Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

HAIO – Fundamental Analysis FY15

11,893 views

Published on

Fundamental Analysis of Hai-O Enterprise Berhad (HAIO) as of FY15 by L. C. Chong

At the time of writing, I owned shares of HAIO.

http://lcchong.wordpress.com
https://www.facebook.com/groups/285121298359919/

Published in: Business
  • Be the first to comment

HAIO – Fundamental Analysis FY15

  1. 1. HAIO FUNDAMENTAL ANALYSIS Financial Year 2015 (30 April 2015) 17 December 2015 L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)
  2. 2. DISCLAIMER I am NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. Stock analysis in this presentation may not neutral because I have incorporated my risk appetite and principles in the analysis. All figures in MYR and in '000s, except per share data 2
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of MAYBANK.
  4. 4. SCOPE • Figures and ratios are based on the figures reported in Annual Report or the latest Q4 Quarterly Report (QR) • Unless there is a need, this analysis will not include financial figures reported in Q1, Q2 and Q3 • I will provide QR result highlights in my blog • Valuation is not covered in this analysis • I will provide valuation in my blog.
  5. 5. CHANGES • 9 Oct 2015 – First write up of HAIO in PowerPoint format • 7 Dec 2015 – Applied new template • 17 Dec 2015 – Added few illustrations, and tweaked presentation of economic moats
  6. 6. REFERENCES • HAIO vs. AMWAY vs. ZHULIAN
  7. 7. BUSINESS PROFILE • Principally engaged in the wholesaling and retailing of herbal medicines and healthcare products, investment holding and property holding • Business segments: Wholesale Multi-level Marketing Retail
  8. 8. BUSINESS PROFILE (CONT.) • Wholesale – Includes wholesaling and trading in herbal medicines and healthcare products, herbs and tea • Over a period of 30 years, HAIO have secured and accumulated exclusive agency rights for importing and distributing in Malaysia more than two hundred branded products from China • The sole distributor for over 50 renowned brands • Hai-O supplies to more than 100 wholesalers and 2,000 retailers, including Chinese medical halls and Chinese medicine clinics, restaurants, mini markets, as well as supermarkets
  9. 9. BUSINESS PROFILE (CONT.) • Multi-level marketing – Includes operating multi-level direct marketing of health food, healthcare, wellness and beauty products • 140,000 distributors throughout the country, and 52,000 core distributors • About 80% of its members are Bumiputera and approximately 2,500 new members join its network each month • High payout ratio of 60% to its distributors and no breakup period.
  10. 10. BUSINESS PROFILE (CONT.) • Retail – Includes operating retail chain stores • 69 retail stores and 9 franchise outlets throughout the country • These retail outlets carry an extensive range of Traditional Chinese Medicines (TCMs), teas, health tonic, wines, gift packs or hampers and other healthcare products • Some of these stores are also providing integrated medical services by making available in-house consultations by qualified TCM physicians.
  11. 11. OWNERSHIP SUMMARY PUBLIC AND OTHER 48% INDIVIDUALS/INSIDERS 37% CORPORATIONS (PRIVATE) 14% INSTITUTIONS 1% Position Date: 21 Aug 2015
  12. 12. TOP 5 SHAREHOLDERS KAI HEE TAN 33% AKINTAN SDN BHD 22% SIOW ENG TAN 20% EXCELLANT COMMUNICATION SDN BHD 15% KEE SIONG CHIA 10% Position Date: 21 Aug 2015
  13. 13. OWNERSHIP ANALYSIS • Holdings of institutions in HAIO is very small • Liquidity of this counter is not bad, but volatility sometimes is quite large • The shareholder with the largest stake in HAIO is Kai Hee Tan with a 11.7% stake • This is a typical pattern of a counter where majority of shareholders are individual and public.
