Wednesday 28 Feb 2024
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This article first appeared in The Edge Malaysia Weekly on February 8, 2021 - February 14, 2021

MALAYSIA’s direct selling industry, an inadvertent beneficiary of the Covid-19 pandemic, is expected to grow turnover at a solid pace over the next few years amid strong interest from consumers and distributors.

“We’ve seen growth almost every year over the last decade,” Datuk Tan Chong Guan, president of the Direct Selling Association of Malaysia (DSAM), tells The Edge in an interview.

Turnover has been growing at a double-digit pace since 2017, says Tan, citing figures from the Ministry of Domestic Trade and Consumer Affairs. In 2017, turnover grew 16.5% year on year to RM15.9 billion, a year later by 12.8% to RM17.93 billion, and in 2019 by a further 20.1% to RM21.54 billion.

Tan believes 2020’s growth pace is likely to match or exceed that of 2019. The full-year numbers will only be made known by the ministry in the middle of the year, he says. But as at September 2020, industry turnover had reached RM17.8 billion.

The coronavirus outbreak last year, which resulted in the government imposing various levels of movement restrictions that are still ongoing, helped spur sales at direct selling companies as more people shopped from home, particularly for health-related and wellness products, Tan says.

At the same time, many were looking for an additional income stream while they worked from home or because they had their jobs or salaries cut.

For those reasons, as well as the increasing digitisation of the businesses which makes it easier to reach consumers, he believes the industry will continue to grow at a healthy pace over the next few years. “This year, we expect between 10% and 15% growth … but this is a projection on the conservative side,” he says.

There are about 300 licensed direct selling companies in Malaysia, but not all are active, he says. Among the better known ones are Amway (Malaysia) Holdings Bhd, Hai-O Enterprise Bhd, Zhulian Corporation Bhd, CNI Holdings Bhd, Avon Cosmetics (M) Sdn Bhd, Elken Sdn Bhd, Nu Skin (M) Sdn Bhd and Young Living (M) Sdn Bhd.

DSAM itself has 126 members. Founded in 1978, the national trade association promotes the industry and acts as a voice for its members. Apart from DSAM, the Malaysian Direct Distribution Association also represents the industry.

According to Tan, an interesting trend observed during the pandemic is a stronger-than-usual focus on the health-related segment.

“We don’t have the full figures out yet, but I would expect health food supplements to have a bigger contribution to industry sales in 2020. In 2018, 2019, the health food supplement, the wellness part of it, contributed about 47% of total industry sales, while cosmetics and personal care — such as shampoos, conditioners, skincare products — contributed 19%. So, these two categories [usually] take up 66% of the entire direct selling industry in Malaysia,” he shares. “And the figures internationally don’t run very far … it’s very similar. Health food supplements and skincare are the key drivers in terms of product mix.”

Asked if more new players had emerged in the industry last year, Tan replies in the negative. “As direct sellers, we cut off the middleman and whatever savings we get is passed on to our business partners in the form of incentives and bonus commissions. So, for a person to set up a new company during the pandemic is not easy as they have to build a market from scratch. And, during these times, people tend to buy from people they know and from a trusted brand,” he explains.

Interestingly, for a country with a population of just over 30 million, Malaysia was ranked seventh globally in terms of sales by the World Federation of Direct Selling Associations in 2019. Within Asia-Pacific, it ranked fourth after China, Japan and South Korea. “I would say we’ve punched above our weight,” Tan remarks.

Moving towards self-regulation

Last December, Domestic Trade and Consumer Affairs Minister Datuk Seri Alexander Nanta Linggi acknowledged that direct selling was becoming a large industry and said that the ministry was formulating a Direct Selling Industry Plan for the 12th Malaysia Plan.

“This is in line with the ability of the direct selling industry to contribute to the country’s economic strengthening efforts, apart from its importance in creating employment and business opportunities for the people,” Linggi said.

According to Tan, the gist of the blueprint is protecting the consumer and moving towards self-regulation.

“The blueprint [is about] moving towards self-regulation in the industry, and for the association to manage the industry players,” he says, noting DSAM already has in place a code of ethics that members must abide by.

At the same time, the Direct Sales and Anti-Pyramid Scheme Act 1993, which governs the industry, is being refined to ensure its alignment with technological advancements. According to Tan, Malaysia was among the first in the world to come up with such an act. It was deemed necessary amid scams and pyramid schemes that cast the industry in a bad light.

“It’s [about] patching up the loopholes. Because, in the past, there were a lot of unlicensed companies that [were] scams. They operate using the direct selling model, but they are not direct selling companies. And this is where a lot of misconceptions about the industry came about,” he explains.

Pyramid schemes are illegal in Malaysia — as in most countries — and make money from recruitment.

