EU YAN SANG INTERNATIONAL LTD
E02.SI
Eu Yan Sang - When Stronger Immunity Did Not Help Much
- Despite stronger sales from Singapore, Malaysia and Australia in local currency terms, we expect weak profitability to persist as revenue from EYS’ largest market, Hong Kong, continued to sink lower in 2QFY16.
- We think the current valuation remains unattractive given the weak earnings potential.
- Maintain SELL with an unchanged SGD0.36 TP (14% downside), pegged to 1x FY16F P/BV.
Stronger immunity offset by Hong Kong.
- Eu Yan Sang’s (EYS) weak set of 2QFY16 (Jun) results were in line with our expectations. As the Hong Kong market has higher profit margins compared to the other regions, stronger sales from Singapore and Australia were unable to offset lower revenue in Hong Kong.
- While management cited its new strategy to focus more on domestic customers in Hong Kong, we think this would not make up for the shortfall in Chinese tourists’ spending. As such, we believe that EYS’ earnings would continue to be impacted by the unfavourable forex exchange rates and high operating costs in Australia.
Uncertainties in Australian operations.
- EYS signed a memorandum of understanding (MOU) to acquire Venture Integrity Health (VIH) in Nov 2015. However, despite the larger scale and higher bargaining power against suppliers after the acquisition, management guided that the timeline required for the Australian business to turn around would be delayed to FY17F from FY16F.
- We reckon that management may need more time to consolidate the operations after the acquisition. Surprise sales growth in MYR terms.
Sales from Malaysia were down 2% after translating to SGD.
- However, we were surprised by the 14% revenue growth in local currency terms as the Malaysian Consumer Sentiment Index was at its all-time low of 63.8 during that period – even below the Asian Financial Crisis and Global Financial Crisis levels.
- According to management, the revenue growth was due to heightened member promotions.
- We believe this could also be a result of the pent-up demand following the goods and services tax (GST) implementation last year.
Maintain SELL with an unchanged SGD0.36 TP.
- Whilst we see some bright spots from higher sales across some markets, we expect no strong catalyst to revive the company’s earnings in the current challenging operating environment.
- We adjust our FY16F-18F earnings by -7% to 2% to reflect the new partnership with HCare Investments in China and the acquisition of VIH in Australia.
- Maintain SELL and TP SGD0.36, pegged to 1x FY16F P/BV.
Juliana Cai
RHB Invest
|
http://www.rhbinvest.com.sg/
2016-02-15
RHB Invest
SGX Stock
Analyst Report
0.36
Same
0.36
