HAI-O ENTERPRISE BERHAD

Transcription

1 HAI-O ENTERPRISE BERHAD Analysis Date: 20/09/2013 (HAIO) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios Financial Year: /04/2013 Latest Quarter: 30/04/2013 Price: 2.74 Stock Category: Turnaround Overview Hai-O Enterprise Berhad engages in wholesaling and retailing herbal medicines and healthcare products; investment holding; and property holding activities primarily in Malaysia. The company is involved in the wholesale and trade of herbal medicines and healthcare products, Chinese herbs, and tea and other beverages. It also engages in the multi-level direct marketing of health food, healthcare, wellness, and beauty products; manufacture and distribution of pharmaceutical products and health food; and provision of heat transmission and energy saving technology. In addition, the company leases machinery and equipment; operates as a licensed money lender and insurance agent, as well as importer, exporter, and commission agent; offers advertising services; imports and trades wine; provides research and laboratory services; and offers clinical services. It operates approximately 70 Hai-O Chain stores. Hai-O Enterprise Berhad was founded in 1975 and is headquartered in Klang, Malaysia. Board: Main Board FBMKLCI: NO Industry: TRADING SERVICES Sub-Sector: TRADING AND DISTRIBUTION Ownership: Corporate Owned (Local) L. C. Chong Page 1 of 15

2 Financial Performance Sustainable Profitability ROE 5% 7% 11% 2 35% 32% 34% 14% 15% 2 ROIC 6% 11% 15% 36% 85% 54% 66% 22% 29% 34% Rating: Very Good Measure 3-Y Avg. 5-Y Avg. 3-Y % 5-Y % Consistency ROE 15% 17.29% 19.77% 17.72% % 17% ROIC 15% 30.33% 35.35% 21.84% % 12% After the Company tightened its rules and procedures relating to purchasing and other documentation in order to comply with industry regulations introduced in 2010, HAIO profitability dropped dramatically: ROE 34% -> 14% and ROIC 66% -> 22%. Nevertheless, starting 2011 onwards, I see slow but steady recovery in HAIO business. It has since adopted more proactive measures to attract new members/distributors and improve its performance. The Company also shifted its focus from big-ticket items, such as water filters, to consumercentric products like beauty and health products, of which sales have been largely `consistent and recurring in nature. ROE increases from 14% (2011) to 2 (2013); ROIC increases from 22% (2011) to 34% (2013) 600, , ,000 - Growth Quality Rating: Very Good Result YoY % 3-Y % 5-Y % 10-Y % Consistency Revenue 11.85% 9.12% % 9.93% 33% EPS % % % From 2004 to 2010, HAIO earnings were increasing consistently. In 2011, it earnings was affected adversely just because of new regulation. For me, this is not a disaster. HAIO is recovering, but it may takes some times. 300, , , PAR-Adjusted EPS Revenue Linear (PAR-Adjusted EPS) Linear (Revenue) 0 L. C. Chong Page 2 of 15

3 Healthy Cash Flow Rating: Very Good Measure 3-Y Avg. 5-Y Avg. 3-Y % 5-Y % Consistency CROIC 15% 27.33% 31.46% 45.26% -8.75% 9% CCC % 36.61% 13% CCC - Cash Conversion Cycle In overall, HAIO's ability in cash flow generation is very strong (except 2010) CROIC 3% 11% 15% 35% 83% 33% 64% 13% 27% 33% 0 CCC ,000 70,000 60,000 50,000 Cash Flow - Growth Quality 80,000 70,000 60,000 50,000 Rating: Very Good Result YoY 3-Y 5-Y 10-Y Consistency Ops. Cash % 48.19% % 18.36% 4 Owner 30.58% 43.94% -1.99% 26.37% 5 In overall, HAIO's ability in cash flow generation is very strong and also consistent (except 2010). 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10, Net Ops. Cash Owner Linear (Net Ops. Cash ) Linear ( Owner ) L. C. Chong Page 3 of 15