“The best way to determine a direct selling company from a scam is to check if the company has a direct sales licence. The second piece of advice I’d offer is check if they are actually selling products. With direct selling, the payment of commission is based on [the sale of] products, so if a scheme is offering rewards that are not based on the sale of a product, it is a pyramid scheme,” he says.

Another red flag, he adds, is high entry fees. The start-up fee for legitimate direct selling companies is generally low and is mainly to cover training materials, sales aids and the like.

Meanwhile, DSAM is working with its counterparts in Asean to help local direct selling companies venture out in the region. “We want them to explore Asean markets, and the good news is that the permanent secretariat is based in Malaysia,” Tan says.

Analysts see no shine in direct selling stocks despite better earnings

There are only four direct selling companies on Bursa Malaysia and all posted commendable earnings last year, having received an unexpected boost from the Covid-19 outbreak as more people made purchases from home or looked for an additional source of income. The four are Amway (Malaysia) Holdings Bhd, Hai-O Enterprise Bhd, Zhulian Corp Bhd and CNI Holdings Bhd.

A fifth — DXN Holdings Bhd, a health supplement producer that uses a direct selling model — may be listed on Bursa as early as the fourth quarter of this year. DXN has picked banks for an initial public offering that could raise about US$400 million (RM1.63 billion), Bloomberg reported last week, citing sources. What is clear is that DXN’s valuations will be closely watched.

The share prices of the four companies, which sunk to either multi-year or record lows in mid-March last year at the start of the Movement Control Order, have since appreciated substantially. Amway, Hai-O and Zhulian have a history of paying dividends and continued doing so last year while many other companies held back.

Yet, very few analysts track these companies, which are a segment within the consumer products and services sector. And most who do are currently not particularly bullish on their investment prospects. Zhulian and CNI have no analyst coverage.

Amway, the biggest among them by market capitalisation (RM941.93 million), saw net profit grow 7.3% year on year (y-o-y) to RM42.63 million for the first nine months of the financial year ended Dec 31, 2020. Revenue expanded 17.4% to RM837.39 million.

It announced a dividend per share (DPS) of five sen in each of the first three quarters, bringing the total DPS so far to 15 sen, the same amount as the previous year.

Amway’s share price, which sank to more than a five-year low of RM4.50 on March 19 last year, has since gained 27.3% to RM5.73 as at Feb 4. Bloomberg data shows that there are just three research houses that track the stock. TA Securities has a “buy” call with a target price of RM6.00, while Kenanga Research has an “underperform” (RM5.20) and KAF Seagroatt & Campbell Securities, a “hold” (RM5.45).

Although Amway’s 9MFY2020 earnings beat consensus forecasts, Kenanga Research is concerned about potentially weaker profitability going forward. “Moving ahead, we believe the group’s top line should continue to be supported by the growing demand for health supplements and home-care products following the shift in consumer shopping patterns brought about by the global pandemic. Nonetheless, the higher import costs from the unfavourable US$/RM forex rate are likely to exert pressure on margins, leading to poorer profitability,” it said in a Jan 6 report on the consumer sector, on which it had a “neutral” call.

“Note that Amway uses the Bloomberg one-year forward rate as a hedge rate base, which we believe was at RM4.36/US$, and is effective from 3QFY2020 to 2QFY2021 (versus RM4.17/US$ previously),” it added.

Nevertheless, it maintained its DPS forecast of 27.5 sen for both FY2020 and FY2021, which is what Amway has paid out in the last three years. Based on its Feb 4 price, this works out to a yield of 4.8%.

Meanwhile, Main Market-listed Hai-O, which has a market capitalisation of RM616.14 million, is pegged a “hold” by Affin Hwang Capital (target: RM2.22) and JF Apex Securities (RM2.30).

The stock, which closed at RM2.13 on Feb 4, has gained 88.5% since hitting a low of RM1.13 on March 23 last year. The company saw net profit grow by a stronger-than-expected 36.9% y-o-y to RM20.61 million for the first half of the financial year ending April 30, 2021.

Affin Hwang raised its FY2021-FY2023 earnings forecasts for Hai-O by 2.1% to 20%, and subsequently raised its target price by 29 sen to RM2.22, but maintained the “hold” call.

Main Market-listed Zhulian posted a net profit of RM46.77 million for the year ended Nov 30, 2020 — slightly lower than the RM49.52 million a year ago. Revenue was flat at RM170.68 million.

On Feb 4, its share price had gained 85.3% to RM1.77 from a low of 95.5 sen on March 23 last year, giving it a market cap of RM814.2 million.

As for CNI, it returned to the black with a net profit of RM130,000 in the first nine months of FY2020 compared with a net loss of RM4.92 million in the previous corresponding period.


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