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Management Discussion And Analysis ("MD&A")
 
 
Introduction

This MD&A is to provide information on major aspects on the financial performance of Hai-O and its subsidiaries ("Hai-O Group" or "Group") and actions taken to achieve these financial results, outline the actions taken by the Group to operate in a sustainable and reliable manner as well as highlights of the Group's business strategies for the upcoming financial year.


The information contained in this MD&A may include some forward-looking statements that are subject to risks and uncertainties, which may cause some variances between the actual results and the expectations communicated in these forward-looking statements. Accordingly, these forward-looking statements should not be construed as a forecast of Hai-O Group's future performance. Given such uncertainties, readers are cautioned and advised not to place undue reliance on these forward-looking statements.


Operating Structure

We continue to operate under 3 core business segments i.e. Multi-Level Marketing ("MLM"), Wholesale and Retail, which collectively contribute approximately 93% of Hai-O Group's earnings for the financial year ended 30 April 2019 ("FY2019"). Our non-core divisions of manufacturing, credit & leasing, insurance agent, investment holding and property holding contribute approximately 7% of the Group's earnings.


The Group operates primarily in Malaysia with a total of 96 business setups comprising:


  • 37 MLM branches, stockists and sales points spanning across both Peninsular and East Malaysia as well as 1 branch in Brunei;
  • 57 retail chain stores and franchises, primarily located in the Klang Valley, with a foothold in all major states in Malaysia; and
  • 2 international-standard manufacturing facilities with accreditation from ISO, HACCP, GMP and US FDA. One of our manufacturing facilities located in Klang, Selangor is Halal certified by Jabatan Kemajuan Islam Malaysia (JAKIM).

The Group's products are predominantly distributed locally. The Group's ventures in Brunei and Indonesia have not seen material development during the year.


During the FY2019 financial year, we remained focused on delivering returns to shareholders. The Group's business initiatives and actions were supported by a strong balance sheet and commitment to improve operational efficiency while managing risks. This has helped us to withstand many unforeseen challenges during the year coming from both the domestic and global fronts. In Malaysia, the unexpected change in government brought significant uncertainties in terms of policies which affected Hai-O directly and indirectly. The transition from the Goods and Services Tax ("GST") to the Sales and Services Tax ("SST") regime has directly affected our core consumer businesses as consumers deferred purchase decisions pending clarity of the new tax regime. In addition, various policy uncertainties also dented consumer confidence and led to weaker overall spending as consumers turned more cautious. Externally, escalating trade frictions between the US and China have taken a toll on economic activity in Asia as evident in slowing export activities almost across Asia.


In response to the challenging domestic and global economic conditions, we have broadened our products base to focus on small ticket items in FY2019, stepped up promotional events and rewards to drive sales, drove efforts to achieve greater productivity, cost efficiency and optimisation, while continuing to manage and capitalise on threats/opportunities arising from digitalisation. We believe these proactive business initiatives implemented during the year would put us in good stead for the future.


Financial Results

As a result of the prolonged weakness in consumer spending, the Group recorded a 28.9% drop in revenue to RM328.4 million in FY2019, compared with RM461.7 million recorded in the previous financial year. This was primarily attributed to the MLM segment which suffered a more than 30% drop in revenue, whilst the Wholesale and Retail segments were relatively more resilient with sales declines of 7.4% and 2.4% respectively. The Group's profit before taxation ("PBT") dropped by 34.3% to RM63.4 million from RM96.5 million in the previous financial year. This set of results should be seen in the context of the very challenging business environment in FY2019, and also an exceptionally good year for the Group in FY2018 driven by the MLM division's 25th anniversary sales events. Furthermore, profitability in FY2019 was also affected by higher marketing and branding costs as well as expenses associated with corporate social responsibility ("CSR") activities undertaken by the Group.


BALANCE SHEET REVIEW


The financial position of the Group remained robust with total assets of RM364.2 million as at 30 April 2019, out of which RM95.1 million comprised highly liquid assets in the form of cash and cash equivalents and short-term investments, which was in line with the Group's mainly cash-based businesses. Total liabilities of the Group as at 30 April 2019 amounted to RM43.6 million, which comprised largely trade-related payables. As at the end of the financial year, the Group had minimal borrowings of RM0.3 million which were incurred for trade financing purposes. The equity attributable to ordinary holders of the parents as at 30 April 2019 was RM310.2 million, equivalent to RM1.07 per share.


