OSIM International
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Consumer Discretionary / Singapore OSIM SP Consumer Discretionary / Singapore 10 August 2015 OSIM International OSIM International Target (SGD): 1.88 Upside: 10.3% OSIM SP 7 Aug price (SGD): 1.71 Initiation: the second coming 1 Buy • Premium retailer in the healthy lifestyle segment; share price is 2 Outperform (initiation) down 40.6% since end-July 2014 3 Hold • Net profit should pick up by 15.4% and 9.8% for 2016-17E, 4 Underperform driven by new product launches and the growing tea business 5 Sell • Initiating with Outperform (2) rating and 12-month TP of SGD1.88 (13.5% above the consensus mean) How do we justify our view? ■ Catalysts likely because we are more bullish New products. OSIM launched its on its tea business. latest massage chair, the uMagic, in 2Q15, and the results have been ■ Risks encouraging, with this product The key risks to our positive call Shane Goh boosting overall revenue growth to would be: 1) a poor take-up rate for (65) 6499 6546 6.4% QoQ for 2Q15 and net profit new products, and 2) delays in store [email protected] growth to 66.1% QoQ. In 2H15, OSIM openings. plans to release the uDiva Classic, the sequel to its existing massage sofa. ■ Investment case The uDiva Classic would have a lower The share price of OSIM, a retailer price of SGD1,999 (vs. SGD2,588 for Share price performance of premium lifestyle products such the uDiva). (SGD) (%) 2.9 105 as massage chairs and luxury tea, is down by 40.6% in the past year. 2.5 91 Stronger tea sales and 2.1 78 Poor sales in Asian markets and a profitability. We expect TWG Tea contraction in its operating margin, 1.8 64 to be OSIM’s fastest growing 1.4 50 have resulted in OSIM’s quarterly segment in 2014-17E, driven by: 1) Aug-14 Nov-14 Feb-15 May-15 net profit declining by 0.7-53.1% new store openings, and 2) higher OSIM Inter (LHS) Relative to FSSTI (RHS) YoY over the same period. Investors corporate sales. Apart from delays in have been asking whether and when Beijing, TWG Tea looks on track to 12-month range 1.44-2.85 its earnings will bottom out. hit its 2015 target of 15 news stores. Market cap (USDbn) 0.96 3m avg daily turnover (USDm) 2.34 In our view, OSIM should see a Management said that, overall, the Shares outstanding (m) 779 Major shareholder Mr. Ron Sim (65.6%) steady improvement in its earnings TWG Tea business was profitable in trajectory from 2016, led by both the 1H15, propped up by South Asia. We Financial summary (SGD) launch of new versions of its popular expect profitability to improve in massage chair and greater Year to 31 Dec 15E 16E 17E 2016E, underpinned by: 1) a third of Revenue (m) 652 722 768 diversification/penetration of its its stores entering the post-gestation Operating profit (m) 110 129 142 premium tea business. We forecast period, and 2) better scale Net profit (m) 87 101 111 2016-17E net profit growth of 9.8- economies. Core EPS (fully-diluted) 0.112 0.130 0.142 15.4% YoY, as we expect sales to EPS change (%) (12.5) 15.4 9.8 Daiwa vs Cons. EPS (%) 4.1 8.1 10.7 rebound from 2016, after falling by ■ Valuation PER (x) 15.2 13.2 12.0 5.6% in 2015E. We expect an Our 12-month TP of SGD1.88 is Dividend yield (%) 3.5 3.5 3.5 earnings recovery in 2016 to be the based on 2016E PER of 14.5x DPS 0.060 0.060 0.060 PBR (x) 2.8 2.5 2.2 key share-price catalyst, and (OSIM’s past 5-year mean). Our accordingly initiate coverage with an EV/EBITDA (x) 8.4 7.0 6.0 2015-16E EPS are 4.1% and 8.1% ROE (%) 19.6 20.9 20.5 Outperform (2) rating. ahead of the Bloomberg consensus, Source: FactSet, Daiwa forecasts See important disclosures, including any required research certifications, beginning on page 37 Consumer Discretionary / Singapore OSIM SP 10 August 2015 Contents Initiation: the second coming ........................................................................................................ 6 Brief company history ................................................................................................................. 6 Investment thesis ........................................................................................................................ 6 Product launches expected to drive sales recovery .................................................................... 8 Tea business brewing nicely ...................................................................................................... 12 Consumer feedback: what goes into buying a massage chair? ................................................. 14 Industry competitiveness ........................................................................................................... 16 Financial position ....................................................................................................................... 