Has Zhulian Reached Its Full Potential?

Zhulian just released its FY13Q4 financial results yesterday and it caught many investors by surprise.

For its Q4, revenue drops 37% QoQ from RM124.1mil to RM78.0mil, while net profit plunged even more at 65% from RM39.6mil to RM13.7mil.

       

For its full FY2013 ended Nov13, net profit increases only 3% from RM117.1mil to RM121.0mil, even though revenue retreats 7% from RM450.4mil to RM417.1mil.

Though the remarkable drop in FY13Q4 is somewhat magnified by its preceding record-breaking FY13Q3, I think investors should be careful about this situation.

From the management's report, the poor Q4 result is due to decrease in overseas market demand, in which I think Thailand probably play a major role in it.

There is no significant special one-off loss in the quarter, it is solely due to poor sales.

Historically, Zhulian always enjoys their best sales and results in the fourth quarter. Why does it drop so much in FY13Q4?

From Sep-Nov 2013, Hari Raya Puasa was just over, it is understandable that sales may slow down. However, overseas sales is the main culprit and it is unlikely to slow down to such extent. During this period as well, there were not many street protests in Thailand I guess.

From Dec13 onwards, the political turmoil in Thailand gains momentum. Thailand government has just imposed state of emergency in Bangkok for 60 days. Will it affect Zhulian's performance in Thailand even more?

Or is it because there are other new direct sales companies emerging in Thailand and snatch distributors and sales away from Zhulian? Successful business always attract opportunists to duplicate the business model to share the cake.

Or is there a new direct selling rule in Thailand which affect Zhulian negatively?

No one except the directors know what is the main reason behind the poor FY13Q4 performance.

Will FY14Q1 bounce back to previous level of RM30mil net profit a quarter? If you are very confident that it will, then you can take this opportunity to buy its shares.

If you are not sure, then better don't.

What if Zhulian post results similar to FY13Q4 or even worst for the whole FY2014? This may mean RM60mil net profit a year with EPS 13sen and fair value of just RM1.30 if PE 10x is given. I think target PE should not be high for companies with negative growth.

Investors must be careful in company with a sudden massive decline in revenue and profit. This may be the start of a downfall that may take a long time to recover or never recover.

For example:

In the first one year after listing, MEGB (Masterskill) posted a spectacular RM100mil net profit for FY2010. However, there was a significant drop in both revenue and profit in FY11Q2. After that, it gets worse and never recover until today.

For Guan Chong, which has been high flying for few years, posted a surprise drop in results in FY13Q1 result. This has proven to be a warning of subsequent worse results until today.

Perhaps HaiO is more relevant to Zhulian. HaiO was a hot stock few years back with its high growth and great dividends, something like what Zhulian is enjoying now?

HaiO was also hit by a sudden drastic drop in revenue and profit in FY10Q4. After this, its results were much worse and it never recover to its previous level even after 3-4 years now. 

Of course there are some reasons behind the downfall of these examples. What is the reason in Zhulian's case? No special reason? Or the management are reluctant to tell?

I think there should be a special reason behind such a drastic drop. I think only.

I'm not trying to ask anyone to buy or sell Zhulian at this moment. 

What I'm trying to say is that, be careful when both revenue and profit drop significantly without a clear reason given, unless you know the reason and it is fully justified.

People tend to go in when a "proven good & strong" company is trading at a "cheaper" price due to "temporary bad result". However, any good company can turn into a bad company very fast out of anyone's expectation.

If you are lucky, you gain. If luck is not on your side, you lose.

These are great examples of the uncertainty in stock market investment.