Hai-O Enterprise Bhd (Symbol & Code: HAIO 7668) - 5th Sep 2009

(13 Years Historical Chart)

Company Background

Established in 1975, Hai-O has become a famous household name offering a wide range of Chinese medicines, medicated tonic and health care products. Hai-O was successfully listed on the second board Bursa Malaysia Securities Berhad in 1996, being the first traditional healthcare company on the stock exchange. In 2007, Hai-O had successfully transfered to the main board of Bursa Malaysia. The principal business of the company involves wholesaling, retailing, multi-level marketing, pharmaceutical manufacturing and modern Chinese Medicinal Clinics.

Peking Tongrentang (M) Sdn Bhd, a joint venture company (the JV Company) between Beijing Tongrentang and Hai-O started its business in Kuala Lumpur since 2002.

The Group is also promoting the integrated health services by combining the Traditional Chinese Medicine (TCM) clinic services and the effective non-decocted Chinese herbal with its existing retail stores. The TCM clinic services will be provided by its joint venture partner, Sanjiu (999) Pharmaceutical.


Fundamentals

ROE: 34.53%
Average EPS Growth Rate: 20.7%
D/E: 0.04
Gross Profit Margin: 33.73%
Average P/E: 8.45
Dividend Yield: 8%
Fair Value: RM 5.25
Current Price: RM 5.10
Recommendation: BUY


SWOT Analysis

Strengths
In the wholesale business, Hai-O has established itself as one of the leading distributors for Chinese medicinal products in Malaysia. Over a period of 30 years, it has secured and accumulated exclusive agency rights for importing and distributing in Malaysia more than two hundred branded products from China. The products include a wide range of quality Traditional Chinese Medicines, teas and wines. The group has developed multi-distribution channels that give them broad access to Chinese medical halls, hypermarkets, supermarkets, convenience stores, restaurants and other retail outlets.

Besides this, Hai-O has a strong retail presence across the country with over 50 Hai-O Chain Stores in major cities and towns, comprising owned branches and franchise shops. These stores are staffed by professional herb masters to provide advice on herbs and TCMs to customers.

Its multi-level marketing (MLM) segment has emerged as the largest contributor to the group sales and profit (contributed about 75% of group turnover and 69% of profit in FY08). This segment is involved in the direct sales of nutritious food, lingerie, skin care products, motor oil and fertilizers. Presently, the MLM division has over 100,000 distributors and growing at an average of 3-4k of new members per month.

Some of its achievements & recognitions/awards:

• Hai-O was ranked No. 6 out of 100 top listed companies in creating Shareholder Value by KPMG and The Edge in 2008.

• Hai-O was awarded Forbes Asia 2007 in the category of Best Under A Billion List in 2008.

• Hai-O Raya Bhd was awarded The BrandLaureate Award 2008-2009 under the Product Branding for Traditional Chinese Medicine category.

• Hai-O Raya Bhd was awarded the "Malaysian Business Ethics Excellence 2008" award by the Ministry of Domestic Trade & Consumer Affairs.

• Hai-O Marketing Sdn Bhd was awarded the "Malaysian Business Ethics Excellence 2008" award by the Ministry of Domestic Trade & Consumer Affairs.

• Hai-O was awarded Forbes Asia 2007 in the category of Under A Billion List in 2007.

• Hai-O is the first traditional herbal health care company to adopt a truly home grown franchise programme.

• SG Global Biotech Sdn Bhd was awarded the GMP (Good Manufacturing Practice) status and ISO:9001 certification in 1999 and its subsidiary QIS Laboratory Sdn Bhd was awarded with GLP (Good Laboratory Practice) in 2007.

• Hai-O was awarded the "Superbrand" status by the Malaysia Superbrand Council for the year 2003/2004.

• Hai-O Raya Bhd was awarded by Malaysia Book of Records 2001 for having the greatest number of traditional healthcare chain stores in the country.

• Hai-O Raya Bhd won the "Golden Bull Award" as one of the Malaysia's Top 100 Outstanding SMEs in 2003.

• Hai-O Raya Bhd is also one of the winners of "Enterprise50" award organized by SMIDEC and Deloitte.


Weaknesses
Some of its products are not unique because similar products are sold by their competitors as well.


Opportunities
Hai-O is currently expanding its MLM operation into Indonesia. As most of its distributors are Bumiputeras, this will provide a greater opportunity for them to expand their business network.
Even though there is a possibility that the MLM market may get saturated and thus experience slow growth in their sales someday, as what is happening to Amway now, from its previous financial reports there is no sign that this is happening anytime soon.

Also, there is still room to expand its wholesale/retailing business. Hence, Hai-O has the best of both world in expanding its business: Conventional (Wholesale & Retail) and Unconventional (MLM)


Threats
As some of its MLM products are also sold by its competitors, it may experience losses of customers. However, as MLM is also a "relationship business", distributors who have build a good with relationship with their customers may retain loyal customers to their products.

The group profit margin can be affected if there is stronger-than-expected strengthening of the US Dollar against the Malaysian Ringgit.


CONCLUSION

Hai-O is still growing strong and the Dividend Yield is high. As the current price is below the Fair Value, I give it a Buy rating.