OSIM another step to record year

Fair value S$1.87


• 3Q12 PATMI surges 49.3% YoY
• 1 S cent dividend declared
• More upside potential ahead

3Q12 results within expectations
OSIM International Ltd (OSIM) reported a 49.3% YoY surge in its 3Q12 PATMI to S$19.6m on the back of a 15.1% YoY increase in revenue to S$142.3m. Results were within our expectations. The strong bottomline performance was partly due to a low base effect in 3Q11, given a one-off tax provision of S$2.8m, without which 3Q12 PATMI would have grown by 23.1%. Sequentially, revenue and PATMI declined 8.0% and 13.1% respectively, but this was largely due to seasonal factors. For 9M12, revenue increased 8.8% to S$447.1m, or 73.3% of our full-year estimate. PATMI of S$64.3m represented a growth of 23.7%, which constituted 74.2% of our original FY12 projections and 93.1% of FY11’s full-year figure.

Three consecutive quarters of interim dividends for FY12
OSIM also declared a dividend of
1 S cent/share (3Q11: nil). This brings total DPS to 4 S cents YTD. We raise our FY12 DPS forecast marginally from 4.5 S cents to 5 S cents. We expect OSIM’s dividend payouts to be supported by its healthy free cashflow generation (9M12: S$65.6m; 9M11: S$54.1m).

Reiterating BUY on undemanding valuations
Management is confident of extracting more value from China’s huge consumer market, and expects its core business to remain strong in the coming quarters. We believe that OSIM’s growth would be underpinned by its strong product innovation, focus on middle-to-high income consumers and continued efforts to improve its productivity per man and per store. In addition, OSIM would also focus on building on its international franchise in FY13. We make some minor downward adjustments to our forecasts as we incorporate this latest set of results in our model (refer to Exhibit 5). But as we roll forward our valuations to 14.3x FY13F EPS, we lift our fair value estimate from S$1.79 to S$1.87. Maintain BUY given undemanding valuations. OSIM trades at 12.5x and 11.4x FY12F and FY13F PER respectively, against our projected EPS CAGR of 13.3% from FY11-13F, while offering FY13F ROE of 38.3%.

China’s retail sales exceeded consensus expectations in Sep China, which we believe is OSIM’s largest market, reported a 14.2% YoY growth in retail sales to CNY1.82t for Sep, surpassing the average Bloomberg consensus estimate of 13.2% by 1ppt. This was also the highest growth rate since Mar this year. Meanwhile, although China’s GDP growth of 7.4% YoY in 3Q12 was the slowest rate for seven consecutive quarters, there are signs that growth for the world’s second largest economy could be bottoming out. We draw this conclusion from recent encouraging data arising from China’s industrial production and fixed asset investments besides retail sales as highlighted earlier.

Ample potential to grow in China OSIM’s management remains confident of extracting more value from China’s huge consumer market, and would continue to develop its network there. Rationalisation of non-performing stores would also continue as per usual. Regarding its RichLife business, OSIM has decided to place its focus on eight key cities in China, with a total of 45 outlets currently. Losses have also narrowed significantly this year, according to management. We believe that its RichLife business is on track to achieve breakeven in FY13. Moving forward, we opine that there is still potential for OSIM to expand its sales in China, as there is sufficient leeway for OSIM to increase its penetration rate in core tier one and two cities, in our opinion.