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Managing Director's Statement
 
 
Introduction

Dear Shareholders,


40 years on and as we enter into the 5th decade of operations, Hai-O remains committed to the values on which Hai-O was founded that have brought us from our humble beginnings in Klang to a well-known household name. In our pursuit of building a sustainable business through various operational changes and transformation programs, the Group delivered a respectable operating performance for the financial year ended ("FYE") 2016:



The above results were achieved during a tough operating environment amidst various unwelcoming challenges which continue to linger; weaker Ringgit, softening of consumer sentiment and slowdown in economic conditions. The strong foundation that the Group has built over the years enabled the Group to address these challenges and record the results achieved in FYE 2016. With a strong operating cash flow, continuous implementation of management strategies for efficiency improvement, the Board believes that the Group is well-positioned to sustain a satisfactory progress at the least, over the medium term.


Being the newly appointed Managing Director, I am honoured to be entrusted with the task of steering the Hai-O Group into its next phase of growth and lead the talented and dedicated members of the Hai-O family in this endeavour. In the following sections, I will bring you through the overview of the Group's financial performance for FYE 2016, followed by a detailed business and operation discussion of our core operating segments in Multi-Level Marketing ("MLM"), Wholesale and Retail and also cover briefly on the other businesses which are not core to our overall operations currently but has good potential to provide better contribution to the Group in the future.

Financial Performance

Revenue

The MLM segment contribution in revenue increased and accounted for 66.6% (2015: 56.5%) of the Group's total revenue of RM297.6 million, while the Wholesale and Retail segments contributed approximately 18.3% (2015: 23.6%) and 12.9% (2015:16.9%) respectively to the Group's revenue for the FYE 2016. The increase in the Group's revenue by approximately 24.1% for the FYE 2016 was primarily driven by the sales volume achieved under the MLM segment which is a testament of our product centricity on “small ticket” consumer items strategy implemented since 2014. Both the Wholesale and Retail segments contributions were affected by subdued consumer sentiment post implementation of the Goods and Services Tax (“GST”).


Profit

The Group reported a Profit Before Tax (”PBT”) of RM49.1 million for FYE 2016 (2015: RM42.7 million), an improvement of 15.0% as compared to the previous financial year. The improvement in PBT was notably due to the increase in revenue from the MLM segment but was negatively affected by higher cost of operations in both the Wholesale and Retail segments. The PBT has not increased in tandem with the revenue growth rate because of lower sales from Wholesale and Retail segments coupled with higher operating costs, one off expenses incurred for the 40th anniversary celebration and higher expenses incurred for CSR activities. Nonetheless, an improvement of 15.0% in PBT under the existing operating environment is commendable.


Shareholders' Equity


Shareholders' equity attributable to owners of the Company was RM257.4 million as at 30 April 2016 (2015: RM253.9 million). This is an improvement of 1.4% or RM3.5 million. The shareholders' equity of the Group as at 30 April 2016 as compared to the previous financial year did not improve significantly due to the distribution of approximately 80% of net profit earned during the FYE 2016 as dividend. In addition, approximately 10.7% of the net profit earned during the FYE 2016 was utilised to repurchase our Company's shares for the financial year under review. As a result, net of the fund used for dividend payment and share buy-back, the net assets per share of the Group improved marginally to RM1.33 as at 30 April 2016 (2015: RM1.30).


Cash Flows


Cash balances and short term investments in the form of financial assets of the Group were RM53.7 million and RM53.8 million respectively at the close of FYE 2016. This represents an amount of RM107.5 million in cash and cash equivalents and short term investments. The high cash balance of the Group is a norm for businesses which are cash generative in nature taking into account that our MLM segment is the main driver of the Group's revenue. Apart from a small amount of working capital facility which remained outstanding as at the close of FYE 2016 of RM1.1 million, there were no other borrowings as at 30 April 2016. With our strong cash flow position, Hai-O Group is well positioned to tap on any new growth opportunities.

