Zhulian ... Nov10

S & P Report

Results Review & Earnings Outlook
  Zhulian’s 9MFY10 (Nov.) revenue grew 4% YoY, the bulk of which was achieved during 1HFY10. Lower sales trend and weak USD in 2QFY10 and 3QFY10 had affected 9MFY10 operating profit which fell 8% YoY and margin contracted 3 ppts to 23%. Nevertheless, 9MFY10 net profit ended up with a growth of 9% YoY, aided by higher associate contribution (Zhulian Thailand).

 As 50% of the group’s revenue is transacted in USD, 3QFY10 revenue fell 6% QoQ, due the weakness of the currency during this period and to a smaller extent, a decline in market demand. However, tighter
controls over expenses and higher associate contribution (+21% QoQ) helped push up pretax profit by 16% QoQ.

 We expect the group to launch new products in the nutritional, pharmaceutical and home technology categories to help boost near to mid term sales. These new products will be manufactured in-house
and will carry higher margins which should boost FY11 earnings.

 We expect FY10 net profit to come in at MYR85 mln, on the back of stronger 4QFY10 results given the Ramadhan holidays which is likely to lift earnings as well as higher associate contribution. We forecast
FY11 net earnings to reach MYR93.2 mln driven mainly by contributions from the new product launches.


Recommendation & Investment Risks
 We resume coverage of Zhulian with a Buy recommendation and a 12-month target price of MYR2.10.

 We derive our target price from the average of our DDM value (assuming dividend payout ratio of 60%) and sum of relative PER for its jewelry and non-jewelry parts. The relative PERs for its jewelry and
non-jewelry parts are pegged to the Malaysian sector 2011 PER median of 7.5x and 12.2x for luxury goods and retailing, respectively.

 We continue to like Zhulian for its strong balance sheet (it is debt-free and has cash per share of 30 sen), strong cashflow generating business and attractive dividend yield of 6.4%. The company declared
a third interim dividend single-tier dividend of 3 sen per share, bringing total dividend for 9M10 to 9 sen per share.

 Risks to our recommendation and target price include: (i) lower-thanexpected sales volume as a result of increased competition from both foreign and local direct selling companies, (ii) traditional retailers offering similar products and (iii) higher-than-expected operating costs.