Eu Yan Sang - CIMB Research 2016-02-15: Still a bitter patch

EU YAN SANG INTERNATIONAL LTD E02.SI

Eu Yan Sang Int'l - Ltd Still a bitter patch

1HFY6/16 core net loss was S$1.0m versus our/consensus expectations of S$5.8m/S$4.3m profit for FY16.
Excluding FX gains and non-recurring losses, EYS was loss-making in 1H16.
All markets except Hong Kong saw 1H16 topline improve in local currency terms.

Potential re-rating catalyst: turnaround in Australia and China markets.
Maintain Reduce, with a higher target price of S$0.30 as we roll over to CY17.

EYS’s 1H16 sales declined 4.1% yoy, led by a weaker retail environment in Hong Kong.
Sales mix changes weighed on 1H16 gross margin (49.0% vs. 51.3% in 1H15), contributing to 41% yoy drop in operating profit. This, together with higher interest expenses from additional borrowings, caused 1H16 net profit to drop 87% yoy to S$0.4m.
Excluding one-offs, 1H16 core net loss of S$1.0m disappointed against our S$5.8m FY16 net profit estimate.
Net gearing ratio was 97.4% at 31 Dec 2015.

Hong Kong, which contributed c.40% of total revenue in 1H16, continued to suffer from weak retail environment and lower spending by mainland Chinese visitors, as 1H16 turnover fell 13.7% yoy (21.6% in local currency terms), mitigated by a stronger HK$.

1H16 revenue from Singapore rose 12% yoy, while same-store sales were up 18% yoy, thanks to effective marketing campaigns, launch of new products and expansion into distribution channels such as Guardian stores.

1H16 sales in Malaysia rose 7% yoy in local currency terms, boosted by EYS’s member promotions. However, the RM depreciation offsets 1H16 topline performance, resulting in an 8% decrease yoy when converted to S$. EYS also opened three new outlets.

Australia delivered strong 1H16 revenue growth of 19% in local currency terms to AU$25.6m.
A weaker AU$ dampened growth in SG$ to 7% yoy. However, with two new retail outlets and agreement to acquire seven health food retail stores from Venture Integrity Health, Australia operations may only break even in FY17, instead of end-FY16.

Apart from rationalising the retail network (closed one retail outlet), EYS recently announced a 40:60 JV with HCare Investments.
In addition to capital injection, HCare will be EYS’s exclusive distribution platform in China and lend its expertise in product R&D and retail. In Oct 2015, EYS announced a collaboration with Shanghai Rong Yue Medical Consultancy to start a traditional Chinese medicine (TCM) clinic in Shanghai.

We cut FY16-18 EPS by 9-28% due to lack of near-term respite in retail weakness but raise our target price to S$0.30 as we roll over to CY17 P/E of 13.3x P/E (based on low P/E of 2011 GFC period)

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-02-16

CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 0.30 Up 0.25