Three Signs of A Market Soaking in fear

Times have been extremely chaotic. There are some glaring signs of immense fear that signals for the value investor to awaken from hibernation and pick up some bargains:

1. Long queues outside financial institutions

When the sub-prime crisis brought about a possible collapse of AIG, the local policyholders started surrendering their insurance policies despite repeated calls from MAS that everyone's money is safe. Investors started dumping their holdings in the stock market for fear of greater implications to come. We read of news where policyholders said that they felt "safer in having cold hard cash from AIA." This a definite sign of mass panic and investors riddled with immense fear.

2. A wildly gyrating stock market that fluctuates +/- 10% or 1000+ points over 5 days

Dow Jones Industrial Average swung by a difference of 1000+ points over a short period of 5 days, driven by a mere piece of news of a possible US$700b bailout plan by the US government. This is a colossal move of 10+% in a matter of days and is purely irrational behaviour.

3. Do you also feel the fear and stampeding tremors too?

The fear of a financial meltdown and currency fallout was so prevalent and real that at a point in time even I, an ardent impassioned and rational person, was influenced to think that it might be a wiser choice to stay by the sidelines and do nothing but hold on to cash.

Fear is such a powerful weapon, where there was once I started doubting my own judgments. It was an immense internal struggle on whether to-act or not-to-act. However, the better half of me eventually won: I decided to make a move now.

Be greedy when everyone is fearful

The greater the fear is, the greater courage the value investor must have to act in a rational manner that will go in the opposite direction of the stampeding herd; only then will he be able to reap gains when the time comes.

This reminds me of how Warren Buffet recently acted to acquire a US$5b stake in Goldman Sachs.

As long as (1) the financials of the company have been evaluated to be sound, and (2) there is a significant margin of safety in the price to intrinsic value, and (3) there are good prospects and growth drivers for the company to grow continuously even in recessionary years, the value investor must trust in my own independent judgment and make decisions based on that.

I have started to do my shopping. Have you?

A Cursory Study of Eu Yan Sang

Eu Yan Sang strikes me as a very interesting business proposition. Apparently, in the entire Traditional Chinese Medicine industry in Singapore (and probably the region as well), the only well-known brand is Eu Yang Sang. This definitely warrants a further investigation into the entire business.

Disclaimer: The author is not vested. YMMV.

Industry Overview

When Traditional Chinese Medicine (TCM) was introduced, it was initially not well received by the masses and the medical fraternity. It was then believed to be 'alternative medicine', where the effects of the medication are hard to measure and difficult to draw correlative conclusions. But in recent years, as scientific methods of measurement advanced and studies were conducted on various aspects of TCM, the medical fraternity grew to recognize the benefits of acupuncture, traditional chinese herbs, and 'tieh ta'. We are witnessing a tectonic shift in perspectives of TCM; the paradigm shift is slow but definite.

The traditional chinese medicine industry worldwide is highly fragmented with so many small and unknown players, countless unknown brands of Chinese medicine. Besides Eu Yan Sang, there are no other brands that I can associate TCM with at the moment.

Company Synopsis

Eu Yan Sang's business proliferates all aspects of TCM ranging from clinics to products and herbs distributorship. The company has created a strong retail brand, incorporated scientific methods of measurement to ensure products are of high quality and consistency, established trained general practitioner clinics. In addition, the company has established distributor and retail channels to sell their TCM products which include Bak Foong pills for pregnant ladies and bird's nest drink.

Over the last couple years, Eu Yan Sang made efforts to tap into the growing numbers of health-conscious people by setting up a large concept store of Red-White-Pure, like a one-stop hub for all things related to TCM, ranging from dining to therapy and retail galleries. However, this endeavour failed miserably. A simple google on "red white pure" and instantly I got to read so many yucky reviews on the restaurant food.

Competitive Advantages

1. A strong brand in retail products

Eu Yan Sang has a very good brand in their retail products. Ask any shopper what products/brands they associate with TCM, and Eu Yan Sang naturally comes to one's mind. The other customer touchpoints of clinics and herb distributorship further reinforce the brand of Eu Yan Sang.

2. Sole distributorship for world's finest ginseng - Wisconsin Ginseng

Wisconsin ginseng is famous for being the world's finest form of ginseng with the highest concentration of gisenocides, a chemical that makes consumption of ginseng highly beneficial to the health of human beings. In 2006, Eu Yan Sang managed to secure from the Board of Wisconsin Ginseng a right to exclusively manage, distribute and sell Wisconsin Ginseng.

This is a Buffett classic type of toll bridge economics, or sustainable competitive advantage, that will help the company generate enduring profits for a very long time to come.

3. Differentiated products - high in quality and consistency

The general retailers use arbitrary methods of visual, touch and smells to identify the herbs. The probabilities and occurrences of mis-prescription, and product quality problems are significantly higher, as the method of identification will then rests on the skill of the individual staff.

What sets Eu Yan Sang apart from the rest is that it leverages on scientific methods to ensure the quality and consistency of all the retail products. They employ modern methods that are equivalent to DNA fingerprinting to check and ensure products are consistent and correct.

My Final Comments

On cost controls, revenue expansion

Eu Yan Sang has been making losses for the last few financial quarters; although there's a growing revenue base, costs are spiraling and chewing off the profit margin. Despite the multiple competitive advantages possessed by Eu Yan Sang, it is very disappointing to know that that management has somehow not been able to effectively capitalise on them and generate enduring profits.

On business strategy

Proliferation of Eu Yan Sang products in South East Asia countries is not significant, and much less in China. There remains a huge latent market in South East Asia that is untapped. However, Eu Yan Sang has taken the direction to 'educate' the westerners on the benefits of TCM; they have been expanding their presence in Australia and the United States. Is this business strategy successful? I guess the financial numbers will have to speak for themselves.

Everytime I pass by Eu Yan Sang retail stores, what consistently struck me are the vast retail space and the lack of customers, mostly a few at any one time. While I agree that it is important to strengthen the consumer brand through establishing shopfronts, the management must be conigzant that not a lot of consumers buy health products every day, and must less so for TCM products. Spawning shopfronts at expensive shopping malls and incurring high rental costs may not be a very wise and prudent move.

On transparency

When key appointment holders resign and are replaced just weeks (or was it days?) prior to the the results release, it doesn't reflect well on the company and leaves one's imagination to run wild, was there a serious conflict of opinion that made the CFO decide to leave?

On attractiveness as an investment

Eu Yan Sang was successful at the initial years of public listing; but it made some costly mistakes too. It is only in recent months that they have finally completed cleaning up their balance sheet and restructured the company. As to whether it has potential to become a great investment opportunity, there is still much to be seen.