HAI-O update (HAIO MK, Maintain NEUTRAL, FV RM2.03, Last price RM2.18)

We recently visited Hai-O, which seems to be slowly regaining its earnings momentum. Its strategy of focusing on repeat consumer products instead of bigticket items is working as the MLM division is showing improvement. We believe Hai-O would be able to deliver decent results given: i) the recent collaboration with KAEAM Corp on the global distributorship of bamboo salt, and ii) its bird’s nest export business. Maintain NEUTRAL, with FV of RM2.03.

The worst may be over. Hai-O managed to improve on its revenue and earnings in the last two quarters after eight consecutive quarters of dismal performance, which indicates that the company might be on the  road to  recovery. The core MLM  business bounced back  with a  decent 4.9% y-o-y revenue growth last quarter. Going forward, the management is confident that Hai-O will be able to deliver satisfactory results.

MLM  bounces  back.  The MLM division has around 140k registered members and  is adding  2.5k new members  monthly. The number of new members has  risen  steadily from 2k/month to 2.5k/month y-o-y, with management now aiming for new additions of 3k/month in  the  near term.  Learning from the past, the company  has  shifted its focus from big-ticket items such as water filters to consumer-centric products such as beauty and health products, for which  sales  are  consistent and  are  repeated. We believe the growth momentum in the MLM division is sustainable given the company’s improved marketing strategy and  more balanced product mix.  Meanwhile, its  Indonesia  MLM operation is still relatively small and not making much progress due to fierce competition and strict regulations. Hai-O is trying to penetrate the relatively untapped 2^nd tier cities such as Batam, Medan and Pekan Baru for new markets.

Bamboo  salt the new star.  In early April, Hai-O Marketing signed a global distributorship agreement with South Korea’s KAEAM Food Corp, the  pioneer manufacturer of ‘bamboo salt’ (garam buloh). Hai-O brought in KAEAM  bamboo salt three years ago via an exclusive collaboration, which proved to be timely because this product  is  gaining a  strong  following,  which  allows  the company to expand  into  new markets. Elsewhere, Hai-O’s new subsidiary – Yan Ou Holdings SB (Yan Ou) – will be sourcing for and processing, trading and distributing bird’s nest. Once it obtains the licence  to export  bird’s nest,  this will represent another good revenue stream for the company since the consumption of the product in Asia, especially China, is huge.

Maintain NEUTRAL. Assuming stronger sales for the MLM division, we are marginally revising upwards our FY13 forecast by 1.7%. Maintain NEUTRAL, with a higher FV of RM2.03, based on 12x FY13 EPS.

Source: OSK188