> Corporate Information > Chairman's Statement > Management Discussion And Analysis > Shareholdings  
 
Management Discussion And Analysis ("MB&A")
 
 
Introduction

Dear Shareholders,


The financial year 2017 was filled with uncertainties in the overall operating environment but yet a rewarding year for the Group. The MD&A covered in this Annual Report was marked by challenges we faced during the financial year and milestone achievements. The Group’s growth momentum continued despite macro volatility.


This MD&A covers an overview of the Group's business operations, financial review for the financial year ended (“FYE”) 2017 and the management's expectations for the next financial year.


In this MD&A, we have included information that may constitute 'forward-looking statements'. These statements are not historical facts, but instead represent the management's beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. This information includes statements of current condition and may relate to our future plans and objectives.


Now, allow me to bring you through the MD&A. Firstly, an overview of the Group's operating structure will be shared, followed by a discussion on the overall financial performance of the Group for the FYE 2017. We then will move on to a detailed analysis of each operating segment. We concluded the MD&A with a brief business plan for the next financial year.

Operating Structure

The Group's operations are segregated into 3 reportable segments:

  • which offer different products and services;
  • which are managed separately; and
  • which require different marketing systems and strategies.

These operating segments comprise of:

Operating Facilities and Branding

Our office headquarters is located along Jalan Kapar, Klang, Selangor, which houses the Sales Operations, Warehouse, Accounts & Finance, Information Technology ("IT"), Administration and Human Resources services. Apart from the head office in Klang, we also maintain a corporate office in the heart of Kuala Lumpur City at Jalan Bukit Bintang, to facilitate discussions and meetings which are more conveniently held in the city of Kuala Lumpur.


The Group has MLM branches, stockist and sale points, retail chain stores, franchises and manufacturing plants across Malaysia and Brunei.


The MLM division has 34 branches, stockist and sale points, out of which, 3 are distribution centre ("DC") which cater for e-commerce goods ordering distribution. We have 56 retail chain stores (including 7 franchises), out of which 3 are located in East Malaysia. The 2 manufacturing plants are located at Jalan Kapar, Selangor. Currently, the manufacturing plants are principally servicing the products requirements of MLM and Retail segments. Our manufacturing plants are of international-standard and are certified by ISO, HACCP, GMP and US FDA. In addition, one of the plants has also obtained a HALAL certification from JAKIM. The manufacturing plants have the capabilities to undertake TCM contract manufacturing as well as manufacturing of health food and food supplements.


Our products cater mainly for the domestic Malaysian market, while some of our products are exported to countries such as Indonesia, Brunei and Singapore and are distributed through the Group’s overseas sales offices.


"Hai-O" is a household brand name and is often associated with retail chain stores selling herbal medicines and healthcare products, which was how the Group started. Our MLM business which operates under "Sahajidah Hai-O Marketing", has notably built a number of established brand names in the MLM industry, including "Beautiful", "Min Kaffe", "Infinence", "Cozuma" and "Marine Essence".

Financial Performance

More than a Commendable Set of Results

As we promised a year ago, the Group's strategies were crafted to foster growth while preserving fundamentals. Accordingly, we did not incur major capital expenditure during the year, where key initiatives undertaken on a Group wide basis were to improve operation excellence, including:


Supported by solid business fundamentals, we are happy to share that we continue to enjoy positive growth for the FYE 2017. The Group ended the financial year with a set of financial results which I would put it as "more than commendable" under an extremely competitive and challenging business landscape. The revenue of the Group increased by approximately RM106.61 million or 35.8% and the profit before tax ("PBT") increased by RM29.20 million or 59.5%. The Group's revenue and PBT for the FYE 2017 was RM404.24 million (2016: RM297.63 million) and RM78.27 million (2016: RM49.07 million) respectively.


