Zhulian Corporation Berhad (5131) -- Follow-up review (21/7/2018)

This is a follow-up review of my previous post on Zhulian back on February 2, 2018. Previously, I opined that this counter should begin to consolidate after a significant price retracement as it had been trading close to its Net Assets per share price of around RM1.30. Six months after my previous review and it seems like its share price has started to consolidate.

My last post was based on the financial results of Q4 2017. The company has since released the financial results for 2 quarters. Based on its latest financial results, there seems to be some improvement in its profit after tax margin. Profit after tax in Q2 2018 was about RM12 million, was higher than Q1 2018 and Q4 2017, but generally lower than PAT in 2017, see Table 1: Quarterly Financial Results of Zhulian. 

It has been reporting the same story in its quarterly reports that its decline in revenue was due to a drop in sales in its Thai business operations. Cumulatively, its financials fared much worse, see Table 2: Cumulative Quarterly Financial Results of Zhulian. Revenue, Operating profit, and Profit After Tax declined by 10%, 33%, and 21% respectively. Its operating profit and profit after tax margins have declined as well from 26% and 28% respectively in Q2 2017 to 19% and 24% in Q2 2018. As Thailand is its biggest revenue contributor at about 65% of total revenue, a decline in market demand is seen as negative. 

Table 1: Quarterly Financial Results of Zhulian 

Table 2: Cumulative Quarterly Financial Results of Zhulian 

Dividends anybody? 

Zhulian pays dividends quarterly. In the past, its dividends were 1.5 cents every quarter, and in Financial Year (FY) 2018, it increased its dividends to 2 cents. It paid special dividends of 1.5 cents in FY 2017, bringing its total dividends paid in FY 2017 to 7.5 cents, see Table 3: Zhulian Annual Dividends. 

Based on my dividend yield scenario analysis of Zhulian for FY 2018, at its current price of RM1.50, assuming no special dividends in FY 2018, its dividend yield would be 5%. However, if special dividends of 2 cents are paid, its dividend yield would rise to 7%. In view of its high cash pile and zero borrowings, I think it is possible Zhulian will continue to declare special dividends in FY 2018. 

Table 3: Zhulian Annual Dividends 

Technical Analysis Review 

Recently, Zhulian has picked up some bullish momentum on July 9, 2018. Its share price rose from a low of RM1.40 to a high of RM1.50 on July 20, 2018. Its last 2trading days have broken through the 60-day exponential moving average which has been its dynamic overhead resistance for the past 7 months. This move is, however, not supported with strong trading volume. 

From my observation, a key takeaway point is that trading volume has declined significantly over the past seven months of 2018 compared to 2017. This is probably due to Zhulian recording unfavorable business performance and operating in a weak environment. I think this rally may not be sustainable as its financials and business environment does not support it. 

Chart 1: Zhulian Price Chart 

In my view, the main challenge for this company is to grow its top line. Considering growing revenue is an arduous effort, overcoming this hurdle would mean increasing profits, which would translate into better share price performance. I am sure there are many alternative channels other than through multi-level marketing that Zhulian's products can reach potential customers. 

Based on its past few quarters, it can be seen that the company has some difficulties in sustaining growth. It is hard to foresee future growth in its business unless there is a substantial improvement in its business model.