Eu Yan Sang International Ltd Is At A 52-Week Low – Is It A Bargain?

2015 has been anything but kind to Eu Yan Sang International Ltd (SGX: E02).

Since the start of the year, shares of the traditional Chinese medicine (TCM) retailer has fallen by a quarter from S$0.72 to S$0.535 currently. In fact, S$0.535 is a 52-week low for Eu Yan Sang. So, what is happening to the company and can it be considered a bargain now?

Over the past few quarters, Eu Yan Sang’s profitability has fallen dramatically as you can see in the table below (note both the declining profits and profit-margins).

Eu Yan Sang's profitability

Source: S&P Capital IQ

Given the table above and the fact that the company’s profit for the first nine months of its fiscal year ended 30 June 2015 (FY2015) is down 39% year over year, it’d appear that there’s a good reason for the firm’s 26% decline in price since the start of 2015.

In the meantime, the company’s borrowings have also spiked significantly over recent years. In just the first-quarter of FY2012, Eu Yan Sang’s total debt to equity ratio was only 32%; in its most recent quarter (third-quarter of FY2015), the selfsame figure had more than tripled to 104%. You can see these in the chart below. A company with declining profits and rising leverage is not in a comfortable position.

Eu Yan Sang's total debt to equity ratios

Source: S&P Capital IQ

Eu Yan Sang is seeing difficulties mainly in its businesses in Hong Kong and Malaysia (the two geographies made up 44% and 26% of the company’s total revenue, respectively, in FY2014).

The impact of a slowdown in the spending of Chinese tourists into Hong Kong has dampened Eu Yan Sang’s business in the territory. Meanwhile, the recent implementation of a goods and services tax in Malaysia earlier this year has made the business environment there challenging for Eu Yan Sang.

Interestingly, Eu Yang Sang’s management is of the view that this situation is only temporary. They are still very optimistic about the future of TCM in the region.

Eu Yan Sang’s earnings last peaked at S$25.3 million in FY2011. At its current share price, the company’s only valued at 9 times its peak earnings. If Eu Yan Sang is able to turn around its situation, the company’s current valuation of 25 times its trailing earnings actually does not seem too demanding.

But that said, a key risk for the company right now is its high debt level. Can Eu Yan Sang survive the current slowdown in its business without raising any more capital? If it needs to do so, borrowing even more may not be a palatable choice; this thus leaves Eu Yan Sang with the option of issuing new shares of itself either through a rights issue or private placement. Will existing shareholders of the company see their stakes get diluted in the near future?

These are things which only time will tell. But in the meantime, investors ought to keep a close watch on the firm’s balance sheet.

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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 writer Stanley Lim does not own any companies mentioned above.