OSIM International weak start to the year

Weak 1Q15 results
Amid soft economic conditions for its five key markets, OSIM international Ltd (OSIM) saw a weaker set of 1Q15 results. Revenue was down 13.2% YoY at S$149.8m, forming 20% of our FY15 forecast. We had mentioned in our last report that the group may likely see a modest performance, particularly in its key market China. The muted top-line was also due to the absence of a major flagship chair launch, which would have otherwise been a growth driver. Bottom-line performance continued to be dragged by start-up costs from TWG Tea, higher wages and rental costs, as well as legal costs to a larger extent. As a result, PATMI decreased 53.1% YoY to S$13.5m, forming only 12% of our and Bloomberg consensus’ FY15 forecasts.

2H15 could be better
OSIM’s latest flagship chair, uMagic was recently launched in Apr this year with an introductory price of S$4,988, and it features ‘Magic Hands’ massage technology – a patented ‘Hand-Grip’ massage that offers a humanized massage technique. Management stated that they have received a ‘favourable response’ on this new product thus far. Given that the group’s earnings is particularly sensitive to new massage chair launches, we look forward to 2Q15 for some sign of validation that the new chair should drive growth for this year. With the launch of uMagic in China and other smaller products in the region slated from June-15 onwards, we think 2H15 could present a better picture as OSIM’s products also targets a more resilient affluent market.

Estimates for FY15/16F reduced
We also understand from management that the number of OSIM outlets, which stands at 560 as of 31 Mar-15, will likely remain flat for the year. On the other hand, TWG Tea still expects to open about 15 new stores this year, of which they have opened four (two in China, one in Thailand, one in Singapore) as of end-Apr to a total of 47 outlets. In light of the above, we have revised our forecasts downwards and derived a new FV estimate of S$1.87 (previous: S$1.97), based on blended FY15/16F EPS. Maintain HOLD. OSIM has also declared an interim dividend of 1 S-cent/share and net cash remained at a good level of S$256m.

OSIM TWG Tea business on growth path

No surprises to FY14 results
After a widely disappointing quarter, there were no surprises for OSIM International Ltd (OSIM)’s overall FY14 results. 4QFY14 revenue and PATMI were slightly lower by about 1% YoY to S$177.7m and S$27.4m, respectively. This was largely within the street’s expectations. FY14 revenue rose 6.7% YoY to S$691.1m and PATMI was marginally higher by 0.6% YoY at S$102.2m. The group had also declared a final dividend of S$0.02/share, with total FY14 DPS of S$0.06 giving a yield of 3.2%. While it currently holds a significant cash balance of S$427.6m, no further insight was given on the potential utilization. We note that there were little changes in the group’s regional markets’ revenue contribution profile – 53% of FY14 revenue came from North Asia, which comprises mainly of China, Hong Kong and Taiwan. Management continues to keep their positive outlook on China, citing confidence in the launch of new products from OSIM as well as a resilient affluent consumer market despite closing 32 non-performing OSIM outlets over the year.

Similar pressures ahead with on-going expansion
TWG Tea remains as a fast growing business. TWG Tea opened 6 new stores in 4Q, bringing its total outlets to 43 as of end 2014. Management reiterated its target of opening 15-20 new TWG Tea stores mainly in Asia for 2015. In particular, new stores are expected in Shanghai and Guangzhou while Beijing could see the set up of a central kitchen in 1Q15. Start-up costs, wages and rental costs would still bite on profitability, albeit a tad positive minority interest recorded in 4QFY14 suggests profits were achieved that quarter. With that said, we keep in mind again of the potential legal costs that could be incurred from the two disputes the group is involved in.

Maintain HOLD
Based on the above, we raise our FY15F PATMI by 3.6% and also introduce our FY16 estimates. Following a change in analyst coverage, we keep the target peg of 14x to our FY15F EPS, while our fair value estimate on OSIM increases from S$1.90 to S$1.97. Maintain HOLD.

Osim steady sales growth so far in 2H14

Clear on where it wants to spend the money
OSIM may not have a specific target for acquisitions yet using the proceeds from its recently-issued SGD170m convertible bonds due 2019, but it is very clear on the kind of companies it wants to buy. They must be positioned at the mid- to upper end of the well-being and lifestyle market, have a promising brand, can be scaled up rapidly, is already in China or heading there, and have an interesting product with the potential to dominate its market.

