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HAIO (Overvalued)

Last updated on 25 July 2021

Business Overview of HAIO:

The company is principally engaged in wholesaling and retailing of Chinese herbal medicines, healthcare products, wellness and beauty products, investment holding activities and property holding activities, whilst operating a multi level marketing (MLM) business. However, the bulk of the business’s profits are centered around the company’s wholesale (57% of profit) and MLM (40% of profit) segments.

Photo of Chinese Herbal Medicines
Photo of Chinese Herbal Medicines

Financial Highlights

10 Year Summary

Figure 1: 10 year financial summary of HAIO
Figure 1: 10 year financial summary of HAIO

Review of HAIO’s financials:

  • Currently debt free
  • Return on Invested Capital (ROIC) has been above 10% for the last 10 years
  • Decently profitable business with profit margin above 13% for the last 10 years
  • Very stable free cash flow

To summarize the financials of HAIO, the company’s management has done a good job in ensuring their financials are debt free. The company is highly profitable with a stable free cash flow. Due to the company’s prudent management, they are able to distribute over 80% of its free cash flow as dividends.

Although HAIO’s financials are well managed, it seems that the business is unable to grow in any significant manner. The revenue and profits have remained relatively stable over the 10 year period. Its likely that the business has fully matured and is operating in a saturated market. Further growth can only be expected if the company successfully penetrates into the South East Asian markets.

Net Asset Value

Figure 2: Balance Sheet from HAIO 2021 4th Quarter Results
Figure 2: Balance Sheet from HAIO 2021 4th Quarter Results

Referring to HAIO 2021 4th Quarter results, we could determine the discounted Net Asset Value. The property, plant and equipment was discounted by 15% as the plant equipment values are typically overestimated. I believe that the 15% discount to its value is a safe estimate.

Items such as financial assets, cash and cash equivalents are considered to be highly liquid assets and therefore its value can be assumed to be 100%. The investments in properties are also assumed to be at 100% value since property prices do not fluctuate significantly.

Other items such as inventory and trade receivables are discounted by 15% to factor in the risk of expiring inventory, product quality concerns and bad debts from customers.

The total discounted net asset value comes to RM 323 million.

Total Liabilities

The liabilities are not discounted. This is important as liabilities are generally repaid in full.

Figure 3: Balance Sheet from HAIO 2021 4th Quarter Results
Figure 3: Balance Sheet from HAIO 2021 4th Quarter Results

The total liabilities are equal to RM 46.930 million.

Net Liquidation Value (NLV) = Net Asset Value (discounted) – Total Liabilities

The net liquidation value is the value of the company assuming the business is forced to liquidate all assets immediately to repay its liabilities.

The net liquidation value of HAIO is RM 320 mil – RM 47 mil = RM 273 million or RM 0.45 per share.

This exercise is a good method to determine if a company is deeply undervalued. Assuming the business is still decently profitable and trading below its net liquidation value, then its a no brainer investment. However, such opportunities are hard to come but its always a good exercise. Check out Yoong Onn Corporation if you’re interested in a company trading below its NLV.

Discounted Cash Flow (DCF) Valuation

To determine the business’s value, I typically take the 3 year average free cash flow value to calculate its DCF (Average FCF = RM 38 million). Since the business is unable to grow by any reasonable rate, we can assume the growth to be similar to the average inflation rate, 3%. I normally use 8% as my discounted rate (but this rate is subjective to every individual investor). The total business period is assumed to be 10 years.

Using these values, I calculated HAIO’s DCF valuation to be RM 296 million or RM 0.49 per share.

HAI-O’s Fair Value

NLV = RM 273 million
DCF = RM 296 million
Fair Value = NLV + DCF = RM 569 million or RM 0.94 per share.

Based on my approximate valuations, the company is probably worth around RM 0.94 per share. However, at the time of writing, HAIO is trading at RM 2.08 per share. It’s likely that the market has fully valued the company.

I hope this was helpful. I just wished to share some of my findings and hope that it could assist in your decision making.

If you liked the article, come check out my other post!

Disclaimer: The article is written purely for the purpose of education and entertainment only. The content of this article is an expression of my opinion and should not be taken as professional advise. If you are seeking for professional advise, please consult your financial advisors. You should do your own research and/or seek expert’s advice when doing your investments. Any decision that you made is your own and the author should not be held accountable

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