We initiate  coverage on EIG with a BUY  recommendation  and MYR1.78 FV.  We  expect  the  group  to  register  FY14F-16F  core  earnings  of MYR15.8-21.7m, implying a 3-year CAGR of 11.2%. We like EIG for its: i) established  partnership  with  the  reputable  Dermalogica  skin  care group,  ii)  committed  family-led  management,  and  iii)  decent  earnings growth supported by a sturdy balance sheet.

• Background.  EIG is involved in the beauty and wellness industry.  The group  focuses  on  the  distribution  of skin  care, cosmetics  and  wellness products  as well as services  through its network of self-owned and  thirdparty  salons.  Currently,  the  company  has  a  business  presence  in Malaysia, Singapore, Hong Kong and Thailand.
• Dermalogica’s  exclusive  distributor.  The  group’s  centrepiece  is  its exclusive  distributorship  of  Dermalogica  Inc’s  skin  care  products  in markets like Malaysia, Singapore, Hong Kong and other Asean  nations. US-based Dermalogica Inc is one of the world’s largest professional skin care  brands,  whose  products  are  sold  in  more  than  80  countries worldwide.  Currently,  EIG  distributes  these  products  to  >1,000 independent salons and spa operators throughout the region.
• Operates chain of beauty salons. Additionally, EIG owns and operates the AsterSpring  chain of  beauty  salons, which carry Dermalogica’s  skin care  products.  This  is  complemented  by  its  retail  kiosks,  which  offer consultation  and  distribute  Dermalogica  products.  To  strengthen  its market presence,  EIG  is looking to  increase  the collective number of  its own  salons and  retail kiosks  to 100 outlets  over the next 3-5 years  from 70 currently.
• Earnings  outlook.  We are forecasting  EIG  will  register FY14F-16F  net profits  of  MYR15.8-21.7m  as management looks to  expand its regional presence  by  leveraging  on  Dermalogica’s  maturing  brand.  The  group also  intends  to  expand  its  products  offering  and  brands  via  potential partnerships  with  international  brand  owners.  Meanwhile,  we  are forecasting  for  an annual dividend yield of  3.1 –  3.8%  for FY15F-16F,  in view of EIG’s current hefty net cash of MYR59.4m.

A thing of beauty is a joy forever
Wellness and beauty.  EIG has been  involved in the wellness, skin  care and  beauty industry  for >29 years. The group, which  now  has a  presence  in  Asean  and Hong Kong, was  listed on the Main Board of Bursa Malaysia on 11 Mar ch  2004 with an initial  market  capitalisation  of  MYR160m.  Today,  EIG  has  two  main  business segments,  namely:  i)  distributing  professional  skin  care  products  to  independent salons  –  together with  a sub-segment for fast moving consumer goods (FMCG),  and ii) operating its own chain of beauty and skin care salons.

Brief history. EIG has its roots as a skin care centre operating at Plaza Imbi in Kuala Lumpur  in  1984.  In  1989,  the  group  secured  its  first  exclusive  distributorship  of Dermalogica Inc’s skin care products in  Malaysia, and  was subsequently  granted the distribution rights for the Asean region. In 1992, EIG  set up its  first professional skin care centre, ie Leonard Drake Professional Skin Care, in Bangsar, Kuala Lumpur. By 2000, the group had embarked on its  first overseas venture by setting up  operations in Hong Kong to tap  into  Southern China’s  competitive but rapidly growing skin  care and cosmetics market.

Changing  of the guard.  After a string of disappointing annual  results  in  FY10-11, a strategic change of leadership was  initiated in Aug 2010 by the Chieng family  via  the family-owned  Providence  Capital  SB  vehicle.  Today,  the  Chieng  family  holds  an effective 60.9% stake in EIG (2010: 10.0%). Since the family took the helm, the group has undertaken a review of its product portfolio and discontinued several loss-making segments as well as terminated the distribution of non-core and third party cosmetics brands.

All in the family.  Management is currently led by executive chairman Eddy Chieng, who  was  the  founder  of  Nationwide  Express  Courier  (NAT  MK,  NR)  and  was responsible for bringing FedEx (FDX US, NR) to Malaysia. He is currently assisted by his sons  –  group MD and  CEO Roderick Chieng  (a former investment banker with Macquarie  Group  Australia)  and  non-executive  non-independent  director  Brian Chieng,  also an ex-investment banker.  EIG’s  headquarters  in Bukit Jelutong, Shah Alam, is equipped with facilities to train its own professional skin care therapists.

Flagship  brand.  The  group’s  jewel  in  the  crown  is  its  exclusive  distributorship  of Dermalogica’s skin care products in  nine  countries, namely: i)  Malaysia,  ii)  Thailand, iii)  Singapore,  iv)  Indonesia,  v)  Vietnam,  vi)  Brunei,  vii)  Cambodia,  viii)  Hong Kong,and  ix)  the  Philippines.  Apart  from  that,  EIG  is  also  the  exclusive  supplier  of Dermalogica  products  to  Vietnam and Cambodia.  Dermalogica  is  one of the world’s leading  skin  care  brands  and  was  founded  in  1986  in  the  US.  There  are  now >100,000  licensed  Dermalogica  skin  therapists  worldwide  and  the  brand  can  be found in  >28,000 salons and spas in  >80 countries.  We estimate that Dermalogicarelated sales make up about >75% of EIG’s annual sales currently.

Extension  of  distributorship.  In  2012,  EIG’s  exclusive  distributorship  of Dermalogica  Inc’s  products  to Asean  and Hong Kong  –  which was due to expire in Aug  2013  –  was  given  an  early  two-year  extension  by  the  ultimate  brand  owner, Dermalogica, Inc.  The  existing distributorship will now end by  31 Dec 2015,  with an option  to  renew  for  another  five-year  period.  Looking  at  the  group’s  successful turnaround since the Chieng family took over the helm in 2010, we are confident that EIG will be granted another extension come end-2015.