Segment Review
Multi-Level Marketing ('MLM')

For the FYE 2016, despite the challenging business environment, the MLM segment managed to deliver a set of respectable results where the revenue contributed by the MLM segment increased by 46.3% from RM135.6 million to RM198.3 million and the PBT increased by 26.8% from RM28.8 million to RM36.5 million. Our new strategy to switch focus from "big ticket" items to "small ticket" consumer items has reaped results as sales volume from "small ticket" consumer items contributing to about 70% of the overall MLM sales for FYE 2016.


Our transformation program is building a good momentum. Our primary objective is to build a sustainable business for the MLM segment and move away from over relying on "big ticket" items to drive revenue and bottom line. The first phase of our transformation journey is essentially done and I am proud that our goal to reduce reliance on "big ticket" products is reaping results. A lot of work and resources had gone towards making this a reality, and we have made it a priority to ensure sustainability of our business while offering good products to our members.


In FYE 2016, the operations of the MLM business were essentially driven by three (3) strategic pillars:


Dynamism of Products - We recognise that we need dynamism in our products to cater to the ever changing expectations of consumers. During the year under review, we have successfully re-engineered some of our best-selling products formulation with the aim to offer better quality products to our members. Resources were placed to re-brand, re-package and re-formulate "Health" and "Beauty" range of products. "Celgynic Gold", a supplement for both health and beauty which combines the goodness of the East and the West with a blend of Chinese traditional herbs such as Lingzhi, Cordyceps, American Ginseng and Letcithin, was officially launched during our "Sales Manager and Senior Sales Manager Recognition Ceremony" in conjunction with the International Women's Day 2016 in March 2016. For better product recognition, we have consolidated the branding for our mineral coffee under “Min KAFFE” which was previously marketed under different brandings in Malaysia and outside Malaysia. With the consolidation of the branding of our mineral coffee under "Min KAFFE", we expect to achieve cost efficiency in promoting the product in terms of advertising and promotion for enhancement of product identity.


In respect of our "Beauty" range of products, the Bio-Ever™ Plus was introduced and launched during the FYE 2016. Bio-Ever™ Plus is our newly developed revitalising and anti-aging cream which contains natural ingredients such as Japanese longevity grass, wild soy, wild yam and Centella Asiatica. To further drive revenue growth, we have also introduced and increased the product offering under our popular Premium Beautiful lingerie series.


For product development, we have launched the Cozuma Mattifying Lipstick and Cozuma Glitzy Shine Lip Gloss under the Beauty range of products in 2015/2016, and attained Halal certifications for six (6) additional products. These products are BB Plus, Min KAFFE, Bio-Ever™ Plus and MA range of toothpaste, body wash and shampoo.


The outstanding quality of our products was recognised by the "Readers' Choice Award" under the Natural Health magazine in its November 2015 issue. A total of eight (8) products marketed under Sahajidah Hai-O Marketing were recognised as "Readers' Choice" and these include the Bio-Evolve Water Purification System, Premium Beautiful Foundation Lingerie Series, Marine Essence Bamboo Salt Nourishing Shampoo and Body Wash and Bio Seleza Feminine Pad Series.


Entrepreneurial Distributor Force - As of 30 April 2015, our team consist of 53,000 core distributors. Our distributor force grew steadily at an average of 3,000 members a month in FYE 2016. I am proud to say that we have grown significantly in terms of member recruitment and we have 83,000 members as at 30 April 2016. This represents an increase of 56.6% from the previous year. The significant increase in members during the financial year under review, is again, the result of our transformation program to focus on "small ticket" consumer products which appealed to a wider group of entrepreneurs, where only an affordable capital outlay is required to be part of the family of Sahajidah Hai-O Marketing.


Majority of Sahajidah Hai-O Marketing's entrepreneur distributors are relatively young and energetic, which is invaluable to our MLM business that sets the foundation for future growth and business sustainability. For the FYE 2016, more than 600 members of our dynamic distributor force achieved the ranking at the top 3 tiers of our hierarchy of entrepreneurship, i.e. Crown Diamond Manager, Double Diamond Manager and Diamond Sales Manager.