CASH AND CAPITAL MANAGEMENT


The cash & cash equivalents plus other short term investments in cash & money market funds via unit trust placement totalled RM95.1 million as at 30 April 2019. This was lower compared to the previous financial year, reflecting higher cash dividend payout, the increase in inventory holding as well as additional investments incurred for property, plant and equipment ("PPE") during the year. Cash utilised to reward shareholders' loyalty in the form of dividend amounted to RM52.3 million in FY2019, of which RM40.7 million was in respect of interim and final dividends declared for FY2018 but paid in FY2019. For FY2019, an interim dividend of 4 sen per ordinary share amounting to RM11.6 million was paid during the financial year and a final dividend of 9 sen per ordinary share is recommended by the Board, subject to the approval of shareholders at the forthcoming Annual General Meeting.


There was no major change in share capital of the Company save for the issuance of 34,000 new ordinary shares arising from the exercise of options under the Group's employees' share option scheme. There was also no major capital investment during the financial year, apart from the additional investments incurred for setting up of new MLM branches in East Malaysia, refurbishment and upgrading of PPE and acquisition of an investment property amounting to RM8.3 million.


Review Of Segment Operations
MLM SEGMENT

The MLM segment saw a contraction in revenue and profit in FY2019, the first decline after 4 years of consecutive growth. Negative consumer sentiment due to domestic and global uncertainties, compounded by issues surrounding the transition to SST, took a big toll on this segment. The cutback in members' spending and the slowdown in recruitment and renewal reduced MLM's revenue by RM127.6 million or 36.2% to RM224.9 million in FY2019, down from RM352.5 million in the previous financial year. Corresponding, PBT fell 32.6% from RM70.3 million to RM47.4 million. The preceding financial year was an exceptional year for this segment, which exacerbated the plight in FY2019. The MLM division celebrated its 25th anniversary in FY2018 with a series of aggressive promotional activities and incentives which were launched amidst a very strong economic momentum. The sudden and sharp reversal in sentiment in FY2019 was hence a double whammy compared against a record FY2018.


Although the deterioration of market conditions in FY2019 was not fully anticipated, the strong foundation built over the years has helped us to ride the storm. Our committed distributors and staff and our focus on product quality and costs will continue to anchor this segment in the years ahead. During the challenging year, the MLM segment has continued to take various proactive steps to reinforce our product offering, build members' loyalty, recruit new members while also striving to achieve greater productivity, cost efficiency and optimisation as we manage and capitalise on threats/opportunities arising from digitalisation. Indeed, MLM’s higher PBT margin in FY2019 was testimony to some of these efforts.


Building strong foundation in product offering – Our diverse product base which caters to a wide range of consumers is one of our critical success factors. The MLM segment launched a total of 22 stock keeping units ("SKU") range of products in FY2019, raising our product range to more than 240 SKU spanning from nutritional food & beverage, wellness supplements, skincare, beauty & cosmetic to personal care and households products. The products launched in FY2019 included 2 new product lines, i.e. Kidivo and Sweetality, while the rest were extension of existing product lines. The MLM segment has shifted its new product focus to smaller ticket items, bearing in mind the cautious consumer spending pattern against the backdrop of a more moderate pace of economic growth.


Using the product development approach above, SKU introduced in FY2019 centred mainly on skincare & cosmetic, nutritional food & beverage, fashion products under Infinence and infant care products.


A notable mention during the year is BB+Glo, which is an enhanced version of BB Plus with Collagen, a collagen drink which boasts antioxidant goodness of blackcurrant with enhanced health benefits.


Also to note is M-Ginkgo, a natural health supplement to enhance mental alertness and memory.


To penetrate a new product market, the MLM segment introduced Kidivo for infant care, using only all natural and non-GMO sources of raw materials in the production. We kick-started Kidivo product range with 2 products, namely, "Natural Head-to-Toe Wash” and “Natural Moisturizing Lotion", which received encouraging response from our members.


Leveraging on the success of one of our best-selling products - Bamboo Salt, we introduced "Sweetality", a low-calorie natural sugar replacement derived from sugar cane extract. We also launched 2 other nutritional food & beverage in FY2019: "Shake Me Cocoa", a wholesome delicious protein drink and "Prolicious", a special blend of food and vegetable enzyme, prebiotics and probiotics which promote digestion and gut health.


