Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM20.7m (-30.4%) was below both our and consensus’ expectations by accounting for68.8% and 58.5% of the forecasts, respectively. The negative deviation was due to the worse-than expected performance in its wholesale division.

Dividends

None, as expected.

Key Results Highlights

YoY, 9M15 revenue dipped 11.7% to RM169.5m with MLM the biggest culprit as revenue contribution dropped 12.9% due to the lower sales of ‘big ticket’ items. Meanwhile, operating profit slumped 32.7% to RM26.9m, no thanks to the lacklustre performance of wholesale division (-70.9%), which suffered from the strengthening USD as the majority of its herbs and medicated tonic are imported.

QoQ, 3Q15 revenue surged 7.3%, driven by strong performance of MLM division (+15.8%) on the back of higher purchase before the price increase and aggressive member recruitment activities. These led to a 12.3% increase in total group operating profit but worth noticing is that the wholesale division’s operating profit suffered a big slump of 96.5% to RM0.1m due to the higher operating costs and strengthening USD.

Outlook

Outlook remains challenging with biggest concern on the wholesales division due to the strong USD against MYR. With the USD still staying strong, the Group might face difficulty in sustaining the profitability in this division.

Meanwhile, its MLM division has rebounded strongly in 3Q15, two years after the strategy of focusing more on ‘small ticket items’. The Group guided that ‘small and medium ticket’ item currently contributed almost 2/3 of the total portfolio as opposed to less than 50% in the previous year.

Overall, we still maintain our negative stance on HAIO despite the better performance of its MLM division as we think that the recovery momentum might be affected by the imminent implementation of GST in April 2015.

Change to Forecasts

We made changes to our forecasts by factoring higher operating costs for the wholesale divisions. As a result, FY15-16E net profits were revised down by 1.7%- 0.6%.

Rating

• Maintain UNDERPERFORM

Valuation

• We maintain our TP of RM2.00, based on 12.6x FY16E PER, which is below its 5-year mean. It is trading at PER of c.15x FY16E, above its 5-year mean which we think is unjustifiably rich considering the earnings weakness and further headwinds anticipated in both the wholesale and MLM divisions.

Risks

• Stronger-than-expected MYR against USD
• Sector risk: Better-than-expected consumer sentiment.

Source: Kenanga Research - 25 Mar 2015