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

In case you cannot see the full page due to formatting or other issues, go to: -

http://docs.google.com/Doc?docid=dzg8zhw_24gg8tfr&hl=en

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)

MGSM 840 Syndicate Project APPENDIX 1

Major Global Economic Conditions

According to the International Monetary Fund, the world’s Gross Domestic Product (GDP) in 2006 is US$48.14 Trillion. The breakdown of the GDP globally is as follow:

• European Union (US$14.53T)

• United States (US$13.24T)

• Japan (US$4.37T)

• China (US$2.63T) excluding Hong Kong,

• Canada (US$1.27T),

• Brazil (US$1.07T),

• Russia (US$0.98T)

In assessing global macro economic environment, it is representative of the world’s economy to just consider the European Union, United States & Canada, Japan and China. This makes the economic modeling much easier to comprehend.

Macro Economic View

United States of America, USA

Current Economic Situation

• High interest regime to control inflation.

• Housing defaults on the rise.

• Lower household savings rate of ~1% of income.

• Budget Deficit

  • At an annual >6% of the GDP, USA needs around US$772B a year of funding.

  • Iraq war extraordinary budget causing additional strain on the balance of payment.

  • Depends heavily on China, Japan, Korea and Middle East countries to finance their budget deficit.

• Stock market on all time high.

Near term forecast

• Inflation may be under control.

• If housing defaults and housing starts slow down, this could undermine consumer confidence. Problem of borrowings from housing to finance consumption will also cause a problem in the USA.

• Interest rates likely to remain stable in the next two quarters but could lower.

• GDP likely to slow down, but for the country to go into a recession is unlikely.

• Balance of payment still an issue.

Euro-zone

Current Economic Situation

• Inflation is high and capacity usage in manufacturing is still tight, central banks are expected to continue to raise interest rates¹.

• Funds looking for yield will likely transfer away from US and find its way to the Euro.

• The Euro will strengthen in the coming quarters against the USD.

Japan

• The interest rate remains at 0.5% and CPI is -0.1% (March 2007). The Bank of Japan interest rate will likely stay at 0.5% for the rest of 2007 and probably into 2008.

• The entire economy is expected to be sluggish and will not contribute materially to capital appreciation holding the yen or otherwise.

China²

• Strong GDP growth of greater than 10%.

• Rising income.

• Rising foreign exchange reserves approaching US$1.2 Trillion. Due to the huge trade surplus, to ease pressure on Yuan appreciating, the China central bank takes the approach of currency sanitizing (taking the surplus out of the economy) by investing in the US Government treasury bills.

• M1 money growth is at >10% signifying short term currency inflows.

• Headline inflation is estimated to rise at 1.8% for 2007.

• China likely to raise the bank adequacy ratio to reduce credit for investments to slow investment growth.

• Infrastructure investments continue unabated with Olympics around 2008.

• Growth in investments and exports will moderate in 2008.

In the 1 to 3 year time horizon, investments with currency denomination in the US dollar will likely see an erosion of capital versus the Euro or the China Yuan. US dollar versus Japanese Yen will be fairly stable.

1 http://www.economy.com/dismal/pro/article.asp?cid=74481, Dismal Scientist, Macro Roundup: Europe

2 Moody’s Economy.com 2007 China Outlook, by Helen Kevans in Sydney and Virendra Singh in West Chester.

In case you cannot see this properly, you can go directly to: -

http://docs.google.com/Doc?docid=dzg8zhw_20fxr445&hl=en

MGSM 840 Syndicate Project APPENDIX 7

Common ratio analysis for Bayer

In case you cannot see it displayed correctly, please go to this link: -

http://docs.google.com/Doc?docid=dzg8zhw_17gqpw8t&hl=en

MGSM 840 Syndicate Project APPENDIX 6

Common ratio analysis for Pfizer