OSIM

UOBKayhian on 8 May 2014

VALUATION

• Maintain BUY with a target price of S$3.50. Our target price is derived from our dividend discounted cash flow model and pegged at its 3-year historical PE of 14.8x to 2015F PE.

FINANCIAL RESULTS

• OSIM reported 1Q14 net profit of S$29m (+15%) yoy, the 21st consecutive quarter of record profit. Revenue increased 15% yoy to S$173m as products such as uInfinity, uDivine and uAngel drove sales in the health and massage chair segment. Operating EBITDA rose 22% yoy to S$42m with EBITDA margin improving to 24.3% from 22.5% in 1Q13. As at 31 Mar 14, OSIM had cash and cash equivalents and fixed income investment of S$298m. The company is pleased to recommend an interim dividend of 1 S cent per share.

OUR VIEW

• We expect OSIM’s core business to continue registering top-line growth of 10% and bottom-line growth of 15%. TWG Tea should see exponential growth via expanding its tea boutiques and improving operating margins through greater economies of scale. Management is also keen to grow TWG Tea’s revenue to achieve S$1b in the next 10 years. (CAGR: 35%)
• OSIM only launched uDiva in 2Q14 and management is very optimistic on its sales outlook. The upgraded version of the massage sofa’s price is S$2,588 and with a 36-month interest-free installment plan, the monthly repayment is slightly more than S$70/month, an attractive price point for the mid-income consumer, in our view. OSIM’s strategy is to broaden its customer base and attract first-time users for OSIM products and eventually convert them to trade up for a high-end chair in 3-5 years’ time.
• TWG Tea will be the icing on the cake. We infer that TWG’s net profit contribution to OSIM has yet to materialise due to the initial setup costs of TWG corporate offices and central kitchens in every country. The group ended the quarter with 30 outlets and OSIM would like to increase this number to 45 this year in Taiwan, Hong Kong and China. In Singapore, the company will start operations in Changi Airport terminals 1 and 3 by the end of the year and OSIM has also held a soft launch for the store at Breeze Centre (微風廣場) in Taiwan and plans to eventually launch in Taipei 101 by June.