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