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

This MD&A outlines the review of the financial and operational performance of the Hai-O Group for the financial year ended 30 April 2020 ("FY2020"). We start with the review of our overall financial performance in FY2020, which sets the backdrop to review the individual operating segments which provide greater details of their respective business plans formulated in response to the very challenging business environment in FY2020.


Some of the statements contained in this MD&A that are not historical facts are statements of future expectations with respect to financial results and positions, operations and businesses, and business plans. Forward-looking information is based on Management’s views and assumptions, taking into account prevailing economic and market conditions. While we endeavour to keep shareholders abreast of key developments, mid-term direction and the health of business operations for FY2020 and the coming financial year, this should not be construed as a representation of future performance or commitment. Given such uncertainties, readers are cautioned and advised not to place undue reliance on the forward-looking statements.


Operating Structure

There were no significant adjustments or fundamental shifts in the Group’s business focus in FY2020. Multi-Level Marketing ("MLM"), Wholesale and Retail continues to be our three major core business segments which collectively contributed approximately 92% of Hai-O Group’s earnings in FY2020. Our non-core divisions of manufacturing, credit & leasing, insurance agency, investment and property holdings contributed the balance 8% of the Group’s earnings.


The Group continues to operate and distribute our products primarily in Malaysia. Although we have ventured to Indonesia, Brunei and Singapore through business collaborations with the locals to distribute some products, there was no significant business development from our overseas businesses during the financial year. The Group has in total 95 brick and mortar presence in Malaysia complementing our growing digital platforms.


The operating environment for the Group’s businesses was challenging and constantly evolving in FY2020. On the external front, the escalating US-China trade disputes brought great uncertainties to overall business sentiments even before the sudden and severe outbreak of coronavirus disease ("COVID-19"). In Malaysia, the unexpected change in Government came just before the onslaught of COVID-19. Facing the inevitable setback in business activities, revenue and profits, the Group’s priority was to respond and reposition nimbly and strategically, while preserving our strong core values, balance sheet and foundation. We took the challenge of managing business complexity for sustainability in our stride as we deployed resources effectively to empower our people, products and operations in the very taxing FY2020.


FY2020 presented multiple challenges amidst heightened uncertainties, which required us to make constant adjustments to our priorities and the way we work. Over the last 12 months, we have worked through many issues and challenges, some of which were unprecedented. With our sound fundamentals helmed by a steady and agile Management team, we have initiated a number of business initiatives with a prudent Management oversight to strengthen sustainability and to further fortify our position. We have made adjustments to our product offerings, the approaches to attract, reward and retain customers/members/distributors, business and marketing strategies while also taking a further leap to digitalise both our businesses and operations.

Financial Results

As a consumer-centric Group, we are glad to have weathered FY2020 with resilience as we continue to chart profit for the financial year. This was against a challenging backdrop with various headwinds globally and domestically, including the protracted US-China trade war, sluggish domestic sentiment and regulatory uncertainties, as well as the unexpected change of the Malaysian Government and the COVID-19 shock towards the end of the financial year.


The Group’s revenue declined 22.3% year-on-year ("y-o-y") to RM255.2 million in FY2020, with lower revenue in all three major operating segments of MLM, Wholesale and Retail. Cautious consumer spending aggravated by the COVID-19 outbreak dealt a big blow to our operations across the board. The MLM segment reported a substantial decline in revenue of approximately 30.3%, while the Retail segment also posted a 9.4% y-o-y drop in revenue after its operations came to almost a standstill upon the commencement of Movement Control Order ("MCO") on 18 March 2020.


In comparison, the Wholesale segment was relatively resilient with negligible drop in revenue of 2.7%. Correspondingly, the Group’s profit before taxation ("PBT") fell 34.5% y-o-y to RM41.5 million. Generally, the profitability of the Group was primarily affected by the declining revenue recorded for the financial year. Indeed, gross margin of the Group improved slightly to 38.9% (FY2019: 38.3%) in FY2020 although operating profit margin fell to 16.0% (FY2019: 19.0%) after incorporating several one-off expenses and provisions.


