OSIM International - CIMB Research 2015-12-09: Going through some tough times

OSIM International - CIMB Research 2015-12-09: Going through some tough times OSIM INTERNATIONAL LTD O23.SI 

OSIM International - Going through some tough times 

  • OSIM is going through some tough times at the moment. Sales of its core OSIM massage equipment has declined yoy in all five key markets. 
  • Part of the problem is currency. OSIM stuck to a same US$ pricing formula for all its regions. Where the local currency has fallen, local prices have been jacked up. 
  • The real problem is weak income growth and competition. Real income growth in Asia is weak. In China, cheap copycats have spawned in online retail channels 
  • 2015 saw spending on TWG rollout and legal expenses. That should end in 2016. 
  • Our target price is lowered to S$1.13, based on 13x CY17 P/E . 

■ Poor OSIM sales make a weak investment case 

  • OSIM spends on advertising and promotion to create a desire for an aspirational product (massage chair), sell it at premium pricing at 70% gross margins and outsell any competitor’s products on its premium positioning. In good times, slight topline growth had effects of operational leverage. In lean times like now, sales of discretionary consumption products stumble and negative operating leverage weigh in. 

■ Slow China, Malaysia and Singapore 

  • The weak macro retail environment is the real challenge. 3Q group sales was -11% yoy, Ex-TWG, core OSIM sales probably shrank 13-14% yoy. 
  • Management guided that North Asia sales contracted double-digit (mostly China) while the markets that did even worse were ASEAN (Singapore and Malaysia). 
  • Malaysia’s retail pricing jumped on the RM crashed, so the effect of weak sales could last a while longer. 

■ One-off expenses every other quarter, that should end in 2016 

  • Over the last four quarters, there has been additional expenses in the form of legal expenses (two legal cases) and TWG rollout expenses. 
  • We believe that TWG rollout expenses probably peaked in 2015 while legal expenses will taper off by 2Q16. The negatives of extra costs will ease off, but the challenge is still making the topline grow. 

■ Pickup in store closure momentum warns of things to come 

  • Management does prune stores when individual stores are persistently unprofitable. We were previously hopeful when store pruning seems to have stopped in 4Q14-2Q15. 
  • Unfortunately, 3Q’s jump in store closures suggests more stores have struggles to breakeven recently. 

■ No short-term turnaround 

  • Typically, the business model is to launch new products whenever sales of old ones become tired. The touted blockbuster of the year, uMagic, was already launched in midyear. 
  • While it did show initial promise on launch, sales have come crashing down in 3Q. 
  • There are new accessory products (uCrown3, uPamper2, uGallop2) slated for launch ahead, we see these as necessary actions to fight a weak macro tide.

Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
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