Since 1993, when the incentive trip program was first introduced to reward our entrepreneur members, a total of approximately 16,000 members were rewarded with well-deserved holidays to over 60 destinations world-wide. For the FYE 2016, the incentive trip program to Bangkok hit a snag because of the unfortunate bombing at the Erawan Shrine just one day before the departure for the said trip. In Hai-O, we showed strong commitment to our members and nothing comes ahead of our members' safety. The management took the decision to cancel the trip to Bangkok despite the Group having to bear a hefty cancellation penalty. But we know it was the right decision to make for the safety of our members. In order not to disappoint the 735 qualified members who had shown their commitment in achieving the sales target, the trip to Bangkok was replaced by a trip to Vietnam. The change to a new tour destination for the 735 participants in a short time span was only possible with the help and dedication of the organising committee. My sincere appreciation goes to the organising committee for the job well done.


Apart from Vietnam, another premier incentive trip was also organised to Osaka, Japan, where 348 entrepreneurs qualified and were awarded the trip to Osaka.


We are committed to talent development within our Group. Our training programs provide new and long standing members with a deep sense of products offering, ethics and knowledge of the business. We continue to believe that talent development will be pivotal to the continued growth of the MLM segment for the future.


Versatile Distribution Support - As our MLM business is growing, we realised that we require a distribution platform that is able to support our members to become more efficient and effective. During the financial year under review, efforts had been initiated to upgrade our IT infrastructure platform to enhance buying experience for our members while future-proofing our business to be more entrenched in the e-commerce business. Technology is changing our world and we are seeing how technology revolutionises the buying patterns of the consumers. Social media is used to position ourselves more significantly in the daily lives of our members and the outcome of this effort resulted in more than 6,000 e-commerce sales transacted during FYE 2016 with a transaction value of more than RM3 million in sales.


In terms of our traditional distribution network branches, we are in the process of upgrading our network branches. The conceptual layout is to build a one-stop centre for distribution, information hub and training venue for the MLM business. We are currently undertaking internal management assessment on the required resources to revamp and refurnish our existing branches to improve the efficiency of space and system, to support the growing number of member force and at the same time to increase the visibility of Sahajidah Hai-O Marketing. Currently, we have 32 branches, stockists and sales points across Malaysia, and have also set our foothold in Indonesia, Singapore and Brunei.


Our next transformation strategy, which is currently in the early stage of planning is to have a comprehensive distribution network which spans the length and breadth of the country, ensuring that our brands are available in major towns in Malaysia. The upgrading initiatives were kick-started with the upgrading of the Kuantan branch in FYE 2015 followed by the Kota Kinabalu branch and the Miri branch in FYE 2016. Upgrading and revamping of branches will be carried out in stages and I expect this transformation phase to be implemented within the next 2 to 3 years. The improved layout and system of the MLM branches with standardised corporate identity will be the backbone of our future branch expansion and model for our overseas operations. As our overseas operation is still in its infancy, it had not contributed significantly to the Group’s revenue and profit for the year.

 
Wholesale

The Wholesale segment apart from being the holder of some exclusive distribution rights for Chinese medicated tonic, also distributes tea and precious herbs. The Wholesale segment continues to play an important role in supporting the sourcing of products for the MLM and Retail segments which is the key in ensuring the MLM and Retail segments have continuous supply of goods for their respective operations. For FYE 2016, Wholesale segment revenue of RM54.4 million, decreased marginally as compared to the previous financial year (2015: RM56.6 million). The decrease in revenue of the Wholesale segment was mainly caused by lower demand of Chinese medicated tonic and patented medicine. Despite the marginal decrease in revenue under the Wholesale segment, the PBT decreased to RM5.9 million as opposed to RM6.4 million a year ago, which was primarily affected by margin compression from the depreciation of Ringgit against USD and Renminbi. On an overall basis, the operating expenses for the Wholesale segment were higher for the FYE 2016 owing to general escalation in costs, one-off expenses incurred for the 40th anniversary celebration as well as higher expenses for the CSR activities.


