2Q09 within expectations. Eu Yan Sang International Ltd (EYS) posted a credible set of 2Q09 results, in line with our estimates. Revenue improved by 6.1% YoY to S$53.4m, while operating profit edged up by 1.8% to S$5.2m. PAT rose 39.1% to S$4.7m in the absence of forex losses and thanks to lower taxes (losses from Red White and Pure (RWP) were offset against group profits), but after taking into account losses from discontinued operations arising from RWP, net profit grew by a smaller 12.9% to S$3.5m. EYS's 1H09 earnings have met 52% of our full year estimate. No dividend was declared for the quarter.

Calling it quits with RWP. To recap, RWP was a bleeding concept store that EYS had attempted to dispose off last year. The disposal has since been called off, and EYS has since terminated the business, resulting in a one-time write-off which was reflected as a S$1.19m loss from discontinued operations. The non-recurrence of such losses will free up a substantial drag on the group's future earnings.

Margins held up well. Gross profit margin for 2Q09 came in at 52.0% (vs. 51.1% in 2Q08), PBT margin grew 1.1ppt to 9.3%, and net profit margin inched up by 0.4ppt to 6.6%. Moving into 2H09, we believe that these margins are sustainable, given that inflationary pressure has generally tapered off. Management indicated that cost of raw materials has been easing. On top of this, the recently announced Jobs Credit Scheme will take some pressure off its labour costs.

Sales still strong for now. According to management, sales achieved over the recent Lunar New Year period have been healthy. Going forward, however, a protracted recession and the threat of further job cuts could weigh on consumer spending. We anticipate the employment of promotional discounts as a means of countering weakening consumer spending, and this could hurt the group's revenue if volume growth does not catch up with price declines. Nevertheless, management remains optimistic about growing its volumes by shifting its target market from the premium market to the mass market.

Upgrade to HOLD. We are leaving our estimates unchanged given that 1H09 results are in line with our estimates. Keeping our 8x parameter intact and rolling over our valuation to blended FY09/10, our fair value inches up to S$0.30 (from S$0.29). Since the stock is trading close to our fair value, we upgrade our rating to HOLD.