We have seen promising responses from our members on the newly added small ticket products and are confident that these products will support sales in a meaningful way when the overall market sentiment improves.


Aligning incentive framework – Members' recruitment and retention has always been a priority of the MLM segment. We appreciate our dedicated members who play a pivotal role to promote our products and eventually drive sales growth. We regularly review our incentive and reward framework to ensure that the objectives of our members and the Company are aligned. Progression, Rewards and Engagement are the 3 focus areas under the incentive framework which have been reviewed and re-aligned during the FY2019.


As at the close of the FY2019, our distributor force stood at more than 120,000 members. The number of active members has reduced by approximately 20% as compared to the previous financial year, mainly due to lower members' renewal rate as well as the slowdown in new members' recruitment. We see the lower renewal/recruitment rate as a temporary setback and have proactively managed the issue through various campaigns including special packages for new sign-ups and renewals to accelerate members' recruitment efforts.


Our existing base of more than 120,000 active members remain productive entrepreneurs who will continue to build our MLM business despite prevailing challenges. To sustain members' buying interest, the 24-hour flash sales have been conducted on the 11th of every month since February 2019.


Our efforts to help distributors grow has continued to pay off. In FY2019, 530 members successfully attained the ranking as Diamond Sales Managers ("DSM"), 100 members took a step forward to Double Diamond Managers ("DDM") and 46 members advanced to Crown Diamond Managers ("CDM"). These outstanding and dedicated entrepreneurs were recognised at various gala celebrations organised by the Company including among others, the Diamond Night and Sahajidah Hai-O Marketing Sdn Bhd ("SHOM") Anniversary Celebration held at Setia City Convention Centre, Selangor.


We have also rolled out new initiatives to further foster a productive distributor force. We took steps to enhance members' engagement through improved marketing and customer service management system, and also introduced Diamond Star Awards in addition to the recognition of Excellence Awards for outstanding achievers during the year.


Incentive trips have been one of our proudest traditions to reward our dedicated members. Highlight for the year included trips to Paris, Switzerland and Kunming China, as well as the Jakarta Business Conference Campaign. In total, 1,222 distributors qualified for the incentive trips in FY2019, with a number of high achievers qualifying for all 3 trips. Incentive trip reward serves to recognise the commitment of the distributors, foster distributors’ engagement and expand business potentials.


The MLM segment also regularly organises multiple engagement events with the distributors. Some of these activities include the Annual CDM Convention, Nationwide SHOM Products Roadtour and Strategic Mega Event. In total, 84 training and engagement sessions were held in FY2019. Some of the events were organised in collaboration with CDMs for training, membership expansion and to seek market feedback.


Further migration to e-application - To prepare the business for the inevitable disruption caused by technology, we have embarked on the journey of digitalisation since 2016. During the FY2019, we focused on enhancing applications which enabled distributors to monitor their routine tasks/ sales and to get updates on periodic promotions. Amongst various changes we introduced/enhanced during the financial year were e-Renewal-for-Distributors, Members' E-Commerce Portal, as well as e-Customer Services channel e.g. WhatsApp and telegram as marketing tools. New applications and updates were added to the existing digital platforms to increase efficiency and effectiveness. The features of our members' online portal which could be viewed on mobile phones has been enhanced to cover areas such as product information, marketing and event updates and registration, business opportunities and e-commerce. Some of the enhancements for e-application pave the way towards a paperless business environment, while other added features help to provide frequent updates on promotional activities.


The Group is also working to introduce a "Track & Trace" feature for one of our existing digital platforms to verify product authenticity. This new feature will allow members to verify the authenticity of the products purchased from SHOM using a few simple steps of scanning and verification.


With the progressive digital development, sales transacted through e-commerce transactions have risen to 7.54% of total MLM sales in FY2019, up from 6.52% in the preceding financial year.


Raising standards of responsible and ethical conducts - Our distributors are our frontline representatives who interact with end customers to sell products that meet market demand. In view of this, we have actively taken steps to train our distributors to enhance their sales ethics, professionalism and productivity. During FY2019, product training sessions were held on a regular basis to provide intensive training on product features and efficacy. We also conducted ethical conducts training to make sure that distributors abide by the Health Ministry Malaysia Guidelines in terms of product disclosure standards and that they market our products responsibly without making misleading or unverifiable statements. In addition, we took steps to emphasise that unethical price wars among distributors are prohibited under SHOM’s code of conduct, and that price-cutting will not be a sustainable way of doing business.