For the FYE 2016, the Wholesale segment continued to implement various strategies including strengthening product agencies, promoting healthcare products for young customers, and expanding e-commerce sales.


We have added some new agencies during the year. These included Yanghe Blue Classic Series from China and Kavalan whiskies from Taiwan. We are the exclusive agent for Yanghe Blue Classic Series and is also one of the two exclusive distribution agents for Kavalan whiskies. Apart from wine, whiskies have gained popularity among the younger generation and Kavalan whiskies, which have won many international awards, are very well received by the local market.


Akin to our MLM segment, our e-commerce platform under the Wholesale segment had also received more attention from our customers. Although the transactions via e-commerce platform were still small under the Wholesale segment in FYE 2016, we believe our e-commerce platform together with regular updates and promotional activities from social media, will continue to grow in its popularity due to the changing buying patterns of customers.


For the next financial year, we hope to explore further business opportunities with our principals and business partners in China to widen our products distribution base and strengthen our agencies relationship during this period of strong bilateral-ties between Malaysia and China. 

 
Retail

Our Retail segment is supported by our 58 branches and franchises network across Malaysia which acted as our "branding agent" throughout the country. Similar to many retail businesses in Malaysia, we saw a weaker year for the Retail segment in 2016. Revenue for this segment decreased by 5.7% from RM40.6 million a year ago to RM38.3 million in FYE 2016. The decrease in revenue for the year had been anticipated as consumers were frontloading consumption spending prior to the implementation of the GST in April 2015. As households adjusted their spending to the higher cost of living following the implementation of the GST and depreciation in the Ringgit, sales from our Retail segment were weighed down accordingly.


We also experienced a more drastic drop in the PBT of 31.3% during the financial under review from RM2.6 million to RM1.8 million. Multiple factors had contributed to this result, including the slow-down in sales and the increase in cost of operations in particular rental for tenanted premises and wages which compressed operating margins significantly.


In view of the slow-down in the overall retail business, we only added one (1) new chain store during the year. The new outlet in Bukit Gambir, Penang was officially opened on 8 January 2016.


Our loyalty programme - Hai-O Friendship has more than 103,000 members as at 30 April 2016. Our customer base expansion was further reinforced with the use of social media to promote regular promotional activities and products awareness. We had during the year, replaced short messaging service ("SMS") with Wechat platform to reach out to our customers resulting in a similar coverage while attaining cost saving. We will continue to make effective use of social media to reduce reliance on the traditional advertisement and promotional activities.


On top of our regular promotional activities in our chain stores, we have also worked with different business affiliates such as Tai Thong Group, HN Confinement Care Centre and Public Bank Berhad to further entrench our brand. Some of the promotional activities held during the year were rewarding eligible Tai Thong's customers with discount to purchase selected goods at our chain stores and marketing of confinement herbal products at HN Confinement Care Centre. The promotion campaign with Public Bank Berhad was in a form of "cash back" for Public Bank credit card holders. In addition, product road shows were undertaken to tap the young customers market where road shows were held at the Association of Huazhong Youth and University Putra Malaysia.


During the year, we continued to focus on initiatives to attract and retain the right calibre of talents. Business sustainability necessitated us to build a talent pool, and FYE 2016 marked the opening of the first model shop in Muar under our Employee Entrepreneur Program which is a program to groom employees to own and operate chain stores. The Employee Entrepreneur Program is to complement our franchise concept for branch network expansion. On a separate note, under our In-House Certification Training Program, we have identified 19 employees to be trained for progression to become outlet supervisors, which formed part of our succession planning for outlet operations.

