We came away feeling comforted on its prospect after a meeting with the CFO, Mr Hew Von Kin. Its MLM division is expected to continue its steady run with the backing of strong new recruitments and new fashion ranges as women made up 70% of its distributor base. The other segments are expected to perform modestly and the direct currency transaction to Renminbi bypassing the usage of USD has been initiated by the Government. All in, we reiterate our MARKET PERFORM call on HAI-O Enterprise with unchanged 15.2x PER FY18E which implied +1 SD over the 5-year mean.

MLM pushing the boundaries. 1H17 MLM EBIT surged 91% to RM25.5m driven by both expansion in distributor base and the strong productivity on the back of the effective product strategy and rewarding incentive system. Meanwhile, new recruitments were encouraging with latest active distributors of c.110k representing a jump of 32.5% from 83k in FY16 with an average age group of 30 to 45 years old. Moving forward, management is confident that the momentum can be sustained with younger generation of distributors coupled with the introduction of new lines of products.

Cautious on wholesale and retail segments. Management is maintaining a conservative stance as both divisions are vulnerable to weak consumer sentiment and attributed the weak performance to seasonality factor. The weakening of MYR further dampened business activities as most of the products in its wholesale division are imported, where a 10% depreciation in the local currency will drag down its net profit by RM2m-RM3m or 5%-8% of our FY17E net profit. The management guided that it has taken up the Government’s initiative to capitalise on the Renminbi clearing house as it allowed for direct transaction using Renminbi, bypassing the use of USD as the intermediary for foreign exchange transaction.

Better outlook on the MLM segment. The management is currently rolling out new range of products in stages. The first two products were launched in 2Q17, which is Shake Me and N’Licious in complement with Hai-O’s “Shake & Shape” 30-Day Weight Loss Challenge. Moving forward, the management is planning to introduce a range of fashion product, starting with “Hijab” and “Baju Kurung” in collaboration with Jimmy Choo and other well-known fashion designers. The management is confident that the fashion ranges will attract a huge demand from MLM division as women made up 70% of the distributor base.

Maintain MARKET PERFORM with unchanged Target Price of RM4.03 based on an unchanged 15.2x PER FY18E which implied +1SD over the 5-year mean. While we like the company for its resilience amid a challenging environment, the valuation has somewhat reflected the positives. As such, we are maintaining our neutral stance on the company on its strong brand names, sturdy balance sheet and generous dividend pay-out.

Source: Kenanga Research - 09 Jan 2017