Eu Yan Sang - Too Hard To Swallow

Eu Yan Sang (EYS) posted another quarter of loss after 4QFY15 (Jun), in line with our expectations. Reiterate SELL and SGD0.36 TP (16% downside), pegged to 1x FY16F P/BV. The company continues to be plagued by decreased spending by mainland Chinese visitors to Hong Kong as well as the weakening of MYR and AUD, while Singapore saw improvements from promotional campaigns. EYS is in the midst of rationalising its retail outlets as part of its cost-reduction initiatives.

Challenging environment for discretionary products
During the quarter, revenue dropped 10% YoY to SGD75.2m. In local currency terms, Hong Kong revenue declined the most at 30%, as it faced decreased spending from mainland tourists. Its Australian revenue grew 20% but was ultimately dragged down by the depreciating AUD.

Recovery of Australia is the brightest spot
Revenue at its Australian operations surged as the group increased the number of companyoperated stores and retired non-performing franchisees. As at 1QFY16, its Australian operations remained on track to break even at EBITDA level this year. EYS also signed a memorandum of understanding (MOU) with Venture Integrity Health (VIH) to acquire seven VIH health food retail stores in Sydney. With the increased number of stores, the group could reap economies of scale to expedite improvements in its Australian business.

Cost-reduction initiatives to mitigate challenging environment
EYS has begun rationalising its store outlets and improving back-office efficiency to bring down its cost structure. In 1QFY16, five outlets in Malaysia, two outlets in Singapore, four franchise outlets in Australia and one food and beverage (F&B) outlet in Shanghai had been closed. Nonetheless, the group still has 268 retail outlets and four F&B outlets. As such, EYS continues to suffer from high operating leverage in the weak spending environment.

Technical Analysis
Daily Chart
Reiterate SELL and SGD0.36 TP
We remain cautious on the company’s near-term outlook. Thus, we maintain our SELL recommendation with a TP of SGD0.36 pegged to 1x FY16F P/BV. (Read Report)

Source : RHB Research

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