OSIM International Ltd Don t panic, just need for a Massage

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1 OSIM International Ltd Don t panic, just need for a Massage SINGAPORE CONSUMER RESULTS Exciting year ahead with product pipeline filled and scheduled. Attractive dividend yield. Declared final dividend of 2 cents per share as expected. Lower TP from S$1.44 to S$1.35 but maintain Buy rating. Results at a glance Earnings below expectation. Despites 4Q15 sales were better-than-expectation, net profit was 55% off our expectation due largely to lower than expected gross margins expansion, higher legal costs as well as $5.6m loss on deconsolidation of ONI Australia. Results at a glance (SGD mn) FY15 FY14 y-y Comments Revenue Weak demand across the board EBITDA % Legal costs Profit before tax % Three new TWG start ups Profit after tax % Higher tax on Taiwan GNC's maiden profit remittance Interim dividend per share (cents) 6 6 Source: Company, Phillip Securities Research (Singapore) Analyst briefing key takeaways Tense time on challenging macro landscape. Soft demand across the core countries, sales FY2015 was down 1. Stable gross margin despite a challenging year, remains a positive cash flow generative business. One-off expenses stretched profit growth into a downward pose for If adjusting for deduction of one-off expenses for the year: (i) $10.1m for TWG Tea legal expenses in HK and SG; and (ii) $5.6m loss on deconsolidation of ONI Australia, EBITDA could have held up above $100m mark (at $107.7m, or an EBITDA margin of 17%). New blockbuster massage chair later in 2016, with other small ticket items launching soon. The Group would continue to (i) invest for growth supported by a strong balance sheet; and (ii) invest in new innovative products and marketing dollars to generate demand. How do we view this? Lesser compression from the plaguing legal burden and the deconsolidation of ONI Australia which could save up to $3.5m a year would loosen up the Group s budget. The saved cash flow and expenses could be invested to create future growth. Attractive dividend yield offers a relief to investors. No official dividend policy but management shared that it would strive to maintain annual dividend of 6 cents per share for FY16, translating to an attractive yield of c.6%. Investment Risks Global economy slowdown faster than expected Prolonged legal case Change of consumer behavior Investment Actions Facing current sluggish environment while taking into account of its latest expansion plan, we made amendments to store counts and revised downward FY16e earnings by 16% to S$54 mn, which would translate to a 15x FY16E PER. We maintain Buy rating with a revised TP of S$1.35, change WACC from 8.8% to 9% and reduce terminal growth from 2.8% to 1.8% (the last ten years average inflation rate in Singapore). 1 February 2016 Buy (Maintain) LAST DONE PRICE FORECAST DIV TARGET PRICE TOTAL RETURN COMPANY DATA O/S SHARES (M N) : 742 M ARKET CAP (USD mn / SGD mn) : 529 / WK HI/LO (SGD) : 2.1 / M Average Daily T/O (mn) : 2.43 MAJOR SHAREHOLDERS (%) CHYE HOCK SIM 68.6% CAPITAL GROUP COM PANIES INC 5.2% M ORGAN STANLEY PRICE PERFORMANCE (%) 2.8% 1M T H 3 M T H 1Y R COM PANY (6.0) (24.7) (45.6) STI RETURN (8.75) (11.96) (19.76) PRICE VS. STI Source: Bloomberg, PSR KEY FINANCIALS SGD M N F Y 13 F Y 14 F Y 15 F Y 16 F Revenue EBITDA (adj.) NPAT (adj.) EPS (S Cents) PER, x (adj.) P/BV, x DPS (S Cents) Div Yield, % 3% 3% 3% 6% ROE, % 43% 29% 12% 13% Source: Company Data, PSR est. Valuation Method DCF (WACC:9.; Terminal g: 1.8%) Soh Lin Sin ( ) Investment Analyst sohls@phillip.com.sg SGD 1.02 SGD 0.06 SGD % 0.60 Feb-15 May-15 Aug-15 Nov-15 Feb-16 OSIM SP EQ UITY FSSTI index Page 1 PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0029

