PP 7767/09/2010(025354)

10 August 2010

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
B r ief ing Not e Company No: 233327 -M
MARKET DATELINE

10 August 2010

Amway (M) Holdings Share Price

Fair Value
:
:
RM8.12
RM8.45
2H FY12/10 Growth Expected To Remain At Same Recom : Market Perform
(Maintained)
Level As 1H

Table 1 : Investment Statistics (AMWAY; Code: 6351) Bloomberg: AMW MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009a 663.0 72.5 44.1 -23.7 18.4 - 5.6 Net cash 30.7 5.9
2010f 697.9 89.6 54.5 23.6 14.9 51.0 5.6 Net cash 37.6 6.7
2011f 722.5 92.8 56.5 3.5 14.4 55.0 5.6 Net cash 38.8 6.9
2012f 748.0 96.1 58.4 3.5 13.9 56.0 5.6 Net cash 40.1 7.1
Main Market Listing /Trustee Stock / Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ 1H FY12/10 revenue growth of 8.4% yoy. 1H revenue was largely Issued Capital (m shares) 164.4
driven by new product launches and well-received product promotions. In Market Cap (RMm) 1,334.8
the 1H, Amway introduced various products such as Nutrilite Protein Drink Daily Trading Vol (m shs) 0.1
Mix, Positrim Corn Savoury Soup, and various products under its Artistry 52wk Price Range (RM) 5.92-7.50
cosmetics brand, amongst others. Management expects revenue growth for Major Shareholders: (%)

the full-year FY12/10 to be more along the lines of the 1H, at 7-8%, which Amway Global 51.7
Skim Amanah Saham 16.9
will be supported by further product launches and promotional/branding
EPF 5.7
activities.
FYE Dec FY10 FY11 FY12
♦ Forex not expected to affect 2H margins. With regards to the forex, EPS chg (%) - - -
management highlighted that due to a hedging position it has taken and its Var to Cons (%) 6.8 2.7 4.3
normal inventory position of 10-12 weeks, swings in the USD-MYR will not
impact margins for the remainder of the year. Although this will mean PE Band Chart

Amway will not benefit from any further depreciation of the US$, it also
means that should there be any reversal of trend resulting in an appreciation PER = 17x
PER = 15x
of the US$ or even a price increase implemented by Amway US, Amway’s PER = 13x
margins will not be affected for the rest of the year. Thus, we believe our
assumptions of a sustained operating margin of 16-17% for the full year
could be achieved, which is in line with 1HFY10 operating margin of 17.2%.

♦ Opening more Amway shops. Amway has YTD opened 2 more shops
(Taiping and Mentakab), bringing its total shops to 10 shops all over the Relative Performance To FBM KLCI
country. It is planning to open one more shop in Segamat in 2010 and we
understand that it would be the last shop opening of the year. Management
indicated that, moving forward, they are planning to convert two RDC’s to FBM KLCI
become shops, i.e. close down the warehouse and open a new shop in
another place. The opening of the new shops is not expected to cause capex
to be a lot more than it is currently as each shop would cost RM0.5-1m to
Amway (M) Holdings
renovate, while on the operating level, the rental payments for the location
of the shop will be offset by savings from delivery costs.

♦ Forecasts. No change to our earnings forecasts.

♦ Risks. The risks include: 1) decline in consumer spending power; 2)

intensifying competition; 3) unfavourable exchange rate movement; and 4)
inability to pass on higher costs to consumers.

♦ Investment case. Our DCF-derived fair value remains unchanged at Hoe Lee Leng
RM8.45, using a WACC of 8.1%. Despite the lack of capital appreciation in (603) 92802641
Amway’s share price, we believe that it continues to be attractive as a hoe.lee.leng@rhb.com.my
dividend play, which is expected to yield 6.7% for the full year. Maintain
Market Perform.

Please read important disclosures at the end of this report.

