KUCHING: Offering a wide range of Chinese medicines, Hai-O Enterprise Bhd (Hai-O) recently ventured into the non-core property business, after diversifying into the technology business.
According to OSK Research Sdn Bhd (OSK Research) in its research report, its foray into the property business would reduce the reliance on its volatile multi-level marketing (MLM) segment which was affected by a slowdown in membership growth and the lower buying sentiment among its members.
Hai-O’s first quarter for financial year 2011 (1QFY11) results were substantially below estimates. The weak numbers were attributed to weak sales performance of its MLM division.
OSK Research pointed out that sales had been hit by slower membership growth following the implementation of more stringent rules on new member recruitment imposed by the authorities and the fewer working days due to Hari Raya festive season as Bumiputeras made up 90 per cent of its total members.
While concurring with this, management explained that the poor results were mainly due to lower revenue per distributor as the rules requiring members to declare the value of the products they would be able to sell to consumers had somewhat dampened buying sentiment.
The research house noted that Hai-O had also terminated more members whom it considered ‘unethical’ in their dealings and guided that new membership growth had dropped further to 1,000 members per month from 2,000 to 3,000 members per month in 4QFY10.
It also stated that the banks’ lower appetite in giving out personal loans to its members had also somewhat affected their purchasing power.
The recovery in buying sentiment among Hai-O’s members was taking longer than expected whereby members were ordering less even for the saleable products, thus the MLM division would need more than six months to recuperate, outlined OSK Research.
Nonetheless, with all the measures put in place by the task force set up to beef up performance, Hai-O was confident that its MLM division would regain momentum and continue to drive the group’s earnings.
While the venture into property business could reduce Hai-O’s reliance on MLM in the future should things work out as planned, the concern was that this would bring on more risk given that Hai-O’s MLM business was still trying to recover locally as well as establishing its footing in Indonesia, concluded OSK Research. The research house pegged Hai-O’s target price of RM1.61 per share.