OSIM International

UOBKayhian on 28 June 2012

Investment highlights
· For OSIM stores, the group sees strong potential in China due to the rising number of middle-income consumers. Most of these customers pay cash for the chairs rather than through hire purchase. According to the CFO, the country presents another opportunity once the credit card market matures. Currently, OSIM has 270 stores in China and we expect the group to add another 25 in FY12.
· Sales of uDivine App, an improved version of uDivine massage chairs, have been encouraging in Hong Kong where sales have overtaken its predecessor. This is due to the new massage modules and the ability to synchronize with iPhone in terms of entertainment for the new massage chair. Gross margins are maintained in the 68-70% with pre-tax margins at 18-20%. On market share, OSIM currently produces the most number of massage chairs in the world, according to management.
· Brookstone reported a 45% increase in EBITDA to US$23.3m for FY11 due to improved sales. The new president and CEO for Brookstone, Stephen Bebis, hopes to list the business in three years. Bebis has held senior positions at various retailers in the US and Canada, including Golf Town, Sears and Grossman’s Lumber. To recap, OSIM has written off Brookstone’s value to zero and any listing is a potential catalyst to OSIM’s share price.
· TWG Tea is expanding aggressively with tea salon and boutiques earmarked to open in Bangkok’s Emporium, Dubai’s Dubai World and Malaysia’s Pavilion. TWG is being sold in many of the 5-star hotels in the region as well as in the first- and business-class segments of Singapore Airlines.
· On earnings outlook, the group remains optimistic as it enters 3Q12 even though the quarter is traditionally a low season for the OSIM.

Valuations
· Maintain BUY and target price of S$1.61, pegged to its 3-year historical PE of 15x. Currently, the stock is trading at 10.6x 2012F consensus earnings with a PEG of 0.60x.