The share price of multi-level marketing (MLM) company Hai-O Enterprise Bhd has been raising eyebrows these past few weeks with its rapid upward trend. Year to date, its share price has more than doubled and in the past three months alone, it has gained some 40%.
In comparison, other MLM stocks such as Zhulian Corp Bhd and Amway (Malaysia) Holdings Bhd gained 12% and 0.8% respectively over the last three months.
Last Thursday, Hai-O closed at RM7, showing a gain of 66 sen or 10.4% since the beginning of this month. The counter has surpassed analysts’ target prices in a short span of less than a month.
While the pace of its rise may come across as slightly alarming to some, analysts dismissed the possibility of speculative trades driving up its share price as the rise was supported by fundamentals. They say the recent run-up in Hai-O’s share price was mainly due to its stellar first quarter performance, which had beaten estimates.
For the period ended July 31, 2009, Hai-O’s earnings surged 35.7% y-o-y to RM18.5 million on the back of a 40% jump in revenue in its MLM division. The company, in notes accompanying its quarterly results, said the increase was mainly due to buoyant sales of its health and wellness products.
OSK Research analyst Eing Kar Mei says this represents 32.8% of the research house’s full-year earnings forecast and 34.7% of consensus estimates. OSK has pegged Hai-O’s target PER at 8.5 times.
“Hai-O deserves a higher valuation as it is still undervalued at 8.5 times PER, considering Amway’s target PER is 13 times,” Eing says, adding that a PER of up to 10 times for Hai-O was still reasonable.
While it may be true that Hai-O has a lot more room to grow, comparing it with Amway is not really comparing apples with apples.
However, another analyst notes that Hai-O’s share price rally is tapering off. “We are reviewing our target price at the moment,” says the analyst.
With its share price and earnings fast outpacing estimates, the question on everyone’s mind is whether Hai-O’s drive on the fast lane is temporary or can the growth be sustained.
Group managing director Tan Kai Hee is quite confident of achieving its internal target of 10% growth in business. He says the company will utilise its cash reserves to ensure the sustainability of its growth.
“We have quite a big cash pile in the group as at first quarter ended July 31. We have net cash balance plus short-term investments amounting to Rm80 million,” Tan says.
He says plans for its cash reserves include expanding its manufacturing division to accommodate the increase in business volume as its MLM business continues to grow substantially. A new factory and warehouse is also in the pipeline. Additionally, with the success of its health products, the company also plans to develop its land – measuring some 1.2 million sq ft – in Kapar, which it acquired early last year for RM45 million, into a health and medicinal hub for the region.
“Besides, we are constantly looking for opportunities for viable business ventures that can complement our existing businesses, and to broaden our existing base for non-MLM divisions, such as venturing into a new industry like the advanced technology industry,” he says.
The company recently signed a collaboration agreement with the Institute of Engineering Thermophysics of the Chinese Academy of Sciences (IET) to do research on scientific and commercial applications of high intensity heat transfer technology for industrial purposes. Analyst say positive earnings impact could be felt in two years’ time, according to the management’s conservative guidance.
However, apart from its recent results and ambitious venture into the advanced technology industry, its expansion into Indonesia is probably the main thing that has stirred much interest with investors and would likely be its key growth driver moving forward.
To recap, Hai-O was granted an official business licence to operate its MLM business in Indonesia last August. It took up a 60% stake in a joint-venture company, PT Hai-O Indonesia, with a local partner. It is learnt that the partner is well-connected in Indonesia, with established businesses in Macau and China.
Tan says there were delays in the rollout of its business there as it was still awaiting approval for some of its products. “The regulations differ from country, and at this stage we are still waiting for the approvals,” he adds. Tan declined to elaborate on its expansion there as he has yet to get a full report on the company’s progress in Indonesia.
OSK Research says Hai-O has started recruiting members in Indonesia and was targeting about 5,000 new members there. The target is likely achievable considering Indonesia’s population is some eight tines that of Malaysia.
“While there are many established players in the country, we believe the huge population in Indonesia would provide ample room for Hai-O to penetrate into. We estimated that approximately RM5 million will floe into its topline, based on the conservative assumption that revenue per contributer would be about RM1,000 per annum,” OSK Research says.
In noted that should its venture in Indonesia be successful, Hai-O could further expand into China in the next two to three years, which would make sense since its Indonesian partner already has strong connections there.
Eing says Hai-O’s strong divided payout was also an attraction, with a dividend yield of about 6%. Its proposed final dividend of 32 sen also helped boost its share price.
All things said, Hai-O has proven itself to be a well-managed company with plenty of room for growth as it is once again listed on Forbes Asia’s 200 Best Under A Billion in 2009 for the third consecutive year. It is one of only eight corporations from Malaysia on the list.