Hai-O’s 1HFY14 results were below consensus and our estimates. Sales and  net  earnings  softened  due  to  weaker  numbers  across  the  board. The group declared a 4 sen interim dividend for the quarter. We cut our FV to MYR2.70  (from MYR3.28) as we  lower  our earnings forecasts  on slowing  sales.  Downgrade  to  NEUTRAL  (from  Buy),  as  we  expect  flat performance going forward due to stiff competition.

• Missing consensus and RHB estimates. Hai-O‟s 1HFY14 results were below  consensus  and  our  expectations  as  revenue  and  core  earnings (excluding a one-off MYR4.8m gain  in 1HFY13 and a one-off MYR0.6m gain  in  1HFY14  on  property  disposal)  fell  4.4%  and  13.3%  y-o-y respectively. Sales from  the  multi-level marketing (MLM)  division slipped 9.8%  y-o-y  due  to  a  change  in  marketing  strategy  as  the  company promoted  “small  ticket”  items  to  reduce  its  over-dependence  on  „big ticket‟ items. Turnover at the retail and “others” divisions eased 5.4% and 15.4%  y-o-y  respectively  given  the  stiff  competition  in  the  domestic market.  Topline  at  the  wholesale  segment  grew  7.5%  y-o-y,  mainly driven  by  higher  sales  in  Chinese  medicated  tonic  and  Chinese  tea products  but  core  net  profit  softened  due  to  weaker  EBIT  across  the board, especially from retail (-46.6% y-o-y) and  the “others”  segments  (-59.9%  y-o-y).  Compared  with  2Q13,  revenue  was  a  marginal  0.5% higher  while  net  earnings  dipped  6.7%  due  to  weaker  performance across all segments.
• Margins  narrow.  Gross  profit  and  EBIT  margins  dipped  0.6ppt  and 1.9ppts  y-o-y  respectively  owing to thinner  margins  from  the  wholesale (14.7% vs 17.5% y-o-y), retail (5.3% vs 9.4% y-o-y) and “others” division (46.3%  vs  97.6%  y-o-y).  We  are  positive  on  the  group‟s  strategy  of shifting to  sales of  smaller ticket products given that MLM EBIT margin expanded 0.4% y-o-y.  The group proposed a  4 sen interim dividend  for the quarter, lower than the 6 sen interim dividend paid last year.
• Downgrade  to  NEUTRAL.  We  are  trimming  our  FY14  and  FY15 earnings  forecasts  by  13-20%  on  account  of  slowing  sales.  We  revise lower  our  FV  to  MYR2.70  (from  MYR3.28),  based  on  12x  CY14  EPS. Downgrade  to  NEUTRAL  (from  Buy)  given  that  the  stock  is  currently trading at its historical P/E of 12x. We  expect  earnings  growth  to  ease amid  a  tougher operating  environment.  The  decent  yield could  provide some support to the share price.

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Company Profile
Hai-O is involved in wholesaling, retailing, multi-level marketing and pharmaceuticals, and also operates modern Chinese medicinal 
clinics.

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Source: RHB