Other premium brands. To diversify its brand offerings, EIG  has –  in recent times  –added  other brands such as Davines  and Tisserand  under its umbrella. In 2012, the group  acquired  the  exclusive  distributorship  for  the  latter,  an  aromatherapy  and 
beauty  products  brand, for 10 countries: i)  Malaysia,  ii)  Singapore,  iii)  Thailand,  iv) Brunei,  v)  Indonesia,  vi) the  Philippines,  vii)  Vietnam,  viii)  Cambodia,  ix)  Myanmar,and  x)  Hong  Kong  for  a  10-year  period  with  the  option  to  renew  for  another  10. Subsequently in 2013,  EIG signed a distribution agreement with Davines SPA for the exclusive  rights  to  distribute  Davines  hair  care  products  in  Malaysia,  Singapore, Thailand  and  Brunei  for  a  10-year  period  with  the  option  to  renew  for  another  10 years at the end of  the initial agreement.  Although the contributions  from  these two brands  to  EIG’s  topline  are  relatively  insignificant  vis-à-vis  Dermalogica  –  at  an estimated  <10%  of  group  sales  –  we  believe  the  addition  of  these  two  premium brands to its current stable will enable the group to diversify its product s portfolio and reduce its dependence on Dermalogica over the long-run.

Product distribution network.  EIG has an extensive distribution  network  of  >1,000 independent professional salons across Asean and Hong Kong. In FY13, the product distribution  segment as a whole  contributed MYR60.5m,  or  45% of group  revenue, and  MYR8.4m  in  PBT.  This  makes  this  division  EIG’s  most  profitable  in  terms  of margins.  For  1H14,  this  segment  recorded  revenue  of  MYR30.5m  (+8.2%  y-o-y), primarily  on  higher  sales  in  its  core  markets  in  Malaysia  and  Hong  Kong.  Moving forward, we expect the revenue generated from this  business  to grow at 10% each year,  driven by the  addition of new premium brands  and  increased penetration in the regional markets in which it operates.

Establishing  a  presence in  FMCG segment.  EIG has also moved into  the FMCG business  through  its  wholly-owned  skin  care  brand,  Clinelle.  Parked  as  a  subsegment to its distribution arm,  Clinelle  is sold to pharmacies and high traffic outlets like Guardian, Watsons and SaSa throughout Malaysia and Hong Kong. In FY13, this sub-segment  accounted  for  27%  of  the  distribution  arm’s  segmental  income,  but registered  a  MYR4.2m  pre-tax  loss  due  to  the  lack  of  economies  of  scale.  The losses, however, have narrowed from FY12’s MYR7.0m, mainly due to improved cost control  and inventory management.  Based on this improving trend, we  expect  EIG’s FMCG arm to break even by FY15F

Pamper  me  fabulous.  Under  EIG’s  corporate  salon  division,  the  group  currently owns  52  AsterSpring  skin  care  salons  and  18  Dermalogica  retail  kiosks.  It  has  28 AsterSpring  skin care salons in Malaysia, 14  in Singapore,  three  in Hong Kong and seven  in  Thailand.  Starting  off  as  the  Leonard  Drake  Skin  Care  Health  Spa, AsterSpring  is  now  a premier skin care and beauty salon  provider  located mostly in premier  shopping  outlets.  On  the  other  hand,  EIG’s  consultation  pods  cum  retail kiosks  are manned by  trained  Dermalogica  skin therapists  whose role it is to advise and  recommend  Dermalogica  products  to  customers.  Currently  there  are  six consultation pods  in Malaysia,  eight  in Thailand,  and  three  in  Hong Kong.  In FY13, the corporate salons division contributed MYR74.8m, or 56% of the total revenue, up 4.3%  y-o-y.  This  segment  reported  a  higher  PBT  of  MYR3.0m  (FY12:  MYR1.3m), driven mainly by openings of new  salons and  retail  kiosks.  Moving forward,  EIG  is looking  to expand  its  footprint  and increase  the number of  AsterSpring  salons  and Dermalogica  consultation  pods  to  100  outlets  from  70  regionally  throughout  the region  over the next  3-5  years.  In addition,  management is also looking to penetrate into  newer  markets  in  the  region.  EIG  recently  received  approval  to  incorporate  a distribution  company  in  Indonesia  and  will  be  looking  to  set  up  operations  there subsequently.

A quick check.  We recently  visited an  AsterSpring  salon  at the Suria  KLCC  mall  to take a look at  the services and treatments provided by the salon.  Facial treatments usually  last  around  30  minutes,  while  certain  body  treatments  can  last  up  to  80 minutes. The complete range of facial and body treatment provided by the salon was priced  between  the  MYR80–260  range,  which  we  deem  affordable  considering  the premium  location.  Body  treatments  are  only  available  for  female  customers  while facials are offered to both genders.  AsterSpring  salons operate on an appointment basis,  with  four  sessions  available  in  a  day.  Walk-ins  are  possible,  provided  the therapists are available at  a  particular  time.  Aromatherapy products from  Tisserand and  body  care  products  from  Davines  are  available  for  sale  off-the-shelf. We  also visited  a  Dermalogica  consultation  pod  in  the  same  shopping  mall.  The  kiosk  is located in a very high foot traffic area  and a  skin  consultation only takes about  five
minutes,  after  which  the  Dermalogica  products  suitable  for  the  customer’s  skin condition is then recommended.

Source: RHB