Singapore Company Guide

OSIM International Edition 1 Version 1 | Bloomberg: OSIM SP | Reuters: OSIL.SI

Refer to important disclosures at the end of this report

DBS Group Research . Equity

2 Sep 2015

HOLD

AWAITING FOR BLOCKBUSTER PRODUCTS Neutral on the stock. We believe that chair sales are on a decline trend, and this has been the reason for OSIM reporting lower sequential headline sales growth (ex TWG consolidation) for the past eleven quarters. But, this has been priced in. We think that further downside is limited with support from OSIM’s DPS of 6 Scts per year.

Last Traded Price: S$1.465 (STI : 2,882.77) Price Target : S$1.61 (10% upside) Potential Catalyst: Earnings recovery Where we differ: Below on slower growth in FY16F/FY17F Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

Topline weakness. OSIM’s business is predominantly in massage chairs, with at least 60% of sales from OSIM massage products. While TWG is growing and has exciting prospects, we estimate its contribution to group earnings is small at 810%. GNC’s business is also rather stable in nature. Hence, any growth catalyst rests on chair sales. New chairs will need to be blockbusters in order to reverse the declining revenue trend. ASPs for new chairs are also declining, requiring volumes to work harder to attain revenue growth.

Price Relative S$

Relative Index 240 220

2.9

200 2.4

180 160

1.9 140 120

1.4

100 0.9 Sep-11

Sep-12

Sep-13

OSIM International (LHS)

Forecasts and Valuation FY Dec (S$ m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

Sep-14

80 Sep-15

Relative STI INDEX (RHS)

2014A 691 158 132 102 108 13.4 14.2 (4) 4 12.8 6.0 56.3 10.9 10.4 9.5 5.7 4.1 2.6 CASH 28.8

Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

2015F 659 126 105 82 82 10.6 10.6 (21) (25) 10.6 6.0 61.3 13.8 13.8 10.3 7.0 4.1 2.4 CASH 18.0

2016F 710 133 113 89 89 11.5 11.5 8 8 11.5 6.0 66.8 12.8 12.8 9.9 6.3 4.1 2.2 CASH 17.9

2017F 769 142 122 96 96 12.4 12.4 8 8 12.4 6.0 73.2 11.8 11.8 9.3 5.6 4.1 2.0 CASH 17.7

10.8 B: 3

12.0 S: 2

12.9 H: 5

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ASIAN INSIGHTS www.dbsvickers.com ed: JS / sa: JC

Declining sales growth trend. Since 3Q12, revenue growth y-oy on a quarterly basis has declined from +15% to -13% in 2Q15, excluding TWG. This was despite the continued launch of new chairs. Valuation: Our target price of S$1.61 is based on 14x FY16F earnings. OSIM has been expanding very quickly in key markets of Singapore, Malaysia, Hong Kong, China and Taiwan. As such, we see earnings growth as an integral part of OSIM’s fair valuation. Our target valuation of 14x PE is pegged to the stock’s average 3-year historical mean. Key Risks to Our View: Sluggish chair sales would keep earnings turnaround at bay. OSIM will benefit from a topline turnaround and cost recovery. Tepid demand and high opex would impede the turnaround. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Chye Hock Sim (%) Capital Group Companies Inc (%) Free Float (%) 3m Avg. Daily Val (US$m) ICB Industry : Consumer Goods / Leisure Goods

756 1,108 / 785 66.0 5.1 28.9 2.0

VICKERS SECURITIES

Company Guide OSIM International Store count

CRITICAL DATA POINTS TO WATCH 871

900

Earnings Drivers: 5 key markets. OSIM primarily operates in five key markets Singapore, Malaysia, Taiwan, Hong Kong and China - with all other markets indirectly owned and operated.

841

833

860

2014A

2015F

2016F

892

800 700 600 500 400 300

Needs to introduce blockbuster chairs to drive earnings recovery. We estimate that OSIM massage products contribute close to 60% of total revenue. Revenue growth is typically driven by store openings and new products. However, we observed that sales growth (ex TWG consolidation) from 3Q12 to 2Q15 has been declining despite new product launches including uDiva and uInfinity. We therefore believe that OSIM will need to introduce blockbuster chairs to reverse the declining revenue growth trend. Furthermore, lower ASPs from launch of smaller chairs will require stronger sales volumes to drive sales higher. We hence estimate that OSIM will register slower earnings growth of 8% as compared to mid-teens previously.

200 100 0 2013A

Blended sales per store (S$m) 0.88

0.82

TWG is growing but earnings contribution is small. TWG’s development has been exciting, growing from 26 stores in FY13 to 47 stores currently. It has since expanded in new markets including Korea, Taiwan, Macau and China. Going forward, there are plans to open another 4-6 more stores in Hong Kong, Macau and China in the next few quarters. In Hong Kong, besides store presence, it is also seeking to become the exclusive supplier of teas to the luxury hotels segment. However, we estimate TWG’s contribution to group net profit (70% stake and after minority interest) is small at 8-10%. We see near term headwinds from two possible sources. Firstly, the amount and timing of potential legal expenses from ongoing lawsuits in Singapore and Hong Kong is unknown, giving rise to earnings risks. Secondly, China regulations have prevented TWG from operating its two central kitchens in Shanghai and Guangzhou until there are at least five outlets supporting each kitchen. TWG has 3 outlets in Shanghai and 1 in Guangzhou. It is opening 1 more outlet in Shanghai by the end of this year, and may open 1 retail shop in Beijing. We now anticipate a longer breakeven time for the central kitchens which have been built.

