OSIM International

OCBC on 14 Sept 2012

We opine that one of OSIM International’s (OSIM) core strengths lies in its ability to constantly drive its product innovation. Coupled with its keen focus on improving its productivity and rationalising non-performing outlets, we believe that these would allow OSIM to buffer the macroeconomic slowdown. However, we ease our FY12/FY13 revenue estimates by 1.1/2.2% and PATMI projections by 0.9%/2.2% as we input more conservative assumptions. Since we highlighted OSIM as a possible laggard play during our 27 Jul 2012 report, its share price has outperformed the STI by 13.1ppt. We still see value in OSIM’s current share price despite our reduced forecast. Maintain BUY, with a revised fair value estimate of S$1.79, versus S$1.82 previously (still based on 14.3x blended FY12/13F EPS).

Keeping up its new products innovation drive
We opine that one of OSIM International’s (OSIM) core strengths lies in its ability to constantly drive its product innovation. This has allowed the group to enjoy gross margin expansion (FY10: 65.3%; FY11: 68.9%; 1H12: 70.2%) from a more favourable product mix, while enhancing its brand profile with its novel new products with fresh design concepts and better functionality. During 3Q12, OSIM launched the uDivine App massage chair, an improved version from its earlier uDivine model. This chair enables wireless connectivity to Apple Inc.’s mobile devices; hence users can listen to ambient music while having an array of 13 massage programmes to choose from.

Not immune to macro slowdown, but focusing on margin growth
Although we remain cognisant of the concerns over the slowdown in China’s growth engine which could affect consumers’ discretionary spending, we believe that management would continue to improve its productivity and rationalise non-performing outlets besides its innovation drive to mitigate this. OSIM’s entrenched presence and experience in China would also allow it to make more efficient and accurate operational decisions, in our opinion. Hence we only make some minor adjustments to our FY12 estimates (revenue: -1.1%; PATMI: -0.9%) and also ease both our FY13 revenue and PATMI forecasts by 2.2% as we input more conservative assumptions.

Reiterating our BUY rating
We highlighted OSIM as a possible laggard play during our 27 Jul 2012 report. Since then, its share price has appreciated 13.9% (even after going ex-div), strongly outperforming the STI by 13.1ppt. We still see value in OSIM’s current share price despite our reduced forecast. The stock trades at 11.3x and 10.3x FY12F and FY13F PER, respectively, while offering a projected EPS CAGR of 13.5% from FY11-13F and ROE of 44.1% (FY12F). Maintain BUY, with a revised fair value estimate of S$1.79, versus S$1.82 previously (still based on 14.3x blended FY12/13F EPS).