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?

Update On Hai-O

Posted last June: Hai-O Warns Of Challenging Next Year

Made the following remarks then:

Company itself said 'next financial year will be challenging because of the slowing down in sales activities in the MLM division'.

Ok, as it is, on a y-y comparison, everything is still rosy as its earnings is 70.9 million. Last year it was 52.3 million.

However, since the company is warning of a challenging next year, perhaps its best for one to look at the sales/earnings numbers on a q-q basis.

Here is the most recent 4 quarters.

How?

Is the slowdown apparent?

On Sep 29, I made another posting Quick Update On Hai-O Earnings

Last night Hai-O reported its earnings.

Trailing earnings shows earnings of 35 million but based on recent earnings one would not be too shocked to see earnings at around 25-26 million for fy 2011.

What's the best way to put this ttm into perspective? Won't a simple comparison versus what Hai-O had done over the recent few years be useful?

Hai-O had an incredible run. Last fiscal year 2010, it recorded some 70 million in earnings, which was extremely impressive given that it's fy 2009 earnings of 52.290 million (It's fy 2009 earnings was itself impressive, yes?)

However, the current TTM (trailing twelve month) numbers looks shockingly poor at 35.393 million and as mentioned earlier, based on recent quarterly earnings one would not be too shocked to see earnings at around 25-26 million for fy 2011.

Clearly that the great growth story of its MLM business model is simply not sustainable. Yup, some high growth story cannot last forever and ever.

Quick Update On Hai-O Earnings

Hai-O reported its earnings.

This is how things look...

How?

Previous posting on Hai-O: Hai-O Warns Of Challenging Next Year

Hai-O Warns Of Challenging Next Year

On Star Business: Hai-O records big drop in Q4 revenue

• Saturday June 26, 2010
  
  Hai-O records big drop in Q4 revenue
  
  PETALING JAYA: Multi-level-marketing (MLM) company Hai-O Enterprises Bhd reported a sharp drop in revenue in its fourth quarter ended Apr 30 due to stricter rules on recruitment of new members, in line with more stringent requirements set by the authorities.
  
  Net profit declined 10% to RM14.2mil versus RM15.8mil a year ago, while revenue tumbled 26% to RM98.8mil from RM132.9mil, the company told Bursa Malaysia yesterday.
  
  The group’s performance in the fourth quarter “was below internal target,’’ the company said. But strong growth in previous quaters boosted its full year net profit ended April 30, 2010 (FY10) to RM70.9mil from 52.3mil previously.
  
  The company declared a dividend per share of 14.5 sen in the last quarter, bringing its total payout to 28.5 sen per share.
  
  “The next financial year wll be another challenging year for the group in view of the slowing down in sales activities in the MLM division,’’ it said.
  
  To counter this, the group plans to launch new health supplements and increase the range of its skincare products, as well as organising more workshops for existing members.
  
  “The board of directors is of the opinion that the group would continue to be profitable in FY11,’’ it said.

Company itself said 'next financial year will be challenging because of the slowing down in sales activities in the MLM division'.

Ok, as it is, on a y-y comparison, everything is still rosy as its earnings is 70.9 million. Last year it was 52.3 million.

However, since the company is warning of a challenging next year, perhaps its best for one to look at the sales/earnings numbers on a q-q basis.

Here is the most recent 4 quarters.

How?

Is the slowdown apparent?

Article On Hai-O On Star Business

I was bemused when I read the following article yesterday on Hai-O: Hai-O sales rise on lower petrol prices

Firstly the company's financial controller Hew Von Kin talks about the current company's prospects.

• PETALING JAYA: Hai-O Enterprise Bhd says consumer sentiment improved in November, thanks to lower petrol prices.
  
  “October was our weakest month in the second quarter but sales showed improvement last month as the Government started to reduce petrol prices and consumers geared up for the festive season,” financial controller Hew Von Kin told StarBiz.

• “We expect the wholesale and retail divisions to weaken after Chinese New Year while the MLM division is likely to stay resilient as people seek part-time jobs to supplement their income,” he said, adding that new MLM memberships would offset the slower spending next year.
  
  Hai-O launched a series of healthcare supplement products last weekend, which have received positive response so far.
  
  “We plan to launch a range of skincare products in the first quarter of next year. We have already secured the approvals and are currently working on the packaging and design,” Hew said.

Then the following passage caught my attention.

• Last week, Hai-O reported a stronger net profit of RM10.9mil for the second quarter ended Oct 31, or almost 20% higher than the previous corresponding period of RM9.1mil.
  
  Revenue jumped to RM87.3mil from RM80.5mil a year ago, thanks to higher contribution from the wholesale and MLM divisions. For the first half year, net profit was RM24.5mil on revenue of RM200.2mil.
  
