Lifestyles│Singapore
July 8, 2014
COMPANY NOTE
OSIM International
OSIM SP / OSIL.SI
Market Cap
Avg Daily Turnover
Free Float
Current
S$2.69
Target
S$4.60
US$1,681m
US$2.68m
37.1%
Prev. Target
S$2,096m
S$3.36m
779.1 m shares
Up/Downside
NA
71.0%
Conviction|
|
Selling brands, not just chairs
Notes from the Field
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.
————————————————————————————————————————
Kenneth NG, CFA
T (65) 6210 8610
E kenneth.ng@cimb.com
Company Visit
Channel Check
Expert Opinion
Customer Views
————————————————————————————————————————
Show Style "View Doc Map"
‘‘
We create demand.
Advertising, marketing and
innovation create demand.”
Vol m
Excellent FCF model
– Ron Sim, CEO of OSIM
Price Close
130.9
2.20
109.4
1.70
10
8
6
4
2
88.0
Oct-13
Jan-14
Apr-14
Source: Bloomberg
52-week share price range
2.69
2.90
1.90
4.60
Current
Target
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.
Create desire, then fulfil it
OSIM‟s doctrine is to create demand
by building a brand via advertising,
marketing and innovation. This
requires a willingness to spend. We
estimate that OSIM has had three
times the number of celebrity
endorsements (the latest being Andy
Lau and Lee Min-Ho) than its closest
peer. This results in OSIM‟s products
being priced at a premium over its
peers (except for Inada) and, in spite
of this, it has captured one-third of
the massage chair market.
TWG defines a new market
No one saw the potential for a
premium massage chair 25 years ago
and few saw the potential for
premium tea seven years ago. TWG is
expected to define the luxury tea
market in Asia. Teavana (US) and
Twinings (Europe) have carved out
premium tea markets in their
respective geographies but Asia is still
wide open. A successful tea business
model differs from the Starbucks
chain model in that it is a mix of F&B
and wholesale. TWG seems to have hit
the right formula.
Financial Summary
Relative to FSSTI (RHS)
2.70
Jul-13
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$4.60 implies 25x CY15 P/E
and 8x P/BV, below its luxury brand
peer fair value of 27x P/E and 9x
P/BV. Potential catalysts are: 1) signs
of sustained earnings growth for
massage chairs allaying slowdown
fears in China, and 2) the realisation
of TWG Tea‟s potential.
Revenue (S$m)
Operating EBITDA (S$m)
Net Profit (S$m)
Core EPS (S$)
Core EPS Growth
FD Core P/E (x)
DPS (S$)
Dividend Yield
EV/EBITDA (x)
P/FCFE (x)
Net Gearing
P/BV (x)
ROE
% Change In Core EPS Estimates
CIMB/consensus EPS (x)
Dec-12A
601.7
126.6
86.9
0.12
13.5%
24.47
0.060
2.23%
14.78
31.94
(29.7%)
10.06
48.1%
Dec-13A
647.6
140.4
101.6
0.13
13.5%
21.82
0.060
2.23%
12.56
20.18
(69.2%)
7.18
41.7%
Dec-14F
728.7
167.4
120.1
0.16
18.8%
17.61
0.070
2.60%
10.61
17.39
(60.2%)
4.67
34.1%
1.02
Dec-15F
804.3
193.6
141.8
0.18
13.9%
14.91
0.080
2.97%
9.20
15.19
(63.1%)
4.02
29.7%
Dec-16F
886.7
215.2
157.2
0.20
10.8%
13.46
0.090
3.35%
7.92
13.48
(67.6%)
3.49
28.0%
0.99
0.98
SOURCE: CIMB, COMPANY REPORTS
The CIMB Stock Selection Tools (SST) are designed to complement and enhance the investment decision making process. The SST incorporate a range of analytical tools, providing ready access to key
company and market data, valuation tools and charts. If you are interested in subscribing to the 'Stock Selection Tools', please contact your CIMB account manager.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
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OSIM International
July 8, 2014
PEER COMPARISON
Research Coverage
Bloomberg Code
OSIM SP
1913 HK
1910 HK
OSIM International
Prada S.p.A.
Samsonite Int'l S.A.
Market
SG
HK
HK
Recommendation
ADD
REDUCE
ADD
Rolling P/BV (x)
Mkt Cap US$m
1,681
18,423
4,523
Price
2.69
55.8
24.90
Target Price
4.60
55.0
28.50
Upside
71.0%
-1.4%
14.5%
12-month Forward Rolling FD P/E (x)
12.00
35.0
10.00
30.0
25.0
8.00
20.0
6.00
15.0
4.00
10.0
2.00
5.0
0.00
Jan-10
Jan-11
Jan-12
OSIM International
Jan-13
Prada S.p.A.
0.0
Jan-10
Jan-14
Samsonite Int'l S.A.
Jan-11
Jan-12
OSIM International
Peer Aggregate: P/BV vs ROE
Jan-13
Jan-14
Prada S.p.A.
Samsonite Int'l S.A.
Peer Aggregate: 12-mth Fwd FD P/E vs FD EPS Growth
7.0
35.0%
30.0
150%
6.0
30.0%
25.0
108%
5.0
25.0%
20.0
67%
4.0
20.0%
15.0
25%
3.0
15.0%
10.0
-17%
-58%
2.0
10.0%
1.0
5.0%
5.0
0.0%
0.0
Jan-10
0.0
Jan-10
Jan-11
Jan-12
Rolling P/BV (x) (lhs)
Jan-13
Jan-14
Jan-15
ROE (See Footnote) (rhs)
-100%
Jan-11
Jan-12
Jan-13
12-mth Fwd FD P/E (x) (See Footnote) (lhs)
Jan-14
Jan-15
FD EPS Growth (See Footnote) (rhs)
Valuation
OSIM International
Prada S.p.A.
Samsonite Int'l S.A.
FD P/E (x) (See Footnote)
Dec-13
Dec-14
21.82
17.61
21.46
22.12
25.67
20.73
Dec-15
14.91
18.64
17.90
Dec-13
7.18
5.10
3.79
P/BV (x)
Dec-14
4.67
4.41
3.36
Dec-15
4.02
3.79
2.96
Dec-13
12.56
11.67
13.31
EV/EBITDA (x)
Dec-14
10.61
11.53
11.09
Dec-15
9.20
9.74
9.32
Dec-15
29.7%
21.9%
17.6%
Dividend Yield
Dec-13
Dec-14
2.23%
2.60%
1.68%
1.38%
1.77%
2.26%
Dec-15
2.97%
1.61%
2.60%
Growth and Returns
OSIM International
Prada S.p.A.
Samsonite Int'l S.A.
FD EPS Growth
Dec-13
12.1%
3.7%
18.6%
(See Footnote)
Dec-14
Dec-15
23.9%
18.1%
-3.0%
18.7%
23.9%
15.8%
ROE (See Footnote)
Dec-13
Dec-14
41.7%
34.1%
25.6%
21.4%
15.7%
17.2%
SOURCE: CIMB, COMPANY REPORTS
Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends.
NPAT/EPS values for calculations and valuations are based on recurring and normalised values for GAAP and IFRS accounting standard companies respectively.
2
OSIM International
July 8, 2014
BY THE NUMBERS
Share price info
Share px perf. (%)
1M
3M
12M
Relative
0.9
-1.2
30.7
Absolute
0.7
1.9
34.5
Major shareholders
% held
Ron Sim Chye Hock
62.9
P/BV vs ROE
12-mth Fwd FD Core P/E vs FD Core EPS
12.0
60.0%
10.0
50.0%
8.0
40.0%
6.0
30.0%
4.0
20.0%
2.0
10.0%
0.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
0.0%
Rolling P/BV (x) (lhs)
Growth
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
800%
720%
640%
560%
480%
400%
320%
240%
160%
80%
0%
12-mth Fwd Rolling FD Core P/E (x) (lhs)
ROE (See Footnote) (rhs)
FD Core EPS Growth (rhs)
Profit & Loss
(S$m)
Total Net Revenues
Gross Profit
Operating EBITDA
Depreciation And Amortisation
Operating EBIT
Financial Income/(Expense)
Pretax Income/(Loss) from Assoc.
