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OSIM International Ltd - MANAGEMENT REPLY: Short term weakness, long term strength – which of the analysts is right?

6/9/2013 – OSIM International has reported Q2 results which largely met analyst estimates, but the big question is whether the short term weakness in North Asian sales will be made up in the long term by the growing Chinese middle class.

Growth has now been sustained for 18 consecutive quarters, and the dark days of Brookstone seem far behind the company now.

Question
Question

1. How did you achieve this sustained growth over 18 consecutive months? What were the factors?

Management reply: OSIM is Asia's No1 brand in well-being and healthy lifestyle products.

Our product innovation and competitive positioning have enabled us to achieve record profits. We expect to continue to create higher consumer demand for OSIM products like uDivine App, uAngel, uPhoria, uHug, uPixie, uCozy, uRelax, uPebble, uBio, uSlender and nutritional supplements like Taut, Stem C, Zhi and Liver Protector.


Question
Question

2. As OSIM expands to tap the growth of China's middle class, what lessons is it actively applying from the Brookstone debacle?

Management reply: OSIM has been in China for 20 years now. We are in 45 Chinese cities with 266 outlets.

These are the company's Q2FY13 financials published on July 30:

Revenue: +7.0% to S$165.5 mln
Net Profit: +16.0% to S$26.2 mln
Cash flow from operations: S$30.5 mln vs S$26.3 mln
Cash Reserves: S$237.6 mln vs S$195.8 mln
Final Dividend: 2 cents vs 1 cent

Revenue climbed 7%, despite tougher conditions in China, with the help of a better product mix of massagers and nutritional supplements.

Nutritional supplements subsidiary, ONI Global, and associates DT-OSIM and TWG Tea also played their part.

Question
Question

3. TWG Tea is still a minority-owned joint venture. If it's so good, is there any chance of increasing your stake further?

The company has allocated S$2.5 mln to open new outlets and upgrade existing ones.

It has spent a further S$2 mln and this was on treasury shares.

It also increased its shareholding in associate-JV TWG Tea from 35% to 45% for S$2.

More earnings can be expected for the coming quarters from this move.

As at 30 June 2013 the company was in a net cash position of S$94 mln.

Management expects further growth from market leadership, product innovation and tighter operations.

There will be focus on Taiwan to enhance RichLife performance there.

Analysts surveyed by Reuters have an average OUTPERFORM call with a price target of S$2.34.

Management reply: OSIM has just increased its stake from 35% to 45%. For the TWG Tea joint venture in North Asia, we own a controlling stake of 78% (directly 60% and indirectly 18%).

Bullish analyst report

Bullish analyst report
Bullish analyst report



DBS Vickers Research says the dividend of 2 cents announced this quarter exceeds its 1 cent per quarter estimate.

It has a BUY call with a price target of S$2.50.

Maybank Kim Eng Research says OSIM is laying strong foundations for future growth but it has yet to realise its full potential.

Q2 profits were broadly within expectations though net profit disappointed slightly.

The rise in net profit was achieved by cutting costs, rather than sales growth as initially projected.

Maybank thinks this was caused by a drop in demand, particularly from North Asia.

Question
Question

4. What caused the decline in consumer demand in North Asia?

Management reply: In the context of negative growth of China department stores and tough macro environment, we have achieved positive sales & profit growth.

Question
Question

5. What can you do about it?

(Total 9 questions)

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