Looking Back At Hai-O Then And Now.

Someone asked me why I do less full review of stocks lately.

Well two reasons. The main one is that I am rather lazy. ( LOL! Totally lame! :P )

Secondly I lack motivation. (Haha! What an even more lame excuse! :P )

Well in my flawed ways, when one writes a review of a stock, one should present it in the best fullest possible way giving full consideration to the possible pros and cons on the stock. One should attempt to give both side of the story highlighting the possible positives and possible negatives about the company. To insist only the positive while brushing aside all posble weakness is way too shallow. That's my flawed personal opinion. :)

And this is where it gets tricky and tacky.

And as mentioned many times before, I always believe that any stock can go up or down on any given day. That's just how complicated and complex the market.

And no, I am not even suggesting that fundamental reasoning does not matter. I certainly dare not.

And to complicated matters, time frames complicates matters. It does.

And more so share price movement ( and yeah, it's even more complicated when different time frames are used) is used to judge one's reasoning instead of the justification of one's reasoning.

One of the most interesting example is of course, Hai-O's example, a posting which I had posted yesterday. ( Update On Hai-O ).

Now this one is certainly an interesting case since I had blogged on Hai-O back in 2008.

This was my FULL Review Of Hai-O on April 2008.

I am re-posting it in full here.

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Dedicated to Unker TK.

All data is compiled by myself from Bursa Malaysia website. ( I am liable to make an error and if I do make an error on any numbers, do let me know)

Background.

HaiO sells herbs, health suppliments, health tonics and tea. Here is the company website: http://hai-o.com.my/

Hai-O yearly earnings track record.

Numbers are always extremely interesting and can always be interpretated in many, many ways.

For example, using the bigger picture perspective, one can see from the above table that, HaiO's performance from 1999-2006 was poor. FY 2006 showed HaiO earnings 10.1 million which is a fantastic improvement from its fiscal year 2005's earnings of 5.5 million. However, I would base it on the bigger picture and would consider the fact that for its fy 1999, HaiO was already earning some 11 million. Hence the huge jump in earnings in 2006 should rather be discounted and that HaiO's earnings only turned around in 2007.

So from a bigger picture perspective, one can argue that so far, HaiO has only fantastic year which is fy 2007 and also judging from its ttm (trailing twelve months) earnings, HaiO should have another grand earnings for its current fy 2008.

Now here's another way to look at it where I can make HaiO look like one incredible growth stock!

Let me take out the FY 1999 to FY 2003 earnings. And let's look at the earnings below.

This is now looking like one incredible growth stock eh?

Firstly, here's a site for you to calculate your CAGR (Compounded Annual Growth Rate): http://www.moneychimp.com/calculator/discount_rate_calculator.htm

Let us see if we calculate the CAGR from 2003, we would get the following:

Which looks simply superb! A company growing at an annual compounded growth rate of 57% for its most recent 5 years!

And it's so good that the company has this chart on their website. (see http://en.hai-o.com.my/new/investor_financial_highlights_profit.asp )

However, if the time frame is switch to focus on HaiO's performance from 1999 to 2003, see the results below.
And the CAGR would show a terrible result.


Point is one should understand that numbers can tell different stories depending on how and where you want to look at it from.

For me, I would merely note that HaiO had a fantastic fy 2007 and this year, it should have another fantastic fiscal year.

Would I boldly declare HaiO as a fantastic growth stock? Would you?

Some would simply argue that two great years do not make a growth stock.

Some would simply argue that in HaiO's case, one should look at the bigger picture. From 1999 to current, one has a 10 year time frame, and out of this decade, HaiO has probably performed terribly for 7 years! Although the current 2 years, HaiO is performance is fantastic.

Hey, don't stare at me. I already said that it's so subjective on how one looks at a set of numbers, didn't I?

Hai-O's Current Quarterly Earnings

If you look at the table above, basically HaiO's change of fortune happened since its FY 2007 Q3 earnings.

Balance Sheet

Balance sheet is looking great lately. However, from the quarterly earnings table do note that SI denotes Short Term Investment.

And I never do like to see stuff like this in our local stocks. For me, a listed company should just concentrate and maintain their focus on the company's core business ( Did HaiO failed in this area before?) and not dabble into short term investments. Any excess cash should be simply returned to their shareholders.

From HaiO's website, from their 2007 Annual Report (634 KB) (see page 115) it states that this short term investments is in Unit Trusts!

As of the recent quarterly earnings reported last month, short term investments stood at 22.850 million. Now isn't that an awful lot of money to put into Unit Trust?

Broker Coverage

Affin, OSK and RHB Research covers the stock. So does I-Capital.