Non-Operating Income/(Expense)
Profit Before Tax (pre-EI)
Exceptional Items
Pre-tax Profit
Taxation
Exceptional Income - post-tax
Profit After Tax
Minority Interests
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Net Profit
Recurring Net Profit
Fully Diluted Recurring Net Profit
Dec-12A
601.7
421.0
126.6
(11.3)
115.3
(2.7)
2.2
0.0
114.8
Dec-13A
647.6
455.1
140.4
(13.7)
126.7
(0.4)
2.9
0.0
129.2
Dec-14F
728.7
512.0
167.4
(14.3)
153.1
2.5
0.0
0.0
155.6
Dec-15F
804.3
565.2
193.6
(15.7)
177.9
6.7
0.0
0.0
184.7
Dec-16F
886.7
623.0
215.2
(17.1)
198.1
8.2
0.0
0.0
206.3
114.8
(27.6)
129.2
(27.6)
155.6
(33.2)
184.7
(39.4)
206.3
(44.0)
87.3
(0.4)
101.6
(0.0)
122.4
(2.4)
145.3
(3.4)
162.3
(5.1)
86.9
86.9
86.9
101.6
97.4
97.4
120.1
120.1
120.1
141.8
141.8
141.8
157.2
157.2
157.2
Cash Flow
(S$m)
EBITDA
Cash Flow from Invt. & Assoc.
Change In Working Capital
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow
Net Interest (Paid)/Received
Tax Paid
Cashflow From Operations
Capex
Disposals Of FAs/subsidiaries
Acq. Of Subsidiaries/investments
Other Investing Cashflow
Cash Flow From Investing
Debt Raised/(repaid)
Proceeds From Issue Of Shares
Shares Repurchased
Dividends Paid
Preferred Dividends
Other Financing Cashflow
Cash Flow From Financing
Total Cash Generated
Free Cashflow To Equity
Free Cashflow To Firm
Dec-12A
126.6
0.0
2.3
Dec-13A
140.4
7.3
(15.0)
Dec-14F
167.4
0.0
0.8
Dec-15F
193.6
0.0
(8.7)
Dec-16F
215.2
0.0
(9.5)
(2.5)
(5.7)
(26.7)
94.0
(13.2)
7.4
(5.8)
(29.2)
105.2
(13.9)
5.4
(2.9)
(33.2)
137.5
(13.5)
6.7
0.0
(39.4)
152.2
(13.5)
8.2
0.0
(44.0)
169.9
(13.5)
(5.8)
(17.1)
(36.1)
8.6
0.5
(14.9)
(36.4)
(2.1)
11.7
(4.4)
4.5
0.4
(7.8)
(36.2)
0.0
0.5
(13.0)
(2.9)
0.0
0.0
(52.6)
0.0
0.5
(13.0)
0.0
0.0
0.0
(62.3)
0.0
0.5
(13.0)
0.0
0.0
0.0
(70.1)
(3.1)
(45.4)
12.6
66.6
63.7
(2.2)
(41.4)
59.4
105.3
106.6
0.0
(55.5)
69.0
121.6
127.4
0.0
(62.3)
76.9
139.2
139.2
0.0
(70.1)
86.7
156.9
156.9
SOURCE: CIMB, COMPANY REPORTS
3
OSIM International
July 8, 2014
BY THE NUMBERS
Balance Sheet
(S$m)
Total Cash And Equivalents
Total Debtors
Inventories
Total Other Current Assets
Total Current Assets
Fixed Assets
Total Investments
Intangible Assets
Total Other Non-Current Assets
Total Non-current Assets
Short-term Debt
Current Portion of Long-Term Debt
Total Creditors
Other Current Liabilities
Total Current Liabilities
Total Long-term Debt
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities
Total Non-current Liabilities
Total Provisions
Total Liabilities
Shareholders' Equity
Minority Interests
Total Equity
Dec-12A
201.7
40.0
53.8
48.9
344.5
21.1
46.7
19.8
38.9
126.4
25.0
Dec-14F
336.3
46.3
71.1
12.2
465.9
23.2
18.5
177.1
28.9
247.7
26.6
Dec-15F
413.2
51.1
78.4
12.2
555.0
27.7
18.5
165.1
28.9
240.2
26.6
Dec-16F
499.9
56.4
86.5
16.1
658.9
26.9
18.5
154.0
28.9
228.3
26.6
101.6
165.7
296.9
0.0
0.0
39.2
39.2
0.0
336.0
271.2
72.7
343.9
111.5
21.4
159.6
0.0
0.0
39.3
39.3
0.0
198.8
433.0
81.8
514.8
100.0
17.1
143.7
0.0
0.0
39.3
39.3
0.0
183.0
521.9
90.3
612.2
103.7
17.1
147.5
0.0
0.0
39.3
39.3
0.0
186.7
600.9
99.5
700.5
Dec-12A
8.7%
13.2%
21.0%
0.08
0.27
20.19
24.0%
41.9%
24.62
107.5
45.40
140%
36.7%
Dec-13A
7.6%
10.9%
21.7%
0.33
0.37
21.89
21.3%
35.6%
23.09
119.7
50.53
104%
36.9%
Dec-14F
12.5%
19.2%
23.0%
0.41
0.58
52.91
21.3%
43.8%
22.11
120.9
52.83
100%
34.7%
Dec-15F
10.4%
15.7%
24.1%
0.50
0.67
N/A
21.3%
43.9%
22.11
114.1
53.31
65%
31.3%
Dec-16F
10.2%
11.2%
24.3%
0.61
0.77
N/A
21.3%
44.6%
22.18
114.5
53.49
67%
30.2%
Dec-12A
N/A
8.7%
N/A
N/A
N/A
N/A
1,137
N/A
N/A
Dec-13A
N/A
7.6%
N/A
N/A
N/A
N/A
861
N/A
N/A
Dec-14F
N/A
12.5%
N/A
N/A
N/A
N/A
875
N/A
N/A
Dec-15F
N/A
10.4%
N/A
N/A
N/A
N/A
891
N/A
N/A
Dec-16F
N/A
10.2%
N/A
N/A
N/A
N/A
911
N/A
N/A
90.0
31.8
146.8
0.0
117.2
6.6
123.8
0.0
270.5
196.2
4.2
200.4
Dec-13A
267.3
42.0
72.5
36.0
417.8
25.2
18.5
189.9
28.6
262.1
29.5
Key Ratios
Revenue Growth
Operating EBITDA Growth
Operating EBITDA Margin
Net Cash Per Share (S$)
BVPS (S$)
Gross Interest Cover
Effective Tax Rate
Net Dividend Payout Ratio
Accounts Receivables Days
Inventory Days
Accounts Payables Days
ROIC (%)
ROCE (%)
Key Drivers
ASP (% chg, main prod./serv.)
Unit sales grth (%, main prod./serv.)
Util. rate (%, main prod./serv.)
ASP (% chg, 2ndary prod./serv.)
Unit sales grth (%,2ndary prod/serv)
Util. rate (%, 2ndary prod/serv)
Outlets #/POS (main prod./serv.)
Outlets #/POS (2ndary prod./serv.)
A&P As % Of Sales
SOURCE: CIMB, COMPANY REPORTS
4
OSIM International
July 8, 2014
Selling brands, not just chairs
1. BACKGROUND AND COMPETITIVE ADVANTAGE
Table of Contents
1. BACKGROUND AND COMPETITIVE
ADVANTAGE
p.5
2. MASSAGE CHAIRS: OSIM’s POSITION IN
THE INDUSTRY
p.10
3. PREMIUM TEA: TWG TEA’S POSITION IN
THE INDUSTRY
p.14
4. RISKS
p.17
5. FINANCIALS
p.19
6. VALUATION AND RECOMMENDATION
p.22
‘‘
We create demand.
Advertising, marketing and
innovation create demand.”
