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Dear valued shareholders,
Despite tough market conditions, both in Malaysia and abroad, the Hai-O Group registered another year of solid results for the 2009 financial year. We have delivered a noteworthy year-on-year growth rate of 16.4% in revenue and about 12% growth in profit before tax this financial year, thus, accomplishing our commitment to you, our shareholders to deliver long term sustainable growth.

Economic & Business Environment

The road to global recovery appears to be sluggish and uneven, facing many daunting challenges along the way. Both the World Bank and the IMF are projecting the world economy to slide into a deeper recession in 2009. In July 2009, the IMF revised its global economic forecast to -1.4% in 2009, while the global contraction in 2009 is estimated at -2.9% by the World Bank. According to the latest IMF revision, the US will experience a less severe recession in 2009 compared to Europe which may face a deeper one. The IMF projects the world economy to recover to around 2.5% growth in 2010, with the US recording a meagre 0.8% growth in 2010, slightly higher than the previous 0% growth forecast.

As the external sector tumbles, Malaysia's GDP contracted by a steep -6.2% in the 1st quarter of 2009, following a stagnant 0.1% growth in 4th quarter 2008. Given the deteriorating global economic prospects, a second stimulus package amounting to RM60 billion (about 9% of GDP) was unveiled in March 2009. Although the second package appears larger, the actual direct spending is only RM15 billion (or 25% of total) to be spent over a 2-year period. The recurring concerns have been the speed and efficiency of implementation and the potential leakages. A notable point is the greater attention given to retrenched workers and unemployed graduates. With the second stimulus package, the fiscal deficit is estimated to rise to 7.6% of GDP in 2009, up markedly from 4.8% in 2008.

In a move to make Malaysia more attractive to investors, liberalisation measures have been announced. Starting 22 April 2009, 27 services sub-sectors were fully liberalised to foreign investors, on the premise that Malaysia lacks expertise and local investments in many of these subsectors. Among the sectors opened up are computer and related services, health and social services, tourism services, transport, recreational, business services and shipping. On 30 June 2009, the long standing 30% Bumiputra equity requirement for newly listed companies was removed, making investment conditions less restrictive. This will bring Malaysia's equity market closer to regional benchmarks, but the impact remains to be seen since there are many factors influencing investment decisions.

Consumer and business confidence has improved in the 2nd quarter of 2009, possibly infl uenced by the measures taken to support the economy. These include the fiscal stimulus packages, the historically low interest rates, and the recent liberalisation measures. There are glimmer signs that the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven.

Despite that, the Malaysian healthcare industry in 2009 is said to be in good shape. According to Frost & Sullivan, it is expected to grow at 8% and is being supported by the RM13.7 billion budget (RM13 billion in 2008). This is an increase of 5.35% from previous year, which represents 2% of GDP. The healthcare industry is perceived more as a defensive in comparison to other industries. More often than not healthcare products are viewed as essential goods that should be less affected by cyclical economic events. Despite the economy meltdown, opportunities are anticipated for the Asia Pacific region especially Malaysia. Being one of the countries with excellent infrastructure and facilities as well as cost-competitiveness compared with other developing APAC nations, Malaysia healthcare industry is likely to gain the most out of this global economy condition.

Financial Overview

For the financial year under review, Hai-O Group recorded a noteworthy financial performance by posting a 7.7% growth in profit after tax of RM52.29 million (2008: RM48.54 million), backed by a higher revenue of RM435.22 million (2008: RM373.82 million), an increase of 16.4%. The improvement in revenue was attributable to effective marketing strategies that successfully penetrate into the non-traditional market for our MLM division.

The Group's FY2009 financial position remains intact. As over 70% of the group's business is dealing in cash term, thus it had generated total annual net cash from operations about RM53 million for the financial year under review. The Group's net cash position and short term investment accumulated at RM60 million as of 30 April 2009. Shareholders' fund had also increased to RM165.7 million with net asset per share of RM1.99 due to resilient earning growth.

Business Division Overview

Multi-Level Marketing

In FY2009, we saw another year of double digit growth both in revenue and profit recorded by our MLM division, Hai-O Marketing (HOM) since 6 years ago from FY2003. For the financial year under review, HOM recorded total sales of RM348.88 million against RM281.59 million in FY2008, representing an increase of 23.89%. Correspondingly, the segmental profit before tax is recorded at RM59.8 million, an increase of 26% over the FY2008 of RM47.3 million.

During the financial year, the major highlight was that HOM has invested a significant amount of money, time and effort in its advertising campaign. This year is HOM's first appearance in television commercials. The TV commercials were broadcast nationwide via two private television networks in the country, namely TV3 and TV9. During various air time slots, a series of 10 to 30 seconds commercials highlighted featured product, Bio-Aura Water Filtration System, as well as real life stories on the success of our distributors working with our MLM system. This helps create greater awareness and provides an avenue of communication to a wider audience.

HOM had also sponsored a TV programme "Wanita Hari Ini" on TV3 and the said programme featured and promoted various HOM products such as Premium Beautiful bodyshaper and Bio-Aura water filtration system. We also intensifi ed our efforts on the outdoor advertising channel via putting up more billboards at strategic locations and alongside various highways including PLUS, NKVE and Federal highways. The TV commercials and billboards gave us a high amount of visibility with our intended target customers.