4 25% 2 15% Sustainable Competitive Advantage Rating: Excellent Measure 3-Y Avg. 5-Y Avg. 3-Y % 5-Y % Consistency NPM % 15.28% 16.58% 8.03% 86% FCF/Sales 5% 12.23% 12.06% % 19% NPM - Net Profit Margin Net Profit Margin and FCF/Sales are above 2 and 14% respectively in average. HAIO still enjoy very good margin even if facing stiff competition from AMWAY and ZHULIAN. 1 5% NPM 3% 4% 7% 11% 13% 12% 14% 13% 14% 18% FCF/Sales 3% 6% 7% 14% 14% 8% 13% 1% 2 12% Conservative Debt Rating: Excellent Measure 3-Y Avg. 5-Y Avg. 3-Y % 5-Y % Consistency FCF Cov % % 5.73% 1% 15 Debt/Eqty. < 22.87% 24.64% 3.25% % 27% 10 QR % % -4.53% 7.05% 87% FCF Cov. - FCF Coverage Ratio; QR - Quick Ratio Very rich cash flow and assets. No problem at all to pay the debts FCF Cov. 61% 152% 205% 352% 997% 174% 366% 1 361% 233% Debt/Equity 29% 36% 33% 34% 4 44% 29% 21% 25% 22% Quick R. 127% 127% 136% 161% 194% 195% 284% 307% 278% 28 L. C. Chong Page 4 of 15

5 Economic Moats Cost Advantage Although HAIO does not slash their product price to compete, HAIO enjoy high net margin profit (2 in average) and FCF generation per sale (14% in average). Switching Costs I have few friends involving in MLM business. I found that they are very loyal to the products/brand. Even my mother has been buying Chinese herbs from HAIO for many years. Network Effect As HAIO has 140,000 registered members, of which ~8 are Bumiputera, it is planning to introduce new products that appeal to non-bumiputera users (ie Chinese and Indians) in order to capture the relatively untouched market. The Company will also continue to launch five to eight new products each year. Intangible Assets Rating: Narrow Key Ratios for Economic Moats ROIC 6% 11% 15% 36% 85% 54% 66% 22% 29% 34% CROIC 3% 11% 15% 35% 83% 33% 64% 13% 27% 33% Even if ROIC and CROIC are above my benchmark for the past 9 years, but due to stiff competition from AMWAY and ZHULIAN, I believe that HAIO's economic moats is a bit narrow. Not available or no moat found Efficient Scale Not available or no moat found L. C. Chong Page 5 of 15

6 Valuation Discounted Cash Flows Valuation Refer Appendix 1 3-Y 5-Y 10-Y Good 12% Base 1 Bad 6% Ugly 2% Good 12% Base 1 Bad 6% Ugly 2% Good 12% Base 1 Bad 6% Ugly 2% Fair Value Buy Under Actual M.O.S. 39% 36% 3 23% 42% 39% 31% 22% 47% 42% 31% 18% Growth rate applied in Reverse DCF to reach the current stock price (2.74): -7% Refer Appendix 2 Excess Return Valuation (5-Y) (Banks Only) EY% Valuation Refer Appendix 3 Refer Appendix 4 Good Base Bad Ugly EY% High EY% Low Buffer R4Q-EPS FY14-EPS* FY15-EPS* Fair Value % 4.54% Buy Under Fair Value Actual M.O.S. 56% 2-38% -103% Buy Under Sell Above Comments - For HAIO, I will look into 5 years horizon. - Based on DCF valuation, even if HAIO experiences ugly growth rate (only 2%) for the next 5 years, it is still valued at 3.5. I have 22% margin of safety. - Besides, Revered DCF also suggests that if HAIO experiences super ugly growth (-7%) for the next 5 years, it is valued at 2.74 (the current stock price). This proves that HAIO is still undervalued. - EY% valuation also suggests fair value at I guess this is a bit extreme, but this shows that HAIO got very huge room to grow. L. C. Chong Page 6 of 15

7 Investment Strategy for HAIO Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging - Stop Loss Portfolio Execution: - Buy and Monitor - Momentum Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value Price is below or around the fair price derived from EY% High Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying Selling Basis: Quarterly EPS drop for 3 consecutive months. Has the stock risen too far from its intrinsic value? Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Price is above or around the price derived from EY% Low Fundamental of business turns unattractive or bad The current price is 3 away from my average holding price. Comments: - Based on the valuation, HAIO is obviously under-valued. HAIO is currently at a good buy level. - The current stock price is also close to the buy price derived from EY% valuation. - HAIO company owners and directors also heavily accumulated shares in the past few months. - In the past 2 months, I have accumulated HAIO twice at 2.7 and I will continue accumulate HAIO whenever possible. L. C. Chong Page 7 of 15