Shareholders will be protected
The 2019 CBs will add 6.2% to its outstanding shares while the upsize option of SGD30m may add another 1.1%. However, its 2011 CBs actually did not dilute EPS much as OSIM repurchased 41m shares in 2011-13. These almost fully offset the 65m new shares issued when the 2011 CB holders converted. Management intends to repurchase shares in any market correction.

Steady as she goes
So far in 3Q14, sales growth has been steady. Its new sofa chair, uDiva, is being progressively rolled out in China, to steady sales. TWG is focusing on North Asian expansion, now that OSIM owns 88% of TWG North Asia, its JV with TWG. There will be greater international expansion of its franchise business for chairs and TWG Tea in 2H14 and FY15. Maintain BUY on the same TP, now on 20x FY15E fully-diluted P/E (previously 19x), in line with the higher valuations for its regional and global peers.

OSIM International Zero-coupon convertible bonds issued

Announced S$170m zero-coupon convertible bonds
OSIM International Ltd (OSIM) announced that it has placed out S$170m in principal amount of zero-coupon unsecured convertible bonds (CBs) to institutional and accredited investors. The CBs have an initial conversion price of S$3.525 per new share, which represents a 25% premium over its closing price of S$2.82 prior to the announcement. The maturity date is on 18 Sep 2019, but there are redemption options for both the issuer and bondholders, subject to certain terms and conditions. The yield to maturity of the CBs is 2% per annum. Assuming full conversion, 48.2m new shares will be issued, which is equivalent to 6.19% of OSIM’s outstanding shares in issue, as at 26 Aug 2014. If an upsize option of up to S$30m worth of CBs is fully subscribed, it would represent an additional 1.09% of OSIM’s issued share capital.

Fund raising exercise comes as a surprise to us
OSIM has a strong financial position, with a net cash balance of S$238.5m as at 30 Jun 2014. Hence, this round of fund raising exercise comes as a surprise to us. According to OSIM, the net proceeds raised will be used to roll out and enhance its well-being and lifestyle business in Asia and beyond (35% of net proceeds), finance potential strategic acquisitions (35%) and for general working capital purposes (30%). We believe OSIM’s organic growth can be easily funded by its strong operating cashflow generating abilities. Hence, it is likely that OSIM could be building a war chest for future acquisition opportunities.

Maintain BUY
It is interesting to note that this round of CBs issuance appears to come with better terms as compared to the CBs exercise which OSIM carried out in Jun 2011. The CBs issued back in 2011 had a coupon rate of 2.75% and no dividend protector for existing shareholders (meaning conversion price would be adjusted downwards each time OSIM paid a dividend). We maintain our BUY rating and S$3.21 fair value estimate on OSIM.

OSIM - Strong China momentum in 2Q14 positive for 2H14

Satisfying 2Q
2Q14 net profit of SGD29.5m (+13% YoY, +2% QoQ) met expectations. Management said revenue (+10% YoY, +6% QoQ) could have been 5-10% stronger if not for the World Cup. China was the best performer and was behind North Asia’s revenue outperformance. TWG was profitable but contributions were minimal as it is in expansion mode. Net cash hit SGD271m upon full conversion of the 2011 convertible bonds. The regular 2 SGD cts interim dividend was declared.

Stronger 2H14 expected
Our FY14E forecast is 6% above consensus. 1H14 profit forms 47% of our full year number. Drivers should be:
1) China, with its strong momentum boosted by the uDiva sofa chair which was just launched in China in June;
2) GNC Taiwan’s steady improvements after its return to profitability;
3) new products in 2H14; and
4) stronger TWG contributions.

More new products OSIM will be launching four new massage products in 2H14. These include uBuddy, an office chair with massage functions priced below SGD1,300 and uSqueez Air, a pneumatic leg massager. Early next year, a new mid-range massage chair may be rolled out. OSIM’s strategy is now clear. From just one chair model, it is building up a range of products for different segments: uDiva, an economy chair for younger consumers, and uBuddy for office workers. This strategy should sustain its growth.

