BY CHOONG KHUAT HOCK
Hai-O is an intriguing company run by its equally enigmatic founder Tan Kai Hee. At 70, Tan is a picture of health, a testament to Hai-O's Chinese herbs, medicated wines and medical treatment. Tan, a well- respected figure in the Chinese community, started his corporate life late after spending eight years in jail for his socialist beliefs.
After his release in 1973, Tan, already in his late 30s, was jobless and decided to start a business importing goods from China. With support from his socialist friends, business took off. Deng Xiaoping (1904- 1997) said, “to be rich is glorious”, and in Tan's case, it was never too late to get rich.
Hai-O is now one of the largest importers of Chinese wines, herbal products, medicine and tea. Around 40% of its earnings come from the wholesale and retailing of Chinese products. It has over 100 large wholesalers, 2,000 retail customers and 56 outlets. Hai-O is also the first Chinese healthcare company in Malaysia to achieve GMP (good manufacturing practice) standards for the manufacture of food supplements and traditional pharmaceutical products.
The company is one of the largest traders and investors in pu-er tea, which is said to possess health benefits. The tea from Yunnan is widely collected by the Chinese as it is one of the few teas whose price and quality increase with time.
Hai-O is the sole distributor of many famous pu-er tea brands. The fastest growing division is the multi-level marketing (MLM) division, which has been growing over 40% per annum in the last three years and accounted for around 60% of Hai-O's net earnings in FY2007 ended April 30.
Other interesting points about Hai-O include the fact that its chairman, Tan Sri Osman Cassim (a former diplomat and Southern Bank director), speaks Mandarin fluently and that 95% of its MLM members are Malays. In fact, Hai-O has generated so many Malay millionaires (mainly women) that it was recently given an award by the Ministry of Entrepreneur and Co-operative Development for its contribution as a non-bumiputera company towards bumiputera entrepreneurship.
Precious resource
What is the secret to Hai-O's MLM success? When i attended Hai-O's award ceremony recently, I was surprised to see that over 75% of those achieving top sales were motivated Malay women, many of whom are young attractive millionaires. It appears that Hai-O has successfully targeted the Malay market, which has been overlooked by many other MLM companies. As Hai-O sources its products directly unlike some US-based MLM companies, it is able to pass the benefits of a lower-cost structure to its MLM members, an altruistic socialist trait that has also motivated its MLM members to sell harder and recruit more members.
This pool of motivated Malay women is Hai-O's precious resource. They are fiercely loyal and grateful to “chairman” Tan, and top achievers are given free tips to many destinations, including Mecca. During the award ceremony, an imam was also present to exhort the need for balancing material wealth with spiritual wealth. Positive Islam influences coupled with social ideals is indeed a winning formula that is far superior to the pure pursuit of wealth and the search for the ephemeral “self-actualisation” as promoted by other MLM companies.
Why the predominance of women MLM members? Vanity sells and it is not surprising that Hai-O's top selling products are slimming and health products, which women may be more comfortable discussing with other women.
Hai-O currently has an MLM distribution force of around 70,000 and this number is growing at a rate of 1,000 a month. It is also looking to replicate its successful model in Indonesia by early next year. Prospects look bright as it well be able to use its pool of motivated and articulate Malay women to gain converts in a country that looks up to Malaysia and speaks the same language.
Even without taking Indonesia into account, Hai-O's growth momentum in Malaysia remains strong. Net profits from its MLM division grew an impressive 146.2% from RM5.2 million in FY2006 to RM12.8 million in FY2007. There is still ample scope to grow its MLM revenues, which at RM99.7 million in FY2007 is less than 18% of Amway's FY2006 revenues at RM554.8 million.
Valuation
Those looking for defensive growth will appreciated Hai-O. Defensive companies do not often post strong growth- however, Hai-O's MLM success has ensured a strong growth momentum with a doubling of profits in FY2007. Hai-O's operations generate a cash flow of close to RM30 million a year. Around 70% of its sales are in cash and due to good credit control and management, its receivables in FY2007 declined despite higher sales.
The company will hold an extraordinary general meeting soon to approve a one-for-five bonus issue and has received Securities Commission approval for its proposed transfer listing from the Second Board to the Main Board.
Hai-O has amassed cash reserves and short-term investment of around RM45 million, amounting to 65 sen per share. This has enabled the company to pay a generous dividend per share of 18 sen for FY2007. Assuming a dividend per share of 20 sen for FY2008, Hai-O would provide an attractive yield of 6.6%.
Based on consensus earnings per share forecast of 34.9 sen for FY2008, the shares are trading on a prospective price-earnings ratio of only 9.8 times, which is a lot lower than the PER of the largest MLM company in Malaysia, Amway, at 16 times FY2007 earnings. Stripping out its cash per share of 65 sen, its FY2008 PER is even lower at 7.3 times. Pegging Hai-O's operations on a PER of 12 times and adding back its cash would yield a valuation of around RM4.50 per share.
Hai-O means “seagull” in Mandarin. Indeed, its prospects are soaring on fair MLM winds fulled by a blessed mix of socialist sharing and capitalist motivation.
Disclosure: KSC and its directors may have investments in securities mentioned in the article