  On a quarterly basis, second-quarter net profit was lower by 20% from the first quarter’s net earnings of RM13.6mil.
  
  In the filing to Bursa Malaysia, the company said the weaker quarter-on-quarter results were due to smaller contribution from MLM.
  
  However, the retail business achieved better sales in the second quarter from the first, thanks to members’ sales promotions and higher margins from its house brand products.
  
  Hai-O’s internal growth target for the financial year ending April 30, 2009 was to achieve 5% in sales, it said.
  

I always dislike such comments. Yes, on a yearly same quarter comparison, Hai-O numbers looked great but there is drastic weakness in when compared on a q-q basis for the past few quarters.

As posted in Review of HaiO's Latest Quarterly Earnings

• Which means, if one looks at the very immediate picture, HaiO's earnings are deteriorating at an extremely tremendous pace. The last three quarters, its earnings has went from 18.942 million to 13.602 million to only 10.889 million!

For me, I am bemused at the financial controller. Why didn't he mention or discuss on why Hai-O's earnings has been worsening each quarter?

And that 5% growth rate. That statement as a stand alone was grossly inaccurate. Truth is, Hai-O had stated CLEARLY that they are forced to reduce their growth rate from 20% to a mere 5%!

As stated in its own earnings notes.

• Due to the current global financial turmoil and weak market condition, the Company had revised downward its growth rate from 20% to 5% as mentioned above. However, the Company will strive for better performance in this challenging environment and work towards higher growth rate.

For a company who was projecting almost 20% growth and being forced to revise downwards to a mere 5% due to weak market condition, totally differs that saying a company is forecasting a 5% growth. For as a stand alone, it does not tell the whole story!

And the article ends by saying.

• OSK Investment Bank, in a report, said next quarter’s performance would stay strong driven by the retail division, which would benefit from the Chinese New Year celebrations next month.
  
  “Hai-O’s attractive incentives will continue to drive the expansion of its MLM network and help the group to expand into new markets, like Indonesia, which will kick-start in March,” OSK said.
  
  Hai-O is cash-rich with a war chest of almost RM48mil and generates good dividend yield of about 13%.

Again I am bemused.

Yes, Hai-O currently has a war chest about 48 million.

However, let's be more accurate here!

This war chest is getting smaller, yes?!!!!!!

As posted earlier in my posting, Review of HaiO's Latest Quarterly Earnings

• 
  
  Compare the cash/short term investments versus the same period last year. Impressive?
  
  Want to compare to previous quarter, Quarterly rpt on consolidated results for the financial period ended 31/7/2008?
  
  
  

Last quarter, it had cash equivalents of 60.326 million. It's now only 48 million!

Now that depicts a totally different picture, doesn't it?

Review of HaiO's Latest Quarterly Earnings

Hai-O reported its earnings tonight.

Net earnings came in at 10.889 million.

If you look at the above summary from Dow Jones newswire and compare it versus the same period last year, Hai-O's earnings is looking marvelous! Simply superb!

However, looks can be very deceiving.

It was just in Sept 2008, I made the following posting, Short Note On Hai-O Earnings

Quote:

• Quarterly earnings was at 13.602 million, which is a huge worry, for its previous quarter in June 2008, HaiO reported reported earnings of 18.942 million.

Which means, if one looks at the very immediate picture, HaiO's earnings are deteriorating at an extremely tremendous pace. The last three quarters, its earnings has went from 18.942 million to 13.602 million to only 10.889 million!

This is alarm bells for me!

And if one sole reason to buy HaiO was because HaiO because of its growth story, well its growth story is no longer there. So would one's justification to hold this stock remain true?

How?

I took a quick look-see at some important yardsticks in its balance sheet. I wasn't impressed.

Compare the cash/short term investments versus the same period last year. Impressive?

Want to compare to previous quarter, Quarterly rpt on consolidated results for the financial period ended 31/7/2008?


And yes, HaiO's debts is growing slowly but surely!


Now when you compare these debts to the posting I made on HaiO back in April 2008, Review Of Hai-O

Look at the table posted again.


Compare those ttm numbers versus what we are seeing now. Like what you see?

And here is HaiO's attempt to explain why so terrible.

• Material changes for the current quarter as compared with the immediate preceding quarter
  
  For the second quarter under review, the Group recorded lower profit after taxation of RM 11.15 million as compared to the immediate preceding quarter of RM 13.58 million. The lower profit was mainly attributable to lower revenue achieved by the MLM division, due to the Ramadan festive season in the second quarter which had slowed down the sales activities. However, the retail division had recorded higher revenue and profit as compared to the immediate preceding quarter, contributed mainly by the success of its members’ sales promotion and higher margin contribution from its house brand products.

And this is what the company is now saying about its current prospects.

• Due to the current global financial turmoil and weak market condition, the Company had revised downward its growth rate from 20% to 5% as mentioned above. However, the Company will strive for better performance in this challenging environment and work towards higher growth rate.

