Friday, January 6, 2012

Short Notes on Petra

Article from The Edge (Singapore) Dec 26th. Short points:
  • Petra accounts for 11% of worlds cocoa grinding capacity, fourth after ADM and Cargill (14% each) and Barry Callebaut (12%)
  • In Petra's Indonseia market, they sold cheap chocolates. The Top Wafer bar comntains 12% cocoa powder, while normal chocolate contains 30% chocolate butter. They used wafer instead, and did everything possible to bring the price to IDR500 (7c).
  • Worldwide, chocolate companies are vertically de-segregating. Nestle focuses on consumer brands. Barry Callebaut is the largest chocolate maker in the world - has economies of scale.
  • Analysts (on cocoa grinding): Petra is a small player in Europe, may lack necessary economies of scale. Claudia Lenz, who covers barry Callebaut for Bank Vontobel: In Asia, the demand for compounds and fillings [cocoa powder based products] is much higher than for 'real' chocolate [cocoa butter]. In Europe, the market consists more of real chocolate and I'm not sure whether Petra foods has fully adapted to that.
  • John Chuang (CEO): Petra's board has debated on whether to seperate the consumer and ingredients business, but a decision has yet to be made.

Short Notes on Eu Yan Sang

Article from The Edge (Singapore), Dec 26 2011.

Eu Yan Sang

Interview with Richard Eu:
  • As of Sept 11, EYS has 189 stores in SG, M'sia, HK, Macau and China. Also sells products to supermarkets and convenience stores. 23 TCM clinics in SG/M'sia, and 2 integrative clinics in HK.
  • Growth can no longer be dependent on further expansion in the TCM space alone, will hit saturation at some point. In the company's early years, growth was 20%... "Now our growth rate is slowing down...How do get into another phase of growth where you can look at 15 to 20% growth? Thats why we have to go beyond TCM."
  • Plans to acquire a stable of brands to move into the natural wellness space (eg: detox, organic)
  • EYS stores already carry a range of natural foods, health supplements such as honey mart honey, zing spa products, ProNature oatmeal.
  • Want to separate TCM brand from company. Mentions Nestle: They have their own brand, but also a portfolio of other brands (e.g.: Maggi, Nespresso). EYS must own and develop other brands. "Its going to take years, probably beyond my time."
  • Article mentions past failures: "Red, White & Pure" restaurant launched in 2006 which combined TCM based cuisine with spa treatment...failed and was disposed of in 2009. "It was the wrong time and wrong location" In Aug 10, EYS paid A$3.56m for Healthzone, esp. for its retail franchise in China. Healthzone collapsed last month, probably has to be written off.

My opinion:

I think this is a slippery slope. From medical, tested and proven treatments, to things which may be beneficial, to things that are rubbish:

  • Some of EYS current business is equivalent to (the western idea of) selling medicine or pharmaceuticals (whether prescribed e.g.: antibiotics, or over-the-counter e.g.: panadol). The items sold are backed by (some) scientific research, or 5000 years of TCM tradition, so do generally work.
  • Other products are like health supplements (e.g.: birds nest), may be the equivalent of buying vitamins or fiber supplements. Don't know if they work, but it may.
  • At the bottom, we have practically any cosmetic, weight loss, anti-aging product. These are marketing driven fads....bust cream, slim-10, anti-oxidants, ginko, whatever else....

There are more and more competitors as you move down the slope, with fewer barriers to entry and chances for brand building. It is a riskier business. EYS is good at their core business, but it will be hard to move beyond that, especially if they want to move into a crowded, fickle and marketing driven industry.

Should EYS be valued as a value stock (PE 5-10), rather than as a growth stock (PE 15)?

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