Eu Yan Sang seeking alternative prescription with SGX exit?

THE exodus of consumer stocks from the Singapore bourse looks set to continue.

Trading in the shares of traditional Chinese medicine (TCM) retailer Eu Yan Sang International remained halted on Wednesday amid growing market talk that a move has been made to take it private after over a decade on the mainboard.

Though the company has yet to make any announcement, analysts told The Business Times on Wednesday that a delisting bid was a real possibility given recent challenging conditions in the retail industry and subdued trading liquidity, and such a move would give the company more flexibility in running its business.

If Eu Yan Sang does leave the Singapore bourse, it would add to a string of recent Singapore-listed consumer retail stocks that have been the target of privatisation offers, including lifestyle products retailer OSIM International and caterer Select Group.

Eu Yan Sang called a trading halt on Tuesday eight minutes before the market closed, after receiving a query earlier that afternoon from the Singapore Exchange (SGX) about "unusual price movements" in its shares on Tuesday. The stock had shot up 10.3 per cent or six Singapore cents to S$0.645 in the session, accompanied by a spike in volume.

Market talk is that a potential privatisation attempt for the firm, one of the biggest TCM groups outside China, is being handled by Credit Suisse. Credit Suisse declined to comment.

Eu Yan Sang group chief executive officer Richard Eu also said on the phone on Wednesday that he could not comment.

The well-known TCM retailer's history stretches back more than a century. The business began when its founder Eu Kong set up the first shop in Perak in 1879, and expanded when his only son Eu Tong Sen added outlets across then-Malaya and Singapore, according to the company's website. It was listed on the Singapore stock exchange as "Eu Yan Sang Holdings" in 1973 and was acquired by Lum Chang in 1990.

A few years after that, Eu Kong's great grandson Richard Eu organised a buyout from Lum Chang, formed Eu Yan Sang International and listed that on the SGX mainboard in 2000.

As at the end of 2015, Eu Yan Sang International had 252 company-operated retail outlets in China, Hong Kong, Macau, Malaysia, Singapore and Australia and 20 franchises in Australia, according to a press statement in February when it reported second-quarter earnings.

The stock is thinly covered, with only three research houses following it - and all with a 'sell' or 'underweight' call - going by Bloomberg data as at Wednesday.

Analysts told BT the retail industry has been gloomy across the region, including in Singapore where high overheads and a manpower crunch have chipped away at earnings and darkened the outlook.

"In general the consumer sector is not doing so well, both for Singapore and for ASEAN. In Singapore, high labour costs are denting margins together with foreign worker quotas. In that kind of backdrop, there's low investor interest so it may make sense to privatise, especially if cash flow is still good and the company thinks it may turn around in the future," RHB analyst James Koh said.

"Trading liquidity in the past 12 months has been weak and when companies are listed they have a responsibility to report results every quarter which may not be ideal," he noted, adding that "smaller to mid-size companies which are facing challenging operating environments but have good cash flow" that "may consider the possibility of privatisation" include F&B group BreadTalk, instant coffee mix maker Food Empire and luxury watch seller The Hour Glass. Mr Koh does not cover Eu Yan Sang.

CIMB analyst William Tng, who said he has been covering the stock since July 2013, noted it was "hard to say" for sure if the trading halt was due to a privatisation bid by Mr Eu but "there's a case to be made".

"Tourism is affected in Hong Kong, which is one of their key markets. Malaysia is also a bit slow partly due to the GST (goods and services tax) implementation. In Singapore, you generally can feel that business sentiments are weak ... Privatisation would give them the flexibility to do whatever they need to get their business back on track."

Mr Tng and another CIMB analyst Ngoh Yi Sin had said in their most recent note on Eu Yan Sang, dated February this year, that their rating was "reduce" with a S$0.30 target price.

For the fiscal second quarter ended Dec 31, 2015, Eu Yan Sang posted a net profit of S$498,000, down from S$1.98 million a year earlier, when it had a forex gain of S$938,000. Revenue rose one per cent to S$85.6 million.

This article was first published on May 12, 2016.
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