• Invest while stock price is still attractive
• Building TWG store network to strengthen the third leg of growth
• Downgrade to “Accumulate” rating with unchanged TP$2.25, 15.5% upside

Why invest?

Stock price is still attractive - The share price is currently about 30% cheaper than six months ago. The stock plunged in November because of compressed profit margins by the start-up costs from the TWG Tea business expansion and legal costs in 3Q14. On the whole, the business fundamentals remain strong with the company continuing to generate strong operating cash flows with its asset light business model while maintaining superior gross profit margins. We feel that this is a good opportunity for investors to reinvest into OSIM on the current price weakness.

TWG Tea, the third leg of profit growth - OSIM is currently undergoing the expansion phase for its TWG Tea business. The company is trying to replicate the Starbuck’s proven model of premium products sold directly to the customers via a first -rate retail experience, bringing high quality tea to the mass affluent with the aggressive growth of its store units. While the expansion costs should pressure this year’s profitability, significant contribution is expected to materialise as expansion costs dwindle and operating costs normalise.

Premium branding with strong product pipeline to benefit from the rising affluence in China – Even though there are concerns on the slowdown of China economy, one cannot deny that the Chinese are getting richer by the day. With the rise in the middleto-high income consumers ready to spend with disposable income, the consumer spending in China should remain strong. We see OSIM’s premium branding and strong product pipeline to benefit from the changing trend in Chinese consumers’ behaviour tuning towards differentiated high quality products.

Strong net cash position provides the ammunition for future expansion – The company is currently sitting on a net cash position of S$237mn. While there has not been any concrete plan on the capital deployment, we understand that OSIM is prudent when seeking suitable business investment opportunities.

Key Risks

Execution risks to the TWG business expansion plan – Delays on the TWG expansion plan may lower our valuation on OSIM.

Reliance on new product innovation – It is vital that OSIM stay innovative and nimble to the changing consumers’ needs to maintain its market leader position.

Investment Actions

With the recent uptick on the share price, we downgrade our rating to Accumulate with unchanged TP$2.25.

Source: Phillip Securities Research - 3 Mar 2015