In this MD&A, I will bring you through the financial and operational performance of Hai-O Enterprise Berhad ("Hai-O") and its subsidiaries ("Hai-O Group" or "Group") for the financial year ended 30 April 2021 ("FY2021"). This MD&A will cover the review of the Group's overall financial performance for FY2021, followed by detailed discussions of the financial and operating performance of the Group's major businesses which are divided into four business segments as follows:
Some of the statements contained in this MD&A that are not historical facts are statements of future expectations with respect to financial results and positions, operations and businesses, and business plans. Forward-looking information is based on Management's current views and assumptions, taking into account prevailing economic and market conditions. While we make the best effort to keep shareholders abreast of key developments, mid-term direction and the overall health of operations for FY2021 and the coming financial year, such forward looking statements are not guarantees of future performance and would involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Group, which may cause actual results to differ materially from those expressed or implied in such statements. There can be no assurance that actual outcomes will not differ materially from these statements. There are many factors that could cause actual results to differ materially from those projected in such statements, including (without limitation) the risks and uncertainties associated with the ongoing impacts of the Coronavirus disease ("COVID-19"), changes to the Malaysian and global economic environment, market conditions and changes to the operating environment of the Group. Given such uncertainties, readers are cautioned and advised not to place undue reliance on the forward-looking statements.
The fundamentals of the Group and our people have been tested by the global health crisis which continues to have severe repercussions on our general business environment. The Group has constantly responded and adapted to changes arising from rapidly evolving customer behaviours and spending power amidst the many waves of the pandemic. Indeed, the Group has had a long track record of successfully navigating through many challenges in our history spanning more than four decades. The improvement in the Group’s financial results in FY2021 is again a testament to our strong teamwork and capabilities to overcome challenges together.
The prolonged crisis has further heightened our focus on four essential factors to serve our customers well: the right Products at the right Price via the right Place (which can be virtual) and supported by the right Promotion. Our diversified product portfolios, right pricing, effective promotions and engagement with our customers via online marketing has not only insulated us from the unprecedented challenges, but also opened up new opportunities for the Group. The cost optimisation plan implemented since the last financial year has further supported our resilient performance in the face of the pandemic.
As a strategic step to streamline and fortify the Group's operations, the Company has announced an internal reorganisation exercise and has obtained the High Court of Malaya’s sanction on 23 July 2021 for the Scheme of Arrangement under the internal reorganisation. Barring unforeseen circumstances, the internal reorganization exercise is expected to be completed in 3QFY2022. Through the above exercise, the investment holding function and the operating business entities of the Group will be separated. Beshom Holdings Berhad will become the investment holding entity assuming the listing status of Hai-O, whilst Hai-O and its subsidiaries will continue to operate the existing businesses. The clear demarcation of business activities will enable the respective business segments to monitor their operational risks more effectively, a move that we believe will create value for shareholders through enhancing the Group's operational, reporting and financial flexibility.
With the right strategies and initiatives in place, the Group is set to emerge stronger from the global pandemic. This crisis has pushed us to hone our agility and ability to respond to constantly evolving changes, while enhancing business stability and sustainability to tap new opportunities when the health crisis subsides.
DELIVERING RESILIENCE AND MORE
As we moved cautiously into FY2021, the Group already had in place strategic plans to prepare our people and businesses for unprecedented challenges brought about by COVID-19. Our people under the leadership of the Board and Management have done an extraordinary job and responded quickly and effectively to evolving circumstances as the severity of the crisis deepened with rising infection rates during the course of the financial year. As a quick flashback on the main strategies that was discussed previously in the FY2020 Annual Report, we have tailored our product offerings to focus on low to mid-priced essential health products; we have reduced dependency on physical presence by selling on digital platforms and also automating and streamlining operational processes; increased social media engagements to improve product presence and last but not least, we have continued our efforts to optimise costs. These initiatives have improved the Group's resilience in the face of the pandemic as we recorded a commendable growth in profit amidst modest revenue growth in FY2021.
The Group posted a revenue of RM271.4 million (FY2020: RM255.2 million) in FY2021, an improvement of approximately 6.3% from FY2020. The MLM and Wholesale segments remains the two largest revenue contributors in FY2021, accounting for approximately 85% of the Group's revenue. During the financial year, MLM segment's revenue rose by 10.0% while Wholesale segment's revenue improved by 6.4%. This helped to offset lower revenue from the Retail segment (-2.5%) and other businesses (-30.3%). The Retail segment was hard hit as the operation of the retail chain stores was affected by various movement controls imposed by the Government, whilst revenue from other businesses was primarily affected by the reduction in manufacturing activities due to lower export sales.
