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Saturday, September 7, 2013

Re-rating in store for Zhulian?

Source: http://www.thestar.com.my/Business/Business-News/2013/09/07/Rerating-in-store-for-Zhulian.aspx

MULTI-level marketing (MLM) company Zhulian Corp Bhd, once labelled an undiscovered gem, has performed quite well since the beginning of the year.

Its stock price has risen some 9% year-to-date, outperfoming the benchmark index which is up by about 3%.

Its operations which are located in South-East Asia have been steadily building market share and this has translated into earnings growth over the years.

Balance-sheet wise, Zhulian is in a net cash position with an enviable cash pile of some RM106mil.

And now, it appears that is it ready for a re-rating, says one research house.

According to a report by Kenanga Research which initiated an “outperform” call on the company on Thursday, Zhulian’s Thailand business, which is now among the top three players in that country, is set to drive a “re-rating” story on the firm.

In the last five years, Zhulian’s export revenue has recorded a strong compounded annual growth rate or CAGR of 25.6% against its closest peers likeAmway (M) Holdings and Hai-O Enterprise Bhd which mainly focus on the domestic market, it points out.

“Going forward, export revenue to Thailand is expected to continue growing at an average of 20% per annum, underpinned by the higher population and low per capita sales base compared to Malaysia.”

The report goes on to point out that around 80% of Zhulian’s products are manufactured in-house in Malaysia which enables better cost and supply control whereas its peers mainly outsource their manufacturing requirements at a higher cost.

This has historically resulted in strong earnings before interest and tax (EBIT) margins for Zhulian - an average of 24% in the past five years versus peer average of 16%.

In the current environment of a strong greenback, Zhulian stands to benefit where every 5% appreciation in the US dollar will result in a 10% to 11% increase in earnings, Kenanga, which is the only research house with a recent report on Zhulian, says.

The stock is trading at an undemanding 9.6 times forward price earnings ratio (PER), which is at a deep discount against its peer Amway (17.8 times) and in line with Hai-O at (9.8 times).

Premised on such factors, more upside is on the cards for Zhulian.

“This MLM giant is ripe for a PER re-rating upwards due to its current cheap valuation despite excellent growth prospects,” Kenanga says.

It has a target price of RM4.05 on the company which translates into an upside of 25% above its current price of RM3.24.



Too conservative?

Detractors meanwhile argue that more could be done with the amount of cash that Zhulian - which manufactures and trades a wide range of products including health and beauty products - has.

There are no major expansion plans, says one investor who has invested in Zhulian for a couple of years.

In its Annual Report 2012, Zhulian says for this current financial year, it will “increase its product mix, extend market reach and expand its distribution network.”

“While it has its business strategy in place, shouldn’t its cash be put more to work?

“Although it enjoys first-mover advantage in key Asean markets, could it be a matter of time before competitors catch up?”

Zhulian first went into Thailand and Indonesia in the mid-1990s.

Comparatively, Amway has its business mainly in Malaysia and Brunei while Hai-O started moving into the Indonesian market a couple of years ago.

Zhulian reportedly has some 674,100 distributors across Malaysia, Thailand, Indonesia and Singapore while Amway has about 244,000 distributors and Hai-O, some 171,000.

As a dividend play, Zhulian has a minimum dividend payout ratio of 60% of profits.

Although its net dividend yield is envisaged to be about 6.3% by FY14 against 5.2% to 5.6% of its peers, the yield is lower compared to other companies half its market value.

Property firms like Hua Yang Bhd, for instance which also record relative stable earnings and are trading at undemanding valuations are already paying out dividends of at least 8%.

“If dividend yields are what investors are looking for, I would think there are other choices in other industries,” remarked one market player.

That said, the company’s current cash position certainly allows it to pay out higher dividends in the future.

For FY12, Zhulian’s net profit jumped some 23% to RM117.09mil from the RM95.32mil a year ago on higher export and local sales.

The company’s revenue was up 26% to RM450.425mil year-on-year.

For the current six months to May 31, Zhulian made a net profit of RM67.7mil, 18% higher than the RM57.5mil for the same period a year earlier.

Kenanga estimates that it will make a full year net profit of RM130mil for FY13.

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