This Company Wants to Double its Revenue: Is it Achievable?


Eu Yan Sang International Ltd. (SGX: E02), a traditional chinese medicine (TCM) company, reported earnings on 28 August 2014 for the financial year which ended on 30 June 2014 (FY 2014).

The company’s revenue came in around S$366 million, a 12% increase from the S$326 million in sales it made in the prior financial year. Its net profit, though, fell by 17% to S$15.1 million.

The fall in net profit was mainly due to higher interest costs related to part of the S$132 million in debt the company is holding as of 30 June 2014. The TCM company’s cash and cash equivalent position also deteriorated to S$45.1 million as of the end of FY2014 from S$98.1 million in the prior year.

Despite the drop in profit, the company maintained its dividend pay-out of 2.2 Singapore cents for a dividend yield of 2.6% based on its closing price last Friday.

A closer look at its business

In March 2013, Eu Yan Sang  announced major plans to more than double the production capacity if its plant in Hong Kong. This move is significant as the company expects the plant to support its needs for the next decade.

Included in the plans is the expansion of the company’s research and development capabilities. The product focus for this will be Chinese medicines and nutraceutical health foods, dietary supplements, and complementary medicines. Phase 1 of the construction is expected to be completed in 2016, while operations for the plan will commerce from early 2017. The cost of Phase 1 is budgeted at around HK$500 million (around S$80 million).

On top of that, the company also plans to spend RMB40 million (around S$8 million) on the setup of a GMP (Good Manufacturing Practice) plant in the Chengdu Hi-Tech Zone in China. This is part of the 50-50 joint venture that was announced by Eu Yan Sang with Sichuan Neautus Traditional Chinese Medicine last May.

To understand the interest in China and Hong Kong, about 43% of the company’s sales currently comes from that region. Growth in Hong Kong and China was a strong 24.5%. The graph below shows Eu Yan Sang’s sales by geographical region.

Source: company result announcement

The company ended the financial year with 249 company-owned outlets and 32 franchised outlets (the latter all located in Australia).

A note on debt and cash flow

Eu Yan Sang secured a S$300 million multi-currency medium note programme with DBS Group Holdings Ltd (SGX: D05) in 22 March 2013. The TCM outfit has issued S$75 million in notes, which will be repaid in 2018 and which carries an interest rate of 4.1%, from this programme. Eu Yan Sang also has convertible warrants of around $24.6 million with the remainder in bank borrowings which leads to a total debt of $132 million.

The company ended the financial year with negative free-cash-flow and an operating cash-flow of S$6.3 million for FY 2014, down from S$18.8 million in the prior year. The main reason for the decline in operating cash flow is a $10 million spike in inventory build in FY2014 “in anticipation of higher demand from customers.”

Foolish summary

Eu Yan Sang ended the year with an earnings-per-share (fully diluted) of 3.36 Singapore cents. At the closing price of $0.84 on 29 August 2014, that gives the company a price to earnings (PE) ratio of 25. This is higher than the PE ratio of around 14 for the STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI). As such, the valuation might not excite individual value investors.

Value investors might also be wary of the current high debt load of the company and may prefer to wait for signs of improvement in its operating cashflow.

In the past three years, shares of the company have gained just 13.5% in price, excluding dividends. This performance slightly underperforms the STI ETF which returned 14.6% in capital gains in the same duration.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.