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Profits at Eu Yan Sang International Ltd Fell a Whopping 38%: Here’s What Investors Should Know

Eu Yan Sang International Ltd (SGX: E02) reported its fiscal second quarter earnings yesterday and saw its profits for the quarter fall by 38%. The reporting period was for 1 October 2014 to 31 December 2014.

Eu Yan Sang is a traditional Chinese medicine (TCM) purveyor with 256 retail outlets in Hong Kong, Singapore, Malaysia, China and Macau.

You can learn more about the company here, and catch up on its previous earnings report here.

Financial highlights

Here’s a rundown on the financial figures for Eu Yan Sang’s latest earnings release:

  1. For the fiscal second quarter, overall revenue for Eu Yan Sang fell 8% on a year on year comparison, coming in at $84.7 million.
  2. Profit to shareholders plunged some 38% in the quarter (as mentioned earlier) to around $1.98 million.
  3. Earnings per share (EPS) consequently fell 39% from 0.72 cents in the second quarter last year to 0.44 cents in the reporting quarter. The TCM purveyor made 0.61 cents in EPS for the first half of its fiscal year ending 30 June 2015 (FY2015).
  4. Cashflow from operations was a negative $11.3 million for the past quarter with capital expenditures coming it at $11.1 million. This gives Eu Yan Sang a negative free cash flow of $22.4 million for the quarter. For the first half of FY2015, free cash flow had been a negative $32.8 million.
  5. As of 31 December 2014, the company had $24.4 million in cash and equivalents and borrowings of $167.8 million. The company is in a net debt position of $143 million. Eu Yan Sang’s balance sheet had deteriorated from six months earlier as it had $45.1 million in cash and $132 million in borrowings as at 30 June 2014

In all, Eu Yan Sang has had a sputtering start to FY2015, with revenue stalling and profit plunging. The TCM provider has also picked up around $35 million more in debt since the start of its new financial year.

Operational highlights

In the fiscal second quarter, revenue for all of Eu Yan Sang’s core countries were down except for Australia, which saw a 25% jump in revenue (in Australian dollar terms). Sales in Hong Kong suffered a 20% drop in HK dollar terms – an occurrence that management attributed to lower Chinese consumer spending, and the “Occupy Central” movement.

Management also cited a shorter period to the run-up to Chinese New Year as the reasons behind the sales drop in Singapore, Malaysia and Hong Kong. For the quarter, Eu Yan Sang added four company-operated outlets in Australia and one in Hong Kong, and closed one outlet in China. The company ended the quarter with 287 outlets (inclusive of 31 franchise outlets).

Eu Yan Sang’s Chief Executive Officer, Mr. Richard Eu, added commentary on the fiscal second quarter’s results:

“Our key markets are relatively strong economies but still fragile especially Hong Kong due to political uncertainty and softening of the retail market. Despite this, our business is operating as usual and we have taken necessary steps to manage these challenges. We are working towards bright spots that we have identified –the rising affluence in our target markets which leads to increased demand, new product development and the extension of our wholesale business.”

Looking ahead, the company’s management team expects sales in Hong Kong to gradually improve but at a slower pace. Sales in China is also expected to dampen. On a positive note, Eu Yan Sang expects sales in Australia to continue its upward trajectory from this quarter.

In a previous article, I had noted the ongoing spending and developments in Hong Kong and China:

“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.”

Foolish summary

At its closing price of $0.76 yesterday, Eu Yan Sang traded at around 26 times trailing earnings with a trailing twelve months dividend yield of 2.9%.

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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.