While the modest improvement in revenue was respectable amidst the pandemic, the 26% growth in profit before taxation ("PBT") to RM52.3 million (FY2020: RM41.5 million) was even commendable and could not have been possible without the hard work and dedication of our experienced team. The increase in PBT was also aided by the Group's cost optimization initiatives which yielded total savings of more than RM3.5 million, as well as a one-off gain from disposal of vintage tea amounting to RM0.9 million.
BALANCE SHEET STRENGTH
The Group's strong balance sheet is the pillar of our support, underpinning our ability to drive core business outcomes and deliver returns for shareholders. As at the close of FY2021, total assets of the Group stood at RM371.5 million against total liabilities of RM48.4 million. The Group's current ratio stood at a healthy 5.0 times where the current assets of the Group comprising of inventories, trade receivables, short-term financial investments, and cash and cash equivalents made up approximately 60.6% of total assets. The Group had zero borrowings as at 30 April 2021. Total equity attributable to shareholders as at 30 April 2021 improved by approximately 4.4% from RM299.6 million (equivalent to RM1.03 per share) in FY2020 to RM312.8 million (equivalent to RM1.08 per share).
CASH AND CAPITAL MANAGEMENT
The Group achieves our capital management's objectives by prioritising the Group's ability to continue as a going concern whilst seeking to maximise value to shareholders and stakeholders. The Group regularly reviews and manages our capital structure to achieve a balance between shareholder returns and maintaining a strong balance sheet. To maintain an efficient capital structure, the Group takes into consideration projected operating cash flows, capital commitments and strategic investment opportunities, if any, which arise from time to time.
In response to prevailing business challenges, we have exercised extra prudence in capital and cash management. There was no major capital expenditure made during the year. Liquidity position of the Group remained robust with cash and cash equivalents plus other short-term investments in cash and money market funds of RM113.5 million as at 30 April 2021, as compared to RM95.9 million as at 30 April 2020. Overall, the Group's funding arrangements are designed to keep an appropriate balance between equity and cash balance for the Group’s businesses which are substantially transacted in cash and to provide flexibility to develop new businesses as and when the opportunities arise. As the Group is in a net cash position, the Group would have sufficient financing capabilities to tap on new investment opportunities, if any.
Cash dividends paid to shareholders remained the largest cash outflows for the Group in FY2021, amounting to RM31.9 million, of which RM20.3 million was dividend paid in respect of the financial year ended 30 April 2020.
The Group ventured into the MLM business back in 1992. The MLM segment is housed under Sahajidah Hai-O Marketing Sdn. Bhd. ("SHOM"), which carries more than 250 SKUs of a wide range of products including nutritional food & beverages, wellness supplements, skincare, beauty & cosmetic, personal care and household products. As at the close of FY2021, SHOM had a network of more than 89,000 members. Our MLM products are distributed through 13 branches where 6 are located in East Malaysia after the Group expanded its foothold to Sabah and Sarawak in recent years. The segment is complemented by 21 stockists and 2 sales points across Malaysia that offer efficient logistic and stock management.
Being a major revenue and profit contributor, MLM has played a pivotal role in the Group's overall performance. During the financial year under review, the key focus was to drive operational improvement for the segment which was significantly affected by sluggish consumer spending. To ensure sustainability, MLM management has devised transformational business plans in response to the rapid evolving customer behaviours in an era of "new normal". The segment constantly explores and develops new ways to refine operations in line with customer needs and changing business conditions during the pandemic.
FY2021 will be year remembered for many timely and effective adjustments made for the MLM business, thanks to the nimble management and the strong backing of a wide range of SKUs and the extensive members network. The segment recorded revenue of RM172.4 million and PBT of RM34.0 million in FY2021, which represented an improvement of 10.0% and 4.6% respectively as compared to the last financial year despite market volatility.
Similar to the Group, MLM has focused on the four essential factors of Products, Price, Promotion and Place:-
Products - Selling a wide range of products is one of the key success factors for the MLM segment. Nonetheless, during a period when trading conditions were badly affected by the pandemic, we need to have not just a variety of products but also greater awareness and responsiveness to the marketplace so that our product mix can be dynamically adjusted with the evolving needs of consumers. The MLM segment has devoted substantial resources in the development, promotion and marketing of essential health products during the financial year under review. Two of our star products, Sahajidah Garam Buluh and Min Kaffe, were launched with enhanced taste and added health benefits in FY2021. Sahajidah Garam Buluh is a salt formulated using traditional Korean recipe, which is rich with minerals and micro-elements that are beneficial to the body.
