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Oriental Capital /Singapore Management University
Oriental Capital Global Investment Research
OSIM International (OSIM.SP)
OSIM: Unearthing a Hidden Gem
9 January 2013
BUY
OSIM Unparalleled in Massage Chair Business
OSIM is peerless in the massage chair industry by possessing both
strong technological expertise and marketing capabilities. Its R&D
capabilities have allowed OSIM to launch many “world-first" products,
and well-executed marketing campaigns have positioned OSIM as the
“go-to” brand for massage chairs. Such unique positioning has also
enhanced OSIM’s pricing power. We expect OSIM to preserve its
unique positioning as its peers lack the capabilities to bridge the gap.
Initiating Coverage
Key Data
Current
Fair Value:
Prev Close:
Upside:
STI:
S$2.18
S$1.78
22.5%
3,223.80
Price Performance Chart
Market Underprices OSIM’s Growth Potential
Recent slower than expected store expansion might have raised
concerns regarding OSIM’s growth prospects in China. We however
remain bullish as China’s massage chair industry is forecasted to
grow 20% annually till 2015, and OSIM has more headroom for
growth as its current market share is far lower than in other markets.
OSIM’s premium and international brand positioning is also expected
to appeal to the increasing affluent and savvy Chinese consumers.
Finally, management’s focus on tier one and two cities points to a
more targeted expansion strategy. We view this development
positively and expect capital utilization to improve moving forward.
OSIM Share Px
(S$)
2.00
STI Index
3,500
3,000
1.50
2,500
2,000
1.00
1,500
Price Perf ormance
OSIM: +2483.5%
STI Index: 83.1%
0.50
-
Jan-09
Jul-09
Jan-10
Jul-10
OSIM
Cash War Chest Offers Financial Independence and
Supports New Ventures
OSIM’s strong positioning and exposure to growth markets have
made it highly cash generative; it has amassed S$184.9m of cash as
of 3Q12. OSIM’s management has indicated its intent to hold
sufficient cash to avoid a replay of the credit crunch experienced in
2008. Excess cash will also provide the firepower to grow OSIM’s
peripheral businesses; management has indicated that it would focus
its resources on TWG Tea. We expect aggressive expansion in North
Asia given OSIM’s effective 74% stake and we are optimistic of TWG
Tea’s unique premium retail high-tea experience
Compelling Valuation
Our 3-stage DCF valuation results in a 12-month price target of
S$2.18, representing a 22.5% upside. We believe the market has
undervalued OSIM’s expansion strategy in China. In addition, the
penetration rate of massage chairs in North Asia (ex China) and
South Asia is also well-poised to rise, which will provide further topline growth for OSIM. Our target price implies a forward P/E of 13x,
lower than its 5-year historical average of 19x. With 2013 EPS growth
of 16%, we yield a PEG ratio of less than 1. At current market
valuation, OSIM is indeed a hidden gem for investors.
TAN Yong Yi
[email protected]
LIM Wei
[email protected]
NAING Ye Lin
[email protected]
Adam TAN Kian Hung
[email protected]
Oriental Capital Global Investment Research
1,000
500
TEO Jie Xiang
[email protected]
Jan-11
Jul-11
Jan-12
STI Index
Jul-12
Jan-13
9 January 2013
About OSIM International
Company description
OSIM International is a
luxury lifestyle and
healthcare retailer with
an Asian market focus
OSIM International is a Singapore-based retailer for luxury lifestyle health
products (notably massage chairs) and nutritional supplements. OSIM has
four business units: 1. OSIM, a lifestyle product specialist (including massage
chairs), 2. GNC and RichLife, nutritional supplements retailers and
manufacturer (only RichLife), 3. TWG Tea, a luxury tea boutique and salon,
and 4. Brookstone, a US-based retailer, though this investment has been
written off in 2008.
Exhibit 1: OSIM Group derives 94% of its revenue from Asia
553,740
Others
6%
508,738
476,767
456,661
58,210
71,530
30,938
41,614
205,397
168,669
South Asia
Revenue (FY11)
37%
553.7m
159,915
159,996
North Asia
57%
225,135
258,642
2008
2009
North Asia
298,455
2010
South Asia
317,405
2011
Others
Source: Company data
OSIM International reported record revenue of S$553.7m for FY11, and a
corresponding net profit of S$69.9m. Its Asian focus is evident; 94% of its
revenue is derived from Asia. OSIM’s management has also indicated that
OSIM constitutes 75% of the Group’s revenue for the first 9 months of FY12.
