• Maintain BUY and TP of MYR0.93, 39% upside with 5% FY24F (Feb)yield. We came away more reassured with DXN’s entrenchedfundamentals and prospects, post our site visit to its China operation. Wecontinue to like DXN for its attractive valuation and exciting earnings growthprospects. We highlight the upside potential of dividend payouts (formalpolicy: 50% of net profit), in view of its sturdy balance sheet and strong cashflow generation. We also look forward to contributions from upcoming keyventures into the Argentina and Brazil markets.

• Laying the foundation for a massive China opportunity. We recentlytravelled to Ningxia, China to visit DXN’s manufacturing plants andcultivation facilities. To recap, DXN ventured into China in 2015 with anambition to secure the all-important direct selling license. To meet therequirements (detailed on page 4), investments and efforts have beenpoured in to establish a track record. Apart from that, diversifyingmanufacturing sources into China makes sense from an efficiencyperspective, considering the access to cheap raw materials, highercultivation yields, financial aid and infrastructure support from the localgovernment, as well as the potential of Ningxia as an important region underthe Belt and Road initiative.

• Engagement with key stakeholders. The trip provided an opportunewindow for us to engage with various stakeholders. CEO Teoh Hang Chingexpressed his optimism on DXN’s growth prospects and highlighted theupside potential of dividend payouts, given its strong balance sheet. Seniorindependent director Datuk Noripah Kamso pledged to uphold the highstandard of corporate governance and foresees DXN to be furtherinstitutionalised going forward. Meanwhile, for the private equityshareholder, KV Asia, an exit is not on the horizon – notwithstanding thelapse of the moratorium on 19 Nov, as the firm believes that this counter iscurrently undervalued.

• More than just direct selling. The visit showcased DXN’s biotechnologicalexpertise, which has been instrumental in supporting its brand equity(popular products with high efficacy) and cost efficiency (c.80% GPM, with>90% of products manufactured in-house). Meanwhile, the China marketwill serve as a vital medium-term catalyst, with DXN targeting to file theapplication for a direct selling license in 2-3 year once all of therequirements are met. Apart from expansion into new markets, its othergrowth strategy include the plans to diversify its Fortified Food & Beverages(FFB) portfolio by rolling out more convenient ready-to-eat (RTE) or readyto-drink (RTD) products to further expand the addressable markets.

• Downside risks to our recommendation include unfavorable regulatorychanges and major delays in expansion.

Source: RHB Securities Research - 21 Nov 2023