  14. 14. SHARE BUY-BACK • HAIO management has been issuing many share buy-back, in order to increase treasury shares • This corporate exercise provided some good supports, especially when the market sentiment is not so positive • Key members in the management also regularly increase their holdings • These actions sent a good message to the minority shareholders that prospect of this company still promising.
  15. 15. SHARE BUY-BACK (CONT.) 193,000 194,000 195,000 196,000 197,000 198,000 199,000 200,000 30-Apr-11 30-Apr-12 30-Apr-13 30-Apr-14 30-Apr-15 Number of Outstanding Shares
  16. 16. ECONOMIC MOATS • Cost Advantage – Narrow • HAIO enjoys high gross profit margin above 30% in average • The issue is the strengthening of USD against MYR will result in higher cost of material • Switching Costs – None • There are various of choices in market • Network Effect – Wide • More than 100 wholesalers and 2,000 retailers • 140,000 distributors throughout the country, and 52,000 core distributors • 69 retail stores and 9 franchise outlets throughout the country
  17. 17. ECONOMIC MOATS (CONT.) • Intangible Assets – Narrow • Brand name of HAIO is well known in Malaysia local market, but AMWAY is very strong competitor • Efficient Scale • Not available or not applicable.
  18. 18. ECONOMIC MOATS (CONT.) 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 ROIC 18.7% 20.0% 25.0% 19.5% 12.7% CROIC 4.1% 23.9% 17.6% 10.5% 11.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% ROIC and CROIC Even if ROIC and CROIC above 10%, but both ratios declined since FY2013. This indicates that economic moats of HAIO has been eroding due to stiff competition.
  19. 19. PROFITABILITY 200,000 210,000 220,000 230,000 240,000 250,000 260,000 270,000 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Revenue
  20. 20. PROFITABILITY (CONT.) • From FY11 to FY15, FY13 recorded the highest revenue (FY13: 266 mln). However, its revenue dropped -4.9% in FY14 and further -5.3% in FY15 • Decline of revenue is mainly due to the following challenges/issues: • A slowdown in the global economy, which will cut the purchasing power of consumers • HAIO’s sales challenged by the rising cost of living coupled with implementation of GST in 2015 • Stiff competition among MLM players • Its MLM division continued to struggle with the new product strategy of focusing on ‘small ticket’ items instead of ‘big ticket ‘items. (Kenanga 25 Sep 2014)
  21. 21. PROFITABILITY (CONT.) 48,440 48,730 50,704 56,293 56,654 125,188 141,077 166,997 149,272 135,557 43,663 42,813 40,838 40,063 40,641 5,963 6,912 7,990 7,794 7,055 0 50,000 100,000 150,000 200,000 250,000 300,000 2011 2012 2013 2014 2015 Revenue by Operating Segment Wholesale Multi-level marketing Retail Others Deteriorating of HAIO revenue mainly attributed to the poor performance in MLM segment
  22. 22. PROFITABILITY (CONT.) • HAIO is undergoing a transformation to reduce dependency on big ticket items and moving to health supplements, personal care and cosmetics which started in 2014 • Since then, it has introduced new small ticket items regularly • As a result, revenue contribution from repeated sales items has doubled over the past year to 60% in 2015, reflecting the success of the transformation effort.
  23. 23. PROFITABILITY (CONT.) • The strategy also saw an increasing young and affluent Malay female population in its distribution network • This also bodes well for distributors as the current economic conditions have become increasingly difficult for them to finance the purchase of big ticket items with loans. (iCapital 3 Jul 2015)
  24. 24. PROFITABILITY (CONT.) 38.0% 38.2% 39.1% 36.9% 35.7% 33.0% 34.0% 35.0% 36.0% 37.0% 38.0% 39.0% 40.0% 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Gross Margin
  25. 25. PROFITABILITY (CONT.) • Despite declining revenue, HAIO gross margin still maintain above 30% • The downtrend of gross margin is mainly attributed to its declined revenue and the strengthening of USD/MYR • The strengthening of USD/MYR will result in higher cost of material.