 
Other Operating Segment

In addition to MLM, Wholesale and Retail businesses which are core to our operations, under the "Other Operating" segment, we also derive revenue from rental of investment properties, manufacturing of pharmaceutical products, credit leasing and advertising services. Revenue from other operating business of RM6.7 million for the FYE 2016 decreased by 5.5% from RM7.1 million as compared to the last financial year. Nevertheless, PBT for this segment was maintained at RM4.9 million (2015: RM4.9 million). PBT contribution from "Other Operating" segment had been maintained despite a drop in revenue, primarily due to the improvement in efficiency of our manufacturing plants which had turnaround from a loss position to being profitable. Our manufacturing activities expanded upon the surge in demand for healthcare products from our MLM segment. We currently have two (2) manufacturing plants for manufacturing of pharmaceutical products. Both of our plants are certified with Good Manufacturing Practice ("GMP") status while the newly set-up plant in Jalan Kapar is Halal certified. Currently, the manufacturing plants are still operating below their optimum level and saddled with high depreciation expenses when the new plant in Jalan Kapar was commissioned in FYE 2014. Once the depreciation expenses taper off and coupled with the improvement in production efficiency over time, we expect to see a higher contribution from our manufacturing activities. We hope our manufacturing activities which complement other business segments, will play a more significant role in the future.

Outlook and Prospects

I echo the view of our Chairman in respect of the uncertainties hovering the local economy and market which will impact our operating environment. The Ringgit continues to decline against major foreign currencies as crude oil prices fluctuate with no stability in sight and political woes hogged the headlines, a sphere which is constantly under disruption and requires proactive adjustments for business realities. According to Bank Negara Malaysia, the global economy continues to record growth but would be at a more moderate pace. Looking ahead, global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the European Union referendum in the United Kingdom.


For Malaysia, domestic demand continues to be the main driver of growth. Overall, while domestic economy remains on track to expand in 2016 and 2017, but the uncertainties in the global environment could weigh on Malaysia’s growth prospects. To boost growth and contain inflation rate, Bank Negara Malaysia had recently announced a reduction in the Overnight Policy Rate to 3.0%, but expected growth rate to remain between 4.0% - 4.5%.


While we expect the coming year to be a challenging one, one should look beyond the immediate horizon. I am confident that together with the highly competent members of the Board and management, Hai-O Group will continue to drive a culture of high performance and continuous improvement. I am fully aware that while adaptability in gaining strategic foothold is vital for sustainability and ensuring competitive edge, it needs to be complemented with measures that bolster its underlying fundamentals. Hence, for the coming year, our business strategies are written with the objectives to foster growth while preserving fundamentals.


For the MLM segment, we will embark on the 2nd phase of upgrading the IT infrastructure, where focus will be on the stockist and distributor management system to enhance member portal to be more user-friendly. On-going efforts will be undertaken to improve the layout of the MLM branches to improve brand visibility and buying experience of the members. In addition, we intend to set up warehousing facilities in the southern and northern regions within Peninsular Malaysia to facilitate logistic efficiency in view of the growing number of members and transactions. For the coming financial year, we are expecting business activities in the Wholesale and Retail segments to be affected by the continuous adjustments of spending by consumers to an environment of higher prices as a result of implementation of the GST, and greater uncertainties both locally and externally. Hence, with the business strategies in place for the Wholesale and Retail segments, the Group will be well positioned to seize suitable opportunities when it arises in the future. We will work closely with our business affiliates in China to strengthen business ties to expand products offering. Focus will also be placed on talent management to build a team of future ready talents for our retail outlets.

Appreciation

This marks my first year as the Managing Director of Hai-O and I would like to thank our Chairman, Mr. Tan Kai Hee, who is also my mentor, for his close involvement and guidance during this transition period. On the same note, I would like to congratulate Mr. Tan for being named as one of the "Global Outstanding Ethnic Chinese Elites 2016" by the "Global Outstanding Chinese Association" and "China Wenxian Publishing House". Finally, on behalf of the Board, I wish to thank our management, employees and members of Sahajidah Hai-O Marketing for their tremendous efforts, dedication and pursuit of excellence. The Group would not have been able to achieve the current set of financial results without their committed efforts, especially in such a demanding business environment. I would also like to convey my sincere thanks and appreciation to all our shareholders, customers, distributors, investors, business partners and stakeholders for their confidence and their continued support to the Hai-O Group. To my fellow Directors, as always, thank you for your invaluable support and wise counsel throughout the year.


Tan Keng Kang


10 August 2016