– Ron Sim, CEO OSIM
1.1 Poised to benefit from rising affluence
We see OSIM as a prime beneficiary of the rising group of mass affluent
consumers in Asia. The group sells massage chairs, health supplements and
luxury tea. Its products are not new inventions but OSIM does an excellent job
of branding and marketing its products by creating product classes that are
associated with its brand names. Its mainstay product has always been the
massage chair. However, OSIM took a misstep by branching out to the US in
2005-2009. Since 2009, OSIM‟s story has been about a company moving on
from its mistake and single-mindedly refocusing on its core business. In the
process, the company has expanded the scale of its original core product and
tremendously improved the profit margins of its massage chairs. Its
profitability trends are comparable to some of the most well-known luxury
brands in the world. In 2009-2013, OSIM posted revenue CAGR of only 6-7%
but net profit CAGR of 44%. This was achieved by focusing on store
productivity, rationalising store count and refining its product sourcing
processes. Today, the OSIM brand accounts for ~70% (CY2014) of group
revenue and remains one of its two growth engines. OSIM‟s typical massage
chair customer is an upper middle-income household. The rising affluence and
expansion of the middle class in China are likely to enlarge the addressable
market for OSIM. The business of selling massage chairs is far from ex-growth.
Obviously, OSIM‟s net profit growth rates in 2009-2013 will not be sustainable
moving forward due to its higher base of earnings but this does not mean that
its growth story is dead.
OSIM‟s second growth engine is TWG. TWG is a relatively new luxury tea brand
but it is already known in Asia. It is poised for rapid store expansion in the near
future. We view OSIM as a consumer discretionary company that does a terrific
job of marketing its products and creating demand for them. OSIM is
ultimately well positioned to be a proxy for Asia‟s rising affluent class.
1.2 OSIM, a brand management company
Established in 1979, OSIM is a brand management, marketing and retail
company. The company focuses on well-being and healthy lifestyle products,
including massage chairs, fitness equipment, vitamins and supplements, as well
as luxury tea. Its portfolio of brands includes the eponymous OSIM, TWG Tea,
GNC and RichLife. OSIM started its global expansion by entering the Hong
Kong market in 1986 and subsequently moved into Taiwan, Malaysia and China
in 1993. OSIM entered into a joint venture with Daito Electric Machine
Industry in 2001 to develop its research, development and manufacturing
capabilities. In 2003, OSIM acquired around 30% of Global Active Limited,
GNC‟s franchisee for Singapore, Malaysia, Brunei and China. Global Active was
later renamed ONI Global. In 2005, OSIM purchased the US retailer
Brookstone in a leveraged buyout. We believe that Brookstone‟s distribution
network in the US was the attraction for OSIM. However, Brookstone failed to
deliver, OSIM wrote it down to zero in FY2008 and OSIM does not retain any
interest in Brookstone as of June 2014. In 2011, OSIM added TWG Tea to its
portfolio of brands by acquiring a 35% stake in the company. OSIM
subsequently increased its stake in TWG Tea to 70% in 2014.
Some of the critical factors responsible for OSIM‟s success are the drive and
tenacity of its founder and CEO, Mr Ron Sim. Since its inception, Mr Ron Sim
has been OSIM‟s largest shareholder, with 62.9% ownership. OSIM operates
and franchises its outlets mainly in Asian countries, such as Singapore, Hong
Kong, China, Taiwan, South Korea, Japan and Malaysia. Mr Ron Sim was born
to a struggling family in Singapore and he learned determination and hard
work as a small child by taking on jobs like selling food in hawker stands,
5
OSIM International
July 8, 2014
working in shipyards and construction sites as well as selling encyclopaedias.
Mr Ron Sim recognised that he had a flair for sales but decided to start his own
company rather than accept one of the sales roles he was offered. That company
eventually became OSIM. The company hit a rough patch during the 1985
recession but it emerged stronger. Realising the value of a brand, Mr Ron Sim
began to build a brand in the healthcare sector in 1987. Mr Ron Sim is a firm
believer in branding. In his own words, OSIM's main mission is "selling
lifestyles, creating desires".
1.3 Business segments
OSIM has three main segments, namely: 1) OSIM, which sells massage chairs
and lifestyle products, 2) nutraceuticals, which sells health supplements under
the GNC and RichLife brands, and 3) TWG Tea, which retails and distributes
premium teas. OSIM owns the OSIM, RichLife and TWG Tea brands, and
operates the GNC franchise in Singapore, Malaysia, Taiwan and Australia.
Figure 1: Business segments
Brands
OSIM
Products
Massage chairs
Handheld massagers
Foot massagers
Head massagers
Neck and shoulder
massagers
Nutritional Supplements
RichLife
No. of % of
Geographical Presence
outlets revenue
North Asia, South Asia, Africa, 583
70 - 75%
Europe and the Middle East
China
20
Combined
15 - 25%
GNC
Nutritional Supplements
TWG Tea
Luxury tea
Singapore, Malaysia, Taiwan,
Australia
UK, United States and Asia
including Singapore, Hong
Kong, Taiwan, South Korea,
Japan, Malaysia, Thailand
222
30
5 -15%
SOURCES: CIMB, COMPANY REPORTS
1) OSIM
The lion‟s share of OSIM‟s revenue comes from its flagship business segment massage equipment. OSIM does not provide a breakdown of its revenue but
guides that this segment will contribute 70-75% of group revenue in 2014.
OSIM is Asia‟s no. 1 well-being and healthy lifestyle brand. Massage chairs
contribute the biggest portion of revenue from the OSIM brand, accounting for
~60% of the OSIM segment sales. Other accessories accounted for the
remaining 40%. Contrary to popular perception, massage chair sales are more
resilient than other accessories during periods of economic weakness as the
target customers for massage chairs are typically more affluent households with
more resilient income.
OSIM focuses on marketing and branding, paying less attention to
manufacturing. In terms of the upstream design and manufacturing portion of
the value chain, OSIM now owns a 30% stake in both of its chair design and
manufacturing companies DT-OSIM Healthcare Appliances and Suzhou Daitec
Exercising Machine. The latter handles the manufacturing, as well as some
research and development. The remaining 70% stakes in both of these
companies belong to OSIM‟s strategic partner, Daito Electric Machine Industry
Company Limited. Inada, a Japanese company, was OSIM‟s massage chair
supplier until 2009. OSIM International Trading is OSIM‟s corporate
headquarters (HQ) that oversees the central procurement of the products from
the manufacturing companies and adds on a mark-up to cover the HQ and
central marketing costs, before selling them on to the retail units and
franchisees.
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OSIM International
July 8, 2014
The five main markets that contribute to OSIM sales are China, Hong Kong,
Taiwan, Malaysia and Singapore. Most of the 583 OSIM outlets are operated by
OSIM, while some of the outlets in certain regions are run by franchisees. The
franchised regions include New Zealand, Indonesia, Bahrain, Spain, Kuwait,
Iran and Cambodia. Franchise fees accounted for around 5% of total massage
equipment revenues.
2) Nutraceuticals – GNC and RichLife
The second largest contributor to the group‟s topline is the nutraceutical
segment. This includes GNC and RichLife. OSIM owns these two brands under
a 94.8%-owned holding company, ONI Global. The first brand, GNC, is the
world's largest chain of health food stores, and has been America's largest
nutritional supplement manufacturer since the 1960s. GNC has more than
8,000 stores worldwide, though it operates only the GNC franchise in
Singapore, Malaysia, Taiwan and Australia. OSIM pays the franchiser 5%
royalty and sells the products together with its own house brands. The second
brand, RichLife, is China's first specialty chain store offering premium, trusted,
and fully-imported nutritional supplements. Between the two brands, the GNC
store count is rising while the RichLife store count is falling. Efforts to develop
the nutritional supplement market in China are centred in Shanghai. The
management has guided that the nutraceutical segment is expected to
contribute about ~20% of the group‟s total revenues in the future.