8 Notes Created Date Details Type Source Type 19/09/2013 The performance of the Group s main divisions is analysed as follows: MLM division The revenue dropped by about 27% as compared with the immediate preceding quarter. The division had just completed its incentive trip campaign promotion last quarter which had boosted the sales to its highest level in the last financial year. Therefore the post sales campaign are usually quiet in the following quarter, moreover the fasting month in the month of July has decelerated some activities of the majority Muslim distributors. Additional translation loss of about RM 0.4 million in foreign operations has also lowered down the pre-tax profit. Analysis Quarterly Report Wholesale division - Despite marginal increase in the revenue by 4%, pre-tax profit increase by almost 38%, mainly attributable to higher profit margin derived from higher sales in Chinese medicated tonic and supply of duty free products. Retail division -- The revenue decreased by about 4 as compared to the immediate preceding quarter. The CNY festive season which fell in the fourth quarter of last financial year coupled with year-end members sales generated higher revenue in the immediate preceding quarter. O%20Quarterly%20Report%20July% pdf 27/07/ The MLM division will focus on new product developments, effective product training for distributors, as well as growing its membership base. The wholesale segment, meanwhile, has secured exclusive agency rights for a number of Chinese medicated tonic products and will roll out advertising & promotion programs to boost sales. HAIO is also reexamining its product portfolio and refurbishing its existing outlets to strengthen the retail division. Outlook Analyst Report L. C. Chong Page 8 of 15

9 Created Date Details Type Source Type 23/07/ MLM bullish once more. Hai-O (HAIO) s multi-level marketing (MLM) sales and profitability took a plunge in FY11, mainly due to slower membership growth after the Company tightened its rules and procedures relating to purchasing and other documentation in order to comply with industry regulations introduced in Consequently, MLM FY11 sales and EBIT plummeted to MYR125.2m and MYR22.3m, from RM418.1m and MYR75.3m respectively in FY10. It has since adopted more proactive measures to attract new members/distributors and improve its performance. The Company also shifted its focus from big-ticket items, such as water filters, to consumer-centric products like beauty and health products, of which sales have been largely `consistent and recurring in nature. Analysis;Growth Driver Analyst Report - Enlarging member base. As HAIO has 140,000 registered members, of which ~8 are Bumiputera, it is planning to introduce new products that appeal to non-bumiputera users (ie Chinese and Indians) in order to capture the relatively untouched market. The Company will also continue to launch five to eight new products each year. 04/07/ We are also positive on HAIO as we anticipate its MLM segment to deliver decent earnings growth via continuous efforts to enhance its product mix and expand new markets. 27/06/ Outlook We remain positive on Hai-O s prospect going forward as we anticipate its MLM segment to continue to deliver a decent earnings growth from a lower base through its continuous effort to enhance its product mix and expand new market channels through the recruitment of more new members. Change to Forecasts Due to the low base effect of its MLM segment, we have revised up our FY14E NP estimates by +5% to RM52.2m (from RM49.6m) on the back of a higher membership growth of 12% (vs. previous 6.6%). We are also introducing our FY15E earnings of RM57.1m, representing a 9.5% YoY growth. Analysis;Outlook Outlook Analyst Report Analyst Report 28/03/2013 A slowdown in the global economy, which will cut the purchasing power of consumers. Risk Analyst Report L. C. Chong Page 9 of 15

10 Appendix 1 - Discounted Cash Flows Valuation Discount Rate Margin of Safety Refer Appendix 6 for Risk Factors Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk-Based MOS % 11.59% % 35% 1% 26% 21% 18% Growth Estimation Financial Figures Owner GR. Terminal % Decay Rate (Yr4E-Yr7E) Extra Decay (Yr8E-Yr10E) 12% Shares Out. FCF Type 2013 Owner Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 2 6% Owner % Projection of Present Value and Fair Value FV - Future Value; DPV - Discounted Perpetuity Value; PV - Present Value Senario Yearly GR % 9% 9% 9% 7% 7% 7% Base 1 Good 12% Bad 6% Ugly 2% FV DPV PV Fair Value 3-Y: Y: Y: 4.75 Yearly GR. 12% 12% 12% % 8% 8% FV DPV PV , , , Fair Value 3-Y: Y: Y: 5.20 Yearly GR. 6% 6% 6% 5% 5% 5% 5% 4% 4% 4% FV DPV PV Fair Value 3-Y: Y: Y: 3.96 Yearly GR. 2% 2% 2% 2% 2% 2% 2% 1% 1% 1% FV DPV PV Fair Value 3-Y: Y: Y: 3.33 L. C. Chong Page 10 of

11 Appendix 2 - Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk-Based MOS % 11.59% % 35% 1% 1 21% 18% Growth Estimation Financial Figures Owner GR. Terminal % Decay Rate (Yr4E-Yr7E) Extra Decay (Yr8E-Yr10E) Shares Out. FCF Type 2013 Owner Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% Owner % Projection of Present Value (GR. -7%) FV - Future Value; DPV - Discounted Perpetuity Value; PV - Present Value Yearly GR. -7% -7% -7% -6% -6% -6% -6% -5% -5% -5% FV DPV PV Fair Value 3-Y: Y: Y: 2.47 L. C. Chong Page 11 of 15

