OSIM INTERNATIONAL LTD
O23.SI
OSIM International - More stops than starts
- 3Q15 profit (S$6.2m) way below expectations. It was particularly disappointing after the prior quarter’s rebound hinted at decent sales momentum from uMagic.
- There was a cost blip (S$4m of legal expense relating to the TWG founder case) booked in 3Q, but that alone did not explain the very poor 3Q core profitability.
- Poor massage chair sales was to blame. Quarterly sales of S$142m (-11% yoy) was the worst in four years. North Asia sales fell double-digit, SE Asia did even worse.
- A series of stop-starts. New products were there in 3Q but sales did not materialise.
- We cut FY15F EPS 34%. Our target price (16x FY17 P/E) drops a lower quantum only on effects of share buybacks and TP rolling forward. Downgrade to Reduce. (TP S$1.40)
Poor OSIM sales leave a bad taste to the investment thesis
- Since OSIM’s first bad quarter in 3Q14, four quarters of stop-start recoveries had ensued. In previous quarters, a bad quarter was explained by cost blips or lack of new products.
- In 2Q15, uMagic, a potential blockbuster product was launched and showed promise. 3Q15 was supposed to see uMagic’s sequential sales momentum carry on; it did not. Taken in this context, poor 3Q sales achieved was particularly disappointing.
Some one-offs in 3Q15, but that was not entirely to blame
- 2015 was expected to carry the burden of TWG’s rollout expenses and legal expenses pertaining to two legal cases. OSIM incurred S$7m legal expenses over 9M15, of which S$4m was incurred in 3Q15 alone. The case against the TWG founder in Singapore has concluded and is pending judgement. The HK appeal case is due for hearing in Jan 16. Backing out these legal expenses did not make the bottom line any more respectable.
China is slow, Malaysia & Singapore are worst performing markets
- The weak macro retail environment is the real challenge. 3Q15’s group sales was -11% yoy. Ex-TWG, core OSIM sales probably shrank 13-14% yoy.
- Management guided that North Asia sales contracted double-digits (weak China), but Malaysia and Singapore did worse. Malaysia, in particular, suffered as OSIM stuck to its standard US$ transfer pricing policy and products sold in Malaysia would have seen retail prices jump 14%.
Pick-up in store closure momentum warns of things to come
- OSIM’s policy is to maintain premium pricing and gross margins, building a brand in the long-term. Unfortunately, that strategic goal in the face of weak Asian currencies and weak real income growth, is causing a huge dent in chair sales. Management does prune stores when individual stores turn unprofitable.
- We were previously hopeful when store pruning seems to have stopped (4Q14-2Q15). Unfortunately, 3Q’s jump in store closures (14 stores, -2.5%) suggest more stores have struggled to breakeven recently.
Little hope of a turnaround in 4Q15 and 1Q16
- There are new accessory products (uCrown3, uPamper2, uGallop2) slated for launch ahead, but we think there is little hope of a turnaround near-term.
- Store closures are foreboding. Its potential blockbuster product did not do its magic in 3Q. Haze in Southeast Asia will make discretionary retail sales more difficult, while 1Q16 could yet carry a slightly extra burden of legal expenses again. There will be more stops than starts.
Kenneth NG CFA
CIMB Securities
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Jonathan SEOW
CIMB Securities
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http://research.itradecimb.com/
2015-10-28
CIMB Securities
SGX Stock
Analyst Report
1.40
Down
2.06