2 Financial Highlights Figure 1: 4Q2015/ FY15 Results (SGD mn) 4Q15 4Q14 y-y FY15 FY14 y-y Comments Revenue % Weak demand across the board EBITDA % % Legal costs Profit before tax % % Three new TWG start ups Profit after tax % % Higher tax on Taiwan GNC's maiden profit remittance Interim dividend per share (cents) Source: Company, Phillip Securities Research (Singapore) Double whammy when combined with an economic slowdown in the region, the Group incurred two large one-off expenses: a. $4.3m legal fees in 4Q15 for TWG Tea legal cases, totaling to $10.1m for the full year of Nonetheless, the Management shared that pressure legal costs should significantly subside this year. b. Bit the bullet to deconsolidate ONI Australia. A one-off $5.6m loss (comprising the loss on deconsolidation of $2.9m and loss arising from administration of $2.7m) when ONI Australia (a subsidiary of ONI Global) entered into voluntary administration at the end of ONI Australia s average operating loss for the last 3 years was about $3.5m per year. Accordingly, ONI Global will exit the Australian nutrition market and will incur no further operating losses in the future. Nonetheless, gross margin improved by 1ppt despite the meek outlook. Wages and rental expenses rose in However, the management noted that the meek macro environment could ease up the tight labor and rental markets. Strong cash flow generation would support its growth plan. Cash & cash eq. and Fixed Income Investments as at 31 Dec-15 at $397m (net $211m). Figure 2: Revenue, EBITDA and PATMI Figure 3: Margins S$' , , , , , , ,000 Revenue EBITDA Net Income, reported Gross Operating Net 100, FY12 FY13 FY14 FY15 FY16e FY17e FY12 FY13 FY14 FY15 FY16e FY17e Source: Company, PSR est. Source: Company, PSR est. Page 2 PHILLIP SECURITIES RESEARCH (SINGAPORE)

3 Figure 4: Cash Positions Figure 5: EPS and Dividend per Share S$' , , , , , , , ,000 50,000 - Cash generated from ops CCE, end FCF FY12 FY13 FY14 FY15 FY16e FY17e 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 S$' EPS, reported DPS FY12 FY13 FY14 FY15 FY16e FY17e S$Cents Source: Company, PSR est. Source: Company, PSR est. On track with expansion and store rationalization plan Figure 6: Store Count as of 31 Dec-15 Region 31-Dec Sep Jun Mar Dec-14 North Asia OSIM South Asia Rest of world Subtotal GNC/RichLife TWG Tea Total Total Growth (%QoQ) Source: Company, PSR -3.21% -2.18% -1.19% -0.59% 1.08% a. OSIM The management shared that it would continue to target new strategic outlets while rationalizing underperforming ones. b. GNC/ RichLife Drop in store count mainly due to ONI Australia deconsolidation; while its nutrition businesses in the South Asia remain strong. Taiwan the next focus. GNC Taiwan posted its first operating profit in FY2015. The management is hopeful for Taiwan market to evolve into one of its key market for its GNC business (and not just in the OSIM segment), with the help from the freed up management team from ONI Australia. Target to open 5 to 8 new outlets this year. c. TWG Tea: Three new stores were opened during the last quarter of 2015 two in Hong Kong (Elements and Pacific Place), and one in Macau (Four Seasons). Focus to grow in North Asia, particularly in CN, HK and Taiwan. Target to open 15 to 20 outlets this year and are creating new lines of luxury tea. With encouraging response, the Group will continue its strategy to penetrate the luxury hotel market. Page 3 PHILLIP SECURITIES RESEARCH (SINGAPORE)

4 Figure 7: Global Network of of Outlets (As of 31 Dec-15) Figure 8: Global Network of of Outlets TWG Tea 6.6% GNC/RichLife 25.2% OSIM 68.2% North Asia 65.5% South Asia 26.8% RoW 7.7% % -0.59% TWG Tea GNC/RichLife OSIM Total Growth (%QoQ) -1.19% -2.18% -1% -2% -3% -3.21% -4% Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 2% 1% Source: Company, PSR Source: Company, PSR What s next against a challenging landscape ahead? Limited impact from China. A weaker consumer sentiment in China would definitely weigh the topline. However, the management shared that the extent may be lesser than perceived, due to (i) only one-fifth of total sales are contributed by China; and (ii) the Hong Kong businesses remain strong to support topline. Potential in China online sales. Online sales picked up some of the slack from slowing physical store sales last year. This trend can be observed across the broad Chinese retailers. E-commerce has posted record high last year, particularly boosted by China s Single s Day shopping extravaganza. OSIM rode on the wave as well, recording a huge online sales growth in 2015 (<20 yoy). The Group shared that it is currently working with Taobao and JD.com, acknowledging ecommerce as one of its crucial sales channel. Its strategy is to offer a separate range of products from those in physical stores. While carrying the premium brand name of OSIM, these products offer consumers different price points, ranging from RMB 10k to 20k. Other strategy to penetrate China market installment plans. The Group shared that of its total sales in China, less than 1 are made under installment, and that compared to c.7 to 9 in other markets. The Group is currently under discussions with more banks to capture the potential. It would be a long journey before bringing China to the same level. One of the challenges is cultural difference, where Chinese perceived credit payments as being not financially able. Continue to generate demand through new innovative product launches and data mining both offline and online. Its massage chair businesses would continue to be the main earnings driver. Few small ticket items are already in the pipeline while the new chair should be launch in mid Page 4 PHILLIP SECURITIES RESEARCH (SINGAPORE)

