We upgrade HAIO to MARKET PERFORM from UNDERPERFORM as we came away feeling more positive on its outlook after a meeting with the key management featuring founder, Mr Tan Kai Hee, Managing Director, Mr Tan Keng Kang and CFO, Mr Hew Von Kin. Its MLM division is expected to continue its steady run with the backing of strong new recruitments and sound product strategy while the other business segments are expected to perform modestly. Post-meeting, we raised FY16E and FY17E net profits by 9.9% and 15.2%, respectively. Correspondingly, our Target Price is nudged higher to RM2.55 (from RM2.22), based on unchanged 12.9x PER FY17E which is on par with its 5-year mean.

Strong drive from MLM. 9M16 MLM EBIT surged 20% to RM23.5m thanks to the switch in sales strategy whereby the Group focused more on ‘small-ticket items’, which is now contributing 70% of the total sales (from 30% a year ago). Meanwhile, new recruitments were encouraging with latest active distributors of 70k representing a jump of 32% from 57k in FY15 due to its successful recruitment program targeting young Bumiputra group. Moving forward, management is confident that the momentum can be sustained with younger generation of distributors joining the force vying for extra income in amidst of the challenging economy and job market.

Cautious on wholesale and retail segments. Despite the wholesale and retail divisions growing 45% and 127%, respectively, as of 9M16, management is maintaining a conservative stance as both divisions are vulnerable to weak consumer sentiment and attributed the strong performance to seasonality factor. The strengthening of MYR bodes well for the Group as most of the products in its wholesale division are imported and a 10% appreciation in the local currency will boost its net profit by RM2m-RM3m or 5%-8% of FY17E net profit. The operating environment for retail segment remains challenging with no expansion plan, but the Group is not scaling down this division as it complements other segments.

Company in the right hand. New MD (effective February 2016), Mr Tan Keng Kang shared his vision for both short-term and long-term plans for the company. While the latest strategy in its MLM division is already bearing fruits, he aims to build on the current success and viewed the Malaysian market as still full of opportunities. Over the longer-term, HAIO may look beyond Malaysia with Indonesia viewed as a potential market while the modernization in E-Commerce could also be an exciting prospect for the Group to sustain its longer-term growth.

Upgrade to MARKET PERFORM from UNDERPERFORM with higher Target Price of RM2.55 (from RM2.22). We raised FY16E and FY17E net profits by 9.9% and 15.2%, respectively, as we were previously too conservative with the distributor force growth. Correspondingly, our Target Price is nudged higher to RM2.55 (from RM2.22), based on an unchanged FY17E 12.9x PER which is on par with its 5-year mean. We upgrade our rating as we think that the outlook is rosier underpinned by sustainable earnings growth in its MLM division, forecasted to grow 14.4% and 12.5% in the next two years post earnings revision. The stock offers total potential return of 4.4%, including dividend yield and thus justified its ‘MARKET PERFORM’ rating.

Source: Kenanga Research - 6 Apr 2016