Figure 2: Geographical presence of OSIM, GNC, RichLife and TWG Tea
19 OSIM Outlets
1 TWG Outlet
269 OSIM Outlets
21 RichLife Outlets
1 TWG Outlet
3 TWG Outlets
60 OSIM Outlets
48 GNC Outlets
1 TWG Outlet
20 OSIM Outlets
18 OSIM Outlets
3 TWG Outlets
1 OSIM Outlet
5 TWG Outlets
54 OSIM Outlets
82 GNC Outlets
5 TWG Outlet
21 OSIM Outlets
2 TWG Outlets
34 OSIM Outlets
62 GNC Outlets
9 TWG Outlets
11 OSIM Outlets
31 GNC Outlets
SOURCE: CIMB RESEARCH, COMPANY
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OSIM International
July 8, 2014
3) TWG Tea
The third segment is premium teas. The management expects this segment to
contribute ~10% of the group‟s revenues in 2014, and we expect this to be a
fastest-growing segment. TWG Tea was founded by Taha Bouqdib and Manoj
Murjani in Singapore in 2007. OSIM got involved with TWG when it first
acquired a 35% stake in TWG Tea and formed a 60:40 joint venture (TWG Tea
North Asia) with TWG Tea. The first vehicle (TWG Tea) owns the rights for
Singapore and the UK, while the second vehicle (TWG Tea North Asia) owns
the rights for the North Asian markets. OSIM subsequently increased its
ownership in TWG Tea to 70% after the founding members missed
performance targets, and now has an effective stake of 88% in the brand.
TWG Tea is positioned as a luxury brand, deriving sales from distribution
contracts and selective retail points. Distribution revenues include direct supply
contracts with airlines and premium hotels. Clients include SIA (first and
business class) and a wide range of five-star hotels in Singapore. We estimate
that the distribution revenues account for two-thirds of TWG Tea‟s sales. On
the retail side of the business, TWG Tea operates over 30 outlets of high-end
luxury tea cafes and saloons around Asia. It also has distribution capabilities in
the US and the UK. Retail points include Changi Airport, ION Orchard, Marina
Bay Sands in Singapore, Pavilion and KLIA in Kuala Lumpur, IFC in Hong
Kong, Shinmarubiru (Marunouchi) in Tokyo and Siam Paragon in Bangkok.
The select choice of retail points in high-end malls and airports reflects TWG
Tea‟s target market. In contrast, OSIM and GNC stores are generally more
widespread and less picky in locations. We expect TWG Tea to contribute about
24% of the group‟s revenues by 2018.
Figure 3: List of brands and stores in each region
Country
OSIM
Singapore
Malaysia
Thailand
18
GNC
TWG Tea
34
62
9
54
82
5
India
20
China / Hong Kong
269
Korea
19
RichLife
1200
21
13%
1000
Full consolidation of TWG Tea
3
24%
800
600
1
1
Japan
Taiwan
Figure 4: Estimated segmental revenue breakdown (S$m)
400
63%
3
60
48
200
1
Philippines
1
5
Indonesia
21
2
Australia
11
0
2013
2014F
2015F
2016F
TWG
Nutraceuticals
2017F
2018F
31
OSIM
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
The last segment that was under OSIM up till June 2014 was Brookstone.
Brookstone was a US specialty retail company when OSIM bought it in 2005 in
an attempt to break into the US market and build a global brand. It proved to
be too difficult to manage. In 2008, OSIM‟s profitability took a hit, partly
dragged down by the global financial crisis. OSIM has since wrote down the
investment and no longer owns a stake in the company. On a more holistic
group profit perspective, OSIM‟s net margins have recovered from 5% in 2009
to 16% in 2013, driven by: 1) an increase in its sales volumes; and 2) store
rationalisation. We expect the group‟s profit to be driven by 1) a deeper
penetration and further improvement of store profitability for massage chairs
in China, and 2) wider expansion of TWG Tea.
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OSIM International
July 8, 2014
Figure 5: SWOT analysis
Strengths
• Strong regional branding
• Strong cash position
• Proprietary tea blends
• Protected intellectual property designs
Opportunities
• Expansion into new markets
• Potential acquisitions
• Dominate the premium tea market
Weaknesses
• High sensitivity to economic cycles
• High rental cost in prime areas
• Highly dependent on Chinese economy
• Dependent on TWG Tea founder Taha Bouqdib and
OSIM founder Ron Sim
Threats
• Local and foreign competition
• Change in consumer preferences
• Imitation products dilute branding
• Loss in shareholding of TWG Tea due to legal
proceedings
SOURCES: CIMB, COMPANY REPORTS
1.4 Ongoing legal issues with TWG Tea
TWG Tea has two legal issues pending. First, TWG Tea is being sued by the Tsit
Wing Group in Hong Kong for trademark infringement. TWG Tea uses a logo
bearing the acronym “TWG”, which had been registered by Tsit Wing as its
trademark. On 24 Jul 2013, the High Court ruled in favour of the Tsit Wing
Group. TWG Tea has appealed the decision and it will be business as usual for
its outlet in the IFC Mall in Hong Kong until the final verdict is out. Any
restrictions are likely to be limited to TWG Tea‟s Hong Kong operations.
Second, OSIM is contesting a claim by one of the co-founders of TWG Tea, Mr.
Manoj Murjani, involving the subscription of shares in TWG Tea by OSIM. He
is disputing OSIM‟s right to raise its stake in TWG Tea. OSIM plans to contest
the claim. Given that OSIM increased its stake in TWG Tea from 35% to 45% in
Jul 2013, and from 45% to 54% in Oct 2013, we believe that there must have
been some sort of an agreement in place allowing OSIM to raise its stake due to
missed performance targets. In the worst-case scenario OSIM would lose
shareholding in TWG Tea, but we believe that this scenario is unlikely. We note
that only one of the two co-founders is bringing the case. Mr. Taha Bouqdib,
who came up with the bulk of TWG Tea‟s proprietary blends, remains with
TWG Tea as its current chief executive officer. Also, Mr. Taha seems to be the
key man behind TWG Tea, having worked in the luxury tea industry in Paris for
14 years before starting TWG Tea.
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OSIM International
July 8, 2014
2. MASSAGE CHAIRS: OSIM’S POSITION IN THE INDUSTRY
2.1 OSIM’s marketing positioning
OSIM has built a premium brand image for its massage chairs. While the
product was invented by the Japanese, OSIM was the pioneer of this industry
as it conceptualised the business under a specialty retail format, whereas the
Japanese continue to sell the products more as a commodity. Our study of the
products across the market shows that OSIM stands out across the price range.
It is not entirely focused on the luxury end of the market. That position is
occupied by OSIM‟s previous supplier, Inada. In the earlier years, OSIM might
have started out in the affluent segment, but in recent years it has shown a
readiness to play in the more mass-market segments (with products like
uAngel). According to OSIM, it focuses more on branding and advertising as
compared to promotions and discounts by competitors. We have verified this
claim: a look at the various brands in the market shows that OSIM is more
ready to spend on celebrity endorsements vs. its competitors. The current stars
used for its celebrity endorsements are Andy Lau and Lee Min-Ho, but the
celebrities that have at one point endorsed OSIM‟s products include Gong Li,
Lin Chi Ling, S.H.E, Michael Wong, Liza Wang, Louis Koo, Jeannette Aw, Joey
Yung, Moses Lim and Lydia Sum. By our estimates, the number of celebrities
that have endorsed OSIM‟s products surpasses its closest peer by 3-to-1.
Celebrity endorsements are likely linked to the target markets OSIM intends to
push its products into. OSIM‟s first step overseas was to Hong Kong in 1986,
followed by Taiwan, Malaysia (1990) and China (1993), which explains the
celebrity names listed above.
Figure 6: Massage chairs products and price points of OSIM and its competitors (S$)
SOURCES: CIMB, COMPANY REPORTS
The massage chair industry
The massage chair industry was pioneered in Japan in the 1950s with a simple
wooden roller massage chair. The industry now offers products with a wide
range of features, from the simple vibrating massages to the more complex
Japanese shiatsu movements. The price points of the products in the industry
vary widely as well, usually correlated with the number of features offered.
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OSIM International
July 8, 2014
Figure 7: Massage chair features
Function
• Adjustment mechanism
• Head/Neck massage
• Tailbone/Buttocks/Gluts massage
• Accupoints massage
• Stretching
• Hip Twist
• Heat massage
•
•
•
•
•
•
Foot massage
Music synchronisation
Massage style
Smart-phone activated
MP3 enabled
Zero-gravity
Comments
Include pressure scans, infrared scan or body extension options
Range from full head to not at all
Include simple vibrations, rollers or airbags
Specific pressure point massages
Range from specific body part stretching to full body
Range from specific body part heating to full body, can include a
transferable heat pack
Range from rollers to simulated finger pressing
Include Chinese, Thai, Japanese or Swedish
Premium chairs usually include this function to simulate a 'weightless'
feeling
SOURCES: CIMB, COMPANY REPORTS
Until recently, OSIM‟s flagship massage chair products, such as the uInfinity
and the uDivine, were priced to serve the high-income households in their
respective markets. As residential houses got smaller in Hong Kong and
Singapore, the launch of the more affordable and more compact uAngel in 2010
addressed the changing needs of the mass-affluent households.
