Is Zhulian Corporation's High Dividend Yield a Trap for Long-Term Investors?

Zhulian Corporation Berhad (5131.KL) has long captivated income-focused investors with its attractive dividend yield, currently hovering around 3.7% [1]. However, beneath this veneer of generosity lies a precarious financial reality: the company’s dividend payout ratio exceeds 125% of earnings and 102% of free cash flow [2]. This raises a critical question: Is the high yield a reward for patience, or a trap for long-term investors?

Earnings and Cash Flow: A Deteriorating Foundation

Zhulian’s recent financial performance underscores the fragility of its dividend model. In Q2 2025, the company reported a 14% year-over-year revenue increase to RM37.9 million, yet net income fell by 8.7% to RM5.99 million [1]. Profit margins contracted from 20% to 16%, driven by rising expenses [1]. Over the six months ended May 31, 2025, sales grew to RM67.32 million, but net income declined to RM11.57 million from RM12.92 million in the prior year [2].

Cash flow trends are equally concerning. While Zhulian generated RM59.45 million in free cash flow for 2024, this figure has been shrinking at an 11.8% annual rate [3]. In Q2 2025, free cash flow turned negative at -RM117,000 [4]. Operating cash flow for the same period stood at RM30.079 million, but this was offset by negative financing cash flow of RM41,528 [4]. The company’s reliance on cash reserves to fund dividends is evident, yet these reserves are dwindling.

Dividend Sustainability: A House of Cards?

The payout ratio—125% of earnings and 102% of free cash flow—reveals a dividend policy that is structurally unsustainable [2]. For context, industry norms typically cap payout ratios at 60–80% to ensure resilience during downturns. Zhulian’s current approach forces it to distribute more in dividends than it earns, a practice that cannot persist indefinitely.

Historical data further erodes confidence. Between 2020 and 2024, Zhulian’s annual dividends ranged from RM0.03 to RM0.08 per share, but recent payouts have plummeted to RM0.01 per share [5]. The 2025 interim dividend of 1 sen per share, while consistent with quarterly patterns, reflects a 24% reduction compared to 2022 [6]. Shareholders have approved these cuts at annual general meetings, but frustrations simmer over the disconnect between executive compensation and performance. The CEO’s RM1.7 million package, 115% above the industry average, has drawn scrutiny amid a 25% decline in earnings per share over three years [1].

Strategic Shifts and Governance Risks

Management has pivoted toward beauty and wellness products as a growth driver, touting long-term value creation [7]. However, this strategy has yet to translate into improved profitability. Return on capital employed (ROCE) remains at 6.1%, far below the industry average of 10% [7]. Meanwhile, the company’s debt-to-equity ratio of 0.07% [5] offers little buffer against potential shocks.

The governance risks are compounded by a lack of alignment between executive incentives and shareholder interests. With the CEO’s compensation decoupled from performance metrics, investors face a heightened risk of mismanagement [1]. This dynamic undermines confidence in the company’s ability to navigate its current challenges.

A Call for Caution

While Zhulian’s 3.7% yield may appear enticing, the underlying financials paint a cautionary tale. The dividend is currently propped up by a shrinking cash flow buffer and a payout ratio that defies conventional wisdom. For long-term investors, the priority should be assessing whether the company can stabilize its earnings and cash flow before committing to this high-yield proposition.

Source:

[1] Zhulian Corporation Berhad: Can a High Dividend Yield Salvage a Deteriorating Earnings Story? [https://www.ainvest.com/news/zhulian-corporation-berhad-high-dividend-yield-salvage-deteriorating-earnings-story-2507]
[2] We Wouldn't Be Too Quick To Buy Zhulian Corporation... [https://finance.yahoo.com/news/wouldnt-too-quick-buy-zhulian-221714949.html]
[3] ZHULIAN CORPORATION BHD Cash Flow [https://www.tradingview.com/symbols/MYX-ZHULIAN/financials-cash-flow/]
[4] Zhulian Corporation Berhad (5131.KL) cash flow [https://sg.finance.yahoo.com/quote/5131.KL/cash-flow/]
[5] Zhulian Corporation Berhad (5131.KL) - Yahoo Finance [https://finance.yahoo.com/quote/5131.KL/key-statistics/]
[6] [ZHULIAN] Second Interim Dividend on 12-Aug-2025 | I3investor [https://klse.i3investor.com/web/entitlement/detail/28179_2495444203]
[7] Zhulian Corporation Berhad: Strategic Initiatives and Profitability Challenges [https://www.ainvest.com/news/zhulian-corporation-berhad-can-a-high-dividend-yield-salvage-a-deteriorating-earnings-story-250710105a579c2394f3cb67/]