Asian Consumers

DMG & Partners Research, Sept 3

CONSUMER stocks under our coverage were dealt a double-blow by spiking earnings misses and rising interest rates, which eroded their average YTD gain to -1 per cent. With valuations near their historical highs and limited relief from weak consumer sentiment amid escalating cost pressures, we see an unexciting risk-reward trade-off as investors are likely to start factoring in higher yield expectations going forward.

Up to May 2013, the 100 regional consumer counters we cover posted an average return of 19 per cent. Since then, however, they have lost their share price gains, falling by an average one per cent YTD as more companies missed earnings estimates and interest rates rose. The twin-blow reduced their lead over the relevant MSCI consumer staple and discretionary indices, which posted an average loss of 4 per cent YTD.

The Q2 2013 earnings saw the highest level of earnings disappointments in percentage terms since we started tracking the statistics a year ago. Out of the 62 companies that reported their results, 11 per cent were above, 40 per cent within and 49 per cent below our analysts' estimates (Q1 2013: 6 per cent, 68 per cent and 26 per cent, respectively). Cost-induced pressure was commonly cited by regional companies as the key reason for falling short of expectations. Of more concern is our observation that consumer confidence in the region has been waning in recent months.

Our earlier sensitivity analysis shows that a 0.5 percentage point increase in 10-year government bond yields may potentially give rise to an average 10 per cent drop in the fair values of stocks, based on discounted cash flow. Following a 0.7 percentage point spike in US 10-year Treasury bond yield since May to 2.8 per cent currently, the corresponding yields from countries in the region have risen by an average of 1.1 percentage point, with Indonesia seeing the sharpest 2.4 percentage point spike to 8.4 per cent.

Despite the recent correction, valuations remain high at about 16 times forward PE, +0.8 standard deviation to the sector's historical 10-year mean of 14 times. In view of limited relief from weak consumer sentiments and escalating cost pressures, we believe the sector's near-term risk-reward trade-off would be unexciting.

(Singapore stocks under coverage: Eu Yan Sang, "buy", target S$0.92; OSIM International, "buy", target S$2.38; Sheng Siong Group, "buy", target S$0.78.)

Eu Yan Sang International

Aug 28 close: S$0.72

DMG & Partners, Aug 27

EU Yan Sang's Q4 FY13 recurring profit of S$1.3 million (-42 per cent y-o-y, -85 per cent q-o-q) was below our S$3 million estimate as the better margins were mitigated by a higher loss in Australia due to the opening of new stores in H2 2013 and inventory write-offs. We expect the Australia unit to post a smaller loss in FY14 and a profit by FY15, helping to lift profit by ~35 per cent per annum. Maintain "buy", at a higher DCF-derived (discounted cash flow) S$0.92 TP.

BUY

Eu Yan Sang International

CIMB Research, July 10

WE initiate coverage with an "outperform" and target price of $0.89, based on 16.3 times calendar year 2014 PE (0.5 standard deviation above its five-year historical mean).

A turnaround of its Australian and Chinese business segments is a potential re-rating catalyst. We expect to see continued strong sales growth from its core markets (Malaysia, Singapore and Hong Kong) and the rationalisation of its Australian business.

Since the group decided to embark on a strategy of shifting away from franchisees towards self-operated stores, the Australian business recorded its fourth consecutive q-o-q sales growth. Eu Yan Sang's (EYS) 12-year historical sales compounded annual growth rate (CAGR) stands at 12.3 per cent and we do not expect any slowdown. This is in line with robust traditional Chinese medicine (TCM) retail value sales in the Asia-Pacific which are expected to grow at a CAGR of 12.1 per cent over 2012-16.

Furthermore, a recent 50/50 joint venture with Chengdu-based Sichuan Neautus will make EYS one of the largest exporters of TCM herbs from China.

We think that the group is well positioned to combat rising rental and raw material costs. Phase 1 capacity expansion plans are due to be completed in 2016 and this will more than double its existing capacity. The Sichuan Neautus joint venture will also improve margins through lower raw material costs and sales of quality herbs at a later stage.

Despite major capital expenditure plans in the near future, EYS' cashflows are expected to remain strong due to its cash-generative business model.

OUTPERFORM

Asian consumers

DMG & PARTNERS RESEARCH, June 6

REGIONAL consumer stocks under our coverage sprang no surprises in Q1 2013, with 6 per cent above, 68 per cent within and 26 per cent below expectations.

These counters stretched their gains to an average 19 per cent YTD, taking their valuations close to an all-time high of around 18 times P/E. Similarly, there were little surprises from Singapore consumer companies except for Eu Yan Sang International ("buy", $0.88). Its Q3 2013 earnings surged 54 per cent y-o-y to $8.4 million, with 9M13 earnings at $13.4 million, hitting our previous full-year forecast. Results exceeded expectations, as its Australian operations turned around faster than anticipated while losses from its China operations narrowed.

However, other retailers saw mixed fortunes. Earnings from domestic grocery retailer Sheng Siong Group ("neutral", $0.69) jumped 31 per cent y-o-y due to better margins while those of fashion retailer FJ Benjamin Holdings ("neutral", $0.27) plunged by 68 per cent y-o-y on softer timepiece sales to the Chinese. Super Group ("neutral", $4.88) also disappointed as its Myanmar distributors opted to stay light on inventory due to riot concerns.

In the Singapore consumer space, we like Eu Yan Sang and OSIM ("buy", $2.22). Investors may also want to consider Sheng Siong and Super for their strong free cash flow generating characteristics.

Telecommunications sector

EU Yan Sang

DMG & Partners Research, May 13

EU Yan Sang's Q3 2013 earnings rose 54 per cent y-o-y to S$8.4 million. Nine-month 2013 earnings of S$13.4 million made up our entire FY13 forecast. Results exceeded expectations, as its Australian operations turned around faster than anticipated with narrowing losses from China. We raise FY13 forecast earnings by 20 per cent and lift our valuation multiple from 14x FY14 forecast to 18x in light of the turnaround.

Upgrade to "buy" with new TP of S$0.80.

Sales in China have yet to grow to an optimal level to be profitable as there are limited products sold on the shelves, due to regulations which prohibit the sale of some flagship products which are deemed drugs and can only be sold at pharmacies and hospitals.

Hence, management intends to expand its range of food products and health supplements to grow sales. Losses in China have narrowed to approximately S$1 million per annum.

During EYSAN's results briefing, investors were notably excited over the recent listing of Beijing Tong Ren Tang in Hong Kong which currently trades at 36x PE. Annual sales of Beijing TRT stand at approximately HK$470 million (S$75 million) compared to EYSAN's larger HK annual sales of HK$660-720 million.

BUY