18 Positive FCF model .................................................................................................................... 18 Assumptions .............................................................................................................................. 20 Valuation ................................................................................................................................... 23 Risks to our call ......................................................................................................................... 25 Company background ............................................................................................................... 26 OSIM .......................................................................................................................................... 27 TWG Tea .................................................................................................................................... 29 ONI Global ................................................................................................................................ 32 Minority stakes .......................................................................................................................... 32 SWOT analysis .......................................................................................................................... 33 Management ............................................................................................................................. 33 Shareholding structure ............................................................................................................. 34 - 2 - Consumer Discretionary / Singapore OSIM SP 10 August 2015 1 Buy How do we justify our view? 2 Outperform (initiation) 3 Hold Growth outlook 4 Underperform Valuation 5 Sell Earnings revisions OSIM: total store count Growth outlook We expect OSIM’s net profit to recover from 2016, 1,000 10 16 26 driven by 2 catalysts: 1) new product launches, and 2) 43 58 68 78 new store openings for TWG Tea. OSIM launched its 800 251 270 245 latest massage chair, the uMagic, in 2Q15 and is looking 253 238 220 223 226 188 to release the successor to its massage sofa, the uDiva 600 Classic, in 2H15. 400 603 529 586 577 590 561 560 565 570 We also expect a strong contribution from TWG Tea, set 200 to be OSIM’s fastest growing segment over 2015-17E, driven by new store openings. Management aims to 0 open 15 new TWG Tea stores in 2015 north and south 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Asia. It has opened 4 so far, with 11 more in the pipeline OSIM RichLife/GNC TWG Tea for 2H15. Source: Company, Daiwa forecasts OSIM: 12-month forward PER bands Valuation We initiate coverage with a 12-month target price of 12M forward PER(x) SGD1.88, based on 2016E PER of 14.5x (equal to 30 OSIM’s past 5-year mean PER). Our target price offers 25 potential upside of 10.3% from current levels, and is +2 stdev 13.5% above the consensus average. The street is mainly 20 +1 stdev neutral on OSIM (Buys: 3, Hold: 5, Sell: 1). 15 Mean -1 stdev 10 -2 stdev 5 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, Daiwa OSIM: Bloomberg consensus EPS forecasts (SGD) Earnings revisions The Bloomberg consensus has lowered its 2015-16E EPS 0.25 for OSIM by 38.3% and 40%, respectively, since the company announced (on 28 October 2014) its first YoY 0.20 decline in net profit in 24 quarters for 3Q14. We believe this is one factor causing the decline in its share price 0.15 since then. Our 2015-16 EPS forecasts are 4.1% and 8.1% above 0.10 those of the Bloomberg consensus because we think we are more bullish on the TWG Tea business contributing 0.05 to the bottom line. We believe the addition of our Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 numbers to the consensus numbers should result in a EPS Adjustments 2015 EPS Adjustments 2016 technical upward adjustment in the consensus 2015-16 Source: Bloomberg forecasts. - 3 - Consumer Discretionary / Singapore OSIM SP 10 August 2015 Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Total number of stores 854 866 846 861 842 838 856 874 OSIM stores 603 586 577 590 561 560 565 570 RichLife/GNC stores 251 270 253 245 238 220 223 226 TWG Tea stores 010162643586878 Revenue per store (SGD '000) 648 644 703 759 812 816 852 888 Gross margin (%) 65.3 68.9 70.0 70.3 70.4 70.6 70.8 71.0 Profit and loss (SGDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E North Asia 298 317 335 353 366 357 368 384 South Asia 169 205 230 250 279 281 303 330 Other Revenue 42 31 37 44 46 14 51 54 Total Revenue 509 554 602 648 691 652 722 768 Other income 15 13 15 57 19 15 14 15 COGS (176) (172) (181) (193) (205)