Highlights

• FY14 revenue increased 7% y-y to S$691.1mn while FY14 net profit improved marginally by 1% to S$102.2mn.
• Propose final dividend of 2 cents per share, bringing the full year dividend to 6 cents per share
• Expect more innovative products and TWG store expansion for sustained revenue growth in FY15
• Maintain BUY rating at TP$ 2.25

What is the news?

OSIM announced its full year results on 3 Feb 2015, delivering a full year revenue of S$691.1mn (in-line with PSR FY14 estimates). Gross margin remains superior at 70%. Net profits increased marginally by 1% to S$102.2mn, slightly higher than our full year estimates of S$95.8mn due to lower-than-estimated operating expenses. Geographical sales growth for 4Q14 were flat across the 3 regions, implying the sales growth for core OSIM business declined slightly after taking into account higher sales growth for TWG business. A final dividend of 2 cents per share was proposed, bring the total FY14 DPS to SGD 6 cents. The management guided FY15 capex to be similar to FY14 and TWG new store target to be 15-20 outlets this year.

How do we view this?

One-offs cost to weigh down on profit margin in the near term – OSIM revealed that they could incur more legal costs this year for the two on -going disputes for TWG. We expect the higher legal costs and start-up expenses for the supporting infrastructure for TWG expansion in new cities like Beijing and Shenzhen will continue to weigh on the earnings in the interim. Nevertheless, we estimate OSIM to start materialising returns in the end FY15 or early FY16 upon completion of the start-up facilities and initial stores opened in Shanghai and Taiwan to start to break-even. We are still optimistic on the potential of TWG’s strong contribution to the company’s profitability in the future.

Innovation is the key to maintain the market leadership position – The sales growth for core OSIM business dipped due to weaker business environment in its core markets in FY14. Moving forward, the management will be introducing more innovative products and adopting new approaches for new product roll-outs to strengthen the OSIM brand. For example, OSIM has broken away from the traditional marketing for its latest uHip massager with a daring advertisement and a playful social media strategy to give a young and refresh feel to the OSIM brand. The management disclosed that the sales for new products uHip and uInfinity Luxe were encouraging.

Still positive in China retail market – Though China GDP is estimated to slow to 6.9% in 2015, we think that consumer spending is expected to remain strong. China is now with the world’s largest consumer market. The retail sales growth is estimated to improve to 12.5% this year. With the closing of the income gap between the rich and the poor, there is a rise in the middle-to-high income consumers ready to spend with disposable income. We see OSIM to benefit from the trend of Chinese consumers tuning towards differentiated high quality products in their consumption behaviour.

Investment Actions

We roll over valuations to FY15 and introduce our FY16 estimates. Albeit we expect the higher expenses to curtail the company’s profit margin in the near term, we are still positive on OSIM’s long term outlook for its strong cash position and robust cash generative qualities. Maintain BUY with revised TP$2.25.

Source: Phillip Securities Research - 4 Feb 2015