What is OSIM‟s target market then? We believe that it is the top 50-60% of the
households in Singapore and Hong Kong, the top 20% in Taiwan and China‟s
first-/second-tier cities. Based on Euromonitor, households in the region spend
5-9% of their disposable incomes on white goods and appliances. This suggests
that the typical target household that will buy a discretionary consumer item
like a massage chair (costing S$2k–8k) is likely to be the one with an annual
disposable income of more than US$50k. In affluent city-states like Singapore
and Hong Kong, the addressable market for massage chairs is up to 60% of
households. In Taiwan, it is 20%. In less affluent countries like China and
Malaysia, while the overall addressable market is likely to be only 10% of
Malaysia‟s and 5% of China‟s population, the more accurate way to look at this
is to acknowledge the fact that the average household income varies widely
between the rich cities and the small towns. We assume that the addressable
market for the more affluent cities (Kuala Lumpur, Beijing, Shanghai,
Guangzhou) is probably closer to the 20% mark, similar to Taiwan. The
penetration rate of massage chairs is more than 15% of households. Using
right-sized addressable markets for each of the major cities that OSIM operates
in, we estimate that the total massage chair market in Asia is S$1.5bn and
OSIM has a leading market share of 35%. We like this position as our estimated
market share number implies that OSIM is a market leader in the massage
chair industry, but at the same time it leaves room for market share gains. We
see OSIM as having both the benefit of a growing addressable market (as the
middle class in China grows), and the room to still gain market share.
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OSIM International
July 8, 2014
Figure 9: % of disposable income spent
on household goods & appliances (2013)
Category
Product
Massage Chairs
uInfinity
uDivine App
uDivine S
uDiva
uAngel
uBio
uPhoria Warm
uFootsie
uRelax
Massage Sofas
Leg Massagers
Upper Body
Massagers
Retail Price
(SGD)
~$7,988
~$6,088
~$5,288
~$3,288
~$2,000
~$800
~$700
~$240
~$200
12%
Figure 10: Regional household income
distribution 2013
US$ '000
Figure 8: OSIM’s product range
10%
Title:
Source:
Product addressable
400
350
market
Please fill in the values above to have them enter
300
250
8%
200
6%
150
100
4%
50
uCozy 3D
uCozy
Handheld Massagers uDurian
uPen
uGem
~$140
~$100
~$88
2%
~$45
~$38
0%
SOURCES: CIMB, COMPANY REPORTS
0
SOURCES: CIMB, COMPANY REPORTS, EIU
Hong Kong
Singapore
Malaysia
China
Taiwan
SOURCES: CIMB, COMPANY REPORTS, EIU
The main growth market for OSIM is China. Given the presence of five main
markets for OSIM, we estimate that China contributes 21-23% of OSIM‟s
revenues. We are less concerned about the short-term noise about the
slowdown in China, as the longer-term trends of urbanisation and a growing
middle class remain valid. Also, by demographic profile, the presence of two
peaks in China‟s population profile – the 20-24 age group and 35-49 age
group – will provide the right consumer segments (new family starts, affluent
future retirees) for OSIM to grow its massage chair sales in China.
Figure 11: GDP per capita (US$) - China's first-, second-tier
cities
Figure 12: China’s demographic profile (% of each age group)
USD
80,000
12%
70,000
10%
60,000
8%
50,000
Title:
Source:
Please fill in the values above to have them entered in your rep
6%
40,000
4%
30,000
2%
20,000
0%
10,000
0
1992
SOURCES: CIMB, CEIC
2002
2012
SOURCES: CIMB, CEIC
OSIM‟s branding and marketing capabilities give it an edge over its competitors
in Asia Pacific. While Japanese companies tend to focus more on research and
innovation, OSIM leads in marketing and branding. Intellectual property rights
have given some companies an edge in innovation but these incremental
innovations do less than the impact of marketing visibility. We feel that unless a
revolutionary breakthrough in massage chair technology occurs, marketing and
branding will continue to drive market share gains in the industry. Foreign
brands such as OSIM and Panasonic tend to have a better standing in the large
North Asian market as consumers are more brand conscious and wary of
locally-produced merchandise. Among the brands that have significant
in-house retail capabilities, namely OTO, OGAWA and OSIM, OSIM has
positioned itself as the premium massage gear provider. OTO has positioned
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OSIM International
July 8, 2014
itself at a lower price point while OGAWA lies somewhere in the middle.
Premium massage chair brands manufactured in Japan, such as Inada, have
strong local demand in their home market, but carry less weight in
neighbouring countries. As OSIM has successfully focused on marketing and
creating visibility using celebrity endorsements, we expect OSIM to be the
market leader in this space in Asia, excluding Japan.
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OSIM International
July 8, 2014
3. PREMIUM TEA: TWG’S POSITION IN THE INDUSTRY
3.1 OSIM’s positioning in the luxury tea market via TWG
We think that there is an opportunity in the next few years for TWG Tea to be
the name synonymous with luxury tea, just as OSIM is synonymous with
massage chairs today. TWG Tea operates in the luxury tea market and the
emphasis is on the word „luxury‟, not „tea.‟ The roots of TWG Tea are the two
founders of TWG Tea (2007) who set out to build a luxury tea brand in
Singapore and the UK. OSIM saw potential in the business and invested in the
original vehicle (35% stake) when the business was still struggling. OSIM also
set up a separate vehicle to tackle the North Asian markets. The brand
positioning of TWG Tea is clear – it is only available in airlines‟ premium
lounges, five-star hotels and in its own retail points in upmarket malls and
airports. It takes extreme caution and avoids any moves that will dilute the
brand. There are a few premium tea brands in the market but none seems to be
widespread in scale. Gryphon is a high-end brand that retails in supermarkets
but we do not believe that it has scale. Otherwise, luxury tea brands appear to
be born out of UK luxury retail brand names (Harrods, Fortnum and Mason)
and are also rather niche. However, there are mass/high-end tea brands in the
US and Europe that are starting to claim the leadership space but these are not
ubiquitous in Asia yet. We explore this ahead.
Figure 13: TWG Tea’s shareholding
structure
Owns 70%
TWG Tea Company
Pte Ltd
Figure 14: TWG Tea in airline business class lounges, TWG retail points
Owns 60%
Effective
ownership:
88%
Owns 40%
Operates: Singapore, UK,
Franchises
TWG Tea North Asia
Operates: China, Korea, Taiwan, HK
SOURCES: CIMB, COMPANY
SOURCES: CIMB RESEARCH
To be clear, TWG Tea is not a food and beverage (F&B) business. Only 30% of
its revenue comes from F&B while 70% is derived from wholesale sales to
airlines and hotels. TWG Tea only targets a particular class of consumer and
will never retail through supermarket channels. The brand has done well in
Singapore already. Like massage chairs, the market of promise is China. TWG
Tea has rolled out a store in IFC in Hong Kong to understand the Chinese
market and is ready to roll out into Greater China in 3Q14, with initial cities
being Shanghai, Guangzhou and Taipei.
3.2 The tea industry
The global tea industry is estimated to be worth >US$87bn, of which 54% is
derived from ready-to-drink (RTD) teas and 46% (US$40bn) from everything
else. APAC accounts for almost half (US$19bn) of the US$40bn global
non-RTD tea market. The APAC market where OSIM is focusing most of its
operations on is relatively fragmented, with the top five players commanding a
combined market share of about 15%. Most of the leaders (Lipton,
Xiangpiaopiao, U-loveit) have a strong position in the mass market segment
but there are no known leaders in the high-end segment. In terms of volume
14
OSIM International
July 8, 2014
consumption, the number of cups of tea consumed far outstrips that of any
other hot beverage and was estimated at 1.4tr cups in 2011. The past five years
have seen the average selling price (+6%) of tea rising faster than the growth in
volume (+3%) consumed.
