• Poor sales in smaller products
• Stable core massage chair sales
• Challenging retail scene

2Q15 results within expectations

OSIM International Ltd (OSIM) saw an in-line set of 2Q15 results. Revenue fell 13% YoY to S$159.5m, forming 23% of our FY15 forecast. This was due to poorer sales in smaller products, while somewhat cushioned by the launch of uMagic in Singapore, Hong Kong and Taiwan this quarter. As usual, legal costs and generally higher rental costs resulted in PATMI being down 24% to $22.5m, making up 24.2% of our fullyear estimate. OSIM declared an interim dividend of 2 S-cent/share.

Take-up for new chair uMagic seems acceptable on a quarterly basis

In a bid to review the take-up for uMagic, we take a look at last year when OSIM launched uDiva in the same three markets in late Mar, and overall 2Q14 sales had grown by $10.1m/5.8% QoQ. uDiva’s introductory price point was S$2,588 (uMagic: S$4,988) and it was endorsed by popular Korean actor Lee Min Ho (uMagic: no celebrity endorsement yet).

All considered, with a similar increment amount in sales of ~S$9.7m for 2Q15 QoQ, and on management’s guidance that volume growth for massage chairs were better YoY, we believe uMagic’s take-up and contribution this quarter is acceptable.

Downside risks remain for 2H15

We note that uMagic was launched in China from Jun onwards, and product innovation is set to continue with more products in the pipeline for the year ahead, coupled with management’s marketing plans for uMagic. The group also plans to open a handful of TWG Tea stores in Hong Kong and Macau by this year, while aiming to gain a foothold in luxury hotels there as well.

However, given the persistently soft retail scene in the group’s core markets, there could be room for disappointment from weaker-than-expected sales performance. Downside risk could also arise from repercussions due to on-going legal disputes, with the next case to be held in Aug.

FV reduced; Maintain HOLD

We have reduced our FY15/16F estimates to a more reasonable level and derived a new FV estimate of S$1.52 (previous: S$1.87). While OSIM’s price has reached a 52-wk low of S$1.415, we could see more downside ahead and opt to keep our HOLD rating on the stock.

Source: OCBC Research - 24 Jul 2015