STRONG BALANCE SHEET

The financial position of the Group remained strong with total assets of RM361.7 million against total liabilities of RM51.5 million as at 30 April 2020. Close to 60% of total assets were in the form of liquid assets comprising inventories, trade receivables, short-term financial investments, and cash and cash equivalents. As at the end of the financial year, the Group was in a net cash position with zero borrowings. Total equity attributable to shareholders fell marginally to RM299.6 million (equivalent to RM1.03 per share) as at 30 April 2020, compared to RM310.2 million (equivalent to RM1.07 per share) as at 30 April 2019. The slight drop in total equity attributable to shareholders was mainly due to higher dividend payout ratios in FY2019 and FY2020.

CASH AND CAPITAL MANAGEMENT

Amidst the ongoing macroeconomic challenges, we have continued to exercise prudence especially in terms of cash and capital management. No major expenses were incurred for investing and financing activities in FY2020. We maintained a healthy liquidity position with cash and cash equivalents plus other short term investments in cash and money market funds of RM95.9 million as at 30 April 2020 (FY2019: RM95.1 million). The major cash outflow item incurred for the financial year was cash dividends paid to shareholders of RM35.1 million, of which RM26.1 million was in respect of the financial year ended 30 April 2019. The high cash holding of the Group is reflective of our business operations which are mostly transacted in cash. Besides providing sufficient liquidity to support growth, a high cash holding also gives the Group great flexibility and resilience which is particularly important during uncertain times like the prevailing COVID-19 crisis.


Review Of Segmental Operations
MLM SEGMENT

Since 1992 when the Group ventured into the MLM business, Hai-O’s MLM segment under Sahajidah Hai-O Marketing Sdn. Bhd. ("SHOM") has made meaningful contributions to the Group both in terms of revenue and profits. In FY2020, MLM remained the major contributor to the Group’s revenue and profits, supported by 114,000 MLM members who distributed more than 250 stock keeping units ("SKU") of a wide range of products including nutritional food & beverage, wellness supplements, skincare, beauty & cosmetic, personal care and household products. As at the end of FY2020, the MLM segment operated 13 branches, of which 6 were located in East Malaysia. Apart from selfmanaged branches, the MLM segment was supplemented by 21 stockists and 2 sales points across Malaysia for efficient logistic and stock management.


The performance of the MLM segment was stifled in FY2020 due to sluggish consumer spending in the wake of weak market sentiment, political uncertainties following the unexpected change in Government, and the COVID-19 pandemic-fuelled economic downturn. The MLM segment recorded a revenue of RM156.7 million and PBT of RM32.5 million in FY2020, representing respectively a decline of 30.3% and 31.4% from the last financial year.


The full-year results, however, has masked the underlying improvement recorded in the final quarter of the financial year, which underscored Management’s efforts to restrategise the MLM business in response to the "new normal". We are heartened by the encouraging performance but also recognise the need to constantly anticipate, respond and adjust to evolving changes during prevailing uncertainties. It is crucial for the Group to remain proactive and further build on the momentum to fortify business sustainability in order to strengthen our resilience in the face of challenges.


The MLM segment primarily focussed on the following areas to reinforce segment sustaintability during the financial year:


Member empowerment – Distributors are the drivers of MLM sales. Every year, we allocate substantial resources to empower and motivate our distributors in appreciation of their hard work to bring sustainable returns to the Group. Mega events are held each year to achieve the following objectives:

  • To appreciate and recognise the achievements of outstanding leaders and distributors;
  • To create a platform for engagement and interaction among distributors;
  • To uphold morale and sustain sales momentum of distributors; and
  • To introduce new/refreshed products.

During FY2020, we commemorated nearly 4,000 individuals who achieved outstanding sales through the SM/SSM Recognition Event, Diamond Night and SHOM 27th Anniversary Celebration.


The mega events received overwhelming response from members each year. Despite the tough economic condition, underlying morale and interests remained strong. For SHOM 27th Anniversary Night alone, SHOM hosted approximately 6,000 esteemed members. More than 2,500 members participated in the Diamond Night and nearly 2,900 participants gathered in Setia Spice Convention Centre in Penang to recognise the achievements of SM and SSM.


We also hosted a SM/SSM Recognition Night in East Malaysia, attended by more than 800 members.


