Phillip Securities Research 2015-07-28: OSIM - Gearing Up For Sustainable Long-Term Growth. Upgrade to BUY.

Gearing Up For Sustainable Long-Term Growth

  • 2Q15 sales grew 6.4% to S$159 mn, while net profit jumped 68.1% to S$21.9 mn, driven by sales of the well-received uMagic 
  • Catalyst for share price appreciation will be a much better second half 
  • Upgrade to “Buy” with lower TP at S$1.83 

Analyst briefing key takeaways 

 Sales remain soft across the board –

  • 1H15 sales were down 12.9% y-o-y, forming 46.1% of our and 45.4% of consensus full-year estimates. 
  • Sales fell in all three geographical regions. Management noted that within the five core markets, Malaysia in particular was hit by the implementation of GST (Apr-15) and by the weaker currency. 

 Costs to weigh on bottom line – 

  • Profits remain vulnerable in the near term. 
  • Net profit fell 40.1%, forming 31.7% of ours and 40.6% of consensus estimates. 
  • Legal fees for TWG’s court case in Singapore (Aug-15) and TWG brand name final appeal in Hong Kong (Jan-16) remains a drag on net profit. 
  • Higher operational and start-up costs of TWG, higher rental and wages also contributed to OSIM’s lower bottom line. 

 Investment mode on and expansion plan on track – 

  • The company is investing heavily in the long term. 
  • TWG expansion plan is on track with four new TWG stores (in Changi Terminal 3, Guangzhou, Shanghai, and Bangkok) opened in the 1H15. It is targeting to open another 11 new stores in the remaining half (Hong Kong, Macau and Shanghai are potential sites for new stores). 
  • On net OSIM store count is expected to remain stable in 2015 despite some store rationalisation. 
  • Meanwhile, Management is also looking into penetrating the luxury hotel market in Hong Kong by offering TWG tea in hotel rooms. 
  • It has also recently acquired minority stakes in HK-based cosmetics company Laboratoires du Palais Royal Limited (tea-extract skincare products) and Singapore-based technology solutions provider Trek 2000 (potential technological synergies). 

 Challenges remain, but optimistic for the 2H15 – 

  • More small-ticket items in the pipeline would be the key driver for 2H15 amid a lacklustre market. 
  • OSIM is expected to launch its new massage chair, uDiva Classic in end of 3Q15 or early 4Q15. 
  • The chair would be priced at the lower range of S$2k, where customer is most price sensitive. 

How do we view this 

  • As uMagic gains traction alongside other product launches, and with the continual nurturing of new TWG stores, we expect a stronger performance in the 2H15. 
  • The new acquisitions will take some time before they become accretive. 
  • On the macroeconomic front, China has showed tentative signs of stabilising, a welcome background against the aggressive TWG expansion plan. 
  • We think OSIM has the potential to reach our FY15e/16e revenue and net profit estimates. 

Investment Actions 

  • We upgrade our “Accumulate” rating to "Buy" with a lower TP of S$1.83

(Soh Lin Sin)