Period  2Q15/1H15

Actual vs. Expectations 1H15 net profit of RM13.4m (-32%) was below expectations. The result accounted for only 36.4% of our full-year forecast and 35.4% of the consensus estimates. The negative deviation can be attributed to worse-than-expected performance of its MLM division as well as higher-than-expected import costs of the wholesale division.

Dividends  DPS of 4 sen was declared, in line with our expectations. We expect another 10 sen to be declared in 4Q15.

Key Results Highlights YTD, 1H15 sales revenue declined 12% to RM107.5m, mainly due to the lacklustre performance of the MLM division (-18%) as the Group was trying to reduce the dependency on ‘big-ticker items’ by focusing more on the ‘small-ticker items’. Net profit of RM13.4m was down 32% due to the lower sales in MLM division as well as the compressed margin of the wholesale division, which was negatively impacted by the weaker Ringgit that increased the import costs of the imported herbs.

 QoQ, 2Q15 revenue rose 16% to RM57.7m largely due to better performance in the i) MLM division; which recorded stronger sales of RM31.9m (up 12%) thanks to effective sales campaign promotion in the quarter’ and ii) better performance of the wholesale division, which registered revenue of RM14.3m, up 20%. The led to net profit, correspondingly increasing by 15.2% to RM7.2m.

Outlook  The MLM division will continue to suffer from the transition as the Group tries to switch focus to ‘smallticker items’; while the overall consumer sentiment is soft in light of the higher cost of living environment.

 Meanwhile, the wholesale division is expected to see further margin compression in view of the unfavourable forex.

 The Retail division is also not expected to see overwhelming performance due to the higher operating costs as well as subdued consumer sentiments.

 Overall, we maintain our negative stance on HAIO.

Change to Forecasts We reduce our Core Distributor Force (CDF) and productivity assumptions as we were initially too optimistic on the numbers, we also factor in higher import costs for its wholesale division due to the stronger-than-expected USD against MYR. As a result, FY15E-FY16E net profits were slashed by 18.2%-18.4%.

Rating Maintain UNDERPERFORM

Valuation  We correspondingly reduce our Target Price to RM2.00 (from RM2.29) with the earnings cut. Our TP is based on unchanged 12.6x PER FY15E, which implied 5-year mean.

Risks  Weaker-than-expected USD.

 Better-than-expected consumer sentiments.

Source: Kenanga