Figure 15: Global tea retail volume and growth
Figure 16: Global tea retail value and growth
2,500
7%
Title:
Source:
45,000
12.0%
40,000
6%
2,000
10.0%
Please fill in the values above to have them entered in your report
35,000
5%
US$ million
'000 tonnes
30,000
1,500
4%
3%
1,000
8.0%
25,000
6.0%
20,000
15,000
4.0%
2%
10,000
500
2.0%
1%
0
5,000
0%
2008
2009
2010
2011
World tea retail volume
2012
0
2013
0.0%
2008
Growth rate
2009
2010
World tea retail value
SOURCES: CIMB, COMPANY REPORTS, EIU
Figure 17: APAC ready-to-drink tea market players
2012
2013
Growth rate
SOURCES: CIMB, COMPANY REPORTS, EIU
Figure 18: APAC tea market players
Title:
Master Kong (Ting
Hsin International
Group), 10.8
Others, 66.1
2011
Bayce (Beta Gida
Source:
San ve Tic AS)
2%
Please fill in the values above to have them entered in your report
Tata Tea (Tata
Global Beverages
Ltd)
3%
U-loveit
(Guangdong
Others
Strong (Group) Co
85%
Ltd)
3%
President (UniPresident
Enterprises Corp),
7.1
Jiaduobao (JDB
Group, The), 6.2
Xiangpiaopiao
(Zhejiang
Xiangpiaopiao Co
Ltd)
3%
Lipton (Unilever
Group), 5.5
Suntory (Suntory
Holdings Ltd), 4.3
SOURCES: CIMB, COMPANY REPORTS, EIU
Lipton (Unilever
Group)
4%
SOURCES: CIMB, COMPANY REPORTS, EIU
TWG Tea is by no means aiming to be among the leaders in the big tea market,
although being a market leader in the Asia luxury tea market is realistic. We
believe the time is ripe for a premium tea market to blossom in Asia, both
through off-trade and on-trade sales channels. It took Starbucks and Costa
Coffee 25 years to develop the on-trade premium coffee segment. Although
these premium coffee chains do offer a selection of teas, they are often limited
and not a focus. These players did not extend into premium on-trade tea.
Premium on-trade tea never quite took off, perhaps because the economics did
not quite work out. TWG Tea seems to have gotten the formula right with a mix
of food and beverage channels and a wholesale model. Evidently, it has only
been in recent years that there has notably been more serious investments by
players in the premium tea market. These include Twinings (owned by
Associated British Foods), Teavana (owned by Starbucks) and TWG Tea. The
bulk of Teavana‟s operations are in the US. Twinings has established itself in
the European cities. That leaves TWG Tea to carve out the Asia market. We
believe TWG Tea has the best consumer brand recall for luxury tea in Asia, even
if it has only been in operation for a few years.
15
OSIM International
July 8, 2014
There is no lack of affluent consumers in Asia, i.e. there is a market. In our
opinion, the challenge is not from Teavana and Twinings but from the many
specialty tea houses in China and Hong Kong, some selling high-end Chinese
tea, tea that is processed using traditional Chinese methods or procured from a
rare harvest point, at very premium prices. The legacy dominant premium tea
product in Asia is Chinese tea, although there is no single dominant premium
Chinese tea chain in North Asia. We believe the coast is clear for TWG Tea to
carve out a new market altogether in luxury teas in Asia, just as it has done for
massage chairs. We estimate TWG Tea‟s sales was about S$46m in 2013.
16
OSIM International
July 8, 2014
4. RISKS
4.1 Competition in massage equipment
In regions where OSIM competes in, market leadership has been driven by a
willingness to spend on advertising and promotions (A&P) and successful
awareness campaigns. OSIM is particularly good at capitalising on celebrity
endorsements. Most consumer brand companies will spend a certain
percentage of sales on A&P so as sales build up, size does form a bigger barrier
of entry for the smaller guy. The smaller competitor will find it difficult to
sustain A&P spending and outspend the incumbent. We believe OSIM is in such
a position in its five key markets (China, Hong Kong, Taiwan, Malaysia and
Singapore) now. However, that does not mean that competition will not
encroach on OSIM‟s space in the long term as aspiring competitors try to spend
and snatch market share. Amongst its rivals competing in the premium
category of massage chairs are Panasonic and Inada. As Inada tries to build up
its brand, we see more pressure coming from the Japanese company in the
mid-to-long term, subject to the successful branding execution of its campaigns.
The low barriers to entry (besides the high barrier of A&P spend) in this
industry make it imperative that OSIM continues building and maintaining the
brand through marketing and promotion and product refresh. Each product life
cycle is three to five years.
Figure 19: uAngel is a massage sofa, not a massage chair
SOURCES: CIMB, COMPANY REPORTS
At the more mass market end of the massage chair segment, OSIM has
launched uAngel and uDiva, which are watered-down, cheaper versions of the
traditional massage chairs. While that might be viewed as OSIM using price
promotions to steal market share from OTO‟s and OGAWA‟s lower-price point
products, we do not see it that way. OTO‟s Adelle One and Panasonic‟s EP-1285
are ultimately massage chairs while uAngel doubles up as a piece of household
furniture. The product is particularly timely for Hong Kong and Singapore as
households do have the incomes to buy massage equipment but not the space to
house a standalone chair given an ever-shrinking home size.
4.2 Sensitivity to economic cycles
The other main risk for OSIM is that it is susceptible to economic cycles, just
like most consumer discretionary products. The global financial crisis showed
us the sensitivity of OSIM‟s sales to an economic slowdown. Excluding the
effect of Brookstone, OSIM‟s main business regions of North Asia and South
Asia experienced a decline in sales: North Asia saw sales fall from S$352m in
2007 to S$225m in 2008 while South Asia sales declined from S$180m to
S$163m. The mitigating factor to its earnings profile during a downcycle is that
in a recovery, because of its high margins and operating leverage, OSIM‟s
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OSIM International
July 8, 2014
profits tend to expand faster than sales (much like other luxury brand products)
leading to a significant recovery in profitability.
Figure 20: Peer revenue yoy change (%)
Figure 21: Peer net profit yoy change (%)
60%
120%
50%
100%
40%
80%
30%
60%
Title:
Source:
Please fill in the values above to have them entered in your report
40%
20%
20%
10%
0%
0%
-20%
-10%
-40%
-20%
-60%
OSIM
TOD'S SPA
OSIM
TOD'S SPA
LVMH MOET HENNES
HERMES INTL
LVMH MOET HENNES
HERMES INTL
TIFFANY & CO
TIFFANY & CO
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG
18
SOURCES: CIMB, COMPANY REPORTS
OSIM International
July 8, 2014
5. FINANCIALS
5.1 Massage chairs driven by new products and celebrities
The two success factors driving short-term sales performance seem to be new
product launches and celebrity endorsements. According to management,
products have a lifecycle of three to five years, although one still needs to
actively market the product for it to sustain sales throughout the period. OSIM
has a track record of successfully using celebrity endorsements over the years,
with the latest being Andy Lau and Lee Min-Ho. The use of Andy Lau to
endorse uDivine and uInfinity has arguably been the most effective marketing
campaign in recent years and probably reflects the emphasis of growing the
China market.
A successful marketing campaign is typically reflected in the following two
quarters in terms of positive sales performance. We observe yoy sales growth
after the launch of the uDivine, uDivine App and uInfinity. uDivine was
launched in 4Q10 and weighed in on revenue growth in early-2011. The trend
was similar for the uDivine App (mid-2012) and the uInfinity (3Q13).