OSIM Unparalleled in Massage Chair Business
We think OSIM International’s stellar share price performance is driven by its
peerless positioning in the marketplace. Evaluating OSIM and its key
competitors on the basis of their marketing and product innovation (two
categories we think are key success factors), OSIM emerges as the bestpositioned firm given its unique blend of strong product line-up supported by
its well-established distribution channels and marketing efforts. The 2 x 2
matrix below summarizes our view on the marketplace.
Exhibit 2: OSIM Possesses Both Marketing and Technical Expertise
1
High
2
2
Superior and Sustainable Research and
Development Capabilities Differentiates OSIM
from OTO and OGAWA
OSIM’s Strong Marketing Efforts Support
Product Line; Japanese Peers Lack Expertise
Low
Marketing Expertise
1
Low
High
Technical Expertise
Source: Oriental Capital estimates
More importantly, we expect OSIM to remain unchallenged as we anticipate
significant difficulties for both clusters of competitors to bridge the differences.
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Oriental Capital Global Investment Research
9 January 2013
1. Superior and Sustainable Research and Development
Capabilities Differentiates OSIM from OTO and OGAWA
We think OSIM’s product
innovation is sustainable
given strong JV
partnership and CTO
Against OTO and OGAWA which employ similar marketing strategies, we
think OSIM possesses superior product offering due to its R&D capabilities.
Though OSIM products are not patentable which in turn often engender
imitation, we are encouraged by its stellar track record of product innovation.
Successful Product Launches & Awards Support Our View
OSIM’s superior R&D capability is manifested through its constant innovation;
OSIM is often the first among its peers to employ new breakthrough
technology within its products.
Exhibit 3: OSIM Constantly Pioneers Technological Breakthroughs in its Products
2005
OSIM iDesire
World's first full body
massage experience
2008
OSIM uCrown
World's First Anti-Stress
Head Massager
2010
OSIM uDivine
World's first Human-3D
massage chair
2011
OSIM uPhoria
World's first Tui-Na leg
massager
Source: Company news
These innovative products have also received international recognition; OSIM
has won the Red Dot Design Award in 2005, 2007, 2008 and 2011 for its
products, which include uSpace, a massage chair, and uVenus, the world’s
st
1 ambient purifier. OSIM’s success is testimony to its strong product offering
and gives us confidence in its R&D capabilities.
Close Ties with Daito and CTO Sustains R&D Superiority
We expect OSIM to preserve its R&D superiority as it maintains amicable
relationships with its strategic Japanese R&D partner, Daito and Chief
Technology Officer, Mr Tan Kia Tong.
OSIM maintains a close and long-standing relationship with its Japanese joint
venture partner, Daito Electric Machine Industry, which is responsible for both
R&D and manufacturing of OSIM’s products. OSIM currently maintains a 30%
stake in the JV entity, DT-OSIM Healthcare Appliances (Suzhou). Most
recently, OSIM acquired a 30% interest in Suzhou Daitec, yet another JV with
Daito. We view this positively and we expect the relationship to remain strong.
OSIM Chief Technology Officer (CTO), Mr Tan Kia Tong, has spearheaded
OSIM’s relentless ground-breaking R&D since he joined in 2002. Not
coincidentally, since 2003, OSIM launched many of its “World’s first” products
as seen in Exhibit 3.
2. OSIM’s Strong Marketing Efforts Support Product Line;
Japanese Peers Lack Expertise
Beyond a strong product offering, OSIM’s effective marketing campaigns
have positioned OSIM as the “go-to” brand for lifestyle products. A Frost and
Sullivan survey conducted in Hong Kong in 2010 revealed that 75% of all
respondents cited OSIM as the “top-of-the-mind” brand. Our check on
Facebook has also indicated that OSIM has gained the most traction; its Asia
Pacific pages have garnered 80% of the total “Likes” among the three brands.
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Oriental Capital Global Investment Research
9 January 2013
Exhibit 4: OSIM clearly the “go-to” brand for massage chairs and lifestyle products
Frost and Sullivan Hong Kong Consumer Survey
OSIM
Brand Popularity Based on Social Media Traction
OGAWA
6%
75.0%
OTO
19.5%
Panasonic
OTO
14%
3.6%
Sanyo
0.5%
Others
0.0%
OGAWA
0.0%
No brands
identified
OSIM
80%
1.4%
0%
20%
40%
60%
80%
Source: Frost and Sullivan, Facebook, Oriental Capital estimates
Though not representative of OSIM’s standing in all markets, we view this
positively as OSIM clearly possesses expertise in establishing itself in
markets beyond Singapore. This has also translated into financial success;
engagement of Andy Lau to endorse uDivine proved to be a huge success.
