CIMB Research 2015-07-24: OSIM International - De-rating provides good upside. Upgrade to ADD.

De-rating provides good upside 

  • Following a disastrous 1Q15, 2Q15 showed very healthy recovery trends that encourage more confidence about the sales prospects of new OSIM products. 
  • At the same time, share price has de-rated significantly to 14.5x CY15 P/E, providing an excellent buying opportunity. 
  • 2Q15 beat expectations with net profit making up 27%/26% of ours and consensus full-year earnings. 
  • We keep our target price of S$2.06(16x CY16 P/E), but upgrade our rating from Hold to Add. 
  • A stronger 2H15, driven by new products, is a potential re-rating catalyst. 

Driven by uMagic 

  • 2Q group sales rose by ~S$10m qoq (+6% qoq), mostly driven by uMagic sales. 
  • OSIM’s business model is very much helmed by new product launches and the accompanying A&P blitz to drive sales of that particular product. The hype eventually wears off and sales will slow. 
  • The uMagic is a mid-priced (S$5,000) massage chair, hitting a price point that OSIM has traditionally done well. 
  • Its phased launch (HK, SG in April, Taiwan, Malaysia in May, China in June) in all five key markets over 2Q15, helped propel a sales recovery. 
  • Given that some of the markets have not had a full quarter impact yet, we are optimistic that 3Q would be even better. 
  • Despite the sales recovery, management was realistic to guide that the retail environment in Asia was soft. 
  • Management conceded that it sold more chairs per store at this price point, in prior launches for this segment (uDivine) and reckoned that part of the reason could be due to a lack of celebrity endorsement for uMagic; they aim to rectify the A&P in 2H15. 

More new products in the pipeline 

  • A slew of new products is planned to keep up sales momentum. 
  • 1H15 already saw uHip, uSqueezAir and uMagic and several new GNC products. 
  • 2H15 will see a toned-down version of its entry price massage chair (uDiva Classic) and other massage accessories. 

TWG is also launching a range of mooncakes. 

  • TWG: Hong Kong could be the next profitable market. The aggressive store expansion for TWG continues. (47 TWG stores now) 
  • With the HK brand name litigation verdict decided (though OSIM is appealing), TWG is opening at least 3 stores in HK/Macau. 
  • We estimate that TWG is currently only profitable in Singapore but suspect HK could be the next market to turn profitable. 
  • OSIM guides that TWG in HK is penetrating into five-star hotels, a channel that is important both for the brand and for sales. 

(Kenneth NG, CFA; Jonathan SEOW)

Source: http://research.itradecimb.com/