As part of our member empowerment initiatives, we also organized conferences as platforms for interaction, feedback, strategic reviews and exchange of ideas between the highest ranking leaders i.e. Crown Diamond Managers and the Management. Two conferences were held during the financial year, i.e. Majlis Hari Raya in June 2019 and CDM Conference in January 2020.


The MLM segment has traditionally been incentivising distributors to push sales through overseas trips qualification. However, weak consumer demand has made it increasingly challenging for members to meet the qualifying sales targets, especially for premium incentive trips. SHOM organized 2 incentive trips during the financial year, i.e. Melbourne in August 2019 and Bangkok + Pattaya in January 2020. With restricted travels due to COVID-19, incentive trips will be temporarily suspended but Management has and will continue to introduce alternative incentives to motivate distributors, bearing in mind the prevailing market circumstances.


Member recruitment and retention – In tandem with the weak market condition, SHOM has experienced a declining trend in members’ recruitment and renewal for most of the financial year. Many brainstorming sessions were held to review, reposition and re-strategise. Among the new initiatives rolled out for members’ recruitment and renewal in FY2020 was B-XTRA, a business starter plan offering extra savings, product rebates, bonus and rewards for members to build a career through the distribution of MLM products. After the commencement of MCO, SHOM promptly rolled out "Join For Free" (no joining fee for new members) and "Earn From Home" promotions to push online sales to consumers required to stay at home. Promotions were also held to drive membership renewal with selected gifts as added incentives, including a carnival roadshow in East Malaysia to reinvigorate inactive members through the distribution of special gifts for purchases made during the roadshow. To sustain buying interests, “Flash Sales” were organized for targeted products at promotional prices. As a result of these initiatives, we maintained a distributors force of 114,000 members at the end of the financial year. Although this still represented a drop of 6% compared to the last financial year, the retaining members are the loyal and productive distributors force of the MLM segment.


Digital adoption – COVID-19 outbreak has impacted almost every aspect of people’s lives in many parts of the world, forcing businesses to adapt, adjust and renew for survival. Among others, the outbreak has accelerated digital progress for many businesses including SHOM. As the Group has already invested in digital operating models/enablement over the years, Management was able to quickly adapt to galvanise distributors and push MLM sales online, hence demonstrating operational resilience and business sustainability during the COVID-19 health crisis. As many businesses scrambled to adjust to the "new normal", SHOM staged an impressive turnaround in membership in the COVID-19-hit months, leveraging on the functional deployment of social media, online training, e-commerce, teleassistance and in-house applications in the pursuit of business continuity.


As social media is all about building a presence to boost user engagement and deliver better customer experience, SHOM updates its digital contents on Facebook and Instagram on a regular basis with new daily postings and engagement activities. In addition, digital contests, online product tutorials, product videos and product recipes are uploaded and regularly updated on SHOM official social media sites. Notable mentions for some of SHOM’s advertising and promotional activities included “MisiKonfemCun” and MinKaffe & Sweetality Recipe Videos. "MisiKonfemCun" was a digital Ramadhan & Raya Festive Campaign to promote SHOM products for Hari Raya, while MinKaffe & Sweetality Recipe Videos were made in collaboration with Chef Suwarsi to showcase 2 products. As social media provides a good platform for product endorsements, SHOM also conducts campaigns to seek product feedback through its social media platforms. 3 new products - PB Therapants, Boxer and Infinence Treatment Serum have received more than 100 positive testimonials from members, which had boosted sales.


With the MCO providing an added boost to SHOM’s digital push, e-commerce usage by members rose to account for 11.9% of total MLM sales in FY2020 (FY2019: 7.5%). The latest crisis only goes to reinforce our belief that investment in digital infrastructure is imperative for the future. Besides the good progress, we have achieved in digitalising operations and sales, we also need to be ready for the big data era to keep abreast of ever changing consumer preferences, consumption patterns and trends.