In the quarter following the launch of uDivine i.e. 1Q11, OSIM’s revenue grew
12.3% QoQ, 15.7% YoY, and Andy Lau is now synonymous with uDivine.
In contrast, Panasonic and Sanyo are manufacturers which utilize dealers to
distribute their products, and hence marketing is often ceded to the dealers.
Given that Panasonic and Sanyo have utilized such distribution method for all
its products, we believe they lack in-house expertise for marketing and
retailing. Ceding this control, both Sanyo and Panasonic will have lower
control over marketing campaigns and customer relationships management.
Though Panasonic and Sanyo possess comparable or even superior
technology, their inability to support their products with commensurate
marketing efforts diminishes their technological superiority.
OSIM’s Unique Positioning Enhances Pricing Power
OSIM’s unique positioning translates into increasing pricing power; our pricing
benchmark reveals that OSIM’s price for its leg massager has steadily
increased, while its competitors have reduced their prices. We view this
positively given that uPhoria’s sales have been brisk, i.e. the higher prices did
not impact demand for OSIM’s products.
As for massage chairs, we see that OSIM has largely maintained its prices
while OTO and OGAWA have reduced their prices, which provides further
support for our view. (Refer to Appendix K)
Exhibit 5: Strong Pricing Power of OSIM Relative to OTO, OGAWA
Price of Leg
Massager (S$)
900
OSIM uPhoria
700
500
OTO Powerflex
OGAWA Foottee
300
2003
2005
OTO
2007
2009
2010
Ogawa
2011
2012
OSIM
Source: Company data, Oriental Capital estimates
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Oriental Capital Global Investment Research
9 January 2013
Market Underprices OSIM’s Growth Potential
The recent slower than expected store expansion of OSIM (2 stores for 9M12
vs. 50 as guided) might have raised concerns about OSIM’s growth potential.
In particular, we think concerns might have been raised regarding the slowing
Chinese retail market.
On the contrary, we are bullish on China’s massage chair growth outlook. We
considered the affordability of massage chairs to forecast future penetration;
our correlation analysis of % of households with >US$25k income and
massage chair penetration reveals a positive relationship. Significant growth
is expected from China as its % of households with >US$25k income is slated
to grow at a CAGR of 38.3% till 2017. OSIM’s significantly lower market share
also provides more growth headroom. We coin this, the income effect.
Exhibit 6: Asia’s economic growth expected to provide uplift in penetration rate
% of HH with
>US$25k income
Growth
70%
Penetration
Rate (%)
10%
60%
8%
SG
HK
6%
50%
40%
y = 0.0673x + 0.0196
MY
TW
30%
4%
20%
10%
2%
0%
CN
0%
0%
20%
40%
60%
80%
% of Households with >US$25k Annual Income
OSIM's current
100% market share
China
Malaysia
Taiwan
Hong Kong
15%
21%
65%
74%
2013
2014
2015
Singapore
65%
2016
2017
Source: EIU, Frost and Sullivan, The Star, Company data, Oriental Capital estimates
Beyond the income effect, we think longer term changes in consumer
preferences i.e. preference effect can create new demand for healthcare
products as consumers become increasingly savvy and knowledgeable.
We substantiate our view by including Japan in our regression analysis.
Though it has similar affluence levels as Singapore, its penetration is much
higher. This, we think, is a reflection of higher consumer awareness towards
healthcare products, and we anticipate other Asian countries to eventually
catch onto similar trends. This will in turn enhance the relationship between
income and penetration rate. Consumer healthcare spending in all five Asian
markets is also expected to grow. Hence, we are cautiously optimistic of the
potential upside that can arise from increasing consumer awareness towards
healthcare products.
Exhibit 7: Changes in Consumer Preferences Expected to Provide Further Sales Upside
Consumer Healthcare Spending Forecast
Penetration
Rate (%)
30%
Growth Rate
(%)
8%
JP
Market Size
(US$bn)
28
24
25%
6%
20
20%
10%
MY
5%
16
4%
15%
HK
y=
TW
0.0146e2.4385x
12
2%
8
0%
-
4
SG
CN
0%
0%
20%
40%
60%
80%
100%
% of Households with >US$25k Annual Income
120%
CAGR
2012
CN
HK
TW
SG
MY
5.6%
1.8%
4.1%
1.4%
3.6%
2013
2014
2015
2016
Market Size (RHS)
Source: EIU, Euromonitor International
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Oriental Capital Global Investment Research
9 January 2013
Large & Growing Chinese Market Underpins OSIM’s Growth
OSIM is currently the largest player in China with a market share of ~15%.
