Direct growth June 18, 2007

THE STAR

Direct growth
Monday June 18, 2007

The Malay community seems willing and able to buy a lot of health and nutritional products from direct-selling companies.

Hai-O Enterprise Bhd reported on Friday a net profit of RM7.8mil for its fourth quarter ended April 30, 2007, up by almost 200% from the same quarter last year. Much of that surge was attributed to its direct-selling subsidiary in which most of its customers are Malays. It was also attributed to successful launches of new products.

Zhulian Corp Bhd, which distributes its products entirely through direct selling, sprang a surprise through the sheer size of its earnings when it was listed in April. The company has a good five-year track record, with a profit after tax of RM53.9mil last year.

In addition, Zhulian forecast a net profit of RM63.9mil this year, which is exactly the same profit that Amway Holdings Bhd made last year.

The interesting aspect of this is that while their profit levels are comparable, Zhulian's total market value of RM466mil is less than half that of Amway's RM1.1bil. There is, of course, one major difference. Zhulian has been listed just two months, while Amway has a longer track record as a business as well as a listed company.

Zhulian's directors had made an offer for sale of RM1.23 a share. The shares were initially poorly received in the market, trading to a low of RM1.02 last month.

That initial reception could be due to an earlier disappointment with CNI Holdings Bhd, also a direct-selling company, which failed to meet its profit forecast. CNI had forecast it would make a profit after tax of RM48.3mil in 2005 but it delivered a profit after tax of RM29.4mil.

A favourable report on the Penang-based Zhulian by SBB Securities a week ago may have helped lift its share price to RM1.36. There are several reasons to believe there is a certain quality in this company.

Its CEO and major shareholder Teoh Beng Seng seems to think so. He bought more Zhulian shares when the price fell below its initial public offering price, including a block of 25 million shares at RM1.18 each for a total of almost RM30mil last week.

Zhulian may meet its profit forecast. Just prior to its listing, it reported a net profit of RM15.3mil for its first quarter ended Feb 28, 2007. It reported holding net cash of RM102mil on that date, but this would be reduced to about RM70mil after it uses a portion of that to build a new plant.

Being cash-rich and cash generative, the company's board declared an intention to distribute 60% of annual earnings. It forecast earnings per share of 18.5 sen, from which it would pay a net dividend of 11.1 sen a share this year. That works out to a yield of 8.2% at a share price of RM1.36.

Like Hai-O, Zhulian sells its products mainly to the Malays in its domestic market, although it is successfully replicating its marketing model in Thailand which contributed RM202mil to group revenue last year.

There is another similarity between the two companies in that nutritional products also form a large component of Zhulian's revenue. Zhulian produces over 640 products under eight product groups, including gold-plated fashion jewellery.

Although its management has kept a low profile, it is savvy in managing the company to meet investors' expectations. Its track record shows the management's successful efforts in increasing profit margins and return on equity (ROE). Hence, net profit margin stood at 26% while ROE was 29% last year, both of which are very high levels of performance.

Direct selling has shown to be a cash generative business. Berjaya Corp Bhd knew that too. It took private Cosway Corp Bhd, which was de-listed earlier this month. Cosway reported a net profit of RM32mil for the first nine months of its latest financial year.