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 10 August 2010

♦ 1H FY12/10 revenue growth of 8.4% yoy. 1H revenue was largely driven by new product launches and well-
received product promotions. In the 1H, Amway introduced various products such as Nutrilite Protein Drink Mix,
Positrim Corn Savoury Soup, and various products under its Artistry cosmetics brand, amongst others. As part of
its product promotions and branding activities, Amway launched a beauty coach/van which travels across
different cities in the country to hold make-up workshops and other activities, strengthening its brand
awareness. Management expects revenue growth for the full-year FY12/10 to be more along the lines of the 1H,
at 7-8%, which will be supported by further product launches and promotional/branding activities.

♦ Forex not expected to affect 2H margins. With regards to the forex, management highlighted that due to a
hedging position it has taken and its normal inventory position of 10-12 weeks, swings in the USD-MYR will not
impact margins for the remainder of the year. Although this will mean Amway will not benefit from any further
depreciation of the US$, it also means that should there be any reversal of trend resulting in an appreciation of
the US$ or even a price increase implemented by Amway US, Amway’s margins will not be affected for the rest
of the year. Thus, we believe our assumptions of a sustained operating margin of 16-17% for the full year could
be achieved, which is in line with 1QFY10 operating margin of 17.2%.

♦ Opening more Amway shops. Amway has YTD opened 2 more shops (Taiping and Mentakab) bringing its total
shops to 10 shops all over the country. It is planning to open one more shop in Segamat in 2010 and we
understand that it would be the last shop opening of the year. Since Amway embarked on its shop opening
strategy in 2008, the shops have been receiving positive feedback from members as it increases the branding
awareness and physical presence of Amway’s products, especially as the shops are located at easily accessible
locations such as at a shopping mall. The members who were previously negative about the shops opening due
to the competition it poses, are now asking for more shops across the nation. We understand that members
prefer the shops to Amway’s Regional Distribution Centres (RDC) due to the ease of access of the former, thus
providing an easier avenue to recruit members due to the shops product visibility. Management indicated that
they are also planning to convert two RDCs (Brunei and Melaka) to become shops i.e. close down the warehouse
and open a new shop in another place in 2010.

♦ No significant impact to cashflow and dividends. The opening of the new shops is not expected to cause
capex to be a lot more than it is currently as each shop would cost RM0.5-1m to renovate, while on the
operating level, the rental payments for the location of the shop will be offset by savings from delivery costs. We
are thus leaving our current capex and cost assumptions unchanged, while maintaining our dividend payout
assumption for FY10 of 54 sen or a net payout of 99%. Based on current share price of RM8.12, the net dividend
yield will be 6.7%.

Risks

♦ Risks. The risks include: 1) decline in consumer spending power; 2) intensifying competition; 3) unfavourable
exchange rate movement; and 4) inability to pass on higher costs to consumers.

Forecasts

♦ No change in earnings projections. We maintain our FY10-12 earnings projections.

Recommendation and Valuation

♦ Maintain Market Perform. We are optimistic about Amway’s ability to meet our full year forecast as we believe
it will be able to sustain its revenue growth through continous product launches and more branding activities. Our
previous worries over forex swings eating profit margins are somewhat comforted by management indicating that
margins will not be affected for the rest of year, although we are maintaining a certain level of caution due to the
extremely volatile nature of foreign exchange contracts. Our DCF-derived fair value remains unchanged at
RM8.45, using a WACC of 8.1%. Despite the lack of capital appreciation in Amway’s share price, we believe that it
continues to be attractive as a dividend play, which is expected to yield 6.7% for the full year. Maintain Market
Perform.

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 10 August 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09F FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 663.0 697.9 722.5 748.0 Increase in CDF (ooo) 4 4 4

Turnover growth (%) 2.7 5.3 3.5 3.5 Growth in distributor productivity (%) 2 2 2

Cost of Sales (471.5) (477.3) (494.0) (511.3)

Gross Profit 192.4 220.6 228.5 236.8

EBITDA 105.8 122.1 126.4 130.9

EBITDA margin (%) 16.0 17.5 17.5 17.5

Depr&Amor (2.5) (5.1) (5.4) (5.7)

Net Interest 4.7 3.5 2.5 4.0

Pretax Profit 98.9 122.1 126.4 130.9

Tax (26.3) (32.5) (33.6) (34.8)
Net Profit 72.5 89.6 92.8 96.1
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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