Saturday, April 2, 2011

Eu Yan Sang

Regional TCM company. Main business is M'sia, S'pore and HK, attempting to expand into in China:

What they do (breakdown by 2010 revenue):
  • 81%: Retailing. Their main business. Their chain of 171 retail outlets sells their branded TCM and health products throughout HK, S'pore & Msia..
  • 11%: Wholesale. Mostly in HK/China. In HK, sold to large chain stores like Mannings/Watsons. In China, sold to pharmacies/hospitals.
  • Abt 8%: Clinics and others.

Their main products seem to be of two types:
  • Proprietary medicines, taken from a complex traditional formula, put in powder/capsule form, and scientifically tested for results. eg: Bak Foong pill (menstrual symptoms), Bo Ying compound (f0r babies)
  • Generic products, branded with a label (e.g.: birds nest, essence of chicken)

Business model:
Cashflow generated from operations is used to expand their retail network, introduce new products, and start other new businesses. They have been very successful with the first two - in 7 years from 2002 to 2008 (both troughs in recessions), revenue and PBT (excluding exceptionals) have more than doubled.

EYS has been profitable every year since listing in 2001:

Their core retail TCM business has been growing steadily and profitably, but overall profits have been more sporadic. Excluding the exceptional charges smooths out their core profits:

The exceptional charges are usually impairments to non-core businesses, write-offs and exceptional gains from sale of businesses. EYS' previous attempts to diversify into other areas have mostly failed:

Exceptional Charges
-0.7 (impairment of goodwill: Oxford natural products)
-1.4 (provision for diminution in value of investment?)
-2.9m (Write off for Oxford Natural Products)
-0.7m (Provision for impairment Botanical Health Resources)
-1.4 (Impairment of goodwill - Australia (Your Health, Aroma Fresh))
-1.5 (Impairment of Goodwill - unknown...possibly Botanical Health?)
+3.2m (special gain: divestment of Synco)
+1.3 (special gain: sale of property)
+1.4 (special gain: sale of Elixir)
-2.4m (write off RedWhitePure)
-0.5 (YourHealth)
-3.9 (impairment of investment in unquoted shares)

Only 6 of the past ten years have generated FCF, due to high CFI:

Most of the CFI (orange bar above) was spent on new retail outlets (furnishings and fixtures):
  • 02: 7.4m (+9 outlets)
  • 03: 7.8m (+13 outlets)
  • 04: 5.4m (+9 outlets)
  • 07: 4m (+13 outlets). 9.5m construction-in-progress
  • 08: 7.5m (+19 outlets)

Competitive advantage:
They may have some sustainable competitive advantage due to 'upmarket' branding. Cannot quantify. No market share figures are available. The TCM market is large with no clear segment boundaries (e.g.: many small TCM businesses selling herbs). And no clear competitor in the same up-market segment (in S'pore at least).
I don't know if their proprietary products are truly unique, a quick search shows other brands have have similar products (1) (2).

Since the TCM market is so fragmented, I guess they have little or no pricing power. From a 2004 DBSV report:
The TCM market in Hong Kong and China is highly fragmented with many small retail operators and CPM manufacturers. The supply and retail of raw and processed herbs are carried out by 800 medicinal halls and retail outlets in Hong Kong and significantly more in China. There are, however, only 4 major retail chains in Hong Kong and China, namely Eu Yan Sang, Tung Fong
Hung, Nam Pei Hong and Beijing Tongrentang.

Critical for retailers. Generally, EYS seems to stock slightly less than 1 quarter's sales as inventory:

Over the long term, have become more efficient, as sales have risen compared to inventory.

Balance sheet
From their latest Dec 2010 results, they have 5.6m long term loans. Less than one year's earnings.

From their Jun 09 Annual Report: they have 22m operating lease commitments within one year.

Does their business suffer during a recession?

In the 2002 recession and 2003 slowdown (SARS), same store sales suffered:

For 2003, the chairman noted that "SARS had a huge impact on retailing...tourist travel was sharply reduced...consumers stayed away from shopping centers".

However, in the 2008 recession, I can see no effect:
Can't draw a conclusion, other than sales seem affected by long recessions.

Typically how low does EYS' valuation go in a bear market? EYS reached a trailing PE of around 6 to 7 in 2002 (long recession), and 9 to 10 in 2008 (short recession).