We view OSIM’s market leadership position positively as we are bullish on the
Chinese massage chair market and we believe OSIM is best-positioned to
succeed. Three key insights give us confidence:
•
•
•
China’s market for massage chairs is large and show strong
untapped potential and high growth moving forward
OSIM is poised to benefit from the large and growing market given its
premium positioning and international brand recognition
Management’s recent strategy of store rationalization i.e. to focus on
key tier 1 and 2 cities is in the right direction
Exposure to Large Chinese Market with Huge Untapped
Growth Potential
OSIM’s share of pie has
tremendous potential
to increase amidst a
fast-growing market
OSIM currently has 274 stores in China with potential net new stores
expected annually. The Chinese market is highly attractive, with the top eight
cities alone commanding a total market size of ~US$900m by 2015E.
According to a report published by Hejun Consulting, the Chinese massage
chair industry is also expected to grow at ~20% CAGR from now till 2015E.
Frost & Sullivan has also projected the Chinese health and wellness
equipment industry to grow at 18.3% annually till 2015E to reach S$5.7bn.
With a large market and strong growth, we estimate OSIM’s current revenue
derived from China as a % of total potential market in China to be 4%. This is
in contrast to the 15% market share that OSIM currently has. Assuming that
OSIM maintains its market share as the market grows, we expect to see
revenue upside of ~73% above current levels in China.
Exhibit 8: Large and Growing Chinese Market Shows Upside Potential
OSIM’s current revenue share
Competitor’s estimated revenue share
Total untapped potential revenue share
Heilongjiang
Jilin
Beijing market:
S$245m
Liaoning
Xinjiang
Hebei
Inner Mongolia
Gansu
Ningxia
Qinghai
Gansu
Shaanxi
Beijing
Tianjin
Tianjin available
market: S$145m
Shanxi
Shandong
Anhui
Tibet
Hubei
Sichuan
Chongqing
Hunan
Chongqing available
market: S$61m
Shanghai
Shanghai available
market: S$298m
Zhejiang
Jiangxi
Guizhou
Yunan
Suzhou available
market: S$39m
Jiangsu
Henan
Guangxi
Hangzhou available
market: S$48m
Fujian
Guangdong
Guangzhou available
market: S$44m
Shenzhen available
Hainan market: S$15m
Source: Oriental Capital estimates
OSIM’s Premium and International Positioning to Thrive in
Growing Chinese Luxury Market
The appeal of OSIM’s premium and international positioning increases as
consumers become more wealthy and savvy. Across all its competitors, OSIM
has the highest price points in China, cementing its premium positioning.
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Oriental Capital Global Investment Research
9 January 2013
Exhibit 9: OSIM’s premium and international positioning caters strongly to the luxury market
Top 3 buying factors for Luxury Purchases
荣泰: RMB 32,800
OTO Bodycare: RMB 29,800
2008
2010
Readyto-wear
1.
2.
3.
Good material
Superior craftsmanship
Innovative design
Superior craftsmanship
Innovative design
Good material
1.
Leather
goods
1.
2.
3.
Ogawa/奥佳华: RMB 16,000
Dotast (多迪斯泰): RMB 14,767
Mid-tier
KGC: RMB 17,400
LIFE POWER/生命动力: RMB 16,000
艾力斯特: RMB 13,800
凯仕乐: RMB 12,188
松科: RMB 9,900
司达康: RMB 9,900
Rovos/荣耀: RMB 8,400
KUS: RMB 7,980
乐尔康: RMB 6,800
1.
2.
1.
2.
3.
Innovative design
Superior craftsmanship
Timeless style
1.
2.
3.
Superior craftsmanship
Innovative design
Internationally well-known
brand
1.
2.
3.
Superior craftsmanship
Innovative design
Internationally wellknown brand
1.
2.
Superior craftsmanship
Internationally well-known
brand
Innovative design
3.
Panasonic//松下: RMB 32,000
Jewelry
Mass
Price of massage chairs
美国喜健: RMB 35,800
Premium
Osim/傲胜 Udivine Sport: RMB 44,000
Watches
2.
3.
3.
