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Eu Yan Sang - RHB Invest 2015-12-02: Concoction Gone Wrong

Eu Yan Sang - RHB Invest 2015-12-02: Concoction Gone Wrong EU YAN SANG INTERNATIONAL LTD E02.SI 

Eu Yan Sang (EYSAN SP) - Concoction Gone Wrong 

  • Restrictions on travel to Hong Kong – EYS’ largest market – imposed by China’s Government are likely to have a structural impact on sales. 
  • SELL, with a SGD0.36 TP (18% downside, 1x FY16F P/BV). 
  • The continued AUD and MYR weakness is likely to have a negative impact on its annual performance. 
  • While it has begun cost-cutting initiatives, recovery is likely to be slow as it still has 268 retail outlets and four F&B outlets. 


 Operating environment is rife with problems. 

  • Travel restrictions imposed on Mainland Chinese visiting Hong Kong is causing a structural change in Eu Yan Sang’s (EYS) customer dynamic. Hong Kong is EYS’ largest market, contributing c.40% of total revenue. Lower spending due to lesser parallel traders and Chinese tourists is likely to cause earnings to weaken, which may persist going into FY16F (Jun). Due to the poor economic outlook in Malaysia, we also expect this market (c.15% of topline) to stay muted in FY16. 

 Impacted by depreciation of currencies. 

  • While we see consistent improvement in EYS’ Australian operation through the conversion of its franchise to company-operated stores, revenue growth has also been dragged down by the AUD weakening by 7% YTD. 
  • In addition, tepid spending in Malaysia is also exacerbated by the MYR depreciating by 14% YTD. With that, we expect FY16F revenue to be lower than that of FY15. 

 TCM is a slow remedy. 

  • As a result of lower revenue and high operating leverage, the group has begun rationalising its store outlets to bring down its cost structure. 
  • As at 1QFY16, it closed seven retail outlets, four Australian franchises and one food & beverage (F&B) outlet in Shanghai. However, we believe recovery is likely to be slow as the group still has 268 retail outlets and four F&B outlets. 

 Still a SELL, with a TP of SGD0.36. 

  • In this challenging environment, we believe that the company should rationalise more stores and pursue its wholesale strategy more aggressively as customers who are familiar with its brand need not visit the outlets to purchase its products. 
  • The wholesale strategy may also open its doors to new customers who might have not stepped into EYS outlets. 
  • We remain cautious on the company’s near-term outlook and maintain SELL, with a TP of SGD0.36 pegged to 1x FY16F P/BV.


Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02
RHB Research SGX Stock Analyst Report SELL Maintain SELL 0.36 Same 0.36


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