 
WHOLESALE SEGMENT

Currently, Hai-O's Wholesale segment supplies to more than 100 wholesalers and 2,000 retailers including Chinese Medical Halls, restaurants, supermarkets, hypermarkets and pharmacies in Malaysia. We are the exclusive distributor for over 50 renowned brands of traditional Chinese medicines, health tonics, teas and other healthcare products. The Wholesale segment also serves an important role as the centralised purchasing support for the MLM and Retail segments.


For FY2019, the Wholesale segment recorded revenue of RM59.0 million, which was 7.4% lower than RM63.7 million in FY2018. Segment PBT declined to RM10.8 million from RM19.8 million in FY2018 as a result of lower revenue as well as the Group's higher CSR expense of RM1.4 million which was absorbed under the Wholesale segment. Higher expenses were also incurred to implement initiatives to penetrate new markets and enhance existing customers' incentive structure to sustain business momentum given the general slowdown in overall business activities. Among the promotional activities undertaken were incentive trips to Chengdu, China and Bali, Indonesia as well as a lucky draw contest held to improve the sales of 10 traditional Chinese herbal wines which was opened to all wholesale, retail customers and end consumers.


During the financial year, the Wholesale segment continued to expand its product range and market reach. New products introduced included the Red Star Wine brand “Traditional Brew - 古酿”, 八年棉柔 and 醇和紫坛, and non-alcoholic products such as the Medetop coconut oil range of products, Yuyuantang jasmine and rosebuds tea, soluble water chestnut and sugarcane essence, and various other food products.


In terms of market reach, the Wholesale segment has played a more proactive role in FY2019 to promote the Group's products as part of a healthy lifestyle to the young to middle-age group of consumers. Social media networks such as Facebook, Instagram and YouTube were used to raise awareness on the importance of health food and food replacement supplements to suit the current fast paced and on-the-go lifestyle.


Various brand awareness events were also held in strategic collaborations with business partners such as pharmacies, restaurant chains and mainstream newspapers. Among others, the Chang Yu Night which was held in Genting in November 2018 was coorganised with Sin Chew Daily, while other events in collaboration with Local Association of Women's Division showcased the use of Hai-O products in the preparation of traditional dishes. The latter attracted more than 800 participants.


As part of the efforts to expand overseas, the Wholesale segment has collaborated with our subsidiaries Yan Ou Holdings (M) Sdn Bhd and Yan Ou Marketing (Intl) Sdn Bhd to distribute the Sarangyan brand bird's nest products both locally and in China. The production facility for Sarangyan bird's nest products are internationally certified by HACCP, GMP and JAKIM. We have also obtained the Certification and Accreditation Administration of the People's Republic of China ("CNCA") to facilitate the export of Sarangyan. Sarangyan is available at main shopping malls at KLCC, Pavilion and Guardian in KLIA.


Capitalising on our existing market base, the Wholesale segment has received encouraging response from the sale of Hai-O healthcare hampers through supermarkets and hypermarkets, including Aeon, Tesco and TF Value Mart. The number of hampers sold via these distribution channels increased by more than 50% during the festive seasons in FY2019.


The Wholesale and the Retail segments have continued to work hand-in-hand to promote products distributed by the Retail segment, setting up popup stalls for product launches and products tasting throughout the year. The Group would explore more of such cost optimising and synergistic promotional activities for both segments in future.

 
RETAIL SEGMENT

Hai-O originates from the Retail business which is an important part of our business system even though it is no longer a primary revenue and PBT contributor. The Retail segment has a presence in all major states and remains a prominent household name carrying the Hai-O brand in 57 outlets across Malaysia (7 of which are operating under a franchise model). In line with our objective to provide value-added services, TCM physicians are stationed at selected retail outlets to provide general medical and TCM consultations.


The Retail segment recorded a revenue of RM40.5 million (FY2018: RM41.5 million) and PBT of RM0.9 million (FY2018: RM1.5 million) in FY2019. Retail PBT fell by a larger percentage due to higher operating costs as well as the drop in sales of premium products which command higher profit margins.


For FY2019, the Retail segment has identified several focus areas to improve product mix, expand new promotional activities, increase collaborations with strategic business partners and step up staff training to increase productivity.


