OSIM

Kim Eng on 3 May 2012

Setting the tone for 2012. OSIM is due to announce its 1Q12 results next Monday. We expect the company to kick off a strong year following its robust 2011 results, and set the tone for another stellar year in 2012 with revenue and profit growth in excess of 10% and 20%, respectively.

Growth to be driven by China. We expect sales growth this year to be driven primarily by its outlets in China. Management has guided for a net store opening of 50 outlets in the country (currently about 270 outlets) despite an ongoing store rationalisation programme. On the whole, we expect revenue contribution from North Asia to increase by 15% on the assumption of similar same store sales growth.

China growth moderation not a concern. The Chinese government recently pared the nation’s economic growth target to 7.5% from the 8% goal in place since 2005. We do not think this will have much of an impact on OSIM’s growth prospects as its key target market in China is the top 5% income group, which is unlikely to curb spending habits because of the GDP cut. Besides, the lower target represents a goal to limit exports and capital spending in favour of domestic consumption.

RichLife could turn positive this year. For this business, management will focus on store rationalisation this year, with the strategy concentrated on seven key cities. Much of the rationalisation  cost has already been front-loaded in 4Q11, and we believe there is a possibility that the business will turn positive by end-2012. If so, it would demonstrate OSIM’s retail capability outside of its core massage chair business and would serve as an important stock catalyst, in our opinion.

BUY ahead of results. OSIM’s recent share price weakness provides a good opportunity to buy into the cheapest high-end brand-owner in the region. Other than the rationalisation cost for RichLife, FY11 numbers also included a SGD7m non-cash write-off in investments, as well as an estimated SGD2-3m in one-off tax provisions. This implies that the company may outperform consensus expectations in 2012 and we reiterate BUY with a target price of SGD2.02 (18x FY12) ahead of the upcoming results.