JL Warren Capital

JL Warren Capital LLC is a leading independent equity research firm focused on Chinese companies and listed multinationals in China. We employ a bottom-up research approach that takes great care to avoid the acquisition of material non-public information. Through investigative due diligence including channel surveys and interviews, our research helps clients to pinpoint the dislocations in the market.

Investment Advisors

Assessment of China’s Crackdown on American MLMs

American Direct Seller in China Q1 Preview- USNA, HLF, NUS

China’s Intensifying Crackdown on Direct Sellers - HLF, NUS, USNA

Investment Advisors, JL Warren Capital

Junheng Li

Equity Bottom-Up

In this note, we update our clients with channel surveys from independent distributors and sales reps associated with <a href="https://www.smartkarma.com/entities/herbalife-ltd" target="_blank" data-smartkarma-citation="entities:6216:1" rel="noopener">Herbalife Ltd (HLF US)</a> , <a href="https://www.smartkarma.com/entities/nu-skin-enterprises-inc-a" target="_blank" data-smartkarma-citation="entities:12451:1" rel="noopener">Nu Skin Enterprises Inc A (NUS US)</a> and <a href="https://www.smartkarma.com/entities/usana-health-sciences-inc" target="_blank" data-smartkarma-citation="entities:15961:1" rel="noopener">Usana Health Sciences (USNA US)</a> regarding April- May sales trend.  Our survey results suggest all three American direct sellers demonstrated an accelerated declining trend year-over-year during the period.  We believe that the industry down-cycle has little to do with the geopolitical tension between the US and China, rather it is driven by overly aggressive sales push in 2018, which had drained demand and capital from distributors, and Beijing’s heightened surveillance of the nutritional supplements industry especially distributor recruiting activities.HLF was the worst performer among the three.  We estimated volume points sales down 40% year-over-year in China in Q2.  NUS performed relatively well, helped by its timely shift from health to personal care lines.  Nevertheless, due to the company’s latest scandal this March and a high base in Q2 2018, NUS China is trending down HSD to LDD year-over-year this quarter in RMB term.  USNA stood in-between the two, down mid to high double-digits in local currency.    Although the 100-days law enforcement special campaign implemented to clean up key violations in the direct sales industry especially in health products, officially ended on April 15, meeting approvals resumed in early May. To ensure compliance, Chinese authorities geared up monitoring via audio and video recordings to ensure that no recruiting activities take place during meetings.  In addition, unscheduled spot checks by local regulators have increased by local government staff in an effort to confirm that events are following the revised direct selling rules.  As a result, the sales effectiveness of the events (names sales during and after the meetings) have been muted.Note that all the above estimates are reported in local currency.  Due to the trade tension between the US and China, RMBUSD has depreciated as much as ~8% in Q2 2019/2018.  Each company has their own FX hedging programs, even so, it is unlikely any hedge program can completely offset FX volatility.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/091/513/original/1.PNG?1561570980" class="editor-image img-responsive" data-smartkarma-image-id="91513"></figure>

In this note, we update our clients with channel surveys from independent distributors and sales reps associated with Herbalife Ltd (HLF US) , Nu Skin Enterprises Inc A (NUS US) and Usana Health Sciences (USNA US) regarding April- May sales trend.  Our survey results suggest all three American direct sellers demonstrated an accelerated declining trend year-over-year during the period.  We believe that the industry down-cycle has little to do with the geopolitical tension between the US and China, rather it is driven by overly aggressive sales push in 2018, which had drained demand and capital from distributors, and Beijing’s heightened surveillance of the nutritional supplements industry especially distributor recruiting activities.HLF was the worst performer among the three.  We estimated volume points sales down 40% year-over-year in China in Q2.  NUS performed relatively well, helped by its timely shift from health to personal care lines.  Nevertheless, due to the company’s latest scandal this March and a high base in Q2 2018, NUS China is trending down HSD to LDD year-over-year this quarter in RMB term.  USNA stood in-between the two, down mid to high double-digits in local currency.    Although the 100-days law enforcement special campaign implemented to clean up key violations in the direct sales industry especially in health products, officially ended on April 15, meeting approvals resumed in early May. To ensure compliance, Chinese authorities geared up monitoring via audio and video recordings to ensure that no recruiting activities take place during meetings.  In addition, unscheduled spot checks by local regulators have increased by local government staff in an effort to confirm that events are following the revised direct selling rules.  As a result, the sales effectiveness of the events (names sales during and after the meetings) have been muted.Note that all the above estimates are reported in local currency.  Due to the trade tension between the US and China, RMBUSD has depreciated as much as ~8% in Q2 2019/2018.  Each company has their own FX hedging programs, even so, it is unlikely any hedge program can completely offset FX volatility.  

American Direct Seller in China Q2 Update - NUS, HLF and USNA China