Improve product mix - The focus will be to expand house brand products which command higher margins as the measure to catalyse an improvement in product mix. Currently, products distributed under the Hai-O house brand contribute more than 40% of total retail sales. Our house brand products are primarily manufactured by our in-house GMP manufacturing facilities, which will also help in cost control and margin optimisation. During the financial year, the new SKU added to the retail list included Purple Great Multi-Grain Drink, Cordy Essence Plus and meal supplements product – Five Grains Porridge, Organic Three Treasures and Organic Hulled Millet.


New promotional activities – New promotional activities are needed to sustain buying interests in a weak market environment. As such, the Retail segment conducts regular in-shop marketing campaigns such as 1st Weekend Sales, Key Product Special Sales and Year End Prestock Count Sales. Promotional activities are intensified during festive seasons to capitalise on increased spending by consumers, reaching out to customers via social media networks, print advertisement, radio broadcast and Chinese New Year Roadshows. In particular, we held a roadshow at Universiti Sains Malaysia to target the young consumer market and to create brand awareness.


Collaborations with strategic partners and Chinese physicians – We have in the past collaborated successfully with strategic partners to conduct roadshows as well as advertising and promotional activities. In FY2019, we worked with financial institutions such as UOB Asset Management (M) Bhd by setting up booth on its investment conference day to create brand awareness. Meanwhile, Public Bank Berhad continued to be our strategic partner in joint promotions leveraging on its customers base. Products wise, we collaborated with Korea Ginseng Corporation (正官庄) to run promotional activities for its products distributed in our retail outlets. We also worked with TCM physicians to promote the health benefits of Chinese medicated and herbal products. Currently, there are 12 retail outlets that provide TCM consultation services to customers.


Staff training – To create a consumer-centric workforce, we organise regular training sessions to nurture a team of knowledgeable and productive outlet assistants. Training modules include tests on products knowledge and external training on marketing skills. During the year, we held a two-day session at The Kabin, Jeram Kuala Selangor for 30 managerial and executive staff to foster team work and to improve leadership and communication skills.


 
OTHER OPERATING ACTIVITIES

The main revenue and PBT contributors of our other operating activities are manufacturing and rental income from investment properties. Total PBT derived from other operating activities was RM4.3 million in FY2019 (FY2018: RM4.9 million). Although the Group collected higher rental income from its investment properties in FY2019, this was off-set by lower contribution from manufacturing due to lower internal manufacturing requirements from the MLM and Retail segments.


Outlook And Growth Enablers For The Next Financial Year

The Group is cognizant of the challenging economic backdrop as we progress into a new financial year. On the domestic front, the impact of the change in political landscape will continue to manifest as the new Government reviews and revises policies while restructuring its own finances. Meanwhile, our export-oriented sectors will inevitably fall victim to escalating trade tensions between the US and China, and this is exacerbated by already slowing global economic activity. The International Monetary Fund ("IMF") in its latest forecast, has projected a slowdown in global GDP growth from 3.6% in 2018 to 3.2% in 2019, and this was its fourth downward revision since October 2018. Against the challenging international backdrop, the Malaysian economy is forecast to grow by 4.3% – 4.8% in 2019 (2018: 4.7%), with potential downside risks. As the Malaysian Government practises fiscal restraints, it is imperative for the private sector to fill the gap. However, the high cost of living is constraining the ability and willingness of consumers to spend, which is the challenge for Hai-O in the coming year.


Even though the group does not expect an immediate uplift in the business environment, we believe our solid financial strength and the good growth enablers that we have put in place over the years will stand us in good stead. For the year ahead, the Group will continue to chart our course:

  • to build on measures to expand and adapt products pipeline to cater for market demand;
  • to strengthen our operational capability, in particular upgrading the skills of our distributors and employees;
  • to improve the adoption of digitalisation in our businesses and operations; and
  • to optimise productivity and efficiency.


The successful execution of these measures will help the Hai-O Group to stay on track to deliver another profitable financial performance in the coming year.


Appreciation

I would like to express a special note of thanks to our employees and distributors for their efforts to help the Group to continue delivering values to Hai-O shareholders. I am deeply grateful to all shareholders and stakeholders for the trust you have placed in our brand and leadership of the Hai-O Group.


Thank you.


Tan Keng Kang

Group Managing Director


8 August 2019