Superior craftsmanship
Internationally well-known
brand
Good material
Internationally well-known
brand
Superior craftsmanship
Good material
Source: McKinsey– Understanding China’s Growing Luxury Market, Oriental Capital estimates
International brand
ranks high on luxury
purchase
considerations
favoring OSIM
A McKinsey study on the Chinese luxury market indicates that “internationally
well-known brand” have in recent times emerged as the top three factors for
luxury purchases across all surveyed categories (See Exhibit 9). OSIM’s
global presence in 30 countries and 74% market share in Hong Kong
(gateway to China) clearly signals its international status. Coupled with its
luxurious positioning, we believe OSIM can gain strong traction among
Chinese consumers.
In addition, a report published by Hejun Consulting Group shows OSIM
enjoying high brand awareness alongside its Japanese peers. However,
OSIM’s market share far supersedes that of its Japanese competitors. We
think their brand awareness might have stemmed from other products instead
of their massage chairs and hence the significantly lower market share.
Exhibit 10: OSIM Enjoys High Brand Awareness and Market Share
Brand Awareness
High
Chinese
players
Low
Low
Market Share
High
Source: Hejun Consulting Group
With a premium brand that we anticipate will become increasingly popular
among the Chinese consumers, and a leading position in brand awareness
and market share, we think OSIM is best-positioned among its peers to
succeed and capitalize on the rising demand for massage chairs in China.
OSIM is Geared to Succeed Strategically in China
OSIM’s store
rationalization
focuses efforts on
key luxury markets
OSIM has in recent times engaged in store rationalization across China
closing down unprofitable outlets and moving focus toward key tier 1 and 2
cities. We view this move favourably as the luxury market in China is heavily
skewed towards the top tier cities. The top 15 cities in China carry 71% of all
luxury stores, and massage chair purchases are largely concentrated in tier 1
and 2 cities as illustrated in Exhibit 11 below.
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Oriental Capital Global Investment Research
9 January 2013
Exhibit 12: Luxury stores concentrated in top 15 cities; Massage chair purchases in tier 1 and 2 cities
No of Luxury Brands Stores (2011)
Beijing
62
Tianjin
Shanghai
55
Suzhou
Hangzhou
27
Nanjing
Dalian
Chengdu
21
19
Qingdao
Shenzhen
Kunming
Shenyang
18
Harbin
16
Wenzhou
Guangzhou
13
Level of
Spend
13
13
12
12
11
11
11
Tier 1
City
Highest
Concentration
Tier 2
City
Moderate
Concentration
Tier 3
City
Tier 4
City
Tier 5
City
Developed
Cities
Emerging
Cities
Provincial Townships
Cities
Source: JLL, Hejun Consulting Group
Against a strong macro backdrop, OSIM’s well-aligned brand positioning and
strategic store rationalization plan will allow it to best capitalize on China’s
growth. We are thus bullish on OSIM’s growth prospects in China.
Cash War Chest Offers Financial Independence
and Supports New Ventures
OSIM’s massage chair business is now the de-facto cash cow for the Group.
Though there has been little net change in stores, profit before tax has
averaged S$10m or higher every quarter since 1Q10. With relatively muted
capital expenditure requirements and strong profits, OSIM’s massage chair
business generates strong free cash flows for the firm.
Exhibit 13: OSIM business highly cash generative for Group
PBT (S$m)
% change in OSIM
stores
25
6%
20
4%
15
2%
10
0%
5
-2%
-
-4%
1Q10
2Q10
3Q10
4Q10
1Q11
Profit before taxation
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
% Change in Total Osim outlets
Source: Company data
Not surprisingly, OSIM has amassed S$184.9m cash as of 3Q12, and we
think this war chest allows OSIM to achieve two objectives: 1) to attain
financial independence, and 2) finance new promising business ventures
OSIM Seeks Financial Independence to Avoid Replay of
Financial Crisis
OSIM’s business performance nosedived during the financial crisis, with its
revenue falling 13% YoY and OSIM reported a net loss of S$98.0m (including
an impairment loss of S$77.3m). OSIM had also S$32.7m of debt that was
due in 2009. The poor macro outlook meant that OSIM had no access to debt
markets, and was compelled to turn to the equity market for capital.
In January 2009, OSIM announced a 2-for-9 rights issue at S$0.055 per
share, a 31% discount to the closing price of S$0.08 prior to the
announcement. We think the rights issue was launched at such steep
discount to compel shareholders to subscribe and it raised S$6.5m for OSIM.