Target Price: SGD3.50

OSIM buy on stable growth momentum

Recommendation: ACCUMULATE
Previous Close: S$ 2.86
Fair Value: S$ 3.15 
- Achieved 21 consecutive quarters of profit growth
- 1Q14 Revenue reported at S$173mn (+15% y-y) and net profit at $29mn (+15 % y-y) driven by stronger growth from the South Asia region
- Propose interim dividend at 1 cent per share
- Announce call option notice date to be 8 May 2014 for the convertible bonds
- Expect stronger sales in coming quarters with the launch of new flagship product uDiva and TWG store expansion
- Maintain at Accumulate with raised TP to $3.15

OSIM International has been served a writ of summons

OSIM International has been served a writ of summons by The Wellness Group Pte Ltd and its chairman, Manoj Murjani, over its shares in TWG Tea. The claim in the writ of summons relates to the recent subscription by OSIM and Paris Investment of the shares in TWG Tea and other disputes.

The Wellness Group and Manoj claimed that the issuance of shares was an act of minority oppression and is in breach of the terms of the shareholders agreement dated March 18, 2011, entered into between OSIM, Paris Investment, The Wellness Group, and TWG Tea. OSIM first acquired a 35% stake in TWG Tea in April 2011 for $31.36m. This was raised to 45% last July, and 53.7% in October. Last month, OSIM raised its stake in the luxury tea company to 70%, when TWG Tea undertook a rights issue to raise $25m.

OSIM heading for more growth

 FY13 results were within expectations with recurring net profit up 16% YoY to SGD101.6m. It was a record year for OSIM, while 4Q13 was a record quarter in terms of revenue and net profit. Dividend for the full-year was unchanged at 6 SGD cts.

 Some one-off items were recorded during 4Q13, but their net impact was negligible. The company ended FY13 with a cash hoard of SGD299m.

 We expect profit growth to further strengthen in FY14 as the company consolidates TWG, now another pillar of growth.

FY13 results within expectations
OSIM’s FY13 revenue grew 8% YoY, with higher growth coming from

OSIM International raises stake in TWG-Tea to 70%

OSIM International Ltd (OSIM) announced that it has raised its shareholding in TWG Tea from 53.7% to 70%. This development arose due to OSIM’s undertaking of a rights issues by TWG Tea (OSIM took up all the rights). Total proceeds of S$25m were raised and this would be used mainly for TWG Tea’s store expansion in 2014 and repayment of debt. We are positive on this move as we expect it to be earnings accretive to OSIM.

TWG Tea generated a net profit of S$5.6m in its recent FY13 results (FYE 31 Mar) and we are expecting its earnings traction to gain momentum going forward. We maintain our BUY rating on OSIM but our fair value estimate of S$2.56 is under review pending the release of its 4Q13 results on Mon, 27 Jan 2014 (post trading hours).

OSIM expects to record re-measurement gains from its increase in shareholding in TWG Tea to a controlling stake, but this would be partially offset by impairment charges on ONI Australia and its Brookstone senior preferred notes.

First look at the OSIM new chair

uInfinity soft-launched in Hong Kong. We had a firsthand look at the eagerly awaited new chair, which has just been soft-launched in Hong Kong. This chair will replace the existing uDivine, which has been the flagship for the past three years. Initial selling price was HKD46,800, almost 35% above the existing uDivine App. Singapore’s selling price would likely be in the SGD6,000+ range. This will likely be softlaunched in Singapore and China over the next few weeks.

Getting closer to the human hand. Upon testing, what struck us immediately was the much better massage mechanism, even compared to uDivine which was considered a revolutionary technology. The leg portion has also been given a significant upgrade, feeling similar to the popular leg massager uPhoria. The chair feels much more snuck, owing to the slightly smaller profile, though the sales assistant was quick to assure that even plus-sized customers can still fit comfortably!

No significant change in design. We were however, slightly underwhelmed by the similarity in design to its predecessor. Our view is that this could result in less power drawing in customers at the shops, and OSIM would have to run an effective marketing campaign to counteract this. We understand there are plans in place, which will come in during the official launch.