Short Note On Hai-O Earnings

Blogged last April Review Of Hai-O and More On HaiO

HaiO reported its earnings last Friday.

Quarterly rpt on consolidated results for the financial period ended 31/7/2008

Quarterly earnings was at 13.602 million, which is a huge worry, for its previous quarter in June 2008, HaiO reported reported earnings of 18.942 million. (see Quarterly rpt on consolidated results for the financial period ended 30/4/2008 )

And despite the tremendous weakness on a quarter-to-quarter comparison, folks at OSK has discounted it by suggesting that it's mere seasonal weakness. Here's what OSK said in their earnings review of HaiO's earnings.

• Hai-O registered another set of strong results with 1Q earnings of RM13.6m, 70% higher than our estimates, while revenue and earnings expanded 90.5% and 94.3% respectively. All divisions recorded positive revenue growth, especially the MLM division, which grew 126.6%. Q-o-q earnings were, however, 28.3% lower due to seasonal factors as 1Q is the weakest quarter for the entire year. We are reducing our earnings forecast and target price despite the strong 1Q earnings in view of the weaker consumer sentiment due to higher fuel price, CPI and bearish market. Nevertheless, Hai-O is still a BUY with target price of RM4.50.

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?

Review Of Hai-O

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?

Review of Bursa Station - Day 3

Today I decided to test Bursa Station ability to provide me with information from an investor perspective.

And since I had been chatting a lot on every one's favourite 'investor', bullbear, from FusionInvestor chatbox, I decided to make this a posting with dual purpose: A review of HaiO and A Review of Bursa Station.

First I add Hai-O into my Stock list.

With the cursor clicked on HaiO, I made a right click. A new window pops up and I chose Financials.


My immediate attention was where I drew the arrow. See how it states as 2008 Q3 and the previous quarter indicated 2007 Q2. An error?

So I decided to look at my other feeds.

The above was from RHB and the bottom was from Kenwealth, who uses KLSE tracker software.


And it would appear that everyone is following what's published from HaiO on Bursa website. Quarterly rpt on consolidated results for the financial period ended 31/1/2008 - indicated 2008 Q3 while Quarterly rpt on consolidated results for the financial period ended 31/10/2007 - indicated 2007 Q2. But since Hai-O had already reported its FY 2007 earnings, the quarterly earnings reported by Hai-O in Dec and Sept were wrongly labeled. ( I would not fault Bursa Station here)

Moving on, I scroll down the financial pop-up from Bursa Station on Hai-O.

Neat. The first line indicated a drastic increase of the number of shares and checking Bursa Malaysia website, this increase was caused by a 1:5 bonus issue back in Aug 2007. And as explained by Bursa Station the figures shown are extracted directly from company announcements without any adjustments.

However, as an user, if Bursa Station was to be my one and main financial portal that has everything, then perhaps Bursa Station should come out with a better layout and design that provides the user better flow of information. Remember, as it is, I had only looked at 2 pages, and already I had to make clicks to other websites for better understanding of what's happening here.

Next, I noticed there is no indication of the total cash and total borrowings. Not sufficient! This would mean that I would have to dig out the information myself.

On another note, as an investor, note the investments line on HaiO's balance sheet.

The next page is I see when I scrolled down is the cash flow.

And then at the end is the financial ratios below.


Comments on the EPS line.

Yeah, so many ways to interpret EPS, makes you wonder why folks use PE as a main criteria

Anyway, as it is now, HaiO has some 82 million shares. Last year few years, it had only around 68 million shares. So what Bursa Station is doing here is it calculated all the previous years earnings per share based on a share base of 82 million shares. Yes, it's an adjusted eps figure. Some might like this setting but some might not.

Actually I find it lacking but for many, these information on Bursa Station should probably be enough.

And while right clicking on the stock quote on Bursa Station, I discovered that Bursa Stations offers tick charts!

Two windows opens up. One empty window and one the tick charts. (I am puzzled at the empty window!)

Of course, the main issue here is why a different charting within Bursa Station?

Anyway, it looks messy.

The lower two windows draws the ROC and MACD. I do not like it and I removed both of them via the drop down boxes on the top left. I then took out the Moving Averages too by clicking on the small SMA boxes.

A much cleaner look yes?

The colors of the candles and all of their indicators can be adjusted.

The min ticks offered are the 1, 2, 3, 4, 5, 10, 15, 10, 30 and 60.

So with this tick charts, all my early grouses on Bursa Station were answered except for price adjustment. For example, the below chart shows HaiO on a one year time frame. And the massive gap down in the chart on Sept 2007 is caused by the bonus issue. Again, perhaps Bursa Station should offer the option of having an adjusted price chart and a non-adjusted price chart.