Product innovation – Product innovation is key to the success of SHOM. We strive to be market sensitive and responsive to changes in consumer preferences and devote substantial resources to innovate and upgrade products. SHOM launched a total of 15 new products with 33 SKU in FY2020. Taking into account the reduced spending power of consumers generally, our product innovation and development efforts in FY2020 were mainly directed towards small ticket items such as cosmetics and skincare. Among the new product launched in FY2020 were:


  1. Cosmetics: Cozuma High Precision Liquid Eye Liner, Cozuma Fiber Lash Mascara and Cozuma Long Lasting Eyebrow Pencil; and
  2. Deluxe skincare: Infinence Aqua Radiance Hydrating Serum, Infinence Blemish Control Treatment Serum and Infinence V-Perfect Shaping & Lifting Serum.

We are proud of the overwhelming response from SHOM members following the launch of PB 360 Thera Pants in FY2020. PB 360 Thera Pants, which combines the benefits of "Push-Lift-Lock-Support", is the outcome of extensive product development and market research. We use hightechnology fabrics from Korea, Japan and the US to create a single outfit that is cooling and helps to shape via honeycomb and magnetic crystals technology. Unlike the traditional single-purpose shaping lingerie, PB 360 Thera Pants also promotes other health benefits such as improving blood circulation and correcting posture. Riding on the success of PB 360 Thera Pants, SHOM plans to introduce more products based on the same technology and concept.

 
WHOLESALE SEGMENT

For more than 40 years, Hai-O has been a trusted wholesaler for other wholesale customers and retailers including Chinese Medical Halls, restaurants, supermarkets, hypermarkets, pharmacies and convenience stores. In FY2020, the Wholesale segment served more than 100 wholesale customers and 2,000 retailers across Malaysia. We distribute more than 200 branded products in Malaysia. Our products range from premium quality traditional medicines, Chinese herbs, teas, food supplement to health tonics and wines. Our products are primarily sourced from China, Taiwan, Japan, Scotland and Australia. Our established market position in wholesaling is earned through the delivery of quality products via efficient logistic services which provides confidence and assurance to our product principals and customers. The Wholesale segment is also the centralised purchasing unit for the Group’s MLM and Retail segments.


In FY2020, the Wholesale segment recorded marginally lower revenue of RM57.4 million (FY2019: RM59.0 million), and a 47.2% decline in PBT to RM5.7 million (FY2019: RM10.8 million). Higher sales of Pu-Er tea and export of bird nest products were offset by reduced demand for Chinese medicated tonic, cooking wine and patented medicine. The division was affected by the commencement of MCO which prohibited the delivery of non-essential products and restricted business activities of some customers such as restaurants and duty-free shops. Margins took a bigger hit due to lower contribution from inter-segment sales in addition to an unfavourable shift in product mix and higher import costs.


In the first half of FY2020, the Wholesale segment continued its strategy to expand and secure more product agencies, target younger customers and broaden its distribution channel to high volume businesses such as supermarkets and hypermarkets. This included the rebranding and repackaging for selected products to rejuvenate product images and the remodelling of advertising and promotional ("A&P") programmes to lift sales. At the same time, various initiatives were implemented to recognise and reward customers, including the Jiang Nan Business Incentive Trips which rewarded 37 wholesale customers who met stipulated sales targets, the Pagoda Night held in Genting International Convention Centre attended by more than 700 customers and the Kavalan Dinner which attracted approximately 200 participants.


The second half presented a totally different set of challenges with the sudden outbreak of COVID-19. The segment sources extensively from China and hence faced logistic constraints when China became the first COVID-19 epicentre in January 2020. The Wholesale team immediately took actions, working closely with suppliers and customers to support a coordinated and effective response to pre-empt potential supply chain failures. A systematic approach was taken to manage the situation, identifying critical products which require stock piling and dynamically balancing inventory needs with anticipated demand and order volume. To avoid excessive stock piling, the Wholesale segment deployed "Rationing or Switching" strategies to ration orders by customers and/or suggest product substitutes in the event of low stock levels. In response to logistic hurdles, "Smart Assortment and Smart Delivery Management" was adopted during the MCO period to prioritise delivery and manpower planning in order to maximise operational efficiency and to meet the demand for essential goods from high volume customers.


