1H18 net profit of RM39.3m (+53%) came in within both of our/consensus expectations at 47% of full-year forecasts. The group declared interim DPS of 6.0sen for 1H18, which is 20% higher than 1H17. We upgrade our Target Price to RM5.60 from RM4.40 based on the revised 16x FY19E EPS. Maintain MARKET PERFORM.

1H18 within expectations. 1H18 net profit of RM39.3m (+53%) came in within both of our/consensus expectations at 47% of full-year forecasts. The group declared interim DPS of 6.0sen for 1H18 (1H17:5.0sen), which is within our expectation as c.70% of dividend pay-out typically falls in 4Q.

YoY, 1H18 net profit surged 53% underpinned by: (i) higher revenue (+39%) driven by all three main segments of MLM division (+48%), Wholesale division (+15%) and Retail division (+13%) attributable to its 25th year anniversary grand sales promotion and higher sales volume from newly launched big-ticket items in its MLM fashion and beauty care range of products, and (ii) EBIT jumped 53% with expanded EBIT margin of 20.3% (+1.9pp), boosted by MLM division (+50%), which contributed 76% of the 1H18 group EBIT and supported by its Wholesale division (+113%) with its sales of high-margin products (i.e. premium Chinese medicated tonic).

QoQ, 2Q18 net profit grew 20% despite slightly lower revenue (-1%) thanks to: (i) EBIT increased by 20% with expanded margin of 22.2% (+3.9pp), primarily contributed by its MLM division (+4%), which comprise 71% of the 2Q18 group EBIT and supported by its Wholesale division (+126%), both attributable to higher recurring sales of highmargin consumer products (i.e. F&B, MLM fashion and beauty care range of products), and (ii) lower effective tax rate of 22.3% compared to 23.9% in 1Q18.

Outlook. MLM continued its momentum with its 25th year anniversary grand sales promotion and higher sales volume from newly launched fashion and beauty care range of products under the brand of “Infinence”. Moving forward, the MLM division will continue to develop more products, especially on lifestyle related range of products and beverage products. As Chinese New Year (CNY) festive season is approaching, the Wholesale and Retail divisions will carry out an extensive CNY promotion. Nonetheless, we expect the earnings momentum to be limited by its higher promotion costs and its other operating divisions, including wholesale and retail divisions are still susceptible to unfavourable forex.

Maintain MARKET PERFORM with a higher target price of RM5.60 as we roll-over our valuation year to FY19E (previously from TP of RM4.40 based on 15.2x FY18E EPS). The targeted PER of 16x implying a rerated +1SD of its 5-year mean of Forward PER which was only registered at 15.2x a quarter ago. We believe the 16x PER is justified considering HAIO net profit growth averaging at 31% per annum over the next two years. Risks to our call include: (i) lower-than-expected sales (ii) Higher-thanexpected operating expenses.

Source: Kenanga Research - 19 Dec 2017