OSIM International - Initiation: the second coming


Premium retailer in the healthy lifestyle segment; share price is down 40.6% since end-July 2014

• Net profit should pick up by 15.4% and 9.8% for 2016-17E, driven by new product launches and the growing tea business

Initiating with Outperform (2) rating and 12-month TP of SGD1.88 (13.5% above the consensus mean)

Investment case
The share price of OSIM, a retailer of premium lifestyle products such as massage chairs and luxury tea, is down by 40.6% in the past year. Poor sales in Asian markets and a contraction in its operating margin, have resulted in OSIM’s quarterly net profit declining by 0.7-53.1% YoY over the same period. Investors have been asking whether and when its earnings will bottom out.

In our view, OSIM should see a steady improvement in its earnings trajectory from 2016, led by both the launch of new versions of its popular massage chair and greater diversification/penetration of its premium tea business. We forecast 2016-17E net profit growth of 9.8- 15.4% YoY, as we expect sales to rebound from 2016, after falling by 5.6% in 2015E. We expect an earnings recovery in 2016 to be the key share-price catalyst, and accordingly initiate coverage with an Outperform (2) rating.

Catalysts
New products. OSIM launched its latest massage chair, the uMagic, in 2Q15, and the results have been encouraging, with this product boosting overall revenue growth to 6.4% QoQ for 2Q15 and net profit growth to 66.1% QoQ. In 2H15, OSIM plans to release the uDiva Classic, the sequel to its existing massage sofa. The uDiva Classic would have a lower price of SGD1,999 (vs. SGD2,588 for the uDiva).

Stronger tea sales and profitability. We expect TWG Tea to be OSIM’s fastest growing segment in 2014-17E, driven by: 1) new store openings, and 2) higher corporate sales. Apart from delays in Beijing, TWG Tea looks on track to hit its 2015 target of 15 news stores.

Management said that, overall, the TWG Tea business was profitable in 1H15, propped up by South Asia. We expect profitability to improve in 2016E, underpinned by: 1) a third of its stores entering the post-gestation period, and 2) better scale economies.


Technical Analysis
Daily Chart
Valuation 
Our 12-month TP of SGD1.88 is based on 2016E PER of 14.5x (OSIM’s past 5-year mean). Our 2015-16E EPS are 4.1% and 8.1% ahead of the Bloomberg consensus, likely because we are more bullish on its tea business.

Risks
The key risks to our positive call would be:

1) a poor take-up rate for new products, and

2) delays in store openings. (Read Report)

Source : Daiwa Capital Markets

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