On a positive note, we are glad that the Wholesale segment has demonstrated its ability to sustain business operations in the midst of unprecedented challenges and further entrench Hai-O\’s image as a trusted and reliable wholesaler. The COVID-19 crisis has also propelled and motivated the division to place even greater emphasis on risk controls while further expediting business reforms to support business continuity.


We aim to improve the depth of our wholesale product range and customer base and will also shifting to more digital A&P to build a presence with the younger generation.

 
RETAIL SEGMENT

The Retail segment is the Hai-O Group’s brand advocate and the most visible point of engagement for our loyal customers, our quality products, and our friendly outlet representatives. Our 57 retail chain stores and franchises across Malaysia provide easy access to customers who would like to feel and touch our products. As a value-added service, traditional Chinese medical professionals are available at selected locations to provide general medical and consultation to customers.


As expected, the Retail segment has been hit hard by the slowdown in the overall economy as well as the COVID-19 pandemic, recording a 9.4% drop in revenue to RM36.7 million (FY2019: RM40.5 million) in FY2020. The Retail segment defended its profitability well in the first 3 quarters of the financial year but took the brunt of the imposition of MCO from 18 March 2020. The Group’s retail outlets operated at minimal levels during the 1st phase of the MCO, and operating hours were scaled back to contain costs when most retail outlets resumed business during the 2nd phase of MCO. With lower revenue and added costs to implement standard operating procedures ("SOP") during MCO, the Retail segment narrowly averted a loss position and managed to just break even in FY2020 (before factoring in MFRS 16 impact on leases), compared to a profit of RM0.9 million in the previous financial year.


Similarly with our MLM and Wholesale segments, the Retail segment took proactive measures to bolster sales amidst subdued consumer sentiment in the first half of the financial year, and promptly re-strategised to overcome COVID-19 challenges in the last quarter of the financial year. Among which, the segment implemented action plans to optimise costs, promote the adoption of digital platform, expand distribution channels and embrace new SOP for the safety of our valued shoppers and employees.


Optimising cost – High operating cost in the Retail segment has long been a constraint on profitability, especially in view of the largely fixed nature of rental and manpower as the two major cost components. As such, the Group needs to stringently track the profitability of each retail outlet to optimise performance. In FY2020, Management shortened business hours for several retail outlets to reduce overtime costs via single work shift during MCO. At the same time, we successfully obtained rental concessions for many outlets. These cost containment initiatives have helped the division to avert a loss position in the trying year.


Harnessing digital potentials – On the digital front, COVID-19 has propelled the Retail segment to further step up digitalisation. Action plans rolled out to expand our e-commerce reach during the MCO included Hai-O e-store special rebates, e-store special coupons, Facebook Live broadcasts, “When We Are All Together” family videos and photos contest, and Maxis Business - #KitaSapotKita# Youtube Interviews. We are glad to have been able to capitalise on opportunities arising from the MCO which forced even previously reluctant customers to shop online, and would work hard to retain them to help diversify from the brick-and-mortar business model.


Re-balancing distribution platforms – To extend the reach beyond our in-house e-commerce platform, the Retail segment has also actively explored the potential of new distribution channels through e-market places such as Lazada and Shopee. At the time of writing, Management is at an advanced stage of finalising terms and conditions to develop more online distribution platforms. We hope to participate in this inevitable trend which is shaped by consumer behavior and expected to gain further momentum in the “new normal”.


Adapting to the "new normal"– The "new normal" is not just about digitalisation and new SOP. We need to actively anticipate and respond to changes in lifestyle and market trends, and this will be an ongoing and evolving process. To cater for customers\’ demand, we have added more health supplements to help build immunity, besides making available COVID-19 related products such as masks and sanitizers. With an established image in premier healthcare products, Hai-O hopes to ride the "new normal" in a win-win way in the best interests of our customers, shareholders, employees and the community at large.


During the financial year, promotions were also held for special occasions such as the Chinese New Year, and also in collaboration with brand owners and banks to tap a larger consumer base. Events held included Flash Sales promotion, Buy 2 Free 1 sales campaign for Korea Ginseng Corporation (正官庄), and bundled promotion campaign for house brand products such as Hai-O MingZhu Bai Feng Wan, Hai-O Cordyceps Capsules and Hai-O Imperial Instant Bird’s Nest. We received positive response for the joint promotional activities with banks such as Maybank QR Pay Cashback Promotion and Public Bank Credit Card Promotion. For the first time, the Retail segment collaborated with the Malaysian Retail Chain Association ("MRCA") through the distribution of promotional coupons exclusively for MRCA members.


