The prolonged political crisis in Thailand could continue to be
a drag on Zhulian’s earnings and the main affecting issue is the
controversial rice subsidy scheme which is falling apart as the Thai
government is facing issues raising funds to subsidize farmers. As a
result, disposal income in the rural areas has been significantly
affected, which negatively impacted Zhulian’s
operations in Thailand. As the Thailand election has also been
postponed to Apr-2014, this further pile more downside pressure to
demand (for Zhulian products) which could last for at least two
quarters. Hence, we are taking a conservative stance and slash our
FY14-15E earnings by 38.5%-35.8% to RM84.7m-RM96.9m to account for
potential earnings risk. We also believe that the coming 1Q14 results,
which were in the period during the peak of the political crisis could
be worse than 4Q13. Thus, we cut our TP to RM2.83 (from RM4.70) based on
unchanged PER of 15.4x on lower FY14E EPS. We downgrade the stock to
UNDERPERFORM from MARKET PERFORM given higher earnings risks and -6.5%
total returns from our TP. However, we may look to upgrade the stock and
its earnings once the Thailand political crisis has abated.
Recap on Zhulian Thailand’s (ZTH) disappointing 4Q13 results. We have received further clarifications regarding the recent disappointing results in 4Q13. The drop in Thailand performance was mainly from the decline in sales volume and note that Thailand makes up c.60% of earnings which greatly affected the group. Key culprit was the drop in demand from rural areas, which in the past had contributed greatly to the total revenue of ZTH. The controversial rice subsidy scheme, which paid farmers up to 50% above market rates for their produce, is falling apart. Currently, the government has struggled to raise funds from banks/bonds to settle the debts owed to farmers which back logged as far back as Sept-2013. The commerce ministry said last week that it did not have the authority to extend the scheme beyond February as the caretaker government of Yingluck has been left with limited policy-making powers pending the outcome of the general election. As such, farmers are falling short on funds, which have squeezed disposal income in the rural areas substantially which explains the sharp decline in demand in the final quarter of 2013. Since the election has been postponed to end-Apr, it appears that the situation will drag on until then. However, the pro-rural area policy would likely continue if incumbent Prime Minister Yingluck Shinawatra wins the election.
We believe that earnings could remain soft for at least another 2 quarters, due to the prolonged Thailand political crisis. With the loss of ZTH’s growth story, we believe that Zhulian’s manufacturing segment is now running at a smaller scale as ZTH used to make up c.57% of total revenue contribution and 100% of associates contribution. The deadlock of the political crisis has affected government’s spending plans, raising concerns that it could have a drag on the economy.
The mitigating efforts. Although the local Malaysian MLM market appears to be saturated, the company has been campaigning hard to grab market share. Their efforts are now bearing fruits, as seen with the QoQ improvement in the local Malaysian market performance. Still, in the near-term, we believe the improvements will remain mild as it will be increasingly tough to increase market share in a saturated market. Meanwhile, we understand that their Thai counterpart has managed to appoint a reliable master agent in Myanmar and is expected to start operations officially towards 2Q14. However, we do not expect significant contributions from Myanmar during the first year of operations and have yet to impute for any earnings impact at this juncture.
Lowering earnings estimates. To take into account the above, we have slashed our FY14-15E earnings estimates by 38.5%-35.8% to RM84.7m-RM96.9m as we have lowered: (i) growth in the Thailand Core Distribution Force (CDF) by 28%-32% (ii) revenue per CDF by 24% each year, and (iii) corresponding associates profit is also lowered by 45%-47% due to lower demand and margin squeeze from fixed overheads. As a result, dividends will also decrease to 11.0 sen-12.6 sen based on unchanged payouts of 60%.
Lower our TP to RM2.83 (from RM4.70) based on an unchanged target PER of 15.4x on our lowered FY14E EPS of 18.4sen. The applied target PER implies +1.0x SD of its Fwd. PER mean compared to +1.5x SD applied on other MLM peers like Amway and Hai-O.
