April 9, 2010

HAIO - Price Target News

Stock Name: HAIO
Company Name: HAI-O ENTERPRISE BHD
Research House: OSK

Hai-O Enterprise Bhd
(April 8, RM4.40)
Upgrade to buy at RM4.42, target price of RM5.04
: We believe Hai-O is on track to achieve our FY10 profit forecast of RM72.6 million, driven mainly by better year-on-year (y-o-y) multi-level marketing (MLM) sales on a higher membership base, better y-o-y and quarter-on-quarter (q-o-q) retail sales.

The MLM division reported 9MFY10 and 3QFY10 y-o-y sales growth of 34.6% and 46.1% respectively. We believe this division will give a good showing in 4QFY10 results given the higher y-o-y number of members to date.

Compared to the same period last year, Hai-O recruited 30,000 more members. We see a y-o-y sales growth of some 20% in 4QFY10. Hai-O's 3QFY10 and 9MFY10 retail sales contracted by 19.3% and 5.3% y-o-y respectively.

While this may be cause for concern, the contraction was mainly due to seasonal factors as the Chinese Lunar New Year which took place in late 4Q. We believe the shortfall in 3Q sales would be made up for in 4Q and as such, we see better retail sales in the last fiscal quarter.

Hai-O said Chinese New Year sales were encouraging, with FY10 10-month same-store-sales growth coming in at 3.5% y-o-y.

With regard to its newly formed thermal transfer business, despite the lack of details, the management revealed that there had been some developments and that all is progressing as planned. It has also guided that the current investment cost is about RM3 million and that no additional cost is needed as yet.

Based on this piece of information, we believe the break-even period for this business could be shorter than the management's break-even target of two years.

Should this business make good progress, apart from the potentially high return on investment (ROI), this division together with the retail division should provide a strong earnings support during a downturn, which may render the group more resilient than other MLM players.

Hai-O's share price has rallied strongly since early this year, driven by its uninterrupted stream of good quarterly results. While we are maintaining our FY10 and FY11 net profit forecasts, we upgrade Hai-O to a buy at an unchanged target price of RM5.04 based on 12 times FY11 earnings per share (EPS), given there is a price upside of more than 10% after its shares have retraced by some 5% since our downgrade on March 22. - OSK Research, April 8


This article appeared in The Edge Financial Daily, April 9, 2010.

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