• Achieved 21 consecutive quarters of profit growth
• 1Q14 Revenue reported at S$173mn (+15% y-y) and net profit at $29mn (+15 % y-y) driven by stronger growth from the South Asia region
• Propose interim dividend at 1 cent per share
• Announce call option notice date to be 8 May 2014 for the convertible bonds
• Expect stronger sales in coming quarters with the launch of new flagship product uDiva and TWG store expansion
• Maintain at Accumulate with raised TP to $3.15

What is the news?

1Q14 results revealed revenue at $173mn and net profit at $29mn, an increase of 15% y-y, driven by OSIM brand products as well as TWG Tea. Revenue increased for all 3 regions y-y, with particularly strong growth in the South Asia region (increase from 57mn in 1Q13 to 73mn in 1Q14, 28% y-y). An interim dividend of 1 cent per share has been proposed for this quarter.

How we view this

1Q14 results were within our expectations. The revenue for this quarter was driven mainly by continued momentum in uInfinity, uAngel and uShape. However, we expect to see the new flagship product uDiva to contribute strongly to the sales in coming quarters. OSIM uDiva is a triple enjoyment launcher-sofamassager chair which encompasses a distinctive 3D Power-Ball massage technology at an introductory price of $2588. It comes with 6 massage program with its signature neck & shoulder massage that employs feng chi acupressure points to relieve headache and stiff neck. Riding on the Korean wave in Asia, OSIM has engaged Korea superstar Lee Min Ho as the new endorser. Currently, OSIM had launched uDiva in Singapore, Hong Kong and Taiwan and aims to launch the new product in China soon. We are optimistic that the new flagship product uDiva will build on the success of its predecessor uAngel with its compact design, unique features and cutting-edge technology to reach a wider spectrum of customers and be a key revenue driver in 2014.

TWG Tea network expansion is on track to meet the target of 45 stores in FY14. There are currently 33 TWG stores and management has divulged that the new outlets are performing well. Taiwan had opened its first store at Breeze in 1Q14 and is scheduled to open the second store at Taipei 101 next month. OSIM plan to open 2 TWG stores in China (1 in Guangzhou and 1 in Shanghai) next quarter. The expanded channel network will propel higher revenue contribution from the TWG Tea business.

OSIM has announced the call option notice date to be 8 May 2014. Currently, more than 30% of the bonds had been converted and we believe there will be full conversion of the convertible bonds before the Option Redemption Date 5 July 2014 since the exercised price $1.87 is much lower than the current share price. Estimating OSIM’s FY14 net cash position at be approximately $285mn, OSIM will likely be on a hunt for acquisitions of deep value brands to add on to its portfolio. Moving forward, OSIM will continue with its efforts on the expansion of TWG stores across Asia, new product launches and optimization of operating metrics, especially in China, to propel the top-line and bottom-line growth.

Investment Action

We increase our EPS estimates by 3-5% for FY14 and FY15 on anticipated higher sales volume and better operating metrics. Given the strong balance sheet with a cash war chest of $285mn for acquisitions of valuable brands and the stable growth momentum on the back of TWG’s rapid network expansion and strong marketing efforts of new product launches, we feel there is still room for upward share movement. Maintain Accumulate rating with raised fair value to $3.15 based on DCF valuation. Our target price implies FY14E P/E of 20x, attractive versus OSIM’s current valuation of 18.5x P/E.

Source: Phillip Securities Research - 7 May 2014