Although the stock has been heavily sold down post the disappointing 4Q13 results, we believe that there could be further earnings weaknesses in 1Q14 due to the prolonged Thailand political crisis, which also means that dividends will be affected. As a result, we downgrade the stock to UNDERPERFORM (from MARKET PERFORM) to reflect the potential earnings weaknesses ahead. Our TP implies a total return of -6.5%.
Nevertheless, we believe the company’s integrity remains intact and is a victim of uncontrollable circumstances. Thus, we may look to upgrade the stock post the Thailand election or when the operating risks have abated.
Source: Kenanga
Recap on Zhulian Thailand’s (ZTH) disappointing 4Q13 results. We have received further clarifications regarding the recent disappointing results in 4Q13. The drop in Thailand performance was mainly from the decline in sales volume and note that Thailand makes up c.60% of earnings which greatly affected the group. Key culprit was the drop in demand from rural areas, which in the past had contributed greatly to the total revenue of ZTH. The controversial rice subsidy scheme, which paid farmers up to 50% above market rates for their produce, is falling apart. Currently, the government has struggled to raise funds from banks/bonds to settle the debts owed to farmers which back logged as far back as Sept-2013. The commerce ministry said last week that it did not have the authority to extend the scheme beyond February as the caretaker government of Yingluck has been left with limited policy-making powers pending the outcome of the general election. As such, farmers are falling short on funds, which have squeezed disposal income in the rural areas substantially which explains the sharp decline in demand in the final quarter of 2013. Since the election has been postponed to end-Apr, it appears that the situation will drag on until then. However, the pro-rural area policy would likely continue if incumbent Prime Minister Yingluck Shinawatra wins the election.
We believe that earnings could remain soft for at least another 2 quarters, due to the prolonged Thailand political crisis. With the loss of ZTH’s growth story, we believe that Zhulian’s manufacturing segment is now running at a smaller scale as ZTH used to make up c.57% of total revenue contribution and 100% of associates contribution. The deadlock of the political crisis has affected government’s spending plans, raising concerns that it could have a drag on the economy.
The mitigating efforts. Although the local Malaysian MLM market appears to be saturated, the company has been campaigning hard to grab market share. Their efforts are now bearing fruits, as seen with the QoQ improvement in the local Malaysian market performance. Still, in the near-term, we believe the improvements will remain mild as it will be increasingly tough to increase market share in a saturated market. Meanwhile, we understand that their Thai counterpart has managed to appoint a reliable master agent in Myanmar and is expected to start operations officially towards 2Q14. However, we do not expect significant contributions from Myanmar during the first year of operations and have yet to impute for any earnings impact at this juncture.
Lowering earnings estimates. To take into account the above, we have slashed our FY14-15E earnings estimates by 38.5%-35.8% to RM84.7m-RM96.9m as we have lowered: (i) growth in the Thailand Core Distribution Force (CDF) by 28%-32% (ii) revenue per CDF by 24% each year, and (iii) corresponding associates profit is also lowered by 45%-47% due to lower demand and margin squeeze from fixed overheads. As a result, dividends will also decrease to 11.0 sen-12.6 sen based on unchanged payouts of 60%.
Lower our TP to RM2.83 (from RM4.70) based on an unchanged target PER of 15.4x on our lowered FY14E EPS of 18.4sen. The applied target PER implies +1.0x SD of its Fwd. PER mean compared to +1.5x SD applied on other MLM peers like Amway and Hai-O.
Although the stock has been heavily sold down post the disappointing 4Q13 results, we believe that there could be further earnings weaknesses in 1Q14 due to the prolonged Thailand political crisis, which also means that dividends will be affected. As a result, we downgrade the stock to UNDERPERFORM (from MARKET PERFORM) to reflect the potential earnings weaknesses ahead. Our TP implies a total return of -6.5%.
Nevertheless, we believe the company’s integrity remains intact and is a victim of uncontrollable circumstances. Thus, we may look to upgrade the stock post the Thailand election or when the operating risks have abated.
Source: Kenanga
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