OSIM focus on innovation and productivity

Fair value S$1.35


Macro weakness presents downside risks…
We believe that further downside risks have emerged for OSIM International (OSIM) since our last update on 8 Feb 2012. This stems from increasing signs of easing growth in OSIM’s key addressable markets. The Chinese government recently cut its 2012 GDP growth target to 7.5%. While China’s retail sales of consumer goods grew 14.7% YoY for the combined months of Jan to Feb 2012, this represented a slowdown as compared to the average 17.1% monthly YoY growth recorded in 2011. Meanwhile, Malaysia also revised its economic growth forecast downwards to 4%-5% for 2012, citing weakness in the global economy. Taiwan, another key market for OSIM, highlighted that consumer confidence remains lacklustre, although private consumption is still expected to increase by 2.7% in 2012. We opine that lower economic growth in these markets could manifest into softer demand for OSIM's high-end products, which are largely discretionary in nature.

But partly mitigated by its continuing innovation drive
OSIM’s strategic focus for
2012 would be to continue its innovation drive and actively maximise value from its stores and staff. The latter includes the rationalisation of non-performing outlets. Management has earmarked a pipeline of new innovative products to be launched in a bid to enhance its product offerings. We reckon that the rollout of novel products with new concepts, better functionality and endorsed by renowned celebrities could ‘freshen’ consumer interest and help to mitigate the impact of a slowing economy.

Maintain HOLD
Notwithstanding the softer macroeconomic backdrop, we opine that margin expansion for OSIM could possibly emanate from the following factors in FY12: 1) narrowing losses for RichLife, 2) absence of a oneoff tax provision amounting to S$2.8m which occurred in 3Q11, 3) higher productivity per store and man and 4) increased contribution from its 35% stake in TWG Tea which is accounted for by equity accounting. We maintain our projections and S$1.35 fair value estimate. Reiterate HOLD given limited upside potential.