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Oriental Capital Global Investment Research
9 January 2013
Though OSIM’s financials have now turned around, the management has
indicated its intent to hold sufficient cash to avoid a replay of the credit crunch,
which compelled it to raise equity capital under such unfavourable conditions.
We concur with the management, and think that such financial independence
would augment confidence in the financial health of OSIM.
TWG Tea Shows Growth Potential; Offers Value Accretive
Investment Opportunity
OSIM’s management has recently indicated its intent to scale back on
RichLife and GNC, and to channel resources towards expanding TWG Tea.
OSIM acquired 35% stake in TWG Tea in 2011, and concurrently set up TWG
Tea North Asia joint venture with TWG Tea, of which OSIM holds a controlling
60% stake (74% effective stake). Given its controlling stake in the North Asia
business, OSIM’s management has signalled its intent to roll out 5 – 8 stores
in each of the four countries within the region over the next 3 to 5 years.
TWG Tea is a luxury tea boutique and salon where its stores are situated in
upmarket malls across Asia. Bringing the hotel high-tea concept to retail mall
is first of its kind, and is currently an untapped market. Our visits to its stores
in Hong Kong, International Financial Centre, and Singapore, Marina Bay
Sands convinced us of TWG Tea’s success; stores were full throughout the
day, and also cater to tourists with its pre-packaged premium tea.
We view TWG Tea’s business highly favourably given its unique positioning
and think North Asia offers substantial growth opportunities. To substantiate
our view, we considered cities where TWG Tea can penetrate. Given its
premium positioning, we benchmarked TWG Tea’s expansion opportunities
against presence of luxury malls in the four regions, and came up with a list of
cities that can accommodate TWG Tea stores. Based on our estimates, there
are 22 cities that TWG Tea can potentially penetrate.
Exhibit 14: Cities which TWG Tea can potentially penetrate
Hong Kong
Hong Kong
Shanghai
Shenyang
Ning Bo
Qingdao
China
Korea
Beijing
Chengdu
Seoul
Busan
Gyeonggi-do
Ulsan
Shenzhen
Wuhan
Xi-an
Chong Qing
Daegu
Gwangju
Nanjing
Hang Zhou
Incheon
Taiwan
Taipei
Kao-hsiung
Source: Oriental Capital estimates
Using GDP as an indicator, we estimated these 22 cities to collectively
support 62 TWG Tea stores, which is ~280% higher than the management’s
expansion plan. Hence, we remain bullish on the prospects of TWG Tea, and
believe that it will effectively utilize the capital that OSIM generates.
Attractive Valuation; TP: S$2.18
DCF fair value of
S$2.18 implies 22.5%
upside
We believe the market has not fully priced in OSIM’s growth prospects in
China, where demand continues to be fuelled by both income and preference
effects. We foresee similar effects in North Asia (ex China) and South Asia,
albeit at a slower rate compared to China. For the GNC/RichLife business, we
estimate growth rates to follow healthcare spending patterns expected of the
respective geographical regions. We value OSIM using a 3-stage DCF model
with terminal growth of 1.5% and WACC of 13.8%. On this basis, we arrive at
a fair value of S$2.18, implying an upside of 22.5%. Our price target also
implies a forward P/E of 13x (lower than 5-year historical average of 19x).
With 16% 2013 EPS growth rate, we yield a PEG ratio below 1 for both
trading and forward P/E. These show us that OSIM is indeed a compelling
investment at current market valuation.
