• 3Q14 top and bottom-line below expectations
• Revenue and earnings for the quarter came in disappointing at S$158mn (+3% y-y) and S$16mn (-28% yoy). YTD revenue, however, still maintained a double growth of 10%.
• Propose interim dividend of 1 cent per share
• Maintain at Accumulate with lower TP of $2.69

What is the news?

OSIM 3Q14 underlying net profit came in at S$16mn, down 28% y-y. Top line growth was at single digit 3% for the quarter. 9M14 net profit of S$74.5mn were below expectation, accounting for 63% of PSR/consensus full year estimates. The top-line sales growth has slowed for this quarter main ly due to the weaker environment, including the reduced sales to Brookstone after change of the management. An interim dividend of 1 cent per share has been proposed.

How do we view this?

The 9M top and bottom-line represented 68% and 63% of our full year forecast respectively. The key reason for the lower earnings this quarter is the higherthan-expected operating expenses from the legal and start-up costs of supporting infrastructure including central kitchen, warehouses and employees for the TWG Tea business expansion. The management has guided that it will take at least 3-4 TWG stores to breakeven. Following the first TWG outlet at Golden Gateway in China, OSIM plans to open 3 more stores in Shanghai and Guangzhou this year and 1 store in Beijing next year. We expect the start-up expenses for the new cities will put pressure on the bottom-line margin for FY14 and FY15. However, the TWG business will grow exponentially with significant earnings contribution once the operating expenses are normalised.

Strengthen financial cash position for future growth - The recent 5 year S$CB issuance came as a surprise and raised concerns among the investors as the abundant cash position of $271mn has yet to be deployed. This triggered the start of the decline for OSIM shares in August. Management explained that CB funding came at attractive terms and will enhance OSIM’s ability to capitalise on future acquisitions when opportunity arises. We understand that the management has been looking at various acquisition opportunities but there have not been any firm deals yet. While we maintain on our positive view on OSIM, we believe the uncertainty regarding fund deployment may continue to weigh on OSIM share price in the near term.

Focus on China tier 1 cities amid weaker business climate – Though business in China has experienced a slight slowdown, OSIM is still optimistic on the business outlook in its largest market long term. The management will aim to focus on the positioning of OSIM and TWG stores in China tier 1 cities where the mass affluent (the main target audience) reside. New upcoming product launches like (1) uInfinity Luxe, which gives a head-to-toe massage experience, and (2)uShape Music, which allows one to sync music to his smart device via Bluetooth, will sustain OSIM’s market leadership position in lifestyle products.

Source: Phillip Securities Research - 29 Oct 2014