Previewing 2Q13 results. OSIM will announce after market close on the

OSIM weaving its magic for the new year

• Beneficiary of improved China outlook
• Innovation product drive to propel growth
• Room for further re-rating

Encouraging signs in China’s recent economic data
We believe that OSIM International (OSIM) would be a key beneficiary of a recovery in economic conditions in China, which is its largest market. In our opinion, China’s retail sales have been fairly resilient. The latest retail sales growth of 14.9% YoY for Nov not only exceeded market expectations, but was also the highest increment since Mar this year. According to Bloomberg’s average consensus estimates, China’s real GDP is projected to increase 7.8% YoY in 4Q12, which would imply a reversal of seven consecutive quarters of decelerating economic growth since 1Q11.

Innovation driven growth supported by active advertising
Looking ahead, we expect OSIM to continue its product innovation drive, with plans to launch two new massage chair models in 1Q and 2Q 2013. These new chairs are aimed at augmenting its product portfolio by building on the popularity of its current

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

OSIM innovation to help buffer macro slowdown

Fair value S$1.79


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

OSIM strategy and outlook

We invited Mr Peter Lee, CFO of OSIM, to present the group’s strategy and outlook to our trading representatives.

Investment highlights
• For OSIM stores, the group sees strong potential in China due to the rising number of middle-income consumers. Most of these customers pay cash for the chairs rather than through hire purchase. According to the CFO, the country presents another opportunity once the credit card market matures. Currently, OSIM has 270 stores in China and we expect the group to add another 25 in FY12.

• Sales of uDivine App, an improved version of uDivine massage chairs, have been encouraging in Hong Kong where sales have overtaken its predecessor. This is due to the new massage modules and the ability to synchronize with iPhone in terms of entertainment for the new massage chair. Gross margins are maintained in the 68- 70% with pre-tax margins at 18-20%. On market share, OSIM currently produces the most number of massage chairs in the world, according to management.

• Brookstone reported a 45% increase in

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

OSIM final dividend of 1S¢ was declared

TP S$1.59

OSIM reported a 1% YoY growth in 4Q11 earnings to S$17.1m on the back of an 8% YoY growth in revenue to S$142.7m. Stripping out the S$5m one-off asset gain in 4Q10, core earnings grew by 43%. FY11 earnings rose 38% YoY to S$69.1m, on the back of a 9% growth in sales to S$553.7m. This however fell short of our expectations by 8% and 6% respectively largely due to more aggressive store rationalisation which saw the number of OSIM outlets decline by 16 to 592 in FY11. We lower our FY12 sales and earnings by 10% and 8% respectively to take into account further store rationalisation, especially in regards to RichLife which currently has 104 outlets in 17 cities and would be scaled back to focus on seven key cities. Focus going forward would be on store profitability rather than the number of stores hence we expect further margin expansion in FY12. A final dividend of 1S¢ was declared bringing total FY11 payout to 3S¢.

We maintain our BUY call on the stock with a higher TP of S$1.59(previous S$1.55), as we roll over our valuations to 15x FY12F.

OSIM net cash flow of $61mil from operating activities

DMG - TP of S$1.55

OSIM reported a 1% YoY rise in 3Q11 earnings to S$13.1m. Earnings were dragged lower by a one-off S$3.5m tax provision, which otherwise would have grown by 28% YoY to S$16.6m, in-line with expectations. Revenue however is still below expectations coming in at only 66% of our FY11 forecast as YTD number of OSIM outlets has actually declined by 26 from 608 in Dec10 to 582 in Sep11, as management aggressively closed non-performing outlets.

We tweak our revenue estimates lower by 3%/4% for FY11/12F respectively in view of net negative store growth for FY11 and slower store growth for FY12. We also lower our opex assumptions in view of better cost management which results in a marginal +1%/-1% change in our FY11/12F earnings respectively.

In view of the entire retail industry that has de-rated, we lower our target multiple from 18x to 16x accordingly resulting in a new lower TP of S$1.55, providing a 30% upside from last closing. We continue to like the stock for its strong stable of brands and clean balance sheet. Maintain BUY.



AM Fraser

OSIM – Reported $13.1m profit for 3Q

OSIM 3Q net profit rose marginally to $13.1mil from $13mil a year ago. EPS were 1.74 cents, down from 1.94 cents a year ago. OSIM said it has shown positive growth in sales and profitability for 11 consecutive quarters due to a better product mix and higher productivity which resulted in higher profit margins. Revenue for the first nine months this year has grown 9.3% to $411mil compared to the same period last year, with a net cash flow of $61mil from operating activities.