On the product front, we launched Honbo JFlex Capsules for bone health in FY2020, offering Hai-O Friendship members the opportunity to pre-order before the official debut.


 
OTHER OPERATING ACTIVITIES

The Group also generates income from:

  1. rental of investment properties;
  2. manufacturing of TCM and food supplements; and
  3. credit & leasing business.

Revenue generated from other operating activities has been fairly consistent at around RM4 million per annum for the last 3 financial years, with the bulk coming from rental and manufacturing activities. In FY2020, segmental revenue of RM4.3 million was marginally higher than RM4.0 million in FY2019, thanks to a new tenancy secured for one of the Group’s investment properties. However, segmental profit was lower at RM3.4 million (FY2019: RM4.3 million), dragged by reduced contribution from manufacturing activities and a one-off legal expense of RM0.5 million. Overall, we expect contributions from “Other Operating Activities” to remain fairly stable.


Outlook And Growth Enablers For FY2021

In the latest update, Bank Negara Malaysia painted a cautiously optimistic picture for the domestic economy upon its progressive opening in May 2020, but also highlighted downside risks emanating from both domestic and external factors (see boxed statement).


This sets another challenging backdrop for the Hai-O Group in the new financial year. Indeed, the prospect for a synchronised global recession casts a long shadow, with the COVID-19 pandemic remaining a central issue as its domino effect continues to unfold and reverberate amidst rising risks for a second wave. The Greek philosopher Heraclitus said, "Change is the only constant in life", and this cannot ring more true during such unprecedented times. After weathering the difficult year of FY2020, we believe we have further honed our readiness to adapt and respond to expected and unexpected changes, which is the core of business sustainability. We will continue to balance our long-term strategies and objectives with adjustments necessary to meet short term changes, to stay relevant in the market, and to strengthen our foundation and sustainability.


Effective product strategy, digital adoption drive and distribution channels expansion are expected to be the key focus areas for the Group in FY2021 as we position to further fortify our position as an established healthcare company in Malaysia. Amidst subdued sentiment, we are hopeful that various Government measures, including broad-based assistance and incentives, policy stimulus packages as well as several rounds of Overnight Policy Rate reduction by Bank Negara Malaysia, would help to bolster consumer spending. As we tailor our product strategy to prevailing market conditions, the focus will be on essential health products with low to medium pricing. Digital platforms enhancement will be an ongoing process across all major business segments to reduce our dependency on physical business, automate and streamline operational processes, and to ensure continuity of businesses with minimal interruption in the event of crisis. We also plan to further leverage on social media, digital advertising, live broadcasts and e-training to build brand awareness, improve product presence, expand customer base and optimise costs. Elsewhere, we will intensify efforts to expand our distribution footprint to supermarkets and emarket places to further broaden our reach.


With targeted strategies led by our dedicated and proven Management team, we are ready for another challenging year. We are poised to emerge stronger as we continue to create values for all stakeholders through sustainable and prudent long-term growth.


Appreciation

FY2020 was not an easy year for Hai-O. We are glad to have stayed the course and made strategic adjustments to strike an optimal balance between short-term priorities and long- term growth. The Group’s business sustainability is the culmination of support received from key stakeholders whom we would like to acknowledge. My utmost gratitude to my colleagues on the Board, our loyal Management and employees, and our dedicated MLM distributors. If not for your passion, hard work, commitment and perseverance, we would not have been able to overcome the challenges and obstacles in FY2020. We would also like to express our heartfelt thanks to various ministries, government agencies, suppliers and other business partners for their support and contribution. We continue to look towards the generous support of all stakeholders as we work to create sustainable values in future.


Appreciation also goes to our shareholders for your belief in the Group and our ability to deliver sustainable values. It is our commitment that our journey will always be planned with your interests at heart.


Thank you.


Tan Keng Kang

Group Managing Director


3 August 2020