0.86

0.83

0.79

0.74 0.70 0.53 0.35 0.18 0.00 2013A

GNC/Richlife deliver stable earnings and positive cashflows. OSIM is the sole franchisee for GNC in Singapore, Malaysia, Taiwan and Australia and also the owner of the RichLife brand in China. This business generally generates stable earnings and delivers positive cashflows. We estimate that GNC and Richlife contribute about 25% to total sales. GNC’s store count has increased from 221 in FY13 to 236 in FY14, while store count of Richlife has rationalised from 24 in FY13 to 2 today, due to licensing challenges in importing supplements.

2017F

2014A

2015F

2016F

2017F

Sales growth has be declining ex TWG consolidation yoy ( %) 20

TWG consolidation

15 10 5 0 (5) (10) (15) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Sales mix by geography America/Africa /Europe/ Middle East/Oceania 7%

North Asia 54%

South Asia 39%

EBIT margins (%) ( %) 20 16 12 8 4 0 07

08

09

10

11

12

13

14

Source: Company, DBS Bank

ASIAN INSIGHTS Page 2

VICKERS SECURITIES

Company Guide OSIM International

Balance Sheet: Net cash of S$216m. The business is generally cashflow positive, generating average operating cashflows of S$100m over the past five years. 1H15’s balance sheet has S$404m of cash, well equipped to make acquisitions. We believe the strength of OSIM’s balance sheet will sustain DPS payout despite the recent earnings volatility. Share Price Drivers: Strong sales of new product launches. We believe sales growth for chairs (ex TWG consolidation) have been declining. The recent quarterly revenue decline of 13% y-o-y is at a 6-year low. Hence, the recent earnings decline has been topline-led, driven by poor sales of massage chairs. If the recently launched uMagic garners a strong reception and books in better than expected sales, we believe this will drive an initial recovery of OSIM’s share price. Now that OSIM owns 8.75% of Trek 2000, the development of a blockbuster product incorporating Trek’s IP in OSIM’s product may well help to boost OSIM’s earnings recovery and share price.

Leverage & Asset Turnover (x) 1.2 0.50 1.1 0.40 1.0 0.30 0.9

0.20

0.8

0.10

0.7

0.00 2013A

2014A

2015F

Gross Debt to Equity (LHS)

2016F

2017F

Asset Turnover (RHS)

Capital Expenditure S$m 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2013A

2014A

2015F

2016F

2017F

Capital Expenditure (-)

Key Risks: Strong reliance on new chair sales to drive turnaround. Despite new chair launches (uDivine, uDiva) in the previous quarters, revenue growth rate ex TWG has continued to decline. We now believe that it will take something different and special for new products such as uMagic to reverse this trend.

ROE (%) 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0%

Litigation cases present unknown earnings risks. Furthermore The two ongoing litigation cases in Singapore and Hong Kong where the costs remain relatively uncertain are two unknowns that could spring negative surprises.

5.0% 0.0% 2013A

2014A

2015F

2016F

2017F

Forward PE Band (x) (x)

Consumer sentiment. OSIM is ultimately a retailer of lifestyle products, and its fortunes depend on discretionary consumption. Poor consumption sentiment will be a drag on its demand while strong consumption cycle will fuel demand for its products. COMPANY BACKGROUND Osim is a retailer and brand owner of healthy lifestyle products. The company is the brand owner manufacturer and retailer for the OSIM line of massage chairs and related products worldwide; a sole franchisee for the GNC chain of nutritional supplement retail stores in Singapore, Malaysia, Australia and Taiwan; and a majority owner of the TWG brand of high end luxury tea cafes and saloons.

25.5

+2sd: 23.8x 20.5

+1sd: 19.4x

15.5

Avg: 15x

10.5

‐1sd: 10.6x

5.5 Sep-11

‐2sd: 6.1x Sep-12

Sep-13

Sep-14

Sep-15

PB Band (x) (x) 8.1

+2sd: 7.86x

7.1

+1sd: 6.6x 6.1

Avg: 5.34x

5.1

‐1sd: 4.09x

4.1 3.1 2.1 Sep-11

‐2sd: 2.83x Sep-12

Sep-13

Sep-14

Sep-15

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 3

Company Guide OSIM International

ey Assumptions FY Dec Store count Blended sales per store (S$m)

