RHB Securities 2015-08-28: Eu Yan Sang - Bitter Aftertaste.

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EU YAN SANG INTERNATIONAL LTD E02.SI

Bitter Aftertaste 

• Eu Yan Sang (EYS) reported its first full-year loss of SGD0.6m for FY15 (Jun). 
• We maintain our SELL recommendation with a lower TP of SGD0.36 (14% downside), pegged to 1x FY16F P/BV. 
• Results were significantly below our expectations, mainly due to structural changes in Hong Kong, which has affected sales to parallel traders from Mainland China. 
• While we think earnings have bottomed out, we expect the macroeconomic environment to remain challenging going forward. 

 Worse-than-expected diagnosis this quarter. 

• 4QFY15 revenue dropped 15% YoY, led by the decline in Chinese tourist spending in Hong Kong as well as Goods & Services Tax (GST) implementation in Malaysia. This was partially offset by sales from Singapore, which were up 5% YoY from the launch of new products. For Australia, revenue grew 15% YoY through reduced reliance on franchisees and increased number of company-operated stores. However, we note that Australia was still making a loss of SGD4.5m for FY15. Management guided that it should break even at the EBITDA level in FY16F. 

 Continued weakness across the markets in the near term. 

• We believe that travel restrictions imposed on mainland Chinese to Hong Kong are a structural change. Compounded with the devaluation of the CNY, we expect sales from Hong Kong to deteriorate by 10% in FY16F. Going forward, poor consumer sentiment in Singapore is likely to result in benign growth, while the GST implementation and weakening MYR will continue to stifle demand in Malaysia. 

 Hit by high operating leverage. 

• Excluding its franchisees, EYS has 252 retail outlets. As such, distribution and selling costs remain high despite lower revenue. To reduce costs, the company will rationalize its stores and focus on wholesale channels going forward. 

 Difficult to cure, maintain SELL. 

• Despite the close turnaround of its Australian business, we still expect EYS to post a loss of SGD2m-3m per year from the China market in the near term. Coupled with the gloomy macroeconomic outlook, we are cautious about the company’s near-term profitability. We maintain SELL with a lower TP of SGD0.36 (from SGD0.60), pegged to 1x FY16F P/BV (previously, pegged to peer average of 17x FY15F P/E).

Juliana Cai | http://www.rhbgroub.com/ RHB Securities 2015-08-28

SELL Maintain SELL 0.36 Down 0.60