Zhulian Corporation Berhad - The Shining Star

We believe Zhulian would continue to outshine its MLM peers in the coming quarter, due to the following factors; (i) While Zhulian is the current market leader of the MLM business in terms of market cap, it is still trading at a lower valuation compared to Amway, (ii) Its unique status as the only Syariah compliant MLM company (excluding CNI Holdings) would surely put it on the radar of many institutional funds, (iii) Assuming that the US Fed’s QE3 tapering programme starts next year, Zhulian would be the only MLM company benefiting from a weakening Ringgit trend, and (iv) The company still offers the highest earnings visibility in terms of EPS growth among its MLM peers. In view of growing positive sentiment towards the stock, we have raised our FY14E targeted PER from 13.4x to 15.8x. With a potential total return of 15%, we reaffirm our OUTPERFORM call on Zhulian with a slightly higher target price of RM5.40 (from RM4.60 previously). Zhulian remained as our TOP PICK for the consumer sector.
Five reasons why we prefer Zhulian over Amway: (i) Zhulian is the current market leader in the MLM business in terms of market cap, but is still trading at a lower valuation compared to Amway, (ii) Zhulian has a sizeable regional exposure advantage compared to Amway (Zhulian has a core distributor force of 706k vs. Amway’s 244k), (iii) We remained bullish regarding Zhulian’s future growth potential. We believe that the company could offer the highest earnings visibility in terms of EPS growth (FY13E:+11%, FY14E:+15%), (iv) Its planned expansion into the Myanmar market to start early-CY14 could be another re-rating catalyst for the stock, which we have yet to factor in our forecast, and (v) Zhulian’s net margins (26.0%) is way better than Amway (12.5%). (Refer overleaf for Amway vs. Zhulian head-to-head comparison)
A Syariah Compliant MLM company. Besides CNI Holdings Bhd which is not under our coverage, Zhulian is the other Syariah compliant MLM company listed on Bursa Malaysia. We were surprised by the fact that Amway has dropped out of the Syariah compliant list in the latest Nov-13 publication, while Hai-O has also dropped out from the list in May-13. Given the fact that Zhulian has the biggest market cap and it is a Syariah compliant company in the MLM sector, we believe this attribute will put it on the radar of many institutional funds.
A winner, if QE3 to taper off? The US Federal Reserve has many times hinted that the QE tapering programme would start next year, and we foresee that Ringgit may weaken in 2014. Since export is its major revenue contributor which is quoted in USD, a weakening of the Ringgit against USD bodes well for its earnings upsides. Our current earnings estimates are based on our in-house assumptions of USD/MYR assumption of CY13: 3.17 and CY14: 3.09. However, we do not rule out the possibility of revising upwards our forex assumptions and earnings forecast, should the USD continue to trend north. Based on our forecast, for every 5% increase in FY13-14E USD/MYR forex assumptions, correspondingly, earnings will improve by 10%. (Refer overleaf for sensitivity analysis)
Revise upwards our targeted PER for Zhulian. As at the date of this report, Zhulian is now trading at 14.3x fwd. PER, compared to Amway’s 18.4x fwd. PER. In view that Zhulian currently the market leader of the MLM business in terms of market cap, we believe that it should trade at least on a similar valuation with Amway. As such, we have revised upwards our FY14E targeted PER from 13.4x to 15.8x. We believe that our ascribed PER to Zhulian is fair, because it is still at a 16% discount to the Amway’s targeted PER of 18.7x, which is our margin of safety as Zhullian is yielding a lower net dividend compared to Amway. As of a result, our Target Price has been raised to RM5.40 (from RM4.60 previously). We are bullish regarding the company’s further growth prospect and believe that the company would continue to do well in the coming years, even in financial downturn or slowdown. Over the past 18 years, Direct Selling Association of Malaysia (DSAM)’s records have shown that the overall performance of the direct selling industry in Malaysia actually improves during economic downturn or slowdown. Re-affirm our OUTPERFORM rating!