RHB in its latest report:

• Corresponding to the change in our FY04/08-10 earnings projection, indicative fair value is upgraded to RM4.64 from rm4.04 based on unchanged target PE of 19x CY08 EPS, which is at 40% discount to our CY08 target PE of 16x for the consumer sector, to reflect the smaller earnings base and market capitalisation. Maintain Outperform.

Note: I see CY08 earnings net profit forecasted by RHB is at 38.1 million. (ttm earnings indicates a net earnings of 37.6 million)

OSK in its latest report:

• Maintain BUY. Having taken into account on the current stock market condition and our downgrading in the GDP projection from 6.2% to 5.8%, we are now more conservative thus assuming the lower band of the PE and P/BV of the retail sector. Notwithstanding, our target price revised higher following the earnings revision; and rolling our numbers to FY09. We peg a target price of RM5.00 (previously RM4.60) by applying the composite of 10x (previously 12x) over FY09 EPS of 50.6 sen and P/BV of 2.6x (previously 3x). We reiterate our BUY recommendation on Hai-O.

Note: I see OSK is basing HaiO value on its estimation of HaiO's FY09 earnings, which is estimated at 42 million.

The reports can be be downloaded here: Hai-O Robust earnings driven by MLM division, Hai-O 3QFY04/08 Results Boosted by MLM and Hai-O Amazing Performance

Pros

1. Earnings have been absolutely fantastic the past 2 years or so.

2. Balance Sheet is looking fantastic. Its cash flow is simply awesome!

Concerns

1. Is this a flash in a pan?

What's driving this success for HaiO? Last June, the following article was published on Star Business: MLM and pu-er tea to drive Hai-O sales. The following section is worth noting:

• The sterling performance was due to the MLM division, more intensive sales promotions by the retail division for its royalty customer programme and additional sale of pu-er tea.
  
  Revenue contribution from the MLM division grew 84% while the wholesale segment jumped 119% in FY07.
  
  In addition, the company’s profit margins had improved, thanks to the ringgit appreciation, which lessened import costs and it saved RM1.5mil from a waiver of rental costs and reimbursement on certain expenses for leasing of a shopping complex.
  
  Higher investment income also added to the profitability, Hai-O said.
  
  In keeping to its promise to pay 50% of after-tax profit to shareholders, Hai-O has declared a final dividend of 13 sen per share, bringing the total dividend for FY07 to 18 sen a share.
  
  “We’re proud to be able to sustain our growth since we’ve been around for 32 years now,” Tan said, adding that by carrying only premium products, it was able to fetch better margins.
  
  The MLM model was also seen as sustainable as Hai-O had an average of 1,000 new recruits every month, he noted.
  
  Hai-O has started opening retail outlets in high-traffic shopping malls, such as 1 Utama, Queensbay Mall (Penang) and Pearl Point (Old Klang Road), he said, adding that previously it was focused on shoplots.
  
  Next year, another outlet is targeted to open in Mid Valley Megamall.

From a PURE investing perspective, serious consideration has to be made on the sustainability of HaiO's impressive earnings. In short, is it a flash in a pan.

As stated, pu-er tea and aggressive MLM is driving in the earnings.

Is there a sustainable long term competitive advantage in these two factors?

For example, pu-er tea. How many people you know really drinks this tea? Is it a fad? Is there a substitute equivalent? How much do you really know about this tea?

And then you have the MLM issue, all which is so highly debatble of course. Some believe strongly in such marketing strategy, while some don't because they believe that MLM simply don't last! ( The following recent article is interesting too: Top Hai-O agents earn RM1mil a year - wow, so lucrative?)

How? Would you rate this as a concern at all?

2. Is there a risk to HaiO strong cash balances?

I like to look at the past. It gives an idea what the company has done before and I used it as a rough indicator. For example, in the case of HaiO's strong cash balances, the main concern is what if the company squanders the cash by spending in an extravagant manner? Would this not be a legimate concern? After all, we are talking about investing (buy-and-hold long term) in this stock?

Back in 2003, there was an interesting article on HaiO.

(The above screenshot of the article is clickable for a larger and clearer image or u can see the same article here: http://www.hai-o.com.my/cms/layout/Printer.asp?ProductID=62 )

The following section of the article was very interesting for me:

• On why Hai-O was venturing into the IT sector, he said: “We are debt free and cash rich as we have RM8mil in fixed deposits, RM4mil in our current account, and RM20mil in overdraft facilities. Therefore, we will venture into any business if it can bring us some benefit.”

I didn't like how and what's been said. Rather arrogant in my opinion.

Firstly, HaiO then was a simple Chinese herbs player. That it wanted to venture into IT was a shocker! A shocking diversification if you asked me. And the manner it talked about its cash balances to the media was rather so arrogant!

And what's more shocking is the following table below.

As one can see from the above table, for its fy 2003. HaiO had a total cash of 13 mil. And note that the above table indicated a huge jump in the number of shares in HaiO.