Revenue

The increase in the Group's revenue was solely contributed by the increase in revenue from the MLM segment which increased by RM110.67 million. Revenue achieved by the MLM segment was offset by the lower revenue registered by the Wholesale and Retail segments, and other operating activities. The revenue of the Wholesale segment was primarily affected by lower sales to the Chinese medical halls and duty free customers and ended the FYE 2017 with a total sales of RM52.65 million (2016: RM54.36 million). The Retail segment defended its full year revenue at approximately RM38.15 million mainly through the support from customers' loyalty program and an effective Chinese New Year advertising and promotion (“A&P”) campaign during 3Q17. Revenue registered by other operating activities although decreased slightly due to non-renewal of tenancy by one of our key tenants, the PBT contributed by other operating activities was nonetheless higher as compared to the previous FYE due to higher contribution from manufacturing activities.


Profit

Corresponding to the revenue, the increase in the Group's PBT was mostly contributed by the increase in PBT in the MLM segment of RM26.07 million. The increase in revenue and PBT of the MLM segment is a result of the launch of new products, effective member retention programme and increased sales via the e-commerce platform. Although the revenue from the Wholesale segment decreased, it registered a higher PBT of RM9.49 million, increased by RM3.2 million as compared to the previous financial year, due to the focus on products sourcing for the MLM segment which yielded higher profit to the Group. Retail segment on the other hand, although managed to maintain a revenue level of RM38.15 million, the PBT decreased from RM1.81 million a year ago to RM1.40 million in the FYE 2017. Higher operating costs in the Retail segment resulted in the decrease in PBT. Lastly, the overall increase for the demand in manufacturing activities lifted the PBT of the Group. Other operating activities contributed RM4.81 million to the Group's PBT (2016: RM4.48 million).


Changes in Equity

The Group closed the previous financial year with a shareholders' fund attributable to the equity holders of the parent at RM257.37 million.


During the FYE 2017, the Company distributed part of the retained earnings (RM48.23 million) to the shareholders in the form of shares through a Bonus Issue exercise on a 1:2 basis, firstly to reward the shareholders and secondly to increase the numbers of shares in circulation to promote liquidity, both of which have benefited our shareholders. The Bonus Issue exercise has no impact on the overall shareholders' equity of the Group as the decrease in retained earnings was offset by the increase in share capital. Nonetheless, the payment of dividend in the form of cash, reduced the shareholders’ fund by RM30.87 million during the year. An amount of RM1.05 million was also used by the Company to repurchase the Company’s shares. After taking into account the profit attributable to owner of the company earned by the Group during the FYE 2017 of RM59.48 million and some minor movement in investment in a subsidiary and translation reserve, the Group shareholders’ fund (after non-controlling interest) was RM284.81 million as at 30 April 2017 (2016: RM257.37 million) which represented an improvement of 10.66%.


Capital Resources and Cash Management

Generally, the Group strives to preserve sustainability to continue as a going concern and provide returns for shareholders and other stakeholders.


The capital of the Group comprised of shareholders' capital and reserves.


The shareholders' fund of the Group (after non-controlling interest) as at 30 April 2017 was RM284.81 million.


Currently, the short-term borrowings that the Group has comprised solely of a banking facility for working capital purposes. As at the close of the financial year, the outstanding amount was RM3.05 million. Apart from this working capital banking facility, the Group does not have other drawn down banking facility.


As the Group is involved in low capital intensive businesses and more than 80% of the Group’s sales are transacted in cash, as at 30 April 2017, the Group's cash and cash equivalents and short term investments was RM135.04 million compared to RM107.52 million as at the end of last financial year end. This translated to 47 sen per share. Due to this capital flexibility, the Group has in the past and intends to continue to reward shareholders with attractive cash dividends.


The gearing level of the Group is negligible and the Group is operating at a net cash position.

Segment Review
Multi-Level Marketing ('MLM') Segment

It was another record year for the MLM segment which took the Group to greater heights for the FYE 2017. The revenue of the MLM segment increased by RM110.67 million and the PBT increased by RM26.07 million, representing an increase of 55.82% and 71.44% respectively. The improvement in the overall profit margin of the MLM segment from 18.41% to 20.25% has also reflected the operating efficiency of this segment.


On the back of the outstanding results achieved by the MLM segment, we strived to sustain the growth of this segment, partly from the continuous implementation of the strategies already in place and partly forging ahead with new initiatives to stay close to the objective of bringing value to all stakeholders.


