Zhulian Corporation Bhd
(Mar 24, RM1.71)
Maintain buy at RM1.75 with target price of RM2.50: Zhulian is setting up a subsidiary in Laos (95% stake) with a local joint-venture partner (5%).
This could trigger the next leg of growth, given the saturated Malaysian market. It will replicate its successful Thailand model (43% sales CAGR in FY06 to FY10) in Laos, as the countries have a similar religion, culture, and economic activities.
Moreover, Zhulian will hold a controlling stake, unlike in Thailand where the government capped it at an associate stake. We have yet to factor in any contribution from Laos but we estimate that Laos could potentially add RM30 million per year to group revenue (9% of FY10) and RM7.5 million to net profit (8.6%), assuming 34,000 distributors (0.5% of the population) with RM900 sales per distributor and 25% net margins.
One of Zhulian’s subsidiaries recently received the GMP (Good Manufacturing Practice) certification issued by Malaysia’s Ministry of Health. It will enable Zhulian to:
(i) launch more supplement products (capsules and tablets);
(ii) increase exports; and (iii) gain consumer confidence in its products.
This could lift sales of its nutrition products, a major contributor at 21% of FY10 earnings.
Valuation remains attractive at 8.3 times PER (against Amway (M) Sdn Bhd’s 15.6 times), backed by 13.6% FY10/12F net profit CAGR.
Zhulian is also a proxy to Asia’s multi-level marketing sector with potential expansion into neighbouring Vietnam and Cambodia.
Its balance sheet is strong with RM131.6 million net cash (28 sen per share) as at FY10, which bodes well for future expansion and to maintain 60% payout (implying approximately 7% net yield). — HwangDBS Vickers Research, Feb 8