5 Figure 9: Revenue by Region FY % 53. North Asia South Asia Rest of world % Figure 10: Revenue by Region North Asia South Asia Rest of world Total no. of outlets % FY2014 Source: Company, PSR 4.8% FY Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Source: Company, PSR Figure 11: 3 2 North Asia: Retail Sales: 3mma %YoY (Source: CEIC, PSR est.) Figure 12: 15% 1 South Asia: Retail Sales: 3mma %YoY 1 5% -1 CN: Retail Sales of Consumer Goods HK: Retail Sales Value Index: Consumer Durable Goods TW: Commerce Sales (sa): Retail Trade SG: Retail Sales Index (sa) -5% MY: Retail Trade (Source: CEIC, PSR est.) Figure 13: 2 North Asia: Consumer Confidence Index: 3mma %YoY 1-1 CN: Consumer Confidence Index HK: Consumer Confidence Index -2 TW: Consumer Confidence Index (next 6 mth) (Source: CEIC, PSR est.) Page 5 PHILLIP SECURITIES RESEARCH (SINGAPORE)

6 Valuation Figure 14: DCF Item WACC Target A Share price (as of 29 Jan-16) B No. of shares 779,152 A x B = C Market capitalisation 790,839 D Total debt 185,942 C + D = E Total market value 976,781 C / E Equity ratio 81% D / E Debt ratio 19% Cost of debt Interest rate 2.7% Tax rate 30.2% After-tax interest 1.9% Cost of equity Risk free rate 2.5 Market risk premium 7. Beta 1.17 Cost of equity 10.7% WACC 9. Terminal growth rate 1.8% Item Financials (S$'000) Cash Flow Year FY16e FY17e FY18e FY19e FY20e OCF 73,712 77,100 79,315 81,344 86,584 Capex (15,430) (14,555) (15,006) (15,584) (16,179) FCF 58,282 62,545 64,308 65,760 70,406 Terminal value 986,234 PV 53,463 52,630 49,639 46, ,309 F Enterprise value 888,603 G Add: Net Cash/ (Debt) 183,614 H Less: Minority Interest 50,935 F + G - H = I Equity value 1,021,283 J No. of shares ('000) 757,669 I / J Fair value/share (S$) 1.35 Figure 14: Historical PER Page 6 PHILLIP SECURITIES RESEARCH (SINGAPORE)

7 Financials Income Statement Balance Sheet Y/E Dec, SGD mn FY13 FY14 FY15 FY16e FY17e Y/E Dec, SGD mn FY13 FY14 FY15 FY16e FY17e Revenue ASSETS EBITDA PPE Depreciation & Amortisation (14) (22) (23) (24) (22) Others EBIT Total non-current assets Net Finance Inc/(Exp) (0) Accounts receivables Profit before tax Cash Taxation (28) (30) (22) (23) (25) Inventories Net profit before NCI Others Non-controlling interest 0 0 (2) 0 0 Total current assets Net profit, reported Total Assets LIABILITIES Accounts payables Short term loans Others Total current liabilities Long term loans Others Total non-current liabilities Per share data (SGD Cents) Total Liabilities Y/E Dec FY13 FY14 FY15 FY16e FY17e EPS, reported EQUITY DPS Non-controlling interests BVPS Shareholder Equity Cash Flow Valuation Ratios Y/E Dec, SGD mn FY13 FY14 FY15 FY16e FY17e Y/E Dec FY13 FY14 FY15 FY16e FY17e CFO P/E (X), adj Profit before tax P/B (X) Depreciation & Amortisation EV/EBITDA (X), adj WC changes 2 (18) (6) (5) (4) Dividend Yield (%) 3.4% 2.6% 3.2% 5.9% 5.9% Others (11) (2) Growth & Margins (%) Cash generated from ops Growth Tax paid (29) (26) (39) (23) (25) Revenue 7.6% 6.7% -10.4% -4.2% -5.7% Cashflow from ops EBITDA 10.9% 8.2% % 4.4% CFI EBIT 9.8% 2.5% -47.3% % CAPEX, net (11) (23) (14) (15) (15) Net profit, adj. 16.9% 0.6% -49.6% 4.9% 7.4% Others 8 1 (6) 0 0 Margins Cashflow from investments (3) (22) (20) (15) (15) EBITDA margin 21.7% % 16.8% 18.6% CFF EBIT margin 19.6% 18.8% % 14.6% Loans, net of repayments (4) 0 0 Net profit margin 15.7% 14.8% 8.3% 9.1% 10.4% Dividends (36) (48) (47) (47) (47) Key Ratios Others (10) (13) (51) 0 0 ROE (%) 43.5% 28.8% 12.3% 13.5% 14.2% Cashflow from financing (41) 73 (102) (47) (47) ROA (%) 17.7% 13.3% 6.3% 6.8% 7.3% Net change in cash (72) CCE, end Net Gearing (X) Net Cash Net Cash Net Cash Net Cash Net Cash Source: Company, Phillip Securities Research (Singapore) Estimates *Forward multiples & yields based on current market price; historical multiples & yields based on historical market price. Page 7 PHILLIP SECURITIES RESEARCH (SINGAPORE)

