Keeping up its new products innovation drive
We opine that one of OSIM International’s (OSIM) core strengths lies in its ability to constantly drive its product innovation. This has allowed the group to enjoy gross margin expansion (FY10: 65.3%; FY11: 68.9%; 1H12: 70.2%) from a more favourable product mix, while enhancing its brand profile with its novel new products with fresh design concepts and better functionality. During 3Q12, OSIM launched the uDivine App massage chair, an improved version from its earlier uDivine model. This chair enables wireless connectivity to Apple Inc.’s mobile devices; hence users can listen to ambient music while having an array of 13 massage programmes to choose from.
Not immune to macro slowdown, but focusing on margin growth
Although we remain cognisant of the concerns over the slowdown in China’s growth engine which could affect consumers’ discretionary spending, we believe that management would continue to improve its productivity and rationalise non-performing outlets besides its innovation drive to mitigate this. OSIM’s entrenched presence and experience in China would also allow it to make more efficient and accurate operational decisions, in our opinion. Hence we only make some minor adjustments to our FY12 estimates (revenue: -1.1%; PATMI: -0.9%) and also ease both our FY13 revenue and PATMI forecasts by 2.2% as we input more conservative assumptions.
Reiterating our BUY rating
We highlighted OSIM as a possible laggard play during our
27 Jul 2012 report. Since then, its share price has appreciated 13.9% (even after going ex-div), strongly outperforming the STI by 13.1ppt. We still see value in OSIM’s current share price despite our reduced forecast. The stock trades at 11.3x and 10.3x FY12F and FY13F PER, respectively, while offering a projected EPS CAGR of 13.5% from FY11-13F and ROE of 44.1% (FY12F). Maintain BUY, with a revised fair value estimate of S$1.79, versus S$1.82 previously (still based on 14.3x blended FY12/13F EPS).
China’s retail sales met expectations in August
China, which we believe is OSIM’s largest market, reported a 13.2% YoY growth in retail sales to CNY1.67t for the month of Aug (0.1ppt higher than the growth rate registered in Jul), meeting the average Bloomberg consensus estimate of 13.1%. We believe that there is still potential for OSIM to grow its sales moving forward, although downside risks from slower economic growth in China cannot be negated. For example, luxury brand Burberry Group said earlier this week that its adjusted profit before tax for its current fiscal year would come in at the lower end of analyst forecasts as it is experiencing a broad-based slowdown in all regions. Tiffany & Co. also lowered its full-year sales growth outlook from 7-8% to 6-7% during its recent 2Q12 results. This is attributed to a moderation in its expectations for 4Q12 in Asia-Pacific and the Americas as a result of lingering economic uncertainties.
Penetration rates have potential for expansion
OSIM’s strategy in China is to focus on key tier-one cities and the middle-to-upper end market. During an interview with Bloomberg News, OSIM’s CEO Mr. Ron Sim highlighted that less than 1% of households in the cities which OSIM operates own a massage chair1. We believe this implies plenty of opportunities for penetration rates to grow as middleclass affluence increases and the impetus on spending to improve one’s well-being gets bigger.
Still on track to beat consensus estimates
During our 27 Jul 2012 update on OSIM, we pointed out our belief that the street’s estimates would likely be revised upwards following its strong 2Q12 results. Since then, we note that consensus’ PATMI forecast for FY12 has been raised from S$81.8m to S$83.6m. Although we have lowered our FY12 PATMI marginally by 0.9% to S$86.7m (3.7% above Bloomberg consensus) in this report on account of the continued uncertainty in the macroeconomic environment, we believe that OSIM still remains on track to deliver earnings that would exceed the street’s projections for FY12. This is premised on management’s strong execution capabilities. OSIM would continue its rollout of innovative new products with different price points, while focusing on improving its productivity and operational efficiency and the rationalisation of non-performing outlets.
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