9M19 CNP of RM37.4m (-36%) came in below our/consensus expectations at 68%/62% of full-year estimates, dragged down by lower-than-expected MLM sales. We cut both our FY19E/FY20E CNPs by 9% each on the expectation of lower MLM average sales. Subsequently, we cut our Target Price to RM2.10 from RM2.20 based on revised 12x FY20E EPS. Reiterate UNDERPERFORM.

9M19 below expectations. 9M19 CNP of RM37.4m (-36%) came in below our/consensus expectations at 68%/62% of full-year estimates, dragged down by lower-than-expected MLM sales. No dividend was declared for the quarter as expected. HAIO typically pays its dividends in 2Q and 4Q.

YoY, 9M19 CNP plunged 36% dragged by: (i) lower overall revenue (- 26%) from lower MLM division (-35%), netted off by stronger CNY sales from Retail division (+11%), (ii) contraction in EBIT margin by 2.4ppt to 18.9% from 21.3% in 9M18 from unfavourable merchandise mix skewed towards small ticket items as well as heavy discounting activities to attract distributors, and (iii) higher effective tax rate of 24.8% (9M18: 23.1%). It was unable to match last year grand sales due to weaker MLM sales attributed to cautious distributors spending, and tepid purchasing power that led to stagnant distributors’ growth.

QoQ, 3Q19 CNP decreased by 6% mainly due to lower revenue (-7%) from weaker MLM sales (-11%) and Wholesale segment (-5%), but netted off by stronger CNY sales from Retail division (+16%) which typically falls in 4Q. Furthermore, EBIT margin contracted by 0.2ppt to 19.3% from 19.5% in 2Q19 with merchandise mix skewed towards small-ticket items, while the effective tax rate was slightly higher at 24.4% (vs. 24.1% in 2Q19).

Outlook. We expect to see additional cost pressure coming from the new SST implementation as well as from weakening MYR against RMB and further pressure from minimal distributors’ growth (currently at 140k, plunging from the highest level in FY18 at 160k distributors). Note that, HAIO absorbed the SST of 6%, while maintaining its sales price, pending further talks with suppliers. HAIO expects its Indonesian MLM market to break even this year, but is withholding its Vietnam expansion plans due to the weak market condition. The group’s wholesale division will continue promoting premium Chinese medicated tonics and nonalcoholic products while expanding its neighbourhood medical halls network in particular. The half yearly members’ sales campaign had been carried out for the Retail division during the CNY festive season.

Cut both FY19-20E CNPs by 9% each. We cut both our FY19E/FY20E CNP by 9% each on the expectation of lower MLM average sales.

As such, we also cut our target price to RM2.10, from RM2.20, based on revised 12x FY20E EPS (roll over from 12x FY19E EPS) at its -0.5SD of 5-year forward historical mean. Reiterate UNDERPERFORM.

Risks to our call include: (i) higher-than-expected sales, and (ii) lower-than-expected cost of sales.

Source: Kenanga Research - 26 Mar 2019