The strategies implemented by the MLM segment for the FYE 2017 revolves around 3 main growth drivers:


Dynamic Products Line-up - New Fashion Range

During the financial year under review, we continued our quest to delight our members and consumers with products which focus on health, wellness and lifestyle. Our range of products are selected to meet market demands and evolving customers trends. As at the close of the financial year, we have more than 200 SKU (stock keeping units) products comprising health food & supplements, skincare & beauty, personal care, households, fashion and other products.


A total of 7 new products were launched during FYE 2017. For health and wellness, we introduced ShakeMe Soy Protein drink and N’licious Enzyme drink, both of which are supplements that were developed with health benefits and lifestyle in mind. For our lifestyle range of products, apart from Cozuma Mattifying Lipsticks and infinence skincare series, we proudly introduced 3 types of hijabs and related accessories, i.e. infinence X RR Designer Hijab Essential, infinence X RR Designer Hijab Essential + and infinence X RR Designer Hijab Stellina to meet the market demand for a wide range of hijabs. The range of hijabs was developed in collaboration with renowned local designers Rizman Ruzaini to promote talents in the domestic fashion industry. The grand launching of infinence X hijabs scarf was held in Milan, the fashion capital of Italy, which marked the beginning of fashion product range in the MLM segment.


Entrepreneurial Members - Building a winning culture


Members who predominantly turned entrepreneurs play a pivotal part in driving the growth of the MLM segment. Building a winning culture between our members and the Company is one of the key factors that sustain the growth of the MLM segment. Our agile, innovative and membercentric culture is the primary competitive differentiator which contributed to our growing distributor force. We have approximately 140,000 active members as at 30 April 2017 (2016: 83,000), representing a growth in membership of 68.7% year-on-year. On average, we experienced an addition of approximately 5,000 new members per month for the FYE 2017.


Our strategies to "RECRUIT, RETAIN AND REWARD" members contributed to the overall success of the growth in membership.


Objective
Strategy
Initiative
RECRUIT Ease of entry
  • Efficient use of social media such as Instagram and Facebook to promote members recruitment
  • Online registration made easy and accessible anywhere and anytime.
Attainable entry requirements
  • Affordable and scalable entry requirements to alleviate doubts and to captivate interest
RETAIN Attractive renewal initiative
  • Economical and incentivising renewal package
Year-round sale campaigns and events
  • Fun filled products launching events and activities throughout the years
Recognition
  • Leadership ranking progression nights to recognise all outstanding member entrepreneurs
REWARD Incentive trips
  • Memorable overseas holidays to reward members who worked hard for the year

Recruit

It is disheartening to learn the youth unemployment rate in Malaysia was estimated to have reached 10.7% in 2015, more than 3 times higher than the national unemployment rate of 3.1%. Cautious business sentiments and moderating economic performance have restrained businesses from expanding their workforce. The youths are the most vulnerable to these trends; they are likely to be the last to be hired and the first to be made redundant according to the annual report of Bank Negara Malaysia 2016. We see opportunity and feel obliged to curb youth unemployment rate. Accordingly, our “Recruitment” initiatives were focused on providing a clear and compelling sense of purpose to attract new members and guide expectations. We efficiently used social media to reach out to young members and make “starting your own business” easy through online registration anywhere, anytime. We encourage new members to start with an attainable capital which is scalable at members’ own motivations over time.


Retain

We have 140,000 members registered in our database as at 30 April 2017. The growth in membership was partly attributable to our renewal and/or retention program package which bundles attractive renewal fee with redemption coupons to foster membership renewal which was implemented since last financial year 2016. In addition, together with our top leaders, many activities were held throughout the years to promote the sense of togetherness and at the same time provide avenue for members to interact for knowledge transfer and information exchange.


We also held on a regular basis, smaller scale events to keep the momentum going and for members training. We shared the joy of Hari Raya with our members with "Jom Balik Kampung" to cultivate "balik Kampung" culture, celebrating the festive season with family members. The 25th anniversary theme for Sahajidah Hai-O Marketing - "My Dream My Story" campaign allowed the members to share their success stories for motivational purpose and promote the sense of togetherness. Not forgetting the family of members, we also introduced the "Excellent Academic Awards" to celebrate outstanding academic achievements of the members' children.


