Friday, August 13, 2010

The Great: Hai-O Enterprise Bhd

Well, I have been working to get some conservative valuation on Hai-O, which has taken a heavy beating losing 32% of their market value ever since hitting the heights at RM4.93 to RM3.34 (yesterday closing price). I remember a guy asked me is it time to accumulate this stock?

Well, before I come to that lets have a recap on what make the market suddenly turn bearish. I'm not really that good looking at charts or graph but I don't really see there are smart money "cooking up" or playing around with stock by looking at the volume - apart on the period when the stock splits which somehow excite ....people. Yea, and also the point where support seems to have broken. In fact, I told my friend the other day when it stucked around RM3.40 that my "crystal ball" the price going to drop further. So, I am a good gypsy - with an accuracy rate of what........1/10 maybe.

Anyway, what I say is, the current price drop is likely due to investors concern about its business. So if the market if so efficient, there must be something wrong with the business. I can basically categorize their business into, wholesale and retailing, MLM, energy-thing and the rest which are so-so and not so large. To cut long story short, retailing is doing well and that normally means wholesale is doing well. That heat transfer (or if don't understand energy-thingy) is promising. The rest are the rest. so good. So the worry must be the MLM which contributes more than 80% of its sales. All these due to Hai-O pro active measures to restructure its MLM segment to comply with the new DSA ammendment which sounds something like this:

(a) Presentation of scheme not to be misleading
(i) In the presentation of the direct sales scheme, a person who carries on any direct sales business shall not mislead participants by overemphasizing on disproportionately high bonus or bonus payout.
(ii) Each participants shall be provided with sales kit that includes the marketing plan and code of conduct of the company.
(b) Payment of incentives
Any person who carries on a direct sales business shall provided an incentive based on the volume or quantity of goods or services sold or distributed by each participant and not based on recruitment of persons into the scheme
(c) Participants not to purchase goods or services in an unreasonable amount Each participants is required to purchase goods or service in an amount that can be expected to be resold or consumed within a reasonable period of time.
(d) Agreement (i) Any person who carries on any direct sales business shall provide each participant with a
written contract or statement which described the material term of the agreement.
(ii) The agreement shall provide the following:
a. The participant shall be given not less than ten working days from the date of the
recruitment to cancel his membership (Cooling Of Period);
b. Upon the cancellation of his membership under Paragraph ‘a' the participants shall be
refunded all of payment as specified in the agreement; and
c. At the request of the participant, a person who carries on any direct business shall buy
pack any marketable goods sold to the participant with the previous six months at the
price not less than ninety percent of the amount paid. (Company must have a buy back
d. Any person who contravenes or fails to comply with any provision of these regulation
commits an offence.

I've taken a look at their MLM business model. They should have no problem with (a) and (b). But clause (c) might give them a little trouble as I know there are member who purchase big loads of stocks...just Google Hai-O Marketing. Clause (d) is the one that is likely impact the earnings and in fact not just Hai-O but all other MLMs that operate in Malaysia. 

I take the same view as their management or I shouldn't say that because no matter how many times any one of us calls or email their IR, they are always bullish. But, yea, I have to agree with RHB who somehow seems always bullish as well. Yes, there will be an negative impact on the shorter term but look at the longer term and what (d) could do on the longer term. You'll get quality products + committed members (no one shouting scam...hopefully) = sustainable growth. 

How about the valuation?
Gosh, you gotta love the market don't you if you invest long-term don't ya. Chances are, business "hiccup" or "below expectation" performance are likely to happen within that period. Remember how excited the experts were few months back? And now how depress they look?  
Well, I use 3 scenarios. Since the main contributor for Hai-O is from their MLM business - as for now, I take the average industry sales growth rate of 5% (got this by searching Amway on Reuters).

Scenario 1
All variables are the same as my previous valuation except I take a more conservative approach by using industry average for sales growth at 5% for the next 5 years. It'll show me RM5.15. Too optimistic?

Scenario 2
Sales take a EXTREMELY bad hit next financial year, sales drop by 50% by growing back to 5% CAGR next 4 years. I get RM3.50. Hmmmm.........

Scenario 3
If you are a bit speculative, maybe you can try wait for the next quarter report which is going to out soon and hope it turns out badly so that you can buy it even cheaper. Anyway, those investment bankers are "predicting" a bad one for the coming 2 quarter.

1, 2, 3...which one? So fickle minded one. If you ask me, I'll just say it is a good price.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately

1 comment:

Anonymous said...

Dear LuZeeker,

I like to share my views on MLM industry. To me, MLM is an industry that relies on human factors to a large extent. The founding of the MLM concept is actually fully based on human factors.

Today, the MLM model went through a lot of changes unlike the first model run by Amway, where HAIO is one of them that introduces HAIO stores which are fully owned by the management company. Correct me if I am wrong. While COSWAY operates stores that are invested by the members.

As an investor, I would not venture into any MLM companies as the whole industry throughout the globe is still under dramatic change. The MLM history in China already teach us a lot of lessons. Many MLM direct selling networks or investment companies went disappear in China especially during recession period. China remains the ban of so many direct selling companies until today, except Avon.

Anyone would be free to join or leave a MLM direct selling company. How does the company governs movement and conducts of the network? A Group Sales Leader may quit and leave behind a group of poor members. I believe the direct selling company wouldn't do much until told by the association.

To recap, there is nothing much to evaluate about when comes to human factors.