Figure 22: Qoq revenues and yoy growth
200
uDivine
uDivine App
uInfinity
180
18.00%
16.00%
160
14.00%
140
12.00%
120
10.00%
100
8.00%
80
6.00%
60
40
4.00%
20
2.00%
0
0.00%
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Revenue
Growth YoY
SOURCES: CIMB, COMPANY REPORTS
What does the current marketing programme reveal of OSIM‟s sales efforts
then? In our opinion, the ongoing endorsements by Andy Lau for uDivine
probably reflect an ongoing push into China with an entry-level range of
massage chairs. Andy Lau will appeal to the mature, affluent households in
China. The use of Lee Min-Ho as a new face for OSIM to market its new line of
massage sofas (uDiva, recently launched) probably reflects efforts to sustain
sales in the more affluent key markets of Hong Kong, Taiwan, Singapore and
Malaysia, where households‟ home space is shrinking. We view the Lee Min-Ho
campaign for its new product, uDiva, as an attempt to upgrade consumers from
a starter version of massage sofas (uAngel) to higher price points by riding on
the popularity of K-pop in these affluent markets. The appeal of Andy Lau and
Lee Min-Ho is different but relevant for its target market. Lee Min-Ho has a
wider age range of fans as a result of his breakout role in the award-winning
series “Boys Over Flowers” and will appeal to young families (starting their first
homes) in the four key markets outside China. We expect yoy sales growth to be
driven by the marketing campaign, bringing full-year massage chair equipment
segment revenue growth to 7%.
19
OSIM International
July 8, 2014
Figure 23: Celebrity profiles
Name
Profession
Race/Country
Age
Breakthrough year
Breakthrough production
Audience
Andy Lau
Actor, Singer
Chinese, Hong Kong
52
1982
The Emissary
Women 35 - 55
Lee Min Ho
Actor, Singer
Korean, South Korea
27
2009
Boys Over Flowers
Women 18 - 55
SOURCES: CIMB, COMPANY REPORTS
5.2 The tea story
Digging through the 2013 Annual Report, we find out that TWG Tea made
S$46m in revenues and about S$6m in net profit, on a pro forma basis. We are
aware that F&B stores only account for 30% of group revenues, which implies
that the F&B segment is only a small contributor to TWG Tea group profit after
taking into account rental and staff costs, characteristic of F&B businesses.
TWG Tea currently has >30 tea boutiques (9 in Singapore, 15 in ASEAN
ex-Singapore). TWG Tea plans to expand store count to 40-45 by the end of
2014 and management expects each store to be profitable in their first year.
TWG Tea increased its store count by ten over 2013 and four over 1Q14. We
think the premium tea segment has room to grow. We estimate that total store
count can exceed 100 by 2018, although the amount of earnings contributed
from these stores to overall profitability is less certain. We imagine that the
presence of retail stores and F&B outlets under the TWG Tea brand serves more
to build brand awareness in the luxury segment than to drive profits.
Figure 24: TWG Tea store expansion
4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q 2013 2Q2013 3Q 2013 4Q2013 1Q2014
Number of
outlets
Increase
10
11
12
15
16
17
19
22
26
30
-
1
1
3
1
1
2
3
4
4
SOURCES: CIMB, COMPANY REPORTS
While we applaud TWG Tea‟s store expansion plans, the biggest earnings
growth driver is most likely TWG Tea‟s wholesale segment. In a previous
interview on CNBC (Feb 2012), Mr Taha waxed lyrical about the wholesale
distribution channels. He is most excited by the China market, claiming that
TWG Tea had been approached by Starwood to be present in all of its hotels in
China and that he had partnered with OSIM because of OSIM‟s expertise in the
North Asian markets. In his conversation, he disclosed that the long term goal
for TWG Tea is to become a US$1bn-in-sales company. We believe that if TWG
Tea is to achieve this, the major growth engine must replicate the initial model
in Singapore, that of supplying to premium airlines and five-star hotels in
ASEAN and North Asia. Our model builds in estimates of over S$250m in
revenue for TWG Tea in 2018 and S$39m in net profit for the TWG Tea entity
in 2018, with OSIM‟s share of profit at S$34m.
20
OSIM International
July 8, 2014
5.3 OSIM’s margins vs. peers
We observe OSIM‟s profitability against similar brand management companies
and see distinct margin expansion momentum on the back of its efforts to
optimise store sales and productivity. Excluding Brookstone‟s impact on its
financials, OSIM has made a significant comeback since the global financial
crisis and is currently one of the best amongst its peers in terms of profitability.
OSIM‟s net income margin was 15.7% in CY2013 compared to an average of
10.2% and second only to leader Hermes. The gross margin also came in higher
at 70.3%, which is markedly above the peer group average of 66.3%. We believe
margin expansion will continue as OSIM keeps its focus on store sales and
productivity optimisation.
Figure 25: OSIM's gross profit margin vs. peers (%)
Figure 26: OSIM's net profit margin vs. peers (%)
85%
25%
Title:
Source:
80%
20%
75%
70%
15%
65%
10%
Please fill in the values above to have them entered in your report
60%
5%
55%
50%
0%
OSIM
TOD'S SPA
OSIM
TOD'S SPA
LVMH MOET HENNES
HERMES INTL
LVMH MOET HENNES
HERMES INTL
TIFFANY & CO
TIFFANY & CO
SOURCES: CIMB, COMPANY REPORTS
21
SOURCES: CIMB, COMPANY REPORTS
OSIM International
July 8, 2014
6. VALUATION AND RECOMMENDATION
6.1 Valuation
We compare OSIM against peers in both the global brand management space as
we think that is the most relevant comparison. On a P/E basis, we value OSIM
at 27x CY15 P/E given its 3Y EPS growth rate of 17%, which gives us a fair value
of S$4.91. On a P/BV basis, we apply a 9x book value given OSIM‟s high
recurring ROE of 34%, which gives us a fair value of S$5.00. Our DCF valuation
(WACC 9%) gives us a fair value of S$3.89, which implies 21x CY15 P/E and 7x
P/BV. We blend the three valuation methodologies and arrive at a target price
of S$4.60. Our blended target price implies 25x CY15 P/E and 8x P/BV.
Figure 27: Blended target price
Valuation basis
Multiple (x) Target
price (S$)
$3.89
DCF-FCFF
P/E
P/BV
Blended target price
27x
9x
$4.91
$5.00
$4.60
Comments
WACC: 9%, Terminal value: 2.5%
Implied P/E: 21x, Implied P/BV: 7x
Brand management industry implied multiple of 27x
Brand management industry implied multiple 9x
Implied P/E: 25x, Implied P/BV: 8x
SOURCES: CIMB, COMPANY REPORTS
Figure 28: Forward P/E of luxury peers (x) vs 3Y EPS growth (%)
Figure 29: P/BV of luxury peers (x) vs ROE (%)
35.0
Current: 14.8x
Fair P/E: 27x
CY14 P/BV (x)
CY15 PE (x)
Please fill in the values above to have them entered in your report
Hermes
8
25.0
Tiffany
Tod's
Salvatore
Ferragamo
Prada
10
9x
27x
20.0
Title:
Source:
Titan Co
Titan Co
Hermes
30.0
12
Salvatore
Ferragamo
6
Tiffany &
Co
Tod's
4
LVMH
15.0
2
OSIM
10.0
6%
8%
10%
12%
14%
16%
OSIM
Current: 4.7x
Fair P/BV: 9x
LVMH
0
10%
18%
Prada
15%
3Y EPS growth
20%
25%
30%
35%
40%
Recurring ROE (%)
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
Figure 30: DCF-valuation
(Discounted FCFF)
(S$ m)
PBT
Operating cashflow
Interest paid
Less: Cashflow from investing
Free Cash Flow
Discount Time
Discount Factor
NPV
Enterprise Value
Net Cash / (debt)
Equity Value
No. of outstanding shares
Fair Value
Dec
2009
Dec
2010
Dec
2011
Dec
2012
Dec
2013
Dec
2014F
Dec
2015F
Dec
2016F
Dec
2017F
Dec
2018F
38.57
64.73
1.25
3.98
62.01
67.69
94.50
0.96
15.52
79.94
98.05
99.49
3.11
78.47
24.13
114.84
94.04
5.71
36.07
63.69
129.15
105.22
5.79
4.40
106.62
155.64
137.48
2.89
13.00
127.38
0.23
0.98
124.84
184.66
152.19
0.00
13.00
139.19
1.23
0.90
125.16
206.32
169.86
0.00
13.00
156.86
2.24
0.82
129.37
232.87
190.09
0.00
13.00
177.09
3.24
0.76
133.99
264.87
214.41
0.00
13.00
201.41
4.24
0.69
2204.81
2,718.18
309.71
3,027.88
779,125,956
3.89
Assumptions
Terminal Growth Rate
WACC
2.5%
9.0%
SOURCES: CIMB, COMPANY REPORTS
22
OSIM International
July 8, 2014
6.2 We initiate with an Add rating
We initiate coverage on OSIM with an Add rating and a target price of S$4.60.