The Group's aspiration is not only limited to grow the number of members, we strive towards building a pool of high calibre distributors with ethics and deep products knowledge. Accordingly, numerous events held during the year had also included training sessions target to motivate members, enhance product knowledge, selling skill and strengthening code of ethics. Since the evolvement into a digital platform for doing business, e-training via digital platform was initiated to reach out to a wider group of members. We implemented e-training in the form of products introduction, products support and products review on video sharing website such as YouTube which is cost efficient yet effective.


For us to build a base of distributor force with a strong sense of loyalty culture, we know appropriate recognition to the long serving and contributing members is important. The glittering "Diamonds Night" was held to recognise 760 members who achieved "Diamond Sales Managers" leadership ranking progression. There were also 172 "Double Diamond Managers" and 89 "Crown Diamond Managers" promoted during the financial year 2017.


Reward

We continue to reward target-driven members with overseas incentive trip campaigns. A total of 330 members achieved the sales target and were rewarded with a memorable trip to Italy in March 2017. In addition, 500 members also qualified for a trip to Gold Coast, Australia in August 2017 and in August 2016, 1,000 members landed their foots on to the capital city of Beijing, China. Based on our past experience, incentive trip campaign maintained its sense of appeal to the members and is an effective way to reward the members while lifting the overall sales during campaign periods.


Continuous Enhancement of Distribution Support - Conventional Complemented by Digital

The Group's strategy in strengthening distribution platform through technology adoption has yielded very encouraging results. With the progress in digital, our digital platform enables members/customers to do more and always get connected interactively. We followed through during the year a series of digital initiatives which commenced since the last financial year with wider utility functions and added contents. A live system which is called Solucis System that elevates the overall buying experience of the members was rolled out. The key functions of the system are that it:

  • enables easy access to product information;
  • eases online purchase;
  • makes tracking of members' and downlines' performance easy; and
  • provides back-end support.

With the improvement in our digital distribution platform, it makes it simple for members to track performance against sale targets. The efforts made in digitising the distribution platforms resulted in a substantial increase of e-commerce transactions from 6,300 transactions in FYE 2016 to 44,000 transactions in FYE 2017, an increase of almost 7 times. The revenue from online sale congruently, also increased from RM3.33 million a year ago to RM14.69 million for the FYE 2017. Notably, the increase in online sales for FYE 2017 was contributed by the increase in sales transacted in East Malaysia which may be due to the limitations in transportation system in East Malaysia. We see more room to grow in the e-commerce in East Malaysia, and the existing branch in Kota Kinabalu, Sabah was upgraded to a full fledged DC during the year to cater for the growing demand of online orders and to handle logistics requirements. The Company has also acquired a new shoplot in Penampang, Sabah which is in the pipeline of being set up as another branch in Sabah to cope with the increase in sales transactions. In respect of the progress in upgrading and revamping our MLM branches, we are pleased to inform that we completed the renovation for the newly acquired shoplot in Johor which is now being used as DC for all stockist in the Southern region. Not overlooking the Northern region, a new branch was also set up in Penang in February 2017 and commenced operations in March 2017.

 
Wholesale Segment

As the centralised purchasing support for the MLM and Retail segments, the Wholesale segment recorded a slight decrease of 3.15% in revenue but registered higher PBT of more than 51% of RM9.49 million as compared to RM6.28 million in FYE 2016. As a result, PBT margin, improved from 11.56% to 18.03% for the FYE 2017.


The Wholesale segment's revenue was affected by lower sales to the Chinese medical halls and the duty-free shops during the FYE 2017. The sales to Chinese medical halls was adversely affected by the following:

  • Low level of stock holding by Chinese medical halls in response to weaker sales due to cautious consumers' spending pattern; and
  • Higher custom duty on certain key products such as Chinese liquors with adjusted selling price, resulted in temporary spending adjustments by consumers.

