KUALA LUMPUR, Nov 9 — The management of Zhulian said it remains cautiously optimistic of the group’s perfoRMance for FY14.
It said the outlook for the current year remains challenging due to stiff market competition and economic uncertainty that is leading to lower consumer confidence.
But it expects the market situation to improve as it will increase its marketing efforts to boost the productivity of its distributors.
It is taking prudent measures in evaluating initiatives and opportunities to ensure its business attracts new distributors and retains existing distributors.
These measures include increasing its R&D efforts to develop new products, introducing more promotional campaigns, and improving the quality of its customer service.
Zhulian will also try to tap into new market segments by introducing new products and venturing into new business segments.
Zhulian is a multilevel marketing (MLM) company that started in Malaysia.
It sells products ranging from fashion jewellery to personal care and health products.
It has a presence in Malaysia and Thailand, with revenue from these two countries making up more than 90 per cent of its total FY13 revenue.
But unlike its competitors Amway and Hai O, which focus on the domestic market, it derives 57 per cent of its revenue from Thailand, with Malaysia making up 38 per cent.
Zhulian also operates in Singapore and Indonesia.
The company just announced earnings for Q3FY14:
Revenue: -54 per cent to RM57.2 million
Profit: -74 per cent to RM10.4 million
Cash flow from operations: RM34 million vs RM65.2 million
Dividend: 2 sen per share vs 3 sen per share
The management of Zhulian said the decrease in revenue was mainly due to a fall in demand in local and overseas markets.
It also attributed its lower profit before tax to the drop in revenue and share of profit of an accounted investee.
Zhulian just released two paragraphs to explain its financial results.
Investor Central. We keep your investments honest.
1. Why stick persistently to the two-paragraph template to explain its financial performance?
Zhulian’s troubles started due to the double whammy of the Malaysian and Thai economies, which contribute over 90 per cent of its sales.
In Malaysia, cautious spending by customers due to the escalating cost of living coupled with stiffer competition were the reasons behind its recent lackluster results, while its business in Thailand was hit by the political turmoil.
This has put a stop to all talk of Zhulian being an undiscovered gem which carried a lot of upside.
That was as recent as September last year.
But through good times and bad, Zhulian has always issued two-paragraph explanations for its financial performance, with the first two sentences explaining its revenue, and the following two explaining its profit before tax.
In bad times, it is necessary and shows courage of management if it communicates more to shareholders.
Can it start explaining its financial performance in a more comprehensive manner?
2. When does it expect its Myanmar operations to stop gestating?
According to Kenanga in a report in October, Zhulian’s lower net profit was impacted by the decline in its revenue and was further dragged down by start-up costs in its Myanmar operations as well as a higher tax rate.
The broker said the same thing in its report in July when reporting on Zhulian’s Q2 FY14 results — that net profit was affected by higher start-up costs in Myanmar.
We are not sure if Zhulian can cut it in Myanmar, since nothing has really come out of its venture into Laos, which shares similar cultural traits with its major market Thailand — there was no mention of its efforts and results in Laos in its 2011, 2012 and 2013 annual reports.
Zhulian entered Laos in 2011, according to Hwang DBS Vickers.
The broker even predicted Laos to become Zhulian’s next “growth engine” and to add 34,000 distributors that will contribute RM30 million per year to the MLM company’s revenue.
In hindsight, we do not even know if the broker was wrong, since there has been no mention of Laos by Zhulian in its annual reports.
Maybe things will be different in Myanmar, a country with an economy growing so quickly the World Bank is pegging its 2013/14 GDP growth rate at 8.5 per cent, and is also targeting a figure of 8.5 per cent for 2014/2015.
When does Zhulian expect its Myanmar operations to stop gestating, and to start contributing positively?
3. What are Zhulian’s targets for the Myanmar market?
What are its revenue targets for the Myanmar market? How many distributors and agents does it expect to attain by the end of this year?
4. Where did it invest RM12.1 million in its business?
Zhulian spent the most this quarter on capital expenditure — RM12.1 million, possibly on entering the Myanmar market.
According to a report in May by The Edge at Zhulian’s annual general meeting, group managing director Teoh Meng Keat said the group had allocated RM35 million as capital expenditure for the next 12 months.
Of the RM35 million, RM7.7 million of the capex has been used to purchase a factory in Bayan Lepas in Malaysia to build a manufacturing plant for its liquid, home and personal care products.
What did Zhulian spend RM12.1 million on for Q3FY14?
Is it spending it on factories (Zhulian is known for making its own products, which gives it the advantage of being able to control and absorb costs) and offices in Myanmar? What are the key capex assets it is targeting in the country?
5. Did it lose even more distributors this year?
In the same report in May this year by The Edge, Zhulian revealed that it had 569,709 distributors in Malaysia, Thailand, Indonesia and Singapore.
According to its FY13 annual report released on 15 April, it had 605,516 distributors in its MLM network.
The difference between these two numbers is 35,907 distributors.
In other words, it had lost 35,907 distributors between the time it released its FY13 annual report until May this year.
We had previously asked why it lost 68,484 distributors from FY12 to FY13. We did not receive a management reply.
Why are distributor figures going down so much?
6. Will it relook its dividend policy to conserve its decreasing cash pile?
Zhulian’s cash pile is gradually going down as it is paying out dividends that its operating cashflow cannot support — for Q3FY14, it paid out RM59.8 million in dividends in Q3 while it generated just RM34 million from its operations.
In Q2FY14, it paid out RM46 million in dividends while generating just RM17 million.
It did not pay out dividends in Q1FY14.
According to Reuters, it started the year with RM128.7 million while its current cash on hand stands at RM93.2 million.
It has taken the necessary step this quarter to reduce its dividend payout to 2 sen per share for this quarter Q3FY14 compared with 3 sen per share for Q3FY13.
But if the bad business in Thailand and Malaysia continue, it might need to amend its dividend policy of a minimum 60 per cent payout.
Is it still committed to the 60 per cent payout policy?
7. Will it start borrowing money?
Zhulian is known for being debt-free, since FY08.
But that was based on a strong cashflow.
As of the nine months this FY, it generated just half of its cashflow last year, namely RM 34 million compared with RM 65.2 million. It has a decreasing cash pile.
If it does not change its dividend policy, will it start borrowing money?
8. Are its factories idling?
Since Zhulian is known for owning factories that produce its own products, are its factories working at full capacity?
If not, how much less are they producing?
What are the fixed costs of running the factories?
9. Why not start reporting geographic segments for the quarter?
One thing we have found unhelpful is that Zhulian does not reveal the performance of its geographic segments in its quarterly reports.
Will Zhulian consider reporting the results of its geographic segments?
We have invited the company to an on-camera interview, and/or to reply to our questions in writing.
At the time of publication we have not received a reply (which is why you are seeing this message).
We will update this report if we do.
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