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Richard Eu Yee Ming, CEO of Eu Yan Sang International (EYS), a major traditional Chinese medicine (TCM) retail chain in the region, wants a bigger slice of Asia’s burgeoning wellness and health-food market, and China’s growing and increasingly affluent population is a large part of this ambition.

Although EYS’s brand recognition in China is good, winning market share will still be tough because of several reasons, says Eu. “A lot of our sales in Hong Kong are from tourists from China, but we’re very limited [on the mainland],” he laments.

Because of licensing issues, which caused exports to fall in FY2010, the company is unable to sell the same range of merchandise in China that it does in Hong Kong. He says, in China, the registration of health food can take months while that of medicinal products can take years.

Even its top-selling products such as Bak Foong Pills, popular with women and easily obtained in stores in Hong Kong, Malaysia and Singapore, are considered a type of medicine in China. As such, they are available only in drug stores and hospitals. Eu says: “We have to have a pharmacy licence and hire a pharmacist. It is just too expensive when [the number of products] is limited.”

EYS is getting more products registered in China but has no way of hastening the process, says Eu, who prefers to distribute its products that are deemed as medicine via pharmacies and hospitals. “China is a big market, but it is obviously not easy. There are many players,” he adds.

The company has had to close a retail store in China in the past 18 months, reducing the number of outlets there to three, but stepped up growth in its core markets. It added 11 outlets in Singapore (46), Malaysia (73) and Hong Kong (51) between September and December 2010, bringing the total number of outlets to 175 across five countries, including two in Macau.

Eu isn’t giving up, despite the highly challenging conditions in China. He says the company has other avenues for expansion there and is working on its strategy, but it will take at least two years before there are results. Part of the strategy includes putting more of its products on its partners’ shelves.

For a start, some of its top sellers such as Bird’s Nest and Essence of Chicken will soon appear in more cities throughout China, thanks to its recent investment in Australia-listed Healthzone, which owns the Healthy Life retail chain franchise in Australia and China and has more than 470,000 registered loyalty club members.

EYS became Healthzone’s largest shareholder last August when it paid A$3.6 million (RM11 million) for almost 15% of the natural health products marketer, which has more than 127 retail stores in Australia and plans to open 100 in China by end-2012.

The investment gives EYS access to more than 1,600 retail counters that carry Healthzone’s Aurinda brand of vitamins and supplements in China. Plans are also underway to co-develop new products and brands with Healthzone in the multi-billion-dollar China wellness market, which is growing 17% a year. As it is, Healthzone’s Australian-made natural beauty products are sold in Japan, Hong Kong, Taiwan, South Korea, Canada, Europe and New Zealand. The investment also marked EYS’s re-entry into Australia, where it had to sell its three clinics in 2008 to stem losses.

EYS may also revisit the option of other wellness ventures. Two years ago, it was forced to shut its 10,300 sq ft Red White & Pure TCM spa cuisine restaurant in Vivo­City, Singapore, which featured a 17m tonic bar. Eu says the venture was “ahead of its time” and that things could have turned out differently had the restaurant been in a better location, such as Dempsey Hill. He says the concept — which allows customers to shop and dine in the same place — is already popular with many retail businesses. Thus, he believes it is still viable and could even be done overseas. “Our former chef, Raphael Gamon, started his own restaurant with a similar idea in LA,” he says.

In line with its expansion strategy, EYS has a subsidiary called Yin Yang Spa Products, according to its FY2010 annual report. It had also attempted to take a stake in Sanctuary Spa Group, but aborted the move in early 2009, citing poor economic conditions.

The company could also see expansion opportunities in Temasek Holdings’ tie-up with its Malaysian counterpart Khazanah Nasional to develop an iconic wellness township in Iskandar Malaysia. Eu, who declines to elabo­rate on the possibilities, says every decision will take into consideration the group’s resources and fit its vision.

He explains: “We positioned ourselves originally as a TCM company but, more and more, we are looking at an integrated approach. Although TCM is still our mainstay, there will be a move into other forms of natural wellness products and traditional medicines, mostly herb-based.”

To be sure, EYS may make more strategic acquisitions and is eyeing more tie-ups with global brands that are venturing into the TCM arena, as it did with Nestlé. The Swiss food giant, which has reportedly earmarked US$500 million (RM1.53 billion) to develop health food — including products with TCM tonics — over 10 years, came up with its American ginseng concentrated herbal soup “Yang Sheng Le” in Singapore in collaboration with EYS.

In a joint venture with Truong Xuan Viet Co, EYS will open a chain of TCM clinics, which will also carry EYS products, in Vietnam in FY2011.
EYS already has 23 TCM clinics with trained physicians in Hong Kong, Malaysia and Singapore. Further geographical expansion, including to Indonesia, where its products are available via third-party distributors, is likely to be done with a local partner.

Still, with EYS’s stock doubling in the past year to close at 81 Singapore cents on Jan 6, a good part of the near-term positives could well be reflected in its share price already. At the time of writing, Standard Chartered had not changed its “buy” recommendation or 88 Singapore cent price target, which reflects 18 times FY2011 earnings.

Magnus Gunn, an analyst with Standard Chartered, thinks, however, that its share price could double from current levels over three years, if the group continues to generate steady mid-teen growth from its TCM business, he writes in an Oct 29 note. There is also the potential earnings upside from new products and markets.

“EYS is a great business, with a trusted but underleveraged brand and considerable intellectual property in the preparation and manufacturing of TCM,” Gunn says in the note. As such, he sees EYS benefiting from investors’ gravitation towards established regional TCM peers, which would in turn justify an earnings multiple in the high teens and above.

As the 131-year-old company measures out the right ingredients that will help grow its business for decades to come, it will continue to bank on its expertise that has seen it transform the image of TCM from that of dusty medicinal halls to one of modern retail chains.

Cindy Yeap is a senior writer at The Edge Singapore

This article appeared in Corporate, The Edge Malaysia, Issue 840, Jan 10-16, 2011 

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