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Oriental Capital Global Investment Research
9 January 2013
Exhibit 14: DCF Valuation Reveals Value in OSIM
S$'000
EBIT(1-t)
Add: Depreciation & Amortisation
Less: Change in Non-Cash Working Capital
Less: Capital Expenditures
FCFF
Discount factor
PV
Enterprise Value
Less:
Net debt (cash)
Minority Interests
Equity Value
Fair value per share
Current share price
Upside
2013F
100,677
10,068
188
(16,258)
94,675
2014F
114,174
11,692
(1,588)
(17,740)
106,539
2015F
129,520
13,295
(1,956)
(19,447)
121,413
2016F
142,878
14,940
(2,068)
(21,413)
134,336
2017F
156,888
16,677
(4,042)
(16,519)
153,003
2018F
163,392
16,826
(388)
(17,320)
162,511
2019F
171,113
17,143
(268)
(18,358)
169,630
0.88
83,443
1,641,820
0.77
82,495
0.68
82,595
0.60
80,372
0.52
80,310
0.46
74,941
0.41
68,724
2020F Terminal
177,297
17,642
(173)
(19,605)
175,161 1,442,652
0.36
62,324
0.36
513,309
40,578
3,049
1,598,193
2.18
1.780
22.5%
Source: Oriental Capital estimates
Exhibit 15: Sensitivity reveals limited downside; Historical P/E indicates more upside potential
Terminal Growth
Share Price
2.18
0.5%
1.0%
1.5%
2.0%
2.5%
12.8%
2.30
2.37
2.45
2.53
2.63
13.3%
2.18
2.24
2.31
2.38
2.46
WACC
13.8%
2.06
2.12
2.18
2.25
2.32
(S$)
14.3%
1.96
2.01
2.06
2.12
2.19
14.8%
1.86
1.91
1.96
2.01
2.07
2.20
18x
2.00
16x
1.80
1.60
14x
1.40
12x
1.20
10x
1.00
0.80
0.60
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Source: Oriental Capital estimates
Risks to Our BUY Call
Key risks to our investment thesis for OSIM are: 1. Slowdown in the Chinese
economy, 2. Corporate governance concerns arising from poor disclosure,
and 3. Weaker than expected demand for new products
Slowdown in the Chinese Economy
OSIM generates ~21% of its revenue from China. Given that OSIM’s products
are discretionary in nature, a slowdown in China can potentially heighten
earnings downside risk. However, OSIM caters largely to the luxury market
and we think these consumers’ purchasing power is unlikely to be significantly
impacted by an economic slowdown. Recent data has also indicated that the
Chinese economy has bottomed out and is once again picking up.
Corporate Governance Concerns Arising from Poor
Disclosure
OSIM’s poor financial and operating performance disclosure has raised
concerns regarding OSIM’s corporate governance. Though we concede that
there is room for improvement, it is reassuring that ~76% of Ron Sim’s wealth
stems from his direct stake in OSIM when calculated against his estimated
net worth of US$435m (Forbes, July 2012). Furthermore, Ron Sim has an
additional ~24% deemed stake in OSIM, which increases his stake in the firm.
Hence, we believe that his interests are aligned with that of the shareholders.
Weaker than expected Demand for New Products
OSIM’s strong growth trajectory has largely been driven by its strong product
offering, most notably the uDivine that was launched in 2010. Such success
also raises the bar for OSIM; we think it is essential for OSIM to continue
anticipating consumers’ preferences in order to lead its peers in product
innovation. Nonetheless, we take comfort from the fact that OSIM maintains
strong relationships with its JV partner and CTO.
11
Oriental Capital Global Investment Research
9 January 2013
Disclaimer
Each research analyst primarily responsible for the content of this research report, in whole or in part,
certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the
views expressed accurately reflect his or her views about those securities or issuers; and (2) he or
she has given due credits and sources to the data, resources and information presented in this report
that have been derived from brokerage research reports and databases.
This report is published by Oriental Capital. Opinions are subject to change without notice. This
document is prepared for Oriental Capital clients. Please consult your financial advisor before
engaging in any transactions. Oriental Capital and the covering analyst accepts no liability whatsoever
for any direct or consequential loss arising from any use of this document or further communication
given in relation to this document.