Segmental Breakdown FY Dec

2013A

2014A

2015F

2016F

2017F

871 0.74

841 0.82

833 0.79

860 0.83

892 0.86

2013A

2014A

2015F

2016F

2017F

353 250 45

366 279 46

354 261 44

388 273 50

415 303 51

648

691

658

710

769

2013A

2014A

2015F

2016F

2017F

648 (193) 455 (332) 123 0 3 0 3 129 (28) 0 0 102 98 140

691 (205) 486 (351) 135 0 1 2 (6) 132 (30) 0 0 102 108 158

659 (193) 466 (364) 102 0 2 2 0 105 (25) 2 0 82 82 126

710 (207) 503 (394) 109 0 2 2 0 113 (26) 2 0 89 89 133

769 (225) 545 (427) 118 0 2 2 0 122 (28) 2 0 96 96 142

7.6 8.6 6.9 13.0

6.7 13.0 9.8 9.8

(4.7) (20.1) (24.8) (24.0)

7.9 5.5 6.8 8.2

8.3 6.6 8.0 8.0

70.3 19.0 15.7 43.5 17.7 21.9 44.5 278.4

70.4 19.6 14.8 28.8 13.3 16.7 45.7 NM

70.8 15.5 12.4 18.0 9.5 10.6 56.6 NM

70.8 15.3 12.5 17.9 9.8 10.9 52.3 NM

70.8 15.3 12.5 17.7 10.0 11.2 48.4 NM

Revenues (S$ m) North Asia South Asia America / Africa / Europe / Middle East / Oceania Total Income Statement (S$ m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

Source: Company, DBS Bank

ASIAN INSIGHTS Page 4

VICKERS SECURITIES

Company Guide OSIM International

Quarterly / Interim Income Statement (S$ m) FY Dec 2Q2014 3Q2014 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

4Q2014

1Q2015

2Q2015

183 (54) 129 (91) 38 0 0 1 0 39 (9) 0 30 30 43

158 (46) 112 (85) 27 0 0 0 (5) 23 (7) 0 16 21 33

178 (54) 124 (89) 34 0 0 1 (1) 34 (6) 0 27 28 40

150 (44) 106 (88) 18 0 0 0 0 18 (5) 0 14 14 24

159 (44) 116 (88) 28 0 0 1 0 29 (7) 0 22 22 34

5.8 2.6 4.2 2.4

(13.4) (24.1) (29.0) (27.5)

12.3 20.1 26.9 31.1

(15.7) (40.5) (48.6) (51.8)

6.4 44.6 58.2 65.6

70.4 20.8 16.2

70.9 17.0 10.4

69.5 19.2 15.4

70.6 11.7 9.0

72.6 17.4 14.0

2013A

2014A

2015F

2016F

2017F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

25 18 219 291 73 42 12 680

36 18 211 456 72 44 15 852

48 20 201 487 68 41 15 882

60 22 192 522 74 45 15 929

72 24 182 563 80 48 15 985

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

155 107 35 0 39 271 73 680

17 96 43 168 36 438 54 852

17 92 43 168 36 474 52 882

17 99 43 168 36 516 50 929

17 107 43 168 36 566 48 985

(15) 136 22.6 201.2 128.9 1.1 1.4 1.1 CASH CASH 7.4 0.0

(9) 271 22.6 203.0 143.7 0.9 3.7 3.2 CASH CASH 12.7 0.0

(10) 301 23.5 202.5 150.4 0.8 4.0 3.5 CASH CASH 13.5 0.0

(8) 336 22.1 188.8 140.2 0.8 4.1 3.6 CASH CASH 13.5 0.0

(7) 378 22.1 186.8 138.7 0.8 4.2 3.7 CASH CASH 13.5 0.0

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$ m) FY Dec

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 5

Company Guide OSIM International

Cash Flow Statement (S$ m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

2013A

2014A

2015F

2016F

2017F

129 22 (29) (3) 4 (9) 113 (11) (4) (7) 1 16 (4) (36) 5 (7) (2) (41) 6 74 15.1 14.1

132 30 (26) (1) (16) (2) 117 (24) (4) 0 0 4 (23) (45) 134 0 (15) 73 1 168 17.4 12.3

105 31 (25) (2) 1 0 110 (25) 0 0 0 0 (25) (46) 0 0 0 (46) 0 38 14.1 11.0

113 31 (26) (2) (1) 0 114 (25) 0 0 0 0 (25) (46) 0 0 0 (46) 0 43 15.0 11.5

122 31 (28) (2) (2) 0 121 (25) 0 0 0 0 (25) (46) 0 0 0 (46) 0 50 15.9 12.4

Source: Company, DBS Bank Target Price & Ratings History

2.76

S$ S.No .

2.56

1: 2: 3: 4: 5:

2.36 2.16

2

1.96

Cl o s i n g Pri c e 29 Oct 14 1.94 18 Dec 14 2.01 04 Feb 15 2.02 06 May 15 1.74 24 Jul 15 1.54 Da te

Ta rg e t Pri c e 2.59 2.59 1.94 1.82 1.61

R a ti n g Buy Buy Hold Hold Hold

3 4

1

1.76 1.56

5

1.36 Sep-14

Jan-15

May-15

Sep-15

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank

ASIAN INSIGHTS Page 6

VICKERS SECURITIES

Company Guide OSIM International

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months.

ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 July 2015. 2.

DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 31 July 2015.

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.

ASIAN INSIGHTS

VICKERS SECURITIES Page 7

Company Guide OSIM International

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VICKERS SECURITIES