And when I dig deeper, I noted that HaiO had a Rights Issue in 2003.

Now how? This gives a whole meaning of being cash rich company, yes? See, their debt free and cash rich was not via the company's hard work but this net cash resulted from a rights issue!

And what happened next was interesting.

Now if one look at its 07 Q4 quarterly earnings (Quarterly rpt on consolidated results for the financial period ended 30/4/2007), one would note..

• On 18 April 2007, the Company disposed of the entire 100% equity interest in Hai-O Informtech Sdn Bhd , comprising of 2,000,000 ordinary shares of RM 1.00 each for a total cash consideration of RM 280,000.

Invested 2 million.. sold for 280,000. What about the extras spend during this period? Remember the inital plan was to spend as much as 10 million!

And if one refer back that April 18th announcement: DISPOSAL OF SHARES IN HAI-O INFORMTECH SDN BHD (533171-D)

• 3. EFFECTS OF THE DISPOSAL The Disposal is not expected to have any material impact on the issued and paid-up share capital and shareholding of the major shareholders of Hai-O. The Disposal is also not expected to have any material impact on the net assets and earnings of Hai-O Group for the current financial year.

No material impact?

Take 2007 numbers. It said that it earned a net earnings of 22.114 million. Take this investment of 2 million. Sold at 280k. This is a loss of 1.716million. Yes it's small. BUT do compare 1.716 million to its net earnings of 22.114mil. Well that's about 7.7%.

And strangely, I do not see where and how HaiO accounts for this loss.

Anyway would you call that as an example of past extravagent spending?

Fast forward to present day.

Hai-O buying land in Klang for new facilities (See also: New warehouse to contribute positively to Hai-O in 2009 )

• Hai-O buying land in Klang for new facilities
  21 Dec, 2007
  Source: New Straits Times
  
  HAI-O Enterprise Bhd, a wholesaler and retailer of Chinese herbs and medicine, is spending RM50 million to buy a plot of land and build new facilities in Kapar, Selangor.
  
  The company will pay RM45 million to Bata (Malaysia) Sdn Bhd for a 11.2ha site, and spend another RM5 million to set up a new factory and a warehouse there, senior officials said.
  
  It has yet to finalise the building plan and manufacturing output, they added.
  
  Managing director and chief executive officer Tan Kai Hee said the company would use its reserves to pay for the land and build new buildings to expand its manufacturing output. It may also consider a private placement to raise the fund.
  
  "We are cash-rich, generating RM10 million to RM15 million annually to our reserves," Tan told reporters at the signing of a sale and purchase agreement on the Kapar land in Kuala Lumpur yesterday.
  
  Financial controller Hew Von Kin said Hai-O would use about 6.8ha of the land to build new facilities, while the balance of 4.4ha would be leased back to Bata for handsome fees.

Oh oh.

Where did I read this statement, "We are cash-rich, generating RM10 million to RM15 million annually to our reserves" before?

Dejavu again?

Some view an investment into a stock as being a business partner of the company. Now as a business partner of this business, how do you feel if your partner keeps telling the whole world that they are cash-rich?

And what about this 50 million land purchase again?

Tell me, am I biased or is the sum of this purchase simply way too extravagant? Isn't it simply excessive?

Isn't it like back in 2003. Company had no expertise in IT but yet it went in big time. And now spending 50 million to buy land.

Instead of trying to justify this so-called investment, let's focus on the size instead.

50 million is a lot of money!

Why can't this company spend 10 million instead?

Seriously, can the company not buy land and built a factory with 10 million? No other land in Malaysia?

Ok, if 10 million is not enough, how about 20 million?

Surely 20 million is enough, right?

So why 50 million?

( Note: Hai-O secured RM20m loan to finance property buy )

How? Does one see concern and risk to HaiO's strong cash balances?

And do note, HaiO has been actively buying back the company shares in the open market. And that HaiO's management has promised to return back 50% of its earnings back to the shareholders as dividends and not forgetting that it's rather active with their unit trusts investments. So much plans, eh?

And it all seems to hinges on this pur-tea and MLM earnings.

How would you evaluate your risk in such an investment?

Would you invest in this company?

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This was followed by another posting: More On HaiO

TK said:

• I was initially interested in Hai-O. However, I do not like the 50 Mil investment in property.
  
  Pu-er tea, Moo Moo, this tea, as far as I know, once being 'goreng' & some cost few thousands ringgit a kati hoo.... dun play play... There are people who buy this tea to keep (investors?), the value will goes up according to its age if it is properly kept.
  