12 Appendix 3 - Excess Return Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk-Based MOS % 11.59% 35% 1% 26% 21% 18% Financial Figures ROE Shares Out Book Value Dividend Payout Ratio Terminal % % Projection of Present Value and Fair Value Senario ROE Book Value Ba Go Ug Retained BaseExcess Return PV Fair Value Y: 3.44 ROE 2 22% 24% 26% 27% 29% Book Value Retained GoodExcess Return , Bad PV Fair Value Y: 6.23 ROE 2 18% 17% 15% 15% 14% Book Value Retained Excess Return PV Fair Value Y: 1.98 ROE 2 17% 15% 13% 12% 11% Book Value Retained Ugly Excess Return (38.59) PV (22.30) Fair Value Y: 1.35 L. C. Chong Page 12 of 15

13 Appenfix 4 - EY% Valuation EY% High EY% Low Buffer R4Q-EPS FY14-EPS* FY15-EPS* 9.15% 4.54% Fair Value Buy Under Sell Above * Estimations from Reuters or local analysts' reports High EY% Green Zone EY% 9.15% R4Q FY14 FY15 Green Zone Price($) Price Low 8.68% Buy Under Trading Range 4.61% 5.0 Sell Above Red Zone EY% 4.54% Red Zone Price($) Low High L. C. Chong Page 13 of 15

14 Appendix 5 - Insider Trading Last 3 months or last 30 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted 18/07/2013 PHAN VAN DENH Acquired 247, /07/2013 TAN KAI HEE Acquired 247, /07/2013 TAN KENG KANG Acquired 247, /07/2013 TAN KENG SONG Acquired 247, /07/2013 TAN SIOW ENG Acquired 247, /05/2013 PHAN VAN DENH Acquired 14, /05/2013 TAN KAI HEE Acquired 14, /05/2013 TAN KENG KANG Acquired 14, /05/2013 TAN KENG SONG Acquired 14, /05/2013 TAN SIOW ENG Acquired 14, /05/2013 PHAN VAN DENH Acquired 17, /05/2013 TAN KAI HEE Acquired 17, /05/2013 TAN KENG KANG Acquired 17, /05/2013 TAN KENG SONG Acquired 17, /05/2013 TAN SIOW ENG Acquired 17, /04/2013 PHAN VAN DENH Acquired 4, /04/2013 TAN KAI HEE Acquired 4, /04/2013 TAN KENG KANG Acquired 4, /04/2013 TAN KENG SONG Acquired 4, /04/2013 TAN SIOW ENG Acquired 4, /04/2013 PHAN VAN DENH Acquired 5, /04/2013 TAN KAI HEE Acquired 5, /04/2013 TAN KENG KANG Acquired 5, /04/2013 TAN KENG SONG Acquired 5, /04/2013 TAN SIOW ENG Acquired 5, /04/2013 PHAN VAN DENH Acquired 7, /04/2013 TAN KAI HEE Acquired 7, /04/2013 TAN KENG KANG Acquired 7, /04/2013 TAN KENG SONG Acquired 7, /04/2013 TAN SIOW ENG Acquired 7, /04/2013 PHAN VAN DENH Acquired 4, /04/2013 TAN KAI HEE Acquired 4, /04/2013 TAN KENG KANG Acquired 4, /04/2013 TAN KENG SONG Acquired 4, /04/2013 TAN SIOW ENG Acquired 4, L. C. Chong Page 14 of 15

15 Risk Factors (For Non-Bank Stocks Only) Business Risk Factor 2008/4/ /4/ /4/ /4/ /4/ /4/30 Benchmark ROE 34.53% 31.55% 33.76% 13.88% 15.34% 19.78% 15% Consistency/Quality Check ROIC % 66.09% 22.27% 28.54% 34.47% 15% Consistency/Quality Check CROIC 82.52% 33.08% 63.72% 13.25% % 15% Consistency/Quality Check Intangible % Book Value 0.06% 0.05% 0.04% 0.04% 0.04% 0.04% 1 Consistency/Quality Check Business Risk Factor 8% Factor: Financial Risk Factor 2008/4/ /4/ /4/ /4/ /4/ /4/30 Benchmark Quick Ratio % % % % % 10 Consistency/Quality Check Debt/Equity 39.73% 44.27% 28.92% 20.81% 25.17% 22.21% 10 Consistency/Quality Check Short Term Debt/Equity 3.71% 2.25% 2.29% 2.78% 2.34% 3.08% 5 Consistency/Quality Check FCF Coverage % % % 9.77% % % 10 Consistency/Quality Check Financial Risk Factor 5% Factor: L. C. Chong Page 15 of 15