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.  

OSIM

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近期发展

• 公司连续第19个季度取得盈利增长，由于推出了新产品及生产力提高。天使二变(uAngel)和天王之王(uInfinity)按摩椅等新产品的销量甚佳，因而继续推动盈利增长。
• 公司目前拥有596家傲胜分店，其中266家是位于中国的45个城市。它拟在未来一年里添加20至30家傲胜分店。其稳固的定位将迎来长期需求及消费者对其品牌的忠诚。
• 公司计划扩大其在新加坡、韩国、泰国及马来西亚的TWG Tea茶座网络，并且最近在上海、台湾和澳门成立了三家子公司，以在这些地区实行增长计划。

主要催化剂

• 公司将能乘上本区域消费不断增长的快车，尤其是高收入家庭料将从2010年的1,100万户增加至2020年的1,800万户，而中国将占此增幅的最大部份。
• 公司按不同市场定价及由名人代言的营销策略将有助它维持现有商机及抢占新商机。
• 随着把其在TWG Tea的股权增至53.7%后，预期TWG Tea将在中期内带来具有影响力的盈利贡献，由于茶座分店每年取得3-5%的销售升幅，并且有利可图。
• 雄厚的现金及偏低的营运资本需求让公司能派发健康的股息、回购股票及在品牌收购良机出现时把握机会。

2014 outlook from brokers

Report:

UBS Singapore 2014 outlook

DB 2014 winners

CIMB 2014 small caps ideas

Few takings:

DBS Group Holdings

In the past 2-3 years DBS has started to leverage its Hong Kong franchise as it taps into demand for inexpensive offshore US dollar-linked funding from Chinese corporates. As a result, 

its China loan book has trebled in three years and now represents around 19% of total loans (China contributed 35-40% of all net new lending in the past three years). This has meant 

strong growth in trade finance business, which has been one of the key drivers of revenue growth. But, coupled with the impact of a prolonged period of abnormally low interest rates 

in Hong Kong and Singapore, this has led to a period of loan yield compression and NIM pressure (the gross loan yield is now 2.6%). We believe DBS is the most levered of the big three 

Singapore banks to rising US rates as it is more skewed towards Hong Kong/Singapore than Singapore/Malaysia/Indonesia. At end-Q313, 83% of its deposit base was denominated in 

US, Hong Kong and Singapore dollars. 

Keppel Corp 

We expect offshore & marine to contribute 65% of Keppel’s 2013 net profit, property about 20% and infrastructure 15%. 2014 earnings visibility is high, in our view, and visibility on 

Keppel‘s offshore revenue is strong. The offshore order book is around S$15bn including Transocean’s US$1.1bn order for five jack ups; and around S$6.4bn of new orders have been 

secured year to date. Meanwhile, we believe a turnaround is likely in the infrastructure division, which incurred heavy losses in 2010-12. In our view, Keppel provides good earnings 

visibility and growth potential through its strong order books and dividend yield of 4%.

Noble Group

Noble provides exposure to an underlying global cyclical recovery, in our view. We believe its earnings are leveraged to underlying commodity prices, and we expect underlying prices to 

stabilise and rise steadily over the coming 12-18 months. We also believe low commodity price volatility benefits commodity trading companies; our commodity team expects less 

underlying commodity price volatility over the coming months, which should support Noble's earnings. In the short term, we expect a rebound in sugar pricing to provide earnings 

support for Noble's agricultural division, and we have a Buy rating on the stock. 

OSIM

OSIM's businesses should benefit from the structurally increasing disposable income in Asia. We forecast 15% earnings growth over the next three years, driven by: 1) recent launches 

and a strong pipeline of new products; 2) store expansion in China and franchise stores; 3) continued focus on profitability; and 4) TWG expansion. With a strong balance sheet (net 

cash) and healthy free cash flow, further special dividends cannot be ruled out. Valuations are undemanding. We see potential for a further re-rating, and the valuation gap to the sector 

should narrow given good execution demonstrated by management.