‘No rush to get into Zhulian’

by **Cals** Mon 02 Jun 2014, 23:57

Business & Markets 2014

Written by Kamarul Anwar of theedgemalaysia.com

Monday, 02 June 2014 09:33

KUALA LUMPUR: While Zhulian Corp Bhd has seen its share price plunge to a year low, there are still concerns that the selling pressure has yet to dry up amid expectations of further drop in earnings in the coming quarters.

“There is no rush to get into the stock,” a fund manager said, addind that Zhulian had fallen victim to the political unrest in Thailand.

The fund manager, who has Zhulian on his radar, pointed out that the Thai political unrest had reversed the multi-level marketing (MLM) firm’s growth streak. He noticed that the company’s quarterly net profit had been between RM13 million and RM17 million for the past two financial quarters.

“This could mean that Zhulian’s earnings are probably at around this level with contraction of contribution from Thailand,” he said. Thailand made up nearly 60% of Zhulian’s revenue for the financial year ended Nov 30, 2013 (FY13). The scrapping of the rice subsidy has affected the income of the farmers who are Zhulian’s target market.

In a blue-sky scenario, assuming an annul net profit of RM80 million for FY14, this would translate into earnings per share of 17.39 sen.

“At the current price-earnings ratio of 11 times, Zhulian’s share price should be around RM1.90,” the fund manager explained.

As Zhulian has a dividend payout policy of up to 60% of its annual net profit, an RM80 million net profit would translate into a dividend of 10.43 sen a share. Based on last Friday’s closing of RM2.79, this would in turn translate into a dividend yield of 3.7%, which is within the range of the projected annual inflation rate of 3% to 4%.

Assuming the share price were to go down to the fund manager’s estimate of RM1.90, the dividend yield will be bumped up to 5.49%.

Kenanga Research’s latest estimate for Zhulian’s net profit for the current FY14 is RM84.7 million, a 30% drop from the previous year’s RM121.01 million. Projected revenue is RM356.6 million, down from FY13’s RM417.06 million. Kenanga pegs its target price at RM2.83 with a “market perform” rating.

The research house forecast a net profit of RM96.9 million for FY15, implying a 14.4% growth from the previous year. Its projected revenue is RM388.2 million.

Nonetheless, fund managers and analysts said that this does not take away the fact that Zhulian is fundamentally sound and has bright prospects for growth in the long run.

In this case, the fund manager said Zhulian could face more selling pressure if the stock were to adhere to its current valuations.

“Not that Zhulian is in dire straits or loss-making. It has a strong balance sheet and is fundamentally sound, but investors have been expecting too much from the company after seeing strong growths in the past. The muted share price performance is because of investors’ high expectations and Zhulian’s lower contribution from its Thailand market.

Kenanga Research analyst Khoh Wei Keen said Zhulian is still seeking growth from its Thailand market, despite the political unrest there stemming from a failed rice subsidy scheme which had impeded many a rice farmer’s income stream.

“Zhulian’s management believes the MLM market in Malaysia is already saturated. Compared with Malaysia, Thailand’s market has a low penetration rate,” he told The Edge Financial Daily in a phone interview, adding that he expected the earnings of Zhulian’s Thailand segment to stabilise in the second half of this year.

However, Khoh conceded that Zhulian would have a year-on-year dip in its bottom line this year still. “Yet, there will be growth come next [financial] year and the following year, and the growth will be high relatively as it will come from a lower base [after Zhulian’s net profit decline].”

Economists’ projection for Thailand’s economy is not as sanguine either, given the average forecast gross domestic product growth of 3% is similar to the previous year’s 2.9%. With about 87% of Thailand’s 67 million population classified as rural class, this could hamper Zhulian’s earnings for the time being as its MLM business is popular with the farmers.

The fund manager, meanwhile, believes Zhulian will see growths in its Indonesia and Myanmar markets, with the latter being a recently initiated one. The Indonesian segment made up only 4.88% of Zhulian’s FY13 revenue, from 4.15% in FY10.

“The Indonesian segment’s contribution is still small but it is growing fast,” said the fund manager. Zhulian has yet to recognise Myanmar’s revenue contribution as of FY13.

Zhulian is also prepared for future growths. Recently, the company reportedly said it was investing RM35 million to set up new production facilities, on top of the RM7.7 million it had invested in a new plant in Bayan Lepas.

This article first appeared in The Edge Financial Daily, on June 2, 2014.