At the core of our valuation is the belief that investors have downplayed OSIM
as simply a massage gear retailer. OSIM really is a brand management company,
that much is clear when we consider what it has done with GNC and TWG Tea.
Inherent in such companies are higher operating leverage and higher margins
but why OSIM really deserves the valuation is as follows:
1) A >40% recurring ROE over the past 4 years and an industry-high ROE of
33.9% in CY2014 tell a story of a business that has established a “moat”
with its brand, a big moat with piranhas and crocodiles. The bigger the
company is, the more difficult it is for a competitor to outspend OSIM on
A&P.
2) OSIM enjoys one of the highest profit and gross margins amongst its peers.
It has a profit margin of 15.7% vs. a peer average of 10.2%. OSIM has a
gross margin of 70.3% against a luxury-brand peer average of 66.3%. We
understand the reluctance to view OSIM in the same brand bracket as
Hermes, but if both businesses had similar margins the last eight years and
the former had higher margins than Hermes the past two years, it does
make one pause to consider why it is not appropriate to value OSIM as a
brand company.
3) The added earnings tailwinds from TWG, even as the OSIM massage chair
business will continue to grow from a deeper China penetration and store
optimisation. Over the past years, the bread-and-butter OSIM business
enjoyed margin expansion that allowed earnings growth to outstrip sales
growth, the same trends should continue. We expect half of the group‟s
earnings growth to come from tea and the other half from its original
business. At 17% 3Y EPS growth, we see OSIM as one with likely better
earnings growth potential, within its peer group.
OSIM currently trades at 15x CY15 P/E, which is undemanding against an
industry average of 22x. Against a backdrop of peers where 1) P/E and earnings
growth; and 2) P/BV and ROE; are highly correlated, we believe OSIM is worth
27x CY15 P/E 9x CY14 P/BV. Our target price of S$4.60 implies a P/E of 25x
and a P/BV of 8x.
Figure 31: Peer comparison
Company
Consumer-discertionary
OSIM International
Prada S.p.A.
Samsonite Int'l S.A.
LVMH Moet Hennessy Louis Vuitt
Tiffany & Co
Salvatore Ferragamo SpA
Hermes International
Titan Co Ltd
Tod's SpA
Simple Average
Global F&B chains
Starbucks Corp
Cheesecake Factory Inc/The
Chipotle Mexican Grill Inc
Wendy's Co/The
Burger King Worldwide Inc
Simple Average
Target
Price
Price
(lcl curr) (lcl curr)
Market
Cap
(US$ m)
Bloomberg
Ticker
Recom.
OSIM SP
1913 HK
1910 HK
Add
Reduce
Add
2.69
55.80
24.90
4.60
55.00
28.50
1,681
18,423
4,523
16.8
22.1
21.5
14.8
18.7
18.5
MC FP
P/BV (x)
CY2014
Recurring
ROE (%)
CY2014
Dividend
Yield (%)
CY2014
17.4%
9.6%
20.5%
4.67
4.41
3.36
33.9%
21.3%
16.6%
2.6%
1.4%
2.3%
Core P/E (x)
3-year EPS
CY2014 CY2015
CAGR (%)
Not rated
140.9
na
97,279
18.6
16.7
11.5%
2.46
13.4%
2.4%
TIF US
SFER IM
RMS FP
TTAN IN
TOD IM
Not
Not
Not
Not
Not
rated
rated
rated
rated
rated
102.8
21.63
270.1
357.2
91.00
na
na
na
na
na
13,270
4,949
38,737
5,309
3,784
27.6
23.2
32.5
43.2
20.9
26.2
22.1
19.9
29.3
30.6
18.8
21.8
14.4%
13.8%
11.3%
16.3%
7.2%
13.1%
4.36
7.93
8.33
10.79
3.25
5.61
17.5%
36.5%
28.0%
31.7%
16.3%
22.7%
1.4%
2.1%
1.1%
0.7%
3.0%
1.8%
SBUX US
CAKE US
CMG US
WEN US
BKW US
Not
Not
Not
Not
Not
rated
rated
rated
rated
rated
79.06
46.87
603.6
8.55
27.27
na
na
na
na
na
28.3
20.5
47.9
25.3
28.3
30.0
24.7
17.5
37.6
22.6
24.2
25.3
6.4%
14.3%
22.5%
8.7%
13.5%
13.1%
10.51
4.27
2.54
1.83
5.63
4.96
35.7%
20.0%
22.5%
5.1%
20.5%
20.8%
1.4%
1.3%
0.0%
2.5%
1.2%
1.3%
59,516
2,341
18,762
3,136
9,597
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG
23
OSIM International
July 8, 2014
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Corporate Governance Report:
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and
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The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does
not confirm nor certify the accuracy of such survey result.
Score Range:
90 – 100
80 – 89
70 – 79
Below 70 or
No Survey Result
Description:
Excellent
Very Good
Good
N/A
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OSIM International
July 8, 2014
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Distribution of stock ratings and investment banking clients for quarter ended on 31 March 2014
1416 companies under coverage for quarter ended on 31 March 2014
Rating Distribution (%)
Investment Banking clients (%)
Outperform/Buy/Trading Buy/Add
56.2%
4.6%
Neutral/Hold
28.0%
2.7%
Underperform/Sell/Trading Sell/Reduce
15.8%
1.0%
Spitzer Chart for stock being researched ( 2 year data )
OSIM International (OSIM SP)
Price Close
3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
1.00
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
As at the time of publishing this report CIMB is phasing in an absolute recommendation structure for stocks (Framework #1). Please refer to all frameworks for a definition of any
recommendations stated in this report.
CIMB Recommendation Framework #1
Stock Ratings
Add
Hold
Reduce
Definition
The stock’s total return is expected to exceed 10% over the next 12 months.
The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
The stock’s total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the
stock.
Stock price targets have an investment horizon of 12 months.
Sector Ratings
Overweight
Neutral
Underweight
Definition
An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings
Overweight
Neutral
Underweight
Definition
An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
CIMB Stock Recommendation Framework #2 *
Outperform
Neutral
Underperform
Trading Buy
Trading Sell
The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months.
The stock's total return is expected to be within +/-5% of a relevant benchmark's total return.
The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months.
The stock's total return is expected to exceed a relevant benchmark's total return by 3% or more over the next 3 months.
The stock's total return is expected to be below a relevant benchmark's total return by 3% or more over the next 3 months.
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OSIM International
July 8, 2014
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities
Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily
outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
CIMB Stock Recommendation Framework #3 **
Outperform
Neutral
Underperform
Trading Buy
Trading Sell
Expected positive total returns of 10% or more over the next 12 months.
Expected total returns of between -10% and +10% over the next 12 months.
Expected negative total returns of 10% or more over the next 12 months.
Expected positive total returns of 10% or more over the next 3 months.
Expected negative total returns of 10% or more over the next 3 months.
** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is
permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2013.
AAV – Good, ADVANC - Excellent, AMATA - Very Good, ANAN – Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH – Good,
BCP - Excellent, BEC - Very Good, BGH - not available, BJC – Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET – Very Good, CENTEL – Very Good, CK Excellent, CPALL - Very Good, CPF – Excellent, CPN - Excellent, DELTA - Very Good, DTAC - Excellent, EGCO – Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY –
Excellent, HANA - Excellent, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH – Excellent, ITD – Very Good, IVL - Excellent, JAS – Very Good, KAMART – not available,
KBANK - Excellent, KKP – Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR – Very Good, MAKRO – Very Good, MCOT - Excellent, MEGA – not available,
MINT - Excellent, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS – Excellent,
SAMART – Excellent, SC – Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI – Very Good, SPALI - Excellent, STA - Good, STEC - Very Good, TCAP Excellent, THAI - Excellent, THCOM – Excellent, TICON – Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Excellent, TTW – Excellent, TUF - Very Good,
VGI – Excellent, WORK – Good.
27