MACQUARIE GRADUATE SCHOOL OF MANAGEMENT

MGSM 835 Financial Management

Individual Assignment

Submitted by: Paul, Ho Kang Sang (Student No.: 4109-3593)

Lecturer: Prof. Richard Petty

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EU YAN SANG E02.SI

The share price has out-performed versus the Amex healthcare index and Nasdaq Biotech.

25 Aug 2007 : S$0.57 (Total outstanding shares = 391million)

Recommendation : HOLD

Snap Shot

	FY2004	FY2005	FY2006	*FY2007
Revenues (S$m)	135.2	159.6	173.4	202.7
COGS (S$m)	66.5	80.2	85.5	103.8
Earnings (S$m)		12.4	15.1	16.4
EPS	1.96	3.47	4.01	4.57
P/E Ratio	23.27	13.13	14.25	14.25
EPS growth	-	77.04%	15.56%	13.97%
Nett Cash from Operations (S$m)	13.413	12.148	17.435

Source: Business Week, Eu Yan Sang Annual report 05, 06, SIAS Research

The fundamentals remain strong although the estimated EPS grow has slowed to 13.97%. Overall the sector remains positive. Eu Yang Sang operates mainly in HK, Singapore, Malaysia and the USA. The economies of HK, Singapore, Malaysia continue to show resilience while like to slow compared to 2006. The US economy will continue to be plague by Sub-Prime woes which could affect earnings. The interest rates in the US looks increasing likely to drop in view of loosening liquidity, US earnings will likely be impacted by a depreciating US dollar. Hong Kong earnings will also be impacted as the Hong Kong dollars are closely pegged to the US dollar.

The Risks on the US sub-prime may cause the US market to accept a lower P/E for shares, but is unlikely to affect Eu Yan Sang significantly as EYS was trading at a P/E of 14.25 compared to 25.5 for Health Care industry sector in the USA. The higher P/E in the health Care sector represents a higher P/E the market is willing to pay rather than smart money predicting higher growth. This represents either that the US market is over-valued or Eu Yan Sang is under-valued.

COST OF GOODS SALE

The cost of goods sales as a percentage of revenue is rising. This could be due to rising cost to acquire herbs.

COMPETITION

There are no real competition in the Traditional Chinese Medicine market within Asia and the world at large. The competition came mainly from imitation and fake drugs which could damage the overall sector in the short term, but given Eu Yan Sang’s brand name should place Eu Yan Sang in a very good position to benefit from any up-trend in TCM and alternative medicine growth.

CURRENT RATIO

EYS has a quick ratio of 0.7 times and current ratio of 1.5 times and are on the low side compared to the industry. Debt to equity is also within industry norms. The financial risks should not be significant as the economies in which it operates remain resilient.

ASSET QUALITY

Eu Yan Sang has sufficient cash holdings for liquidity and debt coverage. It also has free-hold, long term lease-hold properties and long term lease hold land valued in excess of S$10m. The properties were last valued at July 2004. In view of the rising property prices, those assets might be worth more if disposed of and entered into an operating lease.

VALUATION

Based on a P/E of 14.25, with an EPS forecast of 4.57cents. The valuation is 65.12cents.

Net Asset Backing for 2006 is S$79.2m (Net Asset backing per share of 20.24cents)

or about 20.24cents per share.

The Discounted Cash Flow method should not be used while the US sub-prime loans risks are not yet fully known as Beta from the past 3 to 5 years may not be relevant during this period.

The return on equity is likely to be in the 10 – 20% range, this will improve the net asset backing per share thereby reducing risks and volatility for the investor.

UPSIDE SURPRISE

There could be an upside surprise as Eu Yan Sang has more than S$10m of properties at book value, last valued at July, 2004. The prices of properties have appreciated significantly in Singapore and HK, a revaluation or asset disposal may increase shareholder equity.

RECOMMENDATION

I recommend a HOLD based on current price of S$0.57. (25 Aug 2007)