OSIM International - Maybank Kim Eng 2015-11-02: Tea Leaf Readings

OSIM INTERNATIONAL LTD O23.SI

OSIM International - Tea Leaf Readings

We hosted a post-results briefing, where management advised clients to stay the course and ride out downturn.
Management suggested TWG could turn profitable next year due to the build-up in HK and acceleration of franchising.
Reiterate HOLD. Short-term still grim, but 3Q15 likely the trough for 2015. A risk is the loss of TWG shareholding fight.

We hosted a post-results management briefing at TWG Republic Plaza, the first TWG Tea store in Singapore. Highlights below:
- OSIM will keep its retail network intact in order to ride the recovery. It can do this as it has a flexible cost structure where rents and staff costs adjust to slower sales. Our analysis suggests that same-store sales are more than covering rentals in Singapore and HK, the two most expensive cities in Asia.
- Expensive chairs outsold smaller massage items in 3Q15 and the share of total OSIM sales rose to 70% from 60-65%. We are encouraged by this as it suggests OSIM is not losing market share. Further, it also suggests each store can still sell 1-2 high-end chairs a week, which is encouraging in a downturn.
- TWG could turn profitable next year, with HK store-count building up rapidly, and franchising accelerating. We are optimistic on franchising, a low-cost but highly profitable way of expanding TWG’s reach. The Middle-east looks especially promising, while distributorships in the US, Canada, and Australia could be converted to franchises.
- Judgement for OSIM vs. Murjani will be known by early 2016. We would expect legal costs to have peaked in 2015, unless OSIM loses the Singapore case. The worst case scenario is a sell-back of the 16.3% stake. But it would have be a price proportionate to the investments put in by OSIM.

Reiterate HOLD. Near-term outlook still poor, but 3Q15 should have been the trough for this year. We see a risk from the loss of TWG shareholding fight.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-11-02

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.49 Same 1.49