EU YAN SANG, a leading manufacturer and retailer of Chinese medicine in Asia, grew its sales 23% y-o-y to S$104.8 million for its first half ended 31 Dec 2007 following an aggressive expansion of its retail chain.
Gross margins were maintained at 52% despite a rise in raw materials cost.
”Customers are willing to pay more when cost of herbs rises,” says CEO Richard Eu.
Demand for Chinese medicine appears to be highly price inelastic, as costs can be passed on to the retail customer.
For example, the recent 100% y-o-y hike in the cost of Cordyceps (a highly prized TCM ingredient for ailments ranging from fatigue to cancer) was fully passed on to customers.
The 128-year old Chinese medicine chain wants to maintain top-line growth at about 15%-20% a year and to maintain margins. Revenue has grown steadily at a cumulative average growth rate of 16.7% a year since FY01.
1H08 operating profit before exceptional items rose 48% to S$10.1m.
Net profit, however, rose only 8% to S$6.3 million as 1H07 was propped up by one-off gains of S$2.7 million arising from the sale of properties in Hong Kong and the disposal of the Elixir business in North America.
Cash flow from operations fell 47% to S$3.5 million due to inventory build-up for the seasonal sales peak leading up to Chinese New Year.
1H08 retail turnover grows 27% to S$77.9 million
14 new stores were opened in the six months ended 31 Dec 2007. Internal target is 10-12 new stores a year, so the management believes that that store openings will likely slow down in 2H08.
Eu Yan Sang now has 139 TCM stores retailing over 280 proprietary Chinese medicines and health foods in Singapore, Malaysia, Hong Kong, Macau, Taiwan and Guangzhou.
It is the leading TCM brand in Singapore, Malaysia and Hong Kong.
1H08 sales growth was led by Malaysia (up 37%), where 6 new stores were opened.
Organic growth parameters in Malaysia and Hong Kong were healthy: same store sales grew about 25% while sales per square foot grew about 15%.
Singapore’s organic growth indicators were affected by the opening of its 4th new outlet in 2Q08.
Unlike in other countries, store openings in Singapore are held at the shopping mall’s concourse, leading to sales from a new store’s inventory being classified as wholesale items. Opening store sales account for 10% of annual turnover.
| 1H08 country sales | Stores | Monthly per store sales | ||
| Hong Kong | S$49.7m | 42 | S$197,063 | |
| Singapore | S$30.3m | 37 | S$136,707 | |
| Malaysia | S$22.0m | 55 | S$66,552 | |
| Others | S$2.8m | 5 | S$94,033 | |
| Retail Total | S$104.8m | 139 | S$123,589 |
Brisk sales of bestsellers such as its flagship bottled bird’s nest, Bak Foong Pill (for gynecological disorders) and Bo Ying Compound (infant health) boosted retail proceeds 27% y-o-y to S$77.9 million.
Retail contributes 74% to top-line.
15 new products were rolled out in 1H08, including ready-to-drink bottled bird’s nest, ready-to-drink health-tonics, Cordyceps capsules, and formulation for hair growth.
1H08 wholesale turnover grows 31% to S$17.2 million
Products carrying the Eu Yan Sang label are also distributed via a vast network of wholesalers, medical halls, supermarkets, drugstores, pharmacies, convenience stores, hospitals, health clubs and spas worldwide.
Wholesale contributes 16% to top-line.
Wholesale turnover grew 31% y-o-y to S$17.2 million in 1H08. China, where Eu Yan Sang’s products are used at over 60 hospitals and retailed by over 19,000 drug stores, accounted for 20% of wholesale revenue.
”We are uniquely positioned as a bridge between China – the world’s largest Chinese medicine producer and market – and the West,” says Mr Eu.
Eu Yan Sang happens to be the only large manufacturer of Chinese medicines outside China. The industry is a highly fragmented one, with competition mainly from small family-owned medical halls.
The TCM player has a 130,000-square-foot plant in Hong Kong. The plant is also Hong Kong's first TCM facility to be awarded good manufacturing practice (GMP) certification and quality award from the trade and industry department.
The state-of-the-art Hong Kong facility also has a therapeutic goods administration (TGA) certification from Australia.
The TCM manufacturer's other GMP factory is in Malaysia – for making traditional pills, capsules and powders as well as packing soups and teas.
Exclusive distributor of the world's Wisconsin ginseng
While American ginseng is also farmed in Canada and China, Wisconsin is acknowledged to produce the premium variety. About 80% of ginseng produced in Wisconsin is sold to Asia.
The distributorship granted by Wisconsin Ginseng and Herb Co-operative, a representative body for all ginseng farmers in the American state, enables Eu Yan Sang to package and sell the American ginseng under its own brand name over 2007-2009.
The deal is expected to give Eu Yan Sang pricing power over Wisconsin ginseng as well as add some S$10 million to FY08 wholesale top-line.
Product spin-offs such as granules and teas using Wisconsin ginseng are in 2008’s product pipeline. The company intends to roll out 9-12 products a year.
1H08 clinic turnover falls 12% to S$9.2 million
Sales from clinics fell 12% to S$9.2 million due to the divestment of 3 medicine centers in Australia in Oct 2007.
The company now has 19 TCM clinics for treating a myriad of ailments ranging from the common cold to chronic diseases such as urinary tract infection.
16 are general clinics in Singapore (13) and Malaysia (3). Another 3 are specialist centers in Singapore at Camden Medical Center and the Paragon for complex conditions such as fertility, cancer management, arthritis and eye conditions.
Clinics contribute 9% to the integrated TCM player's top-line.
Expansion Strategy
With the Wisconsin deal, Eu Yan Sang hopes to open up new markets in China, Indonesia and Taiwan.
Its first store in Taiwan and its 2nd one in Macau were opened during 1H08.
Already one of the top TCM brands in Guangzhou where its first store in China opened, the company wants to use the prosperous Chinese city as a base for moving into China significantly.
