Period

3Q16/9M16

Actual vs. Expectations

9M16 net profit of RM25.2m (+21.6% YoY) is broadly within our expectation, accounting for 80.5% of our full-year forecast. As 3Q16 was boosted by the Chinese New Year (CNY) festival, earnings in 4Q16 is expected to soften, coming from a high base.

Dividends

None, as expected.

Key Results Highlights

YoY, 9M16 revenue surged 23.6% to RM209.5m mainly driven by its MLM division, which recorded revenue growth of 38.4% to RM134.5m on the back of successful marketing strategy and intensive members recruitment. In line with the higher revenue, the MLM division’s segmental EBIT was lifted 20.4% to RM23.5m, while the wholesale division grew 45.3% to RM4.9m due to the higher sales in Chinese medicated tonic and tea. As a result, 9M16 net profit grew 21.6% to RM25.2m.

QoQ, 3Q16 revenue rose 9.4% to RM80.5m, thanks to higher sales in MLM division (+14.6%) and retail division (+15.2%) due to the CNY festive season. 3Q16 EBIT grew 14.4% to RM13.1m attributable to solid performance in MLM division (+42.0%) on the back of higher member recruitment. As a result, net profit increased by 9.4% to RM9.8m.

Outlook

The revenue growth momentum is picking up thanks to members recruitment and incentive reward program. However, the Group expects the weak consumer and business sentiment to persist in the near term, which is in line with our cautious view.

Overall, we still maintain our negative stance on HAIO despite the improving MLM division’s performance in view of the pedestrian earnings growth forecasted for the next two years (4.0% and 7.3%) and the risk in the wholesale and retail divisions.

Change to Forecasts

No changes to our earnings forecasts.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price is unchanged at RM2.22, based on 12.9x PER FY17E, which is on par with its 5- year mean. The valuation is justified by its generous dividend payout (c.75% of net profit) which translates into yield of >5%.

Risks to Our Call

Stronger-than-expected MYR recovery against USD.

Sector risk: Better-than-expected consumer sentiment.

Source: Kenanga Research - 21 Mar 2016