Apart from Sahajidah Garam Buluh and Min Kaffe, encouraging response was also seen for BB+Glo which managed to double its sales during the year with the help of a more affordable seven-day trial pack and a series of promotions.
During FY2021, the Marine Essence Beauty Bar was also given a new look and enhanced with reformulated bamboo salt, which formed part of the product enhancement efforts. Besides the renewed image, the Marine Essence Beauty Bar is now offered in single-unit and three-unit packs to cater to a wider base of consumers with different needs.
Following the success of the renewed Marine Essence Beauty Bar, product development for other variations of beauty products using bamboo salt is underway to widen the product series to include premium hair care, premium body care and oral hygiene extensions. Our product extension strategy will also include halal Cozuma cosmetics, 360 Thera functional shaping attires, Bfit protein supplements targeted at male consumers, and functional inner wear for young female consumers..
Price – In response to weak spending power, the MLM segment focussed its strategy on low to mid-priced products during the year. Flash sales campaigns were conducted to entice members and to clear slow-moving stocks. Free delivery option was offered with minimum purchase to encourage higher spending and to overcome the general resistance towards paying for delivery. During the year, SHOM also launched smaller packs for some of its products, such as the single-unit pack for Marine Essence Beauty Bar and seven-day trial pack for BB+Glo to meet lower pricing market demand and to encourage sales.
Promotion - Promotional activities are vital to the MLM businesses, and it is important to strike the right balance to drive sales while at the same time increase customer loyalty. Management regularly reviews the effectiveness of various promotional activities to make sure that they meet their objectives and to explore areas for improvement. During the year, the MLM segment achieved encouraging results from its various promotions, such as promotion for Min Kaffe and the bundle sales of the Premium Beautiful range of products.
The highlight of the year was the "360 Thera Virtual launch" where a series of promotional activities to showcase the 360 Thera attires was successively rolled out to build the momentum for the launch of the 360 Thera Vest and its related products. These included the 360 Thera Challenge, 3D Virtual event and 360 TheraLife.
Place - The pandemic has heightened the importance of digital adoption in a wide range of business activities from office administration to the marketing and selling of products. While we have seen a rising pace of digital adoption over the years, COVID-19 has accelerated the trend when the extended movement controls forced most employees to work from home and consumers to shop from home. Hence, one key focus for the MLM segment during the year was to further enhance our digital platforms to provide a smooth and seamless experience for our members. Our investments of time, hard work and capital in previous years for early digital adoption are indeed paying off, providing continuity when business activities are severely disrupted by COVID-19.
During the financial year, the MLM segment has achieved many milestones to further strengthen its digital adoption by enhancing various digital platforms to future proof its operations as follows:
The initiatives to entrench our digital foothold have resulted in greater sales conversion through various e-Commerce platforms, enables active members' engagements even during the pandemic and supports uninterrupted delivery of products to customers. E-Commerce sales surged 62% increase to account for 17.5% of total sales for the MLM segment in FY2021 (FY2020: 11.9%). This is indeed the best testimony for business continuity and sustainability.
Other supporting strategies - Our wide network of distributors have always been our prized asset. Various programmes were rolled out during the year to recruit and retain members, including "Kita Bersama Free Membership Campaign", "Be Your Own Boss" and "SHOM e-Renewal with Free Gift". These membership renewal and recruitment programmes have helped to maintain the momentum and high spirit of members amid the persistent challenges. Coupled with other sales promotions, the MLM segment managed to record higher spending per new member as compared to the previous financial year. SHOM's membership base as at the close of FY2021 was 89,000 members.
SHOM has launched various transformational programmes to help and train aspiring members to become "SHOMpreneurs". These programmes helped participants to streamline/revamp/enhance marketing tools, including online and offline materials to boost sales and multiple marketing tools via social media channels. Regular video tutorials for product introduction, product demonstration and instructions as well as testimonial videos were made available throughout the financial year. In addition, Zoominar and Facebook LIVE sessions for product training were held on a monthly basis to provide ample training resources to members in support of their transition to "SHOMpreneurs". For existing "SHOMpreneurs", we have rolled out the e-SHOM Academy to cover future and current trends of sourcing opportunities for their businesses in this digital age. Education topics completed during the year included "How to migrate FB personal to Business Page", "How to use Canva", "How to conduct FB LIVE" and "How to optimize FB reach out".
