Wednesday, December 11, 2013

Eu Yan Sang : When Australia turns around (CIMB)

Eu Yan Sang Int'l Ltd
Current S$0.82
Target S$0.89
When Australia turns around

The eventual return to a breakeven position in Australia will improve group profitability. At the same time, a joint venture with Sichuan Neautus gives EYS access to quality herbs and the capacity expansion plan will support increased demand into the next decade.

The key catalyst for Eu Yan Sang is the reduction in losses at its Australian operations. Australia is expected to lower the group‟s earnings by S$5.8m in FY14 before achieving breakeven in FY15. Rolling forward to CY15 earnings, we raise our target price to S$0.89 (based on 16.3x P/E, 0.5 s.d. above the five-year historical average). Under our revised structure, our rating changes from Neutral to Add.

We understand that Eu Yan Sang lost about S$2.2m in Australia in 1QFY14 and about S$0.3m in China. Based on discussions with management, we see losses in China in FY14 at around S$1.5m before a breakeven occurs in FY15. The company could experience losses of S$5.8m in FY14 for Australia, before breakeven is achieved in FY15. Although its core operations in Singapore, Malaysia and Hong Kong are profitable, an earlier return to the black for Australia would boost group earnings.

Potential JV contribution
Eu Yan Sang has a 50/50 joint venture with Chengdu-based Sichuan Neautus, which will make the company one of the largest exporters of TCM herbs from China. Other than this business‟s export potential, Eu Yan Sang can improve its margins via lower raw material costs made available through this joint venture.

Capacity expansion
In Mar 2013, the group was successful in the bid] for a piece of land (170,100 sq ft) in Yuen Long, Hong Kong, which is directly opposite its existing factory. The new factory will be constructed in phases, with phase 1 expected to be completed in 2016 and operations slated to come online in early 2017. Phase 1 is estimated to cost about S$80m (including land cost) and [will] more than double its existing production capacity in Hong Kong. This will ensure that the group has the capacity to support the increase in demand for wellness products into the next decade.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 29/11/13

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