Fundamental Analysis of Hai-O Enterprise Berhad (HAIO) as of FY15 by L. C. Chong At the time of writing, I owned shares of HAIO. http://lcchong.wordpress.com https://www.facebook.com/groups/285121298359919/

1. HAIO
FUNDAMENTAL ANALYSIS
Financial Year 2015 (30 April 2015)
17 December 2015
L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
Stock analysis in this presentation may not neutral because I have incorporated my
risk appetite and principles in the analysis.
All figures in MYR and in '000s, except per share data
2

3. DECLARATION OF INTEREST
• At the time of writing, I owned shares of MAYBANK.

4. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.

5. CHANGES
• 9 Oct 2015 – First write up of HAIO in PowerPoint format
• 7 Dec 2015 – Applied new template
• 17 Dec 2015 – Added few illustrations, and tweaked presentation of economic
moats

6. REFERENCES
• HAIO vs. AMWAY vs. ZHULIAN

7. BUSINESS PROFILE
• Principally engaged in the wholesaling and retailing of herbal medicines and
healthcare products, investment holding and property holding
• Business segments:
Wholesale
Multi-level
Marketing
Retail

8. BUSINESS PROFILE (CONT.)
• Wholesale – Includes wholesaling and trading in herbal
medicines and healthcare products, herbs and tea
• Over a period of 30 years, HAIO have secured and
accumulated exclusive agency rights for importing and
distributing in Malaysia more than two hundred branded
products from China
• The sole distributor for over 50 renowned brands
• Hai-O supplies to more than 100 wholesalers and 2,000
retailers, including Chinese medical halls and Chinese
medicine clinics, restaurants, mini markets, as well as
supermarkets

9. BUSINESS PROFILE (CONT.)
• Multi-level marketing – Includes operating multi-level direct marketing of health
food, healthcare, wellness and beauty products
• 140,000 distributors throughout the country, and 52,000 core distributors
• About 80% of its members are Bumiputera and approximately 2,500 new members join
its network each month
• High payout ratio of 60% to its distributors and no breakup period.

10. BUSINESS PROFILE (CONT.)
• Retail – Includes operating retail chain stores
• 69 retail stores and 9 franchise outlets throughout the country
• These retail outlets carry an extensive range of Traditional Chinese Medicines (TCMs),
teas, health tonic, wines, gift packs or hampers and other healthcare products
• Some of these stores are also providing integrated medical services by making available
in-house consultations by qualified TCM physicians.

11. OWNERSHIP SUMMARY
PUBLIC AND OTHER
48%
INDIVIDUALS/INSIDERS
37%
CORPORATIONS (PRIVATE)
14%
INSTITUTIONS
1%
Position Date: 21 Aug 2015

12. TOP 5 SHAREHOLDERS
KAI HEE TAN
33%
AKINTAN SDN BHD
22%
SIOW ENG TAN
20%
EXCELLANT
COMMUNICATION SDN BHD
15%
KEE SIONG CHIA
10%
Position Date: 21 Aug 2015

13. OWNERSHIP ANALYSIS
• Holdings of institutions in HAIO is very small
• Liquidity of this counter is not bad, but volatility sometimes is quite large
• The shareholder with the largest stake in HAIO is Kai Hee Tan with a 11.7% stake
• This is a typical pattern of a counter where majority of shareholders are individual
and public.

14. SHARE BUY-BACK
• HAIO management has been issuing many share buy-back, in order to increase
treasury shares
• This corporate exercise provided some good supports, especially when the market
sentiment is not so positive
• Key members in the management also regularly increase their holdings
• These actions sent a good message to the minority shareholders that prospect of
this company still promising.

15. SHARE BUY-BACK (CONT.)
193,000
194,000
195,000
196,000
197,000
198,000
199,000
200,000
30-Apr-11 30-Apr-12 30-Apr-13 30-Apr-14 30-Apr-15
Number of Outstanding Shares

16. ECONOMIC MOATS
• Cost Advantage – Narrow
• HAIO enjoys high gross profit margin above 30% in average
• The issue is the strengthening of USD against MYR will result in higher cost of material
• Switching Costs – None
• There are various of choices in market
• Network Effect – Wide
• More than 100 wholesalers and 2,000 retailers
• 140,000 distributors throughout the country, and 52,000 core distributors
• 69 retail stores and 9 franchise outlets throughout the country

17. ECONOMIC MOATS (CONT.)
• Intangible Assets – Narrow
• Brand name of HAIO is well known in Malaysia local market, but AMWAY is very strong
competitor
• Efficient Scale
• Not available or not applicable.

18. ECONOMIC MOATS (CONT.)
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
ROIC 18.7% 20.0% 25.0% 19.5% 12.7%
CROIC 4.1% 23.9% 17.6% 10.5% 11.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
ROIC and CROIC
Even if ROIC and CROIC above 10%,
but both ratios declined since FY2013.
This indicates that economic moats of
HAIO has been eroding due to stiff
competition.