On the other hand, more stringent rules imposed by authorities in respect of duty-free trades have also impacted the sales in the Wholesale segment negatively.


Despite experiencing a lower sales record for the FYE 2017, the Wholesale segment's PBT increased by a favourable margin due to the focus on premium products during the year and higher profit provided by goods supplied to MLM and Retail segments.


The performance recorded by the Wholesale segment was achieved with the various initiatives introduced to counter weak consumer sentiments which had a direct impact on the performance of the Wholesale segment. We noted that young consumers have been playing an increasing part in family buying decision as their buying power has been increasing more rapidly than that of other age groups. Hence, many young consumers actively participate in shopping for their own and families' needs. Keeping up with this changing trend, many initiatives for the Wholesale segment were undertaken to penetrate the young consumer market, including expanding product range which focuses on, easy consumption and provides clear sense of nutrition benefits.


These products are convenient to consume and target the fast and on-the-go lifestyle of young consumers.


To reinforce the Hai-O branding and further entrench into the young consumer market, Hai-O is proud to be the main sponsor for the script writing contest for micro movie in collaboration with Sin Chew Daily. One of the rules of the contest was to include Hai-O's products/branding in the content of a micro movie for branding promotion purpose. The contest received an overwhelming 1,100 submissions. The filming of the winning script is currently on-going and we look forward to see the public response when the micro movie is released.


During the year, we participated in a number of health exhibitions and events, including the 11th ASEAN Traditional Chinese Medicine Academic Congress (11 屆亞細安中醫藥學系大會) and the 4th Malaysia Klang International Merchandise Expo (第4屆巴生國際商品展).


Apart from initiatives to expand the young consumer market, we continued to invest in initiatives to grow and expand our popular range of products under Chinese medicated tonics including training cum incentive trip campaign for wholesale customers to a distillery in China and addition of SKU such as "Shaoxing Rice Wine Tower TianXiang HuaTiao" ("國色天香花雕"), "8-Years old Shaoxing rice wine Hua Tiao"("8年陳花雕王") and 12-Years old Shaoxing rice wine Hua Tiao ("12年陳花雕").

 
Retail Segment

The Retail segment continue to face multi-faceted challenges operating under a demanding business environment. While consumers continued to adjust spending pattern in response to high cost of living, fierce competition was also seen from the shift in conventional shopping to online purchase. Furthermore, increasing operating costs also had a negative impact on the Retail segment's performance. Retail segment maintained the top-line revenue number and registered sales of RM38.15 million but suffered an approximately RM0.4 million reduction in PBT representing a 22.74% decline in PBT.


Generally, we experienced a declining performance trend in the Retail segment post implementation of Goods and Services Tax. This is in-line with the overall trend in the Malaysia retail industry. The general observation was consumers are cautious in spending and spent only during promotion periods such as Chinese New Year promotion campaign. In addition, profit margin from the Retail segment persistently was put under pressure owing to relatively high operating costs as compared to other segments. Major operating costs in the Retail segment included rental expenses and salaries for retail employees. During FYE 2017, we also suffered a cut in A&P subsidies from brand owners' due to the slow down in the overall retail market.


As digital adoption continues to affect our daily lives, we are not spared from investing in IT infrastructure to sustain our retail business. For FYE 2017, we upgraded the customer relations management ("CRM") system which will allow us to perform data mining on consumers' spending pattern and preference. With this IT investment, we hope we will be able to improve the planning for our merchandising and promotional activities. We also interact regularly with our retail customers through social media platforms such as WeChat and Facebook. Health and wellness information and promotional activities are uploaded and disseminated via social media interfaces.


In view of the gaining popularity of online shopping trend in Malaysia, we held back expansion of branches and closed down 2 non-performing retail outlets during the financial year under review. Currently, the Group has 56 retail outlets (including 7 franchises). To differentiate the products and services, a Chinese physician is stationed at selected retail outlets to provide value added services to our customers in the form of general medical consultation and products knowledge. Currently, 12 retail outlets provide consultation service by Chinese physicians and we plan to increase to other outlet stores over time. To complement these strategies, we organised the traditional chinese medicine course in collaboration with the Oriental Academy of Chinese Medicine. 31 employees participated in the course and were accredited with certification by the Oriental Academy of Chinese Medicine.