Another supporting initiative which was actively pursued during the year was cost control and margin management. Leveraging on our good relationship with suppliers and marketing agencies, sponsorships were sought for various product campaigns and promotions to reduce costs and improve profitability for the segment.
The Wholesale segment was a remarkable performer in FY2021, posting a more than two-fold increase in PBT to RM13.8 million (FY2020: RM6.0 million) on the back of a moderate 6.4% growth in revenue to RM58.6 million. The sharp growth in profit came from the depressed base in FY2020 when the sales of premium products took a hard hit from the outbreak of COVID-19. More importantly, it reflected the impact of timely and effective actions taken by Management in response to the challenging operating environment, which was most gratifying and provided a big motivational boost to the team.
Higher sales for the Wholesale segment in FY2021 were primarily driven by Chinese medicated tonic, premium cooking wine and patented medicine which yielded higher margins, while active cost optimisation measures further increased profitability. Among others, the Wholesale segment benefited from lower costs for marketing and distribution, as well as reduced event expenses with many functions and celebrations held virtually. There was an added boost from one-off gains from the disposal of vintage tea of RM0.9 million.
The Wholesale segment took COVID-19 challenges in their stride by learning, adapting and responding quickly to develop new practices and remain a trusted wholesale supplier to our customers. The segment has benefited from higher demand of essential products after the relaxation of movement controls when restaurants were allowed to open and conditional “dine-in” was permitted. Post movement control order ("MCO") 1.0, we also observed customers' tendency to keep a higher stock level of essential products with long expiry dates, which helped to bolster sales. Despite efforts to ensure minimal supply disruption, we still experienced limitations which necessitated some adjustments to the selling price for some products. The price adjustments, which helped to preserve margins, were generally well received and deemed fair by our customers. These have mutually benefited our Company and customers.
Moving ahead, we foresee further challenges as the demand for premium healthcare products will be affected by weakened spending power due to the prolonged lockdowns. As such, we plan to step up the development of relatively more affordable health products to cater to everyday needs. Young consumer market will continue to be this segment's focus, given the advantages of easier product acceptance, faster consumption cycles and higher volume. To penetrate this market segment, product selection and design will be the key. We plan to introduce a series of Japanese food products to target this market and expand our product line for fast moving consumer goods.
The Wholesale segment intensified its digital adoption efforts in FY2021 by leveraging on established third-party digital platforms. Supported by our manufacturing arm, which specialises in healthcare products, we are able to provide customised supplements and healthcare products exclusively for chain stores or online platforms. We started this initiative with Caring Pharmacy and Beijing Tongrentang's online overseas flagship store.
In light of the current situation and the lingering pandemic in the foreseeable future, there will be further changes to the way we work, market and serve our customers. The Wholesale segment has demonstrated its crisis handling ability through dedication, perseverance, teamwork and collaborations with other departments, defending sales and improving profits despite unprecedented challenges. The team has emerged stronger and will be ready to grasp new opportunities when the pandemic subsides. We keenly await the next breakthrough from the development of more affordable healthcare supplements and the penetration into the young consumer market.
Our retail business was the hardest hit by the COVID-19 pandemic, facing multiple challenges from many fronts as it dealt with various phases of MCO and their associated restrictions and evolving standard operating procedures set by the Government, as well as the inevitable change in customer buying behaviour, just to name a few. However, as a localized retail chain store operator, it is important that we maintain a meaningful presence across Malaysia. With the closure of 2 loss-making branches in Tampin and Jinjang, the Group still operates 55 retail outlets at the end of FY2021.
The Retail segment recorded a revenue of RM35.8 million and a PBT of RM1.2 million in FY2021. Against the adverse business conditions, the marginal 2.5% drop in revenue was deemed respectable. Stringent lockdowns had led to a virtual elimination of casual shoppers for major retail businesses, but our focus on essential health foods and supplements and our intensified digital adoption have helped to prevent further arrest the decline in revenue. Furthermore, the Retail segment staged a commendable profit turnaround, thanks to the comprehensive efforts to contain costs including the efficient use of social media which helped to lower costs for advertising and promotional activities.
Revamped Sales Model - Recognising the changes in consumer behaviour, we need to revamp the Retail segment sales model with urgency, anticipating customer needs and maintaining competitiveness being critical challenges.
Our focus will remain the health and wellbeing of our customers. In FY2021, we rolled out the Zan Summer Herbs Tea and Protect & Care 500ml hand sanitizer. These products were launched in response to the COVID-19 pandemic and were affordably priced for the benefit of the general public.