This had a positive impact on our new member recruitment. Since the previous financial year, our registered members has increased from 60,000 to the present number of more than 100,000 on an average of about 3,000-4,000 new members joining HOM per month. This is a noteworthy achievement for the Company, a clear sign that the various advertising programmes put in place to derive new members are yielding results.

This financial year also saw the launching of two (2) brand new series of products. The first one being the La Praise series of premium facial skin care products. This range of products are targeted at women, and will provide an additional avenue for women distributors in particular to expand their sales revenue. The other new series of products is the Nurich health supplements, which consist of 5 distinct products. The addition of the Nurich series to our present range of health supplements will enhance the appeal of HOM and provide a wider range of choice for consumers.

This FY2009, we are also proud to mention that for the MLM travel incentive, 426 Bumiputra distributors successfully qualified for the Umrah trip to Mecca. And this is all due to the hard work and commitment of all the 426 qualified Bumiputra distributors. Another 648 distributors successfully qualified for another incentive trip to Sydney, Australia.

Wholesale

The wholesale division, Hai-O Enterprise continues to be second largest contributor to the Group, for this financial year under review, it contributed about 10% to the Group's sales and 16% to the Group's segment operating profit. The lower segment results recorded was mainly due to the slowdown in domestic consumption as consumer turned more cautious in their spending and coupled with higher written down and written off value of slow-moving inventory. This FY2009, the wholesale division's marketing channels has expanded into the hypermarket and pharmacy segments, moving forward, we hope that these new channels will be able to contribute positively to the wholesale division's sales. The Pu'er tea market remained sluggish and the Board of Directors remain cautious and adopting a more conservative approach in writing down the Pu'er tea stock to refl ect the realisable value of the stock.

On 16 June 2009, we entered into an exclusive distribution agreement with Yunnan Baiyao Group Co., Ltd. to market a series of Traditional Chinese Medicine products under the brand name of Yun Feng from Yunnan Province, China. A total of 19 SKUs (Stock-Keeping Units) are expected to be introduced in the second half of FY2010 via various Hai-O Group marketing channels and are expected to contribute positively to the next financial year.

On 24 February 2009, Hai-O Enterprise launched the Wincarnis Healthy Cooking Roadshow, featuring popular chef Agnes Chang. The roadshow showcased healthy dishes developed by Chang using Wincarnis as one of the ingredients. Each session featured four recipes. The roadshow made 10 stops in various major towns in Peninsular Malaysia. Hai-O Enterprise is the sole distributor of Wincarnis Medicated Tonic.

Overall, effective marketing strategies and A&P activities such as advertising on 8TV, NTV7 and ASTRO and the sponsorship of the "ASTRO Classic Golden Melody Singing Competition 2009" on ASTRO had created brand awareness and product exposures among family and teen viewers.

Retailing

Revenue from the retailing division, Hai-O Raya is maintaining at approximately RM39.15 million for FY2009, whereas the segment operating profit increased substantially from approximately RM2.0 million in FY2008 to the current FY2009 of RM2.98 million, an increase of 43%. The increase was mainly due to more focus in the promotion and sales of house brand products with higher profit margins.

This can be seen from the higher retailing segment margin in FY2009. In addition, higher A&P costs spent on rebranding advertisement had created wider awareness and attracted many new customers who joined Hai-O Raya's Customer Loyalty Program that brought in more sales. To date, we have recruited a total of 173,676 members in our Customer Loyalty Program. Besides, with the opening of 1 new outlet (Kuchai Lama) and 7 counters in various supermarkets such as Carrefour, Aeon Jusco, etc., also contributed positively to the retailing division's performance.

On 28 May 2009, Hai-O Raya relaunched Hai-O Mingzhu Bai Feng Wan, and also introduced a brand new TV commercial and two (2) product ambassadors for the said product. Hai-O Mingzhu Bai Feng Wan was first introduced to the Malaysian market in 2005 and had since been very popular among consumers, it has sold close to 1 million units (12g) to date.

A 3-month long course on TCM nutrition and its application in food preparation was organized for a selected group of employees where a majority of them are staff of Hai-O Raya. This course enabled the trained employees to have a better understanding of the TCM products that they are dealing with on a daily basis, and by applying these knowledge, they are able to better serve our customers in their respective jobs.

Hai-O Raya's expansion plan in the coming years will include opening 3 to 4 new outlets and introduce 6 new SKUs under the house brand Honbo and Herby on an annual basis. And plans to open 2 new outlets in East Malaysia (one in Kuching, Sarawak and one in Kota Kinabalu, Sabah) is currently underway, this will enhance Hai-O Raya chain store's coverage to a wider area and to better cater to the needs of our customers.

Manufacturing

This year is a wonderful year for the manufacturing division. The external revenue increased to RM2.54 million in FY2009 as compared to FY2008 of RM1.20 million, which translates to an increase of more than 100% correspondingly. The segment profit had also increased to RM0.86 million against last financial year of RM0.45 million, an increase of over 90%.

