OSIM - brand company

OSIM International (AD, TP:S$4.60) - Selling brands, not just chairs
We initiate coverage on OSIM with an Add rating and a S$4.60 target price. We like OSIM for: 1) its high ROEs and consistent free cash flow (FCF) growth, 2) the way its dominant massage chair brand sustains earnings growth, and 3) its new luxury tea brand. We view OSIM as a brand company, and a great proxy for the growing affluent consumer class in Asia. Our blended DCF, P/E and P/BV target price of S$4.60 implies 25x CY15 P/E and 8x P/BV, below its luxury brand peer fair value of 27x P/E and 9x P/BV. Potential catalysts are: 1) signs of sustained earnings growth for massage chairs allaying slowdown fears in China, and 2) the realisation of TWG Tea’s potential. Excellent FCF model The successful running of a brand company results in excellent financials. A&P spending allows OSIM to sell massage chairs for a 70% gross margin while maintaining topline growth of 7% p.a. Our comparison studies show that its margins are not inferior to those of luxury brands in Europe. Focusing on brand retail also means that minimal replacement capex is needed to sustain the business. Free cash flow (FCF) rises in tandem with net profit, with extra cash for investments, even after a 44% FY2013 dividend payout.