  Re the herbs, Hai-O looks like improving in its marketing (outlet design, product packaging). I think its competitors will be 'Yu Yan Sang' I was shocked when I see the price of 'Tong Chong Chow' RM400-RM800 per pack.& I beiieve that chinese herbs business is a fat profit margin business.One of my classlmate drove Merz after joining their MLM while I was still in college. But thats before Hai-O listed... How?

Many thanks Unker TK for sharing what you know.

BullBear posted on FusionInvestor chat:

• HaiO is selling at a low PE (based on ttm-eps). It earns >25% on equity and its net profit margin >10% of its revenue. The arguments centred on its management and its business franchise. IF HaiO continues to perform, those who invested into it would have a return of x% (?5%, 10%, 30%, 50%, 100%), if it unperforms, one might lose y% (?5%, 10%, 30%, 50%, 100%), . Works out the odds (x/y), and see if you like the odds.
  
  Peter Lynch: "The very best way to make money in a market is in a small growth company that has been profitable for a couple of years and simply goes on growing." The key objective of the investor should be to avoid a major loss, the occasional huge winner will offset a number of small losses." "When the news seem terrible, that's when you make the big money in the market."

My dearest BullBear,

A low PE stock means only one thing and that is the stock is trading on a lower valuation compared to what it is currently earning.

Some simply consider that what is happening is the stock is being ignored in the market despite its impressive earnings.

Why?

The market could be wrong and that perhaps this is a stock that's an ignored gem. Yeah, the classical hidden gem and if this is the case, investors who invests in the stock could be rewarded for their stock selection.

However, on the other hand, sometimes the market could be right and that they do sense something is not right within the stock.

And because of this reasoning, I have always realised that a low PE stock does not make a stock a QUALITY stock.

It just means the stock is trading 'cheaply'.

It could be a bargain but it could also be a trap.

In this instance, HaiO is obviously trading cheaply compared to its current earnings.

Now, yes I've raised the concerns on the management and business model.

In every investment reasoning I always evaluate my pros and cons in any investment opportunity.

Yes, HaiO is making tons of money but what's the concerns? What's yours? Well mine are the two simple issue, management and business model.

Main issue here is, are the concerns that I raised legitimate?

Are you comfortable with a MLM business model? Would you invest and buy-and-hold for the long term in such a business?

The issues I raised about the management. Well, did it not happened? Was it not legitimate?

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:)

Ah.. I never got the answers for the questions I raised in the posting More On HaiO

But that's not important.

LOL!

Hai-O soared. Did you make money?

And here's the chart since 2008. Note where I had drawn the line when I made that posting. (I believe the chart had adjusted and priced in the 'bonus and stock split' exercise in 2010)

Nope, this is not ego booster posting and not certainly not a I told you so posting.

Let's look at the Pro and Cons.

The pro.

• 1. Earnings have been absolutely fantastic the past 2 years or so.
  2. Balance Sheet is looking fantastic. Its cash flow is simply awesome!

The earnings continued to soar and I have to add that Hai-O was rather generous with their dividends too.

Needles to say, the stock soared. CHECK!

Now the cons.

• 1. Is this a flash in a pan?
• 2. Is there a risk to HaiO strong cash balances?

And the questions I had raised on the other posting.

• Yes, HaiO is making tons of money but what's the concerns? What's yours? Well mine are the two simple issue, management and business model.
  
  Main issue here is, are the concerns that I raised legitimate?
  
  Are you comfortable with a MLM business model? Would you invest and buy-and-hold for the long term in such a business?
  
  The issues I raised about the management. Well, did it not happened? Was it not legitimate?

Well, as we all now today, that flash in the pan lasted much longer. The boom in Hai-O's earnings caused by the incredible growth in Hai-O's MLM's business model, lasted much longer.

And the stock went up, up and awaayyyyyyy!

Buyers and investors of the stock was well rewarded for taking the investing risk in the company.

But as stated as one of the cons of the business is the MLM business model itself. As many would know, the MLM business model simply isn't sustainable for the long term.

If had one bought the stock in 2008, would one be holding it and loving it forever and ever and watch the stock price sink lower and lower the past year?

Or should one recognise that business model had taken the turn for the worst and recognise that the earnings had been slowing down badly ( do see yesterday Update On Hai-O ) and perhaps the best option is to exit the investment?

Or should one still consider to HOLD because they simply believe in the buy and hold investment theory?

Ah... don't ask me. I have no answers for I am not the friendly investment advisor.

LOL!

Yup, exactly!!!

My talk or writing is simply way too cheap. :=)

But isn't this simply too interesting?

Buyers who understood the pro of the stock would have been rewarded handsomely and if the buyer understood clearly that MLM business growth cannot last forever, certainly they would have understood that there's a time frame involved with such an investment.

ps: How about Hai-O today?

Simple question I would ask ... 'Is Hai-O today the same as Hai-O back in 2008'?

What's the difference then and now?