8 things we learned from the 2017 Hai-O AGM

Hai-O Enterprise Berhad (Bursa: 7668) is a household name offering a wide range of premier traditional Chinese medicine, medicated tonics, and wellness, beauty and healthcare products to customers. Their wide range of products consists of in-house and well-known international brands. Established in 1975, Hai-O built a vertically-integrated supply chain from sourcing and manufacturing to marketing and distribution (in wholesale, retail, and multi-level marketing).

Hai-O was the first traditional healthcare company listed on Bursa Malaysia in 1996. Since then, Hai-O has grown to an equity base of more than RM280 million with a market capitalisation above RM1.2 billion. Despite business challenges, Hai-O has built a strong retail presence in cities and towns in Malaysia with over 60 chain stores. The Group has also established itself as one of the leading multi-level marketing (MLM) networks in Malaysia.

Hai-O has also been acknowledged as one of Asia’s 200 Best Under a Billion by Forbes magazine from 2007 to 2010. Hai-O’s share price has appreciated 155.6% over the last five years, from RM2.07 to RM5.29, with the most significant increase in the last two years.

Here are 8 things we learned from the 2017 Hai-O Enterprise AGM:

1. Revenue increased significantly by 35.8% year-on-year from RM297.63 million in 2016 to RM404.24 million in 2017. This was mainly due to Hai-O’s MLM segment which now contributes 76% of total revenue. The Wholesale segment recorded slightly lower revenues of RM52.65 million, down from RM54.36 million the previous year, due to lower sales from Chinese medical halls and duty-free customers. Revenue from the Retail segment remained flat at RM38.15 million, while the Others segment showed a slight decrease due to the non-renewal of tenancy by a key tenant.

2. Profit before tax also increased substantially by 59.5% from RM49.07 million in 2016 to RM78.27 million in 2017. Again, MLM was the main driver contributing 80% of total profit. The growth in this segment is a result of higher sales via Hai-O’s e-commerce platform which jumped fourfold, the launch of new products and a successful member retention/recruitment programme. Within three years, the number of Hai-O’s MLM entrepreneurial members has grown by nearly 300% from 53,000 members in 2015 to 140,000 members today. The average recruitment of new members is 5,000 to 6,000 per month and the management plans to grow to 180,000 members by end of this year. The majority of members’ age profile is between 25-40 years old.

3. Hai-O’s gearing ratio remains very healthy as the group has very little debt. Currently, the Group only has short-term borrowings of RM3.05 million from a banking facility solely used for working capital. More than 80% of sales are transacted in cash. As at 30 April 2017, Hai-O’s cash and cash equivalents and short-term investments was RM135.04 million, which translates to 47 sen in cash per share.

4. Since its listing in 1996, Hai-O company has distributed RM304.56 million in cash dividends. A shareholder asked the management whether they had any plans to further increase the dividend. The management indicated that they have already increased the dividend per share to 16 sen for 2017, compared to 15 sen in 2016. As the total payout represents 70% of profit after tax, it has already surpassed the company’s dividend policy to distribute at least 50% of its profit after tax.

5. In 2017, Hai-O distributed RM48.23 million (from its retained earnings) through a 1:2 bonus issue exercise to shareholders. Besides rewarding shareholders, the management aims to increase the number of shares in circulation to promote trading liquidity. However, the exercise has minimum impact on shareholders’ equity as the increase in share capital has offset the decrease in retained earnings. Hai-O also used RM1.05 million to buy back 368,100 shares. As of 8 August 2017, the Group holds 9,262,888 treasury shares representing approximately 3.1% of outstanding shares issued.

6. The management has plans to place Chinese physicians at selected retail outlets to differentiate its retail presence from competitors. Besides strengthening its brand positioning in promoting traditional Chinese medicine, the physicians also provide value-added services to customers through consultation and product knowledge.

7. One shareholder voiced his concerns about the management’s decision to close two retail outlets in 2017. The management explained the closings were part of the Group’s rationalisation strategy plan to shutter under-performing outlets. The management revealed its plans to acquire shoplots as the high mall rents have been a burden to operational costs. Hai-O has also switched from renting retail outlets to pushcarts in the mall to save on rental cost.

8. Another shareholder asked a few questions relating Hai-O’s capital expenditure, manufacturing plants and activities. The management shared that the CapEx for developing a manufacturing plant is approximately RM4.5 million. Currently, the manufacturing plants supply over 20 in-house products to Hai-O’s MLM and Retail segments. The management is optimistic about manufacturing growth as they to see more orders for the manufacturing of traditional Chinese medicine, food supplements and health foods.

With additional article contributions by Calvin Soon.

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Mitra Chen is a value investor since 2008. Prior to that, she had over 20 years experience in human resources in the recruitment industry. She strongly believes that everyone can achieve financial independence when they use the right financial methods and tools for their investments.

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