OSIM International - 3Q15: Disappointing quarter; multitude of headwinds unlikely to reverse soon

OSIM reported 3Q15 net profit of S$6.2 mn (-73% QoQ, -62% YoY) (9M15 47% of CS FY15E)—disappointing numbers driven by weak top-line growth across the board and a drag from legal fees. Gross margins were resilient, but operating margins suffered.

Due to a very soft retail demand environment, weakness in topline's growth (-11% YoY) was more broad-based than expected, exacerbated by other local reasons in various core markets. Singapore (haze) and Malaysia's (haze/weak currency) performance was weaker than the already struggling North Asia (weak China consumer demand+falling tourist volumes in HK).

Management explained that it is not resorting to short-term price discounts to cushion demand. The main focus is on North Asia, with new TWG store openings in HK and improving profitability of TWG/OSIM in Mainland China. While 4Q should be relatively better, a quick turnaround in demand appears unlikely.

We trim our EPS estimates by 12-29% on weaker top line and margin assumptions. We cut our TP to S$1.35 (from S$1.50) and downgrade to UNDERPERFORM (from Neutral).

Broad-based weakness in retail demand
Management explained that there was broad-based weakness in retail demand across core markets driven by various reasons apart from the weaker macro environment—haze in Singapore/Malaysia, a weaker MYR in Malaysia and falling tourist volumes in HK.

More OSIM store closures, but TWG expansion to continue OSIM—continued to close underperforming stores mainly in China and Malaysia. In China, management will continue to look for new locations if they can get better rental terms in this environment.

TWG—management appear to be toning down store expansion plans in Mainland China into newer cities, with more focus now on making Shanghai profitable. But in HK, management is going full steam—two new stores opened in 3Q and three more expected in 4Q, with a more aggressive presence in the luxury hotel space as well. Management expects more penetration into the Middle East next year.

Technical Analysis
Daily Chart
Gross margins resilient, but operating margins suffer
Management explained that it is not resorting to any short-term price discounts to boost demand, with the focus still on building the brand. (Read Report)

Read Related Reports
1) OSIM International - Downgrade to Hold on back of lacklustre 3Q15 results by Daiwa Capital Markets, published on 28 October 2015

2) OSIM International - Weak outlook by DBS Group Research, published on 28 October 2015

3) OSIM International - Doubly Hit by Haze and FX by Maybank Kim Eng Research, published on 28 October 2015

4) OSIM International - Another low for earnings‏ by OCBC Investment Research, published on 28 October 2015

5) OSIM International - Hunker Down For Now by RHB Research, published on 28 October 2015

6) OSIM International - More stops than starts by CIMB Research, published on 27 October 2015

7) OSIM International - 3Q15 results below forecast by Daiwa Capital Markets, published on 27 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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