To improve buying momentum, a series of promotions were carried out throughout FY2021, including promotions with marketing affiliates such as TK Bakery and 1Utama’s 1Shop. To maximize our reach, such promotions were held at both physical stores and online platforms and where applicable, in conjunction with special occasions such as Parents’ Day, 38 women day, as well as Lazada and Shopee sales events.
Expansion in e-Commerce – As lockdowns continue amidst rising COVID-19 infection in Malaysia, consumers increasingly spent more time shopping online in FY2021. Recognising this important shift, the Retail segment has expanded our digital foothold from our internal e-Commerce platform to other online market places by setting up Hai-O flagship stores at both Lazada and Shopee in August 2020. Thematic promotions were run every month targeting different products and product categories such as the soup packets series, Chinese medicinal products series and Liquor/Wine series. Sales from third-party online platforms have steadily picked up and we expect this momentum to accelerate when the Hai-O brand gains further "cyber" traction. We are actively extending our reach to more consumers via social media such as Facebook Live, Instagram and WhatsApp messaging services, which are conducive for product introduction, consumer education and product testaments.
Moving to the current financial year, we have revamped our Hai-O eStore which has gone live in August 2021, a timely move to make online shopping a simpler and more pleasurable experience for our shoppers. The revamp is also to complement the Group\’s ongoing efforts to penetrate the younger consumer markets.
Cost optimisation initiatives – As with other segments, the Retail segment has continued to explore options to optimize costs and enhance business sustainability and continuity. Cost containment initiatives at both head office and retail outlets in FY2021 included the closure of two loss-making outlets, the increasing adoption of social media advertising which saved printing and advertising costs, and the migration to virtual training for employees which is not only safer amidst the pandemic but also reduced event costs and associated travelling and accommodation expenses.
OTHER OPERATING ACTIVITIES
Income derived from other operating activities are primarily income received from the rental of investment properties held by the Group. Rental income recorded for FY2021 decreased by 15% to approximately RM2.9 million while income derived from manufacturing activities were relatively stable, with support from the MLM, Wholesale and Retail segments helping to offset lower export sales.
The improvement in PBT in FY2021 mainly reflected a one-off litigation claim of RM0.5 million recorded in the last financial year.
FY2021 has posed enormous and unique challenges to all of us in the Group and I am gratified that we have risen to the challenges in an outstanding way, thanks to great teamwork and the Group’s strong foundation that was built over the years. Amidst the pandemic which dealt a hard blow to our consumer-oriented businesses, the Hai-O Group not only delivered resilient revenue and higher profit but more importantly, was able to further hone agility and adaptability to strengthen stability and sustainability for the future.
While the accelerated rollout of the National COVID-19 Immunisation Programme in Malaysia provides some glimmers of hope, the COVID-19's path remains unpredictable with high risks of virus mutations. We remain hopeful that the Country can achieve herd immunity to support business recovery and improve consumer sentiment in a more sustainable manner, but also recognise the need to brace ourselves for further uncertainties and challenges ahead.
Being consumer centric, the Group is keenly aware of the evolving challenges and is constantly brainstorming to develop, refine and adapt strategies to control and manage risks as we strive to stay ahead and defend our market position as a key essential healthcare player.
In the near term, the Group remains committed to entrenching our businesses and operations digitally by strengthening and enhancing the existing digital infrastructures. We have made encouraging progress on digital adoption since FY2020, and the journey will continue to evolve with changing consumer behaviour alongside technology advances. At the same time, we will relentlessly focus on the delivery of the four essential factors: Product, Price, Promotion, Place, as we execute various strategies on both the digital and non-digital platforms. Costs optimization is another key initiative across the Group to enhance business sustainability. Amidst the COVID-19 storm, the Board is confident of emerging stronger with a solid foundation for the next financial year.
I would like to thank the members of the Board for your steadfast support and confidence in the Management team through a year of unprecedented challenges. In closing and on behalf of the Board, I would like to express my heartfelt appreciation to everyone at Hai-O for your commitment, dedication and efforts to keep each other safe while exploring options to defend, grow and sustain the business during the crisis. Many have gone out of their way in an exemplary show of loyalty and teamwork, and demonstrated the ability, creativity and adaptability to deal with unexpected changes. A big round of applause to a great team.
I would also like to thank our shareholders, customers, business partners and Government agencies for their continued support. Thank you for your faith in Hai-O over the last financial year and for many years to come.
Tan Keng Kang
Group Managing Director