Short Notes on Eu Yan Sang

Article from The Edge (Singapore), Dec 26 2011.

Eu Yan Sang

Interview with Richard Eu:

• As of Sept 11, EYS has 189 stores in SG, M'sia, HK, Macau and China. Also sells products to supermarkets and convenience stores. 23 TCM clinics in SG/M'sia, and 2 integrative clinics in HK.
• Growth can no longer be dependent on further expansion in the TCM space alone, will hit saturation at some point. In the company's early years, growth was 20%... "Now our growth rate is slowing down...How do get into another phase of growth where you can look at 15 to 20% growth? Thats why we have to go beyond TCM."
  
• Plans to acquire a stable of brands to move into the natural wellness space (eg: detox, organic)
• EYS stores already carry a range of natural foods, health supplements such as honey mart honey, zing spa products, ProNature oatmeal.
• Want to separate TCM brand from company. Mentions Nestle: They have their own brand, but also a portfolio of other brands (e.g.: Maggi, Nespresso). EYS must own and develop other brands. "Its going to take years, probably beyond my time."
  
• Article mentions past failures: "Red, White & Pure" restaurant launched in 2006 which combined TCM based cuisine with spa treatment...failed and was disposed of in 2009. "It was the wrong time and wrong location" In Aug 10, EYS paid A$3.56m for Healthzone, esp. for its retail franchise in China. Healthzone collapsed last month, probably has to be written off.

My opinion:

I think this is a slippery slope. From medical, tested and proven treatments, to things which may be beneficial, to things that are rubbish:

• Some of EYS current business is equivalent to (the western idea of) selling medicine or pharmaceuticals (whether prescribed e.g.: antibiotics, or over-the-counter e.g.: panadol). The items sold are backed by (some) scientific research, or 5000 years of TCM tradition, so do generally work.
• Other products are like health supplements (e.g.: birds nest), may be the equivalent of buying vitamins or fiber supplements. Don't know if they work, but it may.
  
• At the bottom, we have practically any cosmetic, weight loss, anti-aging product. These are marketing driven fads....bust cream, slim-10, anti-oxidants, ginko, whatever else....

There are more and more competitors as you move down the slope, with fewer barriers to entry and chances for brand building. It is a riskier business. EYS is good at their core business, but it will be hard to move beyond that, especially if they want to move into a crowded, fickle and marketing driven industry.

Should EYS be valued as a value stock (PE 5-10), rather than as a growth stock (PE 15)?