OSIM International

Kim Eng on 27 Jul 2012

In-line with expectations. 2Q12 results were in line with expectations as OSIM achieved another record quarter. 2Q12 net profit was up 20% yoy to SGD22.5m, driven by sales growth of 12% during the quarter. Management declared another interim dividend this quarter, this time a bumper SGD 2 cents/ share (including SGD 1 cent special dividend).

Revenue growth in China and Hong Kong. Despite widespread concerns about weak retail data, revenue from this region was up 12% yoy during the quarter, even without any significant net store increase. This is no mean feat considering many brands are reporting sales declines. The key difference, in our opinion is that the potential market for OSIM is still immense, with a penetration rate of less than 1%. To put into perspectives, OSIM only needs to grow against its base of less than 40,000 massage chairs (by our est) sold in China last year.

Don’t forget GNC is also a very dominant brand. Numbers for GNC are not separately disclosed, but we believe its steady growth was a factor in South Asia revenue this quarter surging 13% yoy. GNC has a dominant market position in Singapore/ Malaysia. Not only is it a beneficiary of increasing health awareness, we also continue to be impressed by its product innovation. This quarter, it is introducing proprietary products “Taut”, a collagen drink for women and “StemC” a placenta of thorough-bred horses from Japan.

Ability to generate cash. The company is sitting on a net cash position of SGD54m, despite having bought back more than 86.5m shares and paying out bumper dividends this year. We now expect full-year dividends to top SGD 5 cents/ share. This is a company that can generate very strong free-cash flow of more than $75m a year (9% free cash-flow yield) in the absence of major investments.

Rare blend of growth and dividends. At the current price, investors are getting an estimated 4% dividend yield, which is very attractive for a growth company and in light of the current market yield compression. We trim FY12-FY14F earnings by 2-5%, accounting for a weaker China retail market as well as adjust for lower number of shares. We now peg our TP of SGD1.90 to 17x FY12F (1x 3-year PEG). Reiterate BUY.