Eu Yan Sang International Ltd. (SGX: E02) has been an outperformer over the last five plus years. The company recorded capital gains of about 169% from 1 July 2009 to its closing price on 20 November 2014. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI) was 41% for the same duration. During the same timeframe, the company also distributed a total of about 10 cents per share in dividends. While Eu Yan Sang has been giving out healthy returns, as Foolish investors, we should look behind the curtains to…
Eu Yan Sang International Ltd. (SGX: E02) has been an outperformer over the last five plus years. The company recorded capital gains of about 169% from 1 July 2009 to its closing price on 20 November 2014. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI) was 41% for the same duration. During the same timeframe, the company also distributed a total of about 10 cents per share in dividends.
While Eu Yan Sang has been giving out healthy returns, as Foolish investors, we should look behind the curtains to understand how it can continue to grow.
A quick look at sales growth
The business at Eu Yan Sang can be divided into three major buckets. The first business segment would be the Retail segment. As a traditional chinese medicine (TCM) purveyor, Eu Yan Sang has around 250 retail outlets in Hong Kong, Singapore, Malaysia, China and Macau.
According to its Annual Report for the financial year ended 30 June 2014 (FY2014), Eu Yan Sang sells more than 300 products under its flagship name and over 1,000 different types of Chinese herbs and medicinal products. The next business segment would be its namesake-branded TCM clinics in Singapore, Malaysia, and Hong Kong. The third business segment would be its wholesale distribution of its products on a global basis. Eu Yan Sang also has a wholly-owned subsidiary in Health Life Group Pty Ltd (HLG) in Australia. It’s remaining businesses such as food and beverage, rental income, and franchise income fees goes under its “Other” business bucket.
Source: Company Earnings Report
Overall topline for Eu Yan Sang grew from $244.7 million in FY2010 to $366.3 million in FY2014. From the graph above, we can see that majority of its revenue emanates from its retail outlets around Asia. In fact, the retail segment made up 79% of sales in FY2014 and contributed to majority of the company’s sales growth over the past five financial years.
In contrast, over the same time period, the clinic business segment remained relatively flat, and is small in the scheme of things. Eu Yan Sang’s wholesale business segment though has seen steady increases, and makes up about 15.5% of FY2014 revenue. We can look at the geographical spread of its sales next.
Source: Company Earnings Report
From this view, it becomes obvious that Eu Yan Sang is currently making most of its money from Hong Kong, Malaysia, and Singapore. As of the end of FY2014, the TCM company had 58 outlets in Hong Kong, 50 outlets in Singapore, and 88 outlets in Malaysia. Its presence in China is still small with only 14 outlets. For Australia, its HLG subsidiary boasted 68 outlets.
From a geographical perspective, much of the revenue growth has come from Hong Kong, Malaysia, and its HLG acquisition in Australia. Sales growth in Singapore has been tepid in comparison.
A quick look ahead
In March 2013, Eu Yan Sang announced major plans to more than double the production capacity of its plant in Hong Kong. This move is significant as the company expects the plant to support its needs for the next decade.
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. Eu Yan Sang plans to expand its retail network within the Guangdong province of China and then subsequently moving to neighbouring provinces.
For Australia, the TCM company is looking to consolidate its franchisees to drive better efficiency, and to seek cross selling opportunities for its products.
The exercise above is to look at Eu Yan Sang’s sales growth alone. The company is working hard to drive top-line growth. But, all its efforts will cost a pretty penny, so we will have to see if any potential revenue growth can trickle down to the bottom-line to enable the company to support its growth initiatives. This is for another article found here.
As a whole, Eu Yan Sang has grown its top-line by a compounded annual growth rate of 8.3% over its past five financial years. This is achieved by a combination of acquisition, organic growth, and its move into new markets like Australia. The company’s move to double its plant capacity in Hong Kong is its statement of ambition for the next decade.
As of its closing price on 20 November 2014 of $0.725, Eu Yan Sang traded at a trailing earnings ratio of about 22.7, and has a dividend yield of around 3%. You can read a continuation of the analysis of Eu Yan Sang here.
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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.