x FY14 targeted PER considering their similar market capitalisation level.

Risks To Our Call  A slowdown in the consumer spending.

 Strengthening of MYR against USD

Source: Kenanga