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Thursday, September 5, 2013

Zhulian Corporation Berhad - Thai Market To Drive New Growth Era!


We are initiating coverage on Zhulian Corporation Bhd (“ZHULIAN”) with an OUTPERFORM rating and TP of RM4.05 (with a potential total return of 36.9%) based on a targeted PER of 12.5x over FY14E EPS of 32.4 sen. An under-researched stock, ZHULIAN currently trades at 9.6x Fwd PER, at a discount compared to its peers within the multi-level marketing (“MLM”) sector such as Amway (17.8x) and in line with Hai-O (9.8x). Its current valuation appears conservative based on the following; (i) ZHULIAN’s market cap is nearly 3 times bigger than Hai-O’s; (ii) ZHULIAN’s position in both regional and domestic Bumiputra market is more dominant compared to Amway and Hai-O; and (iii) ZHULIAN offers the highest earnings visibility in terms of EPS growth and a net dividend yield of 6.3%. We estimate FY13E-FY14E net profit of RM129.8m (+11% YoY) – RM149.1m (+15% YoY). We believe this home-grown MLM giant is ripe for a PER re-rating upwards due to its current cheap valuation and excellent growth prospects.

Thailand to drive the re-rating story. ZHULIAN (THAILAND) LTD is now the Top 3 MLM companies in Thailand, and also the major contributor to the group's total revenue. In last 5 years, export revenue has recorded a phenomenally strong CAGR of 25.6% vs. other players like Amway and Hai-O which mainly focuses on the domestic market. The group has an absolute first-mover advantage over its peers in the regional market due to its early penetration since 1996. 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.

An established domestic MLM brand name. Known as a leading MLM giant in Malaysia, the majority Bumiputera population made up about 90% of ZHULIAN’s members. Its strong branding within the community will propel ZHULIAN to cash in on this consumer category which is experiencing the fastest growth in terms of population and income.

A complete value-chain business model. Around 80% of ZHULIAN’s products are manufactured in-house in Malaysia which enables better cost and supply control whereas its peers mainly outsourced their manufacturing requirements at a higher cost. Hence, this has historically resulted in strong EBIT margins (average of 24% in the past five years vs. peer average of 16%). They will also benefit from a stronger USD against the Ringgit where every 5% appreciation in USD will result in a 10%-11% increase in earnings.

Highest dividend yield among MLM sector. As at 2Q13, the group is sitting on a cash pile of RM106.4m (RM0.23/share) and zero debt. Riding on the group’s minimum 60% dividend payout policy, we are anticipating a payout of 16.9 sen and 19.4 sen NDPS in FY13E and FY14E respectively. This implied an attractive net dividend yield of 6.3%, higher than Amway (5.2%) and Hai-O (5.6%).

Hidden gem amongst consumer stocks. ZHULIAN is an under-researched stock in the consumer sector with only one research house coverage. The stock is trading at an undemanding 9.6x Fwd. PER, which is at a deep discount against its peer Amway (17.8x) and in line with Hai-O at (9.8x). We pegged Fwd PER of 12.5x in FY14E to value ZHULIAN at a TP of RM4.05 as we postulate that the stock deserves to trade at premium to Hai-O (OP; TP: RM3.00 on targeted PER of 11.8x) given that it is stronger in terms of networking, earnings growth, dividend yield and market cap.

Source: Kenanga

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