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 Activities

In relation to the other operating activities of the Group, revenue is mostly derived from rental income from the investment properties, manufacturing activities of pharmaceutical TCM products, advertising and credit & leasing activities.


The total PBT contribution by other operating activities was RM4.81 million for the FYE 2017 as compared to RM4.48 million in FYE 2016. Manufacturing and property investment activities are primarily the other operating activities which were contributing to the Group's revenue and PBT. Since the commissioning of manufacturing activities in our relatively new manufacturing plants in Jalan Kapar in May 2014, our manufacturing activities have slowly gained traction with the overall operations of the Group. Apart from receiving manufacturing orders from 3rd parties, our manufacturing plants also supported the MLM and Retail segments in the manufacturing of TCM healthcare products, supplements and herbal products. For the FYE 2017, manufacturing activities contributed approximately RM2.08 million to the Group's PBT, while PBT contribution from rental of property investment was approximately RM2.5 million which was lower than the rental collected in the previous financial year of RM4.3 million. The reduction in rental received was due to nonrenewal of tenancy agreement by one of the key tenants.

Outlook and Prospects

The next financial year is expected to be another tough year for the industry which the Group is operating in. On the macro level, there is an increase in uncertainty due to the policy adjustments in China and the long term impact from Brexit. This uncertainty is projected to take a toll on consumer confidence and market sentiment. In 2017, the Malaysian economy is projected to grow by 4.3% - 4.8%, but the achievability of this projection will be dependent on external developments and global economic growth to a large extent. Adding on to the already challenging outlook, inflation is projected to increase in 2017 averaging between 3.0% - 4.0% (2016: 2.1%), primarily due to pass-through impact of the increase in global oil prices on domestic retail fuel prices according to annual report of Bank Negara Malaysia 2016. Rising inflation rate not only will result in consumers cutting spending but at the same time will also increase the operating costs inevitably.


As we mark an end to another successful year, it is the beginning for new expectations. Looking ahead, we have to proactively address potential vulnerabilities and tap on new growth areas to maintain the momentum of growth. With the Group’s solid fundamentals, we are well-positioned to weather challenges ahead. For the MLM segment, we will focus our efforts to add SKU to the fashion range of products after market testing of hijabs that were rolled out in March 2017, which received positive response from our members. Accordingly, product development for the MLM segment will be focusing on trendy lifestyle theme, with leather goods taking the lead and supported by skincare products and expansion of the hijabs range and related accessories. Initiatives for the Wholesale segment is expected to carry out strategies to retain household consumers by increasing household and personal care products focusing on young consumers market. In respect of Retail segment, as the operating costs are relatively higher than other operating segments, we hope to leverage on the new CRM system implemented to streamline and centralise merchandising and A&P activities to achieve cost efficiency.


For our employees/members, we aim to foster a culture to nurture talents to assist in unlocking and fulfilling their potentials. A number of training courses for our retail outlets employees are planned to increase their knowledge in TCM and herbal products, an effort towards differentiating services offer in our retail outlets. For MLM members, we are looking to conduct more innovative A&P events to increase products exposure, to further enhance the spirit of togetherness and at the same time to increase products knowledge of the members. Trainings which emphasize on code of ethics will also be held throughout the year to reinforce sense of integrity among members.


On-going efforts to upgrade digital platforms in all operating segments will continue to optimise business operations and to achieve cost efficiency. While the management is positive on the Group’s outlook for the next financial year, we remain vigilant in FYE 2018 in light of the constantly changing external environment.

Appreciation

On behalf of the Board, I would like to thank the management team, our MLM entrepreneur network and employees for their unwavering commitment and invaluable contributions in delivering greater value for our shareholders under such a demanding and challenging environment during the FYE 2017. My sincere thanks and appreciation also go to all our shareholders, customers, distributors, investors, business partners and stakeholders for their confidence and continued belief in Hai-O Group of Companies.


Tan Keng Kang

Group Managing Director


8 August 2017