Target Price S$0.90
Results
• As expected, a weak 1HFY12. There were no surprises in Eu Yan Sang’s (EYS) 1HFY12 results. Net profit fell 79% yoy to S$1.7m due to an S$8.8m provision for its investment in Healthzone Limited. Excluding the investment provision, net profit would have risen 28% yoy. Although 1HFY12 profit accounted for only 42% of our full-year estimate, we expect a seasonally stronger 2H (particularly in 3Q) to lift earnings closer to our estimates.
• Slight margin pressure on store expansion. EBITDA margin slipped 0.4ppt to 13.2%, largely due to store expansion. 2QFY12 saw EYS opening 16 new outlets (5 in China, 2 in Hong Kong, 2 in Singapore and 7 in Malaysia). Looking ahead, management plans to continue with its expansion drive, particularly in China and Malaysia.
Stock Impact
• Healthzone update. Management provided an update on the developments regarding its Healthzone investment. The company acquired selected business assets for A$5m (S$6.7m). These included its inventory, contracts, franchise and plant & equipment. Management expects the acquisition to be completed by end-Feb 12. As for Healthzone’s China business, management is still evaluating this division and will provide more clarity once a decision has been made.
• High momentum in new store openings. EYS has been expanding its retail presence aggressively, especially in China and Malaysia. In 2QFY12 alone, EYS opened seven stores in Malaysia and five stores in China. In 1HFY12, EYS has opened 20 new outlets, compared with 26 in FY11 and an average of 13 from FY06-FY10. Management is confident of prospects, particularly in China where an increase in its product range offering should also underpin sales. In addition, turnover should also be driven by the introduction of new products. The latest product to be introduced is the Infant Digestive Support Formula. This was launched in Dec 11 in Hong Kong and the initial response has been promising.
Earnings Revision/Risk
• Maintained earnings. We maintain our earnings as we had previously factored in the full provision for its investment in Healthzone. In our view, the group remains on track to deliver a 3-year EPS CAGR of 13.5%, driven by same-store sales (SSS), expansion in new outlets as well as the introduction of new products.
• Potential risks. Key risks to our positive view on the group include:
a) risks to reputation and brand image,
b) rising rental costs,
c) rising raw material costs,
d) regulatory risks,
e) M&A risks, and
f) forex risks.
Valuation/Recommendation
• Maintain BUY and target price of S$0.90, based on 15.9x PE, at a 20% discount to its TCM and health supplement peers.
• As a sanity check, we use a DCF model that incorporates slower earnings growth over the next three years, coming up with a target price of S$0.95. There is upside risk to our valuations, should the stores turn around faster.
Share Price Catalyst
• We see potential catalysts from:
a) positive news or datapoints from its successful organic expansion into China,
b) continued consumer spending on healthcare in the region,
c) successful new product launches, and
d) potential M&As.
Company Background
The Company was incorporated in Singapore on 10 April 1993 under the name of Videlli Pte Ltd which was subsequently changed to Eu Yan Sang International Holdings Pte Ltd on 1 September 1993. On 6 July 2000, it was converted into a public company and adopted its present name. The principal activities of the Company are investment holding and the provision of management services to the Group. Today, EYS manufactures and markets fine quality, Chinese herbs, Chinese Proprietary Medicines as well as health foods. EYS currently offers more than 250 products under its “Eu Yan Sang” brand name and over 1,000 different types of Chinese herbs and other medicinal products. Manufacturing facilities are carried out in its three GMP-certified (Good Manufacturing Practice) factories in Hong Kong and Malaysia. EYS's distribution network comprising of over 90 retail outlets in Hong Kong, Malaysia, Singapore and USA. “Eu Yan Sang” products are available in over 6,000 drugstores, pharmacies, medical halls, hospitals, supermarkets, chain stores, health clubs, spas and convenience stores worldwide. Its cybershop at www.euyansang.com.sg offers its global customers the ease and convenience of purchasing online. In addition, EYS operates a chain of 13 TCM clinics in Singapore and Malaysia; 3 Specialist TCM clinics in Singapore; 4 “YourHealth” Integrative Medicine Centres (IMC) in Australia. The Specialist TCM clinics and IMCs combine the best practices of conventional medicine, TCM and other natural therapies, providing modern consumers with a holistic approach to healthcare.
52 Weeks Range 0.595 - 0.816
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