3Q09 in line with expectations. Eu Yan Sang International Ltd (EYS) leveraged on its seasonally strong quarter to deliver a credible set of 3Q09 results. Both sales and earnings were in line with our projection, with its 9M09 earnings forming 80% of our full-year estimate. Revenue grew 10.7% YoY to S$67.9m. Net profit surged 191.7% to S$3.8m in the absence of impairment charges relating to the disposal of Red White and Pure. Stripping away the impact of one-off items and eliminating the impact of losses from discontinued operations included in 3Q08, core operating profit would have risen by 6.6% but net profit would have fallen by 15.3%. Effective tax rate swelled to 38.7% from 29.5% due to losses at its foreign subsidiaries which could not be offset against group profits.

Growth in sales across key markets. The group registered higher sales across all its key markets despite the soft retail climate. In particular, Malaysia turned in an outstanding 17% YoY growth in revenue thanks to strong hamper sales during the Chinese New Year season. Singapore recorded a 7% improvement in sales, while Hong Kong delivered a 4% growth in turnover. The group's robust sales growth was boosted by the opening of new stores. It opened one new store in Malaysia and two in Hong Kong in 3Q09, bringing the net increase in store count for 9M09 to 10 retail outlets.

Improvement in credit metrics. Cash flow strengthened significantly thanks to the group's sound performance. Operating cash inflow grew to S$13.9m from S$0.4m a year ago. Operational metrics similarly showed encouraging improvements. Cash conversion cycle improved to 90 days from 109 days, inventory days declined to 163 days from 171 days, while net gearing dropped to 6% from 21% on an annualized basis. Management has heightened its vigilance over receivables and cash conservation in light of the tightening credit market. We understand that the group has not had to write off any receivables thus far.

Maintain HOLD with a higher fair value estimate. Although EYS has performed reasonably well, management remains cautious over its outlook given the jittery economic conditions, which could dampen consumer spending. We are leaving our estimates intact as the group is on track to meet our S$13.1m net profit estimate for FY09. Our valuation parameter has been raised to 10x (from 8x) along with the re-rating of its peers, bringing our fair value estimate to S$0.37 (from S$0.30). We maintain our HOLD rating on the stock.