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Eu Yan Sang’s Potential for Growth

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Eu Yan Sang International (SGX: E02) is a global healthcare and wellness company. It started out as a Traditional Chinese Medicine (TCM) store but has since diversified into TCM clinics and even integrative medical centres (where Eastern and Western medicine is combined). The company’s Eu Yan Sang brand, with more than 300 products under its banner, is well-known in Singapore, Malaysia and Hong Kong.

At a price of S$0.82 currently, the company has returned more than 300% (including dividends) for shareholders over the past decade. But even after such a strong showing, there might more to come in the future for its shareholders.

Australia

In 2012, Eu Yan Sang had taken control of Healthy Life Group, a health food retail chain in Australia, when it fell into receivership. The latter had a chain of more than 100 Healthy Life retail stores in the country at the time in addition to a distribution business, which is “one of the largest health food distributors in Australia.”

When Eu Yan Sang took over the business, Healthy Life contributed only S$11.2 million in revenue and a loss of S$3.6 million. Now, Healthy Life has more than 80 retail stores in Asutralia with revenue more than tripling to S$35.3 million; by way of comparison, Eu Yan Sang has revenue of S$359 million in total over the last 12 months.

The acquisition is not only an investment into the health food business in Australia by Eu Yan Sang; it allows the company to explore numerous synergistic potential between the Health Life and Eu Yan Sang brands.

If this venture is successful, investors might be looking at a major growth engine for the company in the coming years.

China

China is the largest and most competitive TCM market in the world. Eu Yan Sang has been trying for many years to expand its business in China but has yet to see major progress.

The TCM retail market in China is filled with competitors such as Tong Ren Tang, which has a larger network compared to what Eu Yan Sang has in China as well as a brand with a much longer history.

However, just last year, Eu Yan Sang had started a joint venture in TCM decoction pieces (processed herbs). If successful, the project will make them one of the largest China-based exporters of TCM herbs. Eu Yan Sang had chosen a smart path of going into the wholesale market instead of taking on furious competition in the retail market.

Foolish Summary

Eu Yan Sang’s business is not without risk. When it took over Healthy Life, the Australian outfit was near bankruptcy and was bleeding cash. The retail business is a tough one to be in generally but it’s especially so in Australia due to its vast land area and low population. Whether Eu Yang Sang can turn around Healthy Life in a sustainable manner remains to be seen.

If that’s not enough, there’s also Eu Yan Sang’s valuation to consider. At its current price of S$0.82, it’s valued at around 20 times its trailing earnings and that’s almost 50% higher than the market’s average price/earnings (PE) ratio of 14.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.