By Choong Khuat Hock
Hai-O Enterprise Bhd continues to deliver impressive results despite the challenging environment last year, with revenues and net profit for FY2009 ended April growing by 16.5% and 7.2% y-o-y respectively.
Its multilevel marketing (MLM) division continues to be its start performer, with revenues up 23.8% y-o-y. The division now accounts for 80% of its operating profit.
Hai-O’s distributor force surpassed the 100,000 mark this year, which is remarkable considering that it was below 60,000 in April 2008.
Its wholesale and retail divisions were not immune to the slowdown, with wholesale revenue posting a 14.6% y-o-y decline and retail revenue declining by 0.4% y-o-y.
Despite lower sales, the retail division posted a 43% increase in profit due to a shift in sales towards house brand products with better margins.
Contribution from its manufacturing operations remains small but as its manufacturing facilities have attained GMP (good manufacturing practice) and FDA (Federal Drug Administration) standards, it is looking to boost its OEM business.
Hai-O has set its sights on replicating its successful MLM model in Indonesia. This will no doubt carry additional risk, especially in Indonesia where bureaucratic hurdles are higher. Malaysian palm oil companies, which have ventured into the country, will attest to a more difficult operating environment. However, the success of Indonesia MLM companies like Smart Nago and ATM has shown that it is possible for Malaysian companies to succeed in Indonesia. Amway, CNI and Zhulian already have a presence in the country.
Hai-O’s venture into Indonesia involves a 60:40 joint venture with a local partner. Initial focus will be to penetrate the market in Jakarta. All necessary license to commence its MLM operation have already been obtained. Key staff are in place and the joint venture is in the final stages of finalising its commission scheme. The expenditure involved in setting up the operations is reasonable, with US$120,000 (Rm423,000) spent on capital expenditure and US$380,000 on working capital. Management is hoping to break even within two years.
Hai-O is looking to start its recruitment drive next month and has set a target of 5,000 to 10,000 members in the first year of operations by tapping on the existing relationships that its Malaysian members have in Indonesia.
Expanding into Indonesia seems like a natural progression for Hai-O, given the similarities in culture between the two countries. As it is, 90% of its members in Malaysia are bumiputeras and some even have family and friends residing in Indonesia. However, as per World Bank estimated, Indonesia’s nominal 2008 GDP per capita is US$2,254, which indicates a much lower purchasing power (Malaysia’s 2008 nominal GDP per capita is US$7,221). One may then question whether a household may want to spend more on water filters that may cost up to US$1,000 per unit. On the flip side, Jakarta’s high population of 8.5 million and relatively poorer water quality point to a sizeable potential market for Hai-O, the most popular being its water filter.
The prospects for the MLM market in Indonesia are good as its population of 240 million only has MLM sales of US$667 million, lower that the US$2.1 billion in Malaysia, with a population of only 26 million (World Foundation of Direct Selling Association). Hai-O widened its product offering the introduction of health products at end-2008 and skincare products in March 2009.
The company will be paying a total dividend of 42 sen, representing a net payout ratio of 51% for FY2009 ended April, higher than its minimum payout ratio of 50%. Assuming a similar 42 sen dividend for FY2010, dividend yields are attractive at 8.6%. Based on a share price of Rm4.86, it is only trading at a trailing PER of 6.8 times EPS, after stripping out its net cash of Rm65.7 million (78 sen per share). Consensus forecasts are pointing to lower net profit for the current year but Hai-O could surprise on the upside if the current sales trend continues.
Hai-O means seagull in Mandarin; despite the turbulence of the current economic ill winds, the company seems to be soaring to new heights with veteran socialist and respected Chinese community leader Tan Kai Hee at the helm. Its rapid growth is primarily because of Hai-O’s willingness to share a generous proportion of MLM profits with its members, coupled with its organisational skills and ability to introduce relevant products. So far, its formula of blending socialist sharing and capitalist motivation seems to be working.