19. PROFITABILITY
200,000
210,000
220,000
230,000
240,000
250,000
260,000
270,000
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Revenue

20. PROFITABILITY (CONT.)
• From FY11 to FY15, FY13 recorded the highest revenue (FY13: 266 mln). However, its
revenue dropped -4.9% in FY14 and further -5.3% in FY15
• Decline of revenue is mainly due to the following challenges/issues:
• A slowdown in the global economy, which will cut the purchasing power of consumers
• HAIO’s sales challenged by the rising cost of living coupled with implementation of GST
in 2015
• Stiff competition among MLM players
• Its MLM division continued to struggle with the new product strategy of focusing on
‘small ticket’ items instead of ‘big ticket ‘items. (Kenanga 25 Sep 2014)

21. PROFITABILITY (CONT.)
48,440 48,730 50,704 56,293 56,654
125,188
141,077
166,997 149,272 135,557
43,663
42,813
40,838
40,063
40,641
5,963
6,912
7,990
7,794
7,055
0
50,000
100,000
150,000
200,000
250,000
300,000
2011 2012 2013 2014 2015
Revenue by Operating Segment
Wholesale Multi-level marketing Retail Others
Deteriorating of HAIO revenue
mainly attributed to the poor
performance in MLM segment

22. PROFITABILITY (CONT.)
• HAIO is undergoing a transformation to reduce dependency on big ticket items and
moving to health supplements, personal care and cosmetics which started in 2014
• Since then, it has introduced new small ticket items regularly
• As a result, revenue contribution from repeated sales items has doubled over the
past year to 60% in 2015, reflecting the success of the transformation effort.

23. PROFITABILITY (CONT.)
• The strategy also saw an increasing young and affluent Malay female population in
its distribution network
• This also bodes well for distributors as the current economic conditions have
become increasingly difficult for them to finance the purchase of big ticket items
with loans. (iCapital 3 Jul 2015)

24. PROFITABILITY (CONT.)
38.0% 38.2%
39.1%
36.9%
35.7%
33.0%
34.0%
35.0%
36.0%
37.0%
38.0%
39.0%
40.0%
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Gross Margin

25. PROFITABILITY (CONT.)
• Despite declining revenue, HAIO gross margin still maintain above 30%
• The downtrend of gross margin is mainly attributed to its declined revenue and the
strengthening of USD/MYR
• The strengthening of USD/MYR will result in higher cost of material.

26. PROFITABILITY (CONT.)
18.4%
20.9%
25.7%
20.0%
15.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Execution Ability

27. PROFITABILITY (CONT.)
• By Moody’s standard, for FY15, execution ability of HAIO is rated as A
• If we look back 10 years history, its execution ability ranged from A to A+.

28. LEVERAGE & COVERAGE
0.00 x
0.05 x
0.10 x
0.15 x
0.20 x
0.25 x
0.30 x
0.35 x
0.40 x
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Debt / EBITDA
By Moody’s standard, for FY15,
debt/EBITDA of HAIO is rated as Aaa.

29. LEVERAGE & COVERAGE (CONT.)
0.00 x
20.00 x
40.00 x
60.00 x
80.00 x
100.00 x
120.00 x
140.00 x
160.00 x
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
EBITA/Interest
By Moody’s standard, for FY15, interest
coverage of HAIO is rated as Aaa.

30. LEVERAGE & COVERAGE (CONT.)
61.3%
283.1% 281.2%
553.7%
435.0%
0.0%
100.0%
200.0%
300.0%
400.0%
500.0%
600.0%
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Retained Cash Flow to Debt
By Moody’s standard, for FY15,
RCF/Debt of HAIO is rated as Aaa.

31. LIQUIDITY
61 60
48
69
87
0
20
40
60
80
100
120
140
160
2011-04-30 2012-04-30 2013-04-30 2014-04-30 2015-04-30
Cash Conversion Cycle
Cash Conversion Cycle Days In Inventory Days In Receivables Days Payable Outstanding

32. LIQUIDITY (CONT.)
• HAIO’s Cash Conversion Cycle (CCC) has been increasing since FY13
• "Days in Receivables" and "Days Payable Outstanding" do not change much, but
"Days in Inventory" increased drastically since FY14. Reasons:
• The strengthening of USD against MYR resulted in higher cost of material
• Increase of inventory – This may be attributed to the transformation in reducing
dependency on big ticket items and moving to health supplements, personal care and
cosmetics which started in 2014

33. GROWTH DRIVERS
• 19 Sep 2014 – The Group has been awarded a sole distributorship of Maotai, a
famous Chinese liquor. We reckon that this will be the another source of income for
the division. However, the reception of the product remains to be seen as whether
the drink will be popular among the local community as compared to western liquor
• 20 Nov 2014 – The Company also shifted its focus from big-ticket items, such as
water filters, to consumer-centric products like beauty and health products, of which
sales have been largely consistent and recurring in nature
• In FY15, CapEx increased 137% if compare to FY14. The retail division has been
looking for high traffic location for its new outlets and will enhance its CIS image by
refurbishing its existing outlets.

34. ISSUES/RISKS/CHALLENGES
• A slowdown in the global economy, which will cut the purchasing power of
consumers.
• HAIO’s sales challenged by the rising cost of living coupled with implementation of
GST in 2015
• Stiff competition among MLM players
• HAIO’s MLM is strong in Chinese modern medicine, but as for other products, it has
weaker brand name compared to other MLM players.
• Margins erosion due to the weakening of Ringgit against USD
• 25 Sep 2014 – Its MLM division continued to struggle with the new product strategy
of focusing on ‘small ticket’ items instead of ‘big ticket ‘items.

35. SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 9 Oct 2012 2.06 2,340 390 280 3,010 8.8%
5-Y 8 Oct 2010 3.09 3,090 630 750 4,470 7.7%
10-Y 7 Oct 2005 0.336 336 3,090.22 5,796.67 9,222.89 39.3%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 2.34 as of 9 Oct 2015
3. Unit purchased is 1,000.

36. GOING FORWARD
• Next financial year will remain challenging in view of weakening domestic
purchasing power and high costs of living, resulting consumers more cautious in
spending
• Weakening of MYR against USD currency will increase the cost of import purchases.
• Despite the current slump in its earnings, coupled with the possibility of longer-
than-expected effect from the strategy shift, HAIO’s attractive dividend will be the
main catalyst for the stock.