The increase was mainly due to more OEM contract manufacturing customers secured by this division. In addition to that, more house brand products (under the brand name "Honbo") introduced by the retail division and a new range of health supplements ("Nurich") launched by the MLM division had also boosted up the performance of the manufacturing division.

The stevia-based sweetener manufacturing contract with PureCircle was terminated due to non-fulfillment of the terms of the agreement by PureCircle. The termination does not have any material effect to the Company. On the positive side, the termination of this agreement will release SG Global from the exclusivity clause and therefore is open to opportunities to secure businesses with many other potential OEM customers.

Joint Venture Companies

A joint venture company between Hai-O and Beijing Tongrentang Co Ltd, which is the largest producer of traditional Chinese medicine in China. It is also one of the oldest and most respected practitioners in traditional Chinese medicine. It is a well known name widely among Chinese and Asians worldwide. Through the joint venture, Hai-O is able to tap into the wealth of experience and knowledge accumulated by Beijing Tongrentang from its 340 years of operation, and deliver to our customers in Malaysia the best available clinical and pharmaceutical services in traditional Chinese medicine.

Peking Tongrentang (M) Sdn. Bhd. currently has 3 outlets opened in Kuala Lumpur, Petaling Jaya and Penang.

Prospect For The Future

Hai-O shall with great determination maintain our existing strengths, eliminate obstacles to overcome difficulties, turning adversity into prosperity, sailing against the current and strive for greater victories. Hai-O will not slow down or cut down its advertising and promotion spending, instead it will integrate on its present resource base. Hai-O's backbone is Hai-O Marketing, 80% of Hai-O's revenue are contributed by Hai-O Marketing with 100,000 registered distributors that forms a very strong sales network, they are Hai-O's strength in combating this economic recession. An economic downturn is an adversity, people will start looking for part-time jobs and earn some extra income, and the unemployment situation will bring forth to Hai-O Marketing an even greater sales force, which would further strengthen the already strong team line-up.

Hai-O's slight decline in sales in the wholesale division last year caused some concern, everyone remained cautious of the situation. And beginning this year, Hai-O strengthened its advertising and promotion efforts, and struggled to shake off the sales decline. And it has proven that this approach is effective, at the end of the 4th quarter financial year that ended on April this year, Hai-O's financial results had a double-digit growth, indicating that even during the United States sub-prime mortgage crisis, Hai-O's overall business still has room for development.

One of Hai-O's long-term goals is to gradually increase its value to become one of KLSE's highest value creation stock (we are currently ranked 6th in the top 100 winners in the KPMG Shareholders Value Award 2008). In the process of this advancement, Hai-O must maintain its stable profitability, reward generous dividends to our shareholders, and remain a company that performs brilliantly.

Human Resources

At Hai-O, we recognize the human capital is our most important asset. Our human resource culture centred on 3 core values: Sense of Belonging, Teamwork and Equal Opportunity. We encourage our staff to excel and value their careers in Hai-O as their own undertaking. In Hai-O, we all work together as a team and strive to inculcate a sense of ownership to our company. We provide equal opportunity to our staff to make contributions and in return to enjoy a rewarding career. With such philosophy in mind, Hai-O is committed to bringing out the best in our staff and to build the success together.

During FY2009, the training department organized a series of KPI (Key Performance Index) training programmes conducted by an external professional. Key Performance Indicator (KPI) is a very important management tool to corporate managers. It helps to set clear expectation of the management, and also direct the focus of every employee to put their efforts to achieve what the management expects.

The directors and managers of the Group participated in a 2-day team building and training programme in Awana Genting Highlands Golf & Country Resort. A seminar on "Translating Strategy Into Operations/Actions" was conducted during the programme by Tay Guan Mong, a well-known management consultant from Singapore.

Twenty one (21) Hai-O employees were hand-picked to attend a 96-hour "TCM Nutritionist Course" over a period of 3 months. The course was conducted by Dr. Chang Yoon Sang, a nutritional therapist from the Nature Science Research Academy. The aim of this course was to enable the said group of Hai-O employees to familiarize themselves with the knowledge and application of Chinese medicinal food and consequently allowing them to utilize their new found knowledge in their respective jobs. During the course, they also concocted a recipe booklet containing 17 Chinese medicinal food recipes, this is to promote the various health benefits of Chinese medicinal food. The recipe booklet entitled "Healthy Home-Cooked Recipes" is available at our Hai-O Raya chain stores.

We have conducted numerous product trainings for our wholesale and retail sales team, enabling them to gain better product knowledge and its competitive advantage so that they can better serve our customers.

Acknowledgment

On behalf of the Board of Directors, please allow me to express my sincerest gratitude and appreciation to our valued customers, suppliers, shareholders and business associates and bankers and not forgetting our MLM distributors for their continued support and trust. A big thank you is also extended to the government and relevant authorities and officers for their assistance.

We are very lucky to be supported by an incredible group of men and women who run our operating units on all levels, without them, we wouldn't have been where we are today. Therefore, from the bottom of my heart, you all have my thanks.

Tan Kai Hee
Managing Director