  26. 26. PROFITABILITY (CONT.) 18.4% 20.9% 25.7% 20.0% 15.9% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Execution Ability
  27. 27. PROFITABILITY (CONT.) • By Moody’s standard, for FY15, execution ability of HAIO is rated as A • If we look back 10 years history, its execution ability ranged from A to A+.
  28. 28. LEVERAGE & COVERAGE 0.00 x 0.05 x 0.10 x 0.15 x 0.20 x 0.25 x 0.30 x 0.35 x 0.40 x 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Debt / EBITDA By Moody’s standard, for FY15, debt/EBITDA of HAIO is rated as Aaa.
  29. 29. LEVERAGE & COVERAGE (CONT.) 0.00 x 20.00 x 40.00 x 60.00 x 80.00 x 100.00 x 120.00 x 140.00 x 160.00 x 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 EBITA/Interest By Moody’s standard, for FY15, interest coverage of HAIO is rated as Aaa.
  30. 30. LEVERAGE & COVERAGE (CONT.) 61.3% 283.1% 281.2% 553.7% 435.0% 0.0% 100.0% 200.0% 300.0% 400.0% 500.0% 600.0% 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Retained Cash Flow to Debt By Moody’s standard, for FY15, RCF/Debt of HAIO is rated as Aaa.
  31. 31. LIQUIDITY 61 60 48 69 87 0 20 40 60 80 100 120 140 160 2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30 Cash Conversion Cycle Cash Conversion Cycle Days In Inventory Days In Receivables Days Payable Outstanding
  32. 32. LIQUIDITY (CONT.) • HAIO’s Cash Conversion Cycle (CCC) has been increasing since FY13 • "Days in Receivables" and "Days Payable Outstanding" do not change much, but "Days in Inventory" increased drastically since FY14. Reasons: • The strengthening of USD against MYR resulted in higher cost of material • Increase of inventory – This may be attributed to the transformation in reducing dependency on big ticket items and moving to health supplements, personal care and cosmetics which started in 2014
  33. 33. GROWTH DRIVERS • 19 Sep 2014 – The Group has been awarded a sole distributorship of Maotai, a famous Chinese liquor. We reckon that this will be the another source of income for the division. However, the reception of the product remains to be seen as whether the drink will be popular among the local community as compared to western liquor • 20 Nov 2014 – 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 • In FY15, CapEx increased 137% if compare to FY14. The retail division has been looking for high traffic location for its new outlets and will enhance its CIS image by refurbishing its existing outlets.
  34. 34. ISSUES/RISKS/CHALLENGES • A slowdown in the global economy, which will cut the purchasing power of consumers. • HAIO’s sales challenged by the rising cost of living coupled with implementation of GST in 2015 • Stiff competition among MLM players • HAIO’s MLM is strong in Chinese modern medicine, but as for other products, it has weaker brand name compared to other MLM players. • Margins erosion due to the weakening of Ringgit against USD • 25 Sep 2014 – Its MLM division continued to struggle with the new product strategy of focusing on ‘small ticket’ items instead of ‘big ticket ‘items.
  35. 35. SHAREHOLDER RETURN Time Frame Date Bought at Original Value Dividend Received Unrealized Gain/Loss Current Return CAGR % 3-Y 9 Oct 2012 2.06 2,340 390 280 3,010 8.8% 5-Y 8 Oct 2010 3.09 3,090 630 750 4,470 7.7% 10-Y 7 Oct 2005 0.336 336 3,090.22 5,796.67 9,222.89 39.3% Assumptions: 1. Commission paid is ignored in this simulation 2. The current price is 2.34 as of 9 Oct 2015 3. Unit purchased is 1,000.
  36. 36. GOING FORWARD • Next financial year will remain challenging in view of weakening domestic purchasing power and high costs of living, resulting consumers more cautious in spending • Weakening of MYR against USD currency will increase the cost of import purchases. • Despite the current slump in its earnings, coupled with the possibility of longer- than-expected effect from the strategy shift, HAIO’s attractive dividend will be the main catalyst for the stock.

×