8 Ratings History Market Price Target Price Source: Bloomberg, PSR Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan PSR Rating System Total Returns Recommendation Rating > +2 Buy 1 +5% to +2 Accumulate 2-5% to +5% Neutral 3-5% to -2 Reduce 4 <-2 Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation Page 8 PHILLIP SECURITIES RESEARCH (SINGAPORE)

9 Management Chan Wai Chee (CEO, Research - Special Opportunities) - yebo@phillip.com.sg Contact Information (Singapore Research Team) Jacky Lee Chee Waiy (Head, Research) - jackyleecw@phillip.com.sg Research Operations Officer Mohamed Ghazali - ghazali@phillip.com.sg Consumer Healthcare Infrastructure REITs (Hospitality) Macro Soh Lin Sin - sohls@phillip.com.sg Peter Ng - peterngmc@phillip.com.sg Pei Sai Teng peist@phillip.com.sg Transport REITs (Industrial) REITs (Commercial, Retail, Healthcare) Property Technical Analyst Richard Leow, CFTe, FRM - Dehong Tan - tandh@phillip.com.sg Jeremy Ng - jeremyngch@phillip.com.sg richardleowwt@phillip.com.sg Banking and Finance Jeremy Teong jeremyteongfh@phillip.com.sg SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore Tel Fax Website: JAPAN Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku, Tokyo Tel Fax Website: THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel / Fax Website UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel Fax Website: INDIA PhillipCapital (India) Private Limited No.1, 18th Floor, Urmi Estate 95, Ganpatrao Kadam Marg Lower Parel West, Mumbai Maharashtra, India Tel: / Fax: Website: CAMBODIA Phillip Bank Plc Ground Floor of B-Office Centre,#61-64, Norodom Blvd Corner Street 306,Sangkat Boeung Keng Kang 1, Khan Chamkamorn, Phnom Penh, Cambodia Tel: 855 (0) /855 (0) Website: Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel Fax Website: INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta Indonesia Tel Fax Website: FRANCE King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel Fax Website: AUSTRALIA Phillip Capital Limited Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel Fax Website: TURKEY PhillipCapital Menkul Degerler Dr. Cemil Bengü Cad. Hak Is Merkezi No. 2 Kat. 6A Caglayan Istanbul, Turkey Tel: Fax: Website: HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel Fax Websites: CHINA Phillip Financial Advisory (Shanghai) Co Ltd No 550 Yan An East Road, Ocean Tower Unit 2318, Postal code Tel Fax Website: UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel Fax Website: SRI LANKA Asha Phillip Securities Limited 2 nd Floor, Lakshmans Building, No. 321, Galle Road, Colombo 03, Sri Lanka Tel: (94) Fax: (94) Website: DUBAI Phillip Futures DMCC Member of the Dubai Gold and Commodities Exchange (DGCX) Unit No 601, Plot No 58, White Crown Bldg, Sheikh Zayed Road, P.O.Box Dubai-UAE Tel: / Fax: Page 9 PHILLIP SECURITIES RESEARCH (SINGAPORE)

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