12
Oriental Capital Global Investment Research
9 January 2013
Appendix A: Financial Statements
Balance Sheet
S$'000
Current assets
Loans to associated companies
Stocks
Trade debtors
Other debtors deposits and prepaid operating expenses
Due from subsidiaries (trade)
Due from subsidiaries (non-trade)
Due from affiliated companies (trade)
Due from affiliated companies (non-trade)
Due from associated companies (trade)
Due from associated companies (non-trade)
Due from joint venture (trade)
Due from joint venture (non-trade)
Properties held-for-sale
Short term investment
Fixed deposits
Cash and bank balances
Total Current Assets
2010
2011
2012F
2013F
2014F
2015F
46,735
38,003
8,551
467
13
1
1,828
16,793
56,364
168,755
12,800
52,303
40,974
10,483
1,016
260
10,910
117,351
76,462
322,559
1,170
52,843
42,472
9,971
711
5
523
236
768
52
10,910
71,906
202,729
394,297
1,204
57,930
46,561
10,931
780
5
573
259
842
57
10,910
78,828
262,921
471,800
1,279
65,762
51,427
12,074
861
6
633
286
930
63
10,910
87,067
330,714
562,012
1,371
75,266
57,311
13,455
960
7
705
319
1,036
70
10,910
97,028
408,376
666,813
18,635
12,592
16,648
19,872
44,344
16,543
13,428
7,480
1,624
70,407
17,459
7,941
2,358
108,517
24,647
268
44,844
17,029
7,479
10,134
4,177
108,577
30,837
294
45,392
17,561
8,199
11,109
4,579
117,970
36,885
324
45,997
18,149
9,056
12,270
5,057
127,738
43,036
361
46,671
18,804
10,092
13,674
5,636
138,275
Total Assets
239,162
431,076
502,873
589,770
689,750
805,088
Current liabilities
Trade creditors
Other creditors and accruals
Provisions
Due to subsidiaries (trade)
Due to subsidiaries (non-trade)
Due to affiliated companies (trade)
Due to affiliated companies (non-trade)
Due to associated companies (trade)
Due to associated companies (non-trade)
Due to joint venture (trade)
Short-term bank loans
Provision for income tax
Bank loans - current portion
Obligations under finance leases - current portion
Liability component of Convertible Bond-current portion
Bills payable to banks (unsecured)
Bank overdrafts
Total Current Liabilities
19,039
55,918
5,682
79
19,433
218
99
1,251
10,998
357
58
13,670
126,802
21,025
57,472
5,860
38
22,448
292
17,121
40
16,260
140,556
24,282
49,208
6,609
3
60
17,675
255
353
5,006
11,446
15,649
20,616
292
151,453
26,619
53,944
7,246
3
66
19,376
280
387
5,488
12,547
17,156
22,600
320
166,032
29,402
59,583
8,003
3
73
21,401
309
427
6,061
13,859
18,949
24,962
353
183,385
32,765
66,399
8,918
4
81
23,850
345
476
6,755
15,444
21,117
117,040
27,818
394
321,406
119
445
1,864
2,428
117,040
77
513
4,383
122,013
117,040
482
3,420
120,943
117,040
529
3,750
121,318
117,040
584
4,142
121,766
651
4,615
5,266
129,230
262,569
272,396
287,350
305,151
326,672
72,410
(37,662)
–
98,018
545
4,863
7,699
2,724
(10,171)
(30,302)
108,124
63,983
(14,277)
3,773
144,810
545
5,477
2,724
(14,544)
(27,033)
165,458
63,983
(14,277)
3,773
206,663
545
5,477
2,841
(14,544)
(27,033)
227,428
63,983
(14,277)
3,773
278,606
545
5,477
2,841
(14,544)
(27,033)
299,371
63,983
(14,277)
3,773
360,785
545
5,477
2,841
(14,544)
(27,033)
381,550
63,983
(14,277)
3,773
454,602
545
5,477
2,841
(14,544)
(27,033)
475,367
1,808
109,932
3,049
168,507
3,049
230,477
3,049
302,420
3,049
384,599
3,049
478,416
Non-current assets
Fixed assets
Investment property
Subsidiaries
Associated companies and a joint venture
Intangible assets
Loan to an associated company
Long-term investment
Long-term receivables
Deferred tax assets
Total non-current assets
Non-current liabilities
Liability component of Convertible Bond
Bank loans - non-current portion
Obligations under finance leases - non-current portion
Provision for pension benefits
Deferred tax liabilities
Total non-current liabilities
Total Liabilities
Equity attributable to equity holders of the Company
Share capital
Treasury shares
Equity component of convertible bonds
Accumulated profits
Enterprise expansion funds
Capital reserves
Hedging reserve
Warrant reserve
Revaluation reserve
Premium on purchase of minority interests’ shares
Foreign currency translation reserve
Minority interests
Total equity
13
Oriental Capital Global Investment Research
9 January 2013
Income Statement
S$'000
Revenue
Other operating income
Changes in inventories of finished goods
Finished goods purchased
Employee benefits expense
Depreciation and amortisation expenses
Other operating expenses
Financial expenses
Financial income
Impairment loss on intangible assets
Impairment losses on quoted and unquoted equity shares
Reversal of impairment loss on unquoted equity shares
2010
508,738
15,415
(10,866)
(165,462)
(79,404)
(11,276)
(186,732)
(961)
197
(2,934)
-
Share of profits/(losses) of associated companies and a joint
venture before financial expenses and impairment loss
Share of financial expenses of a joint venture
Share of impairment loss of a joint venture
2011
553,740
13,082
5,568
(177,533)
(88,264)
(11,472)
(186,785)
(3,108)
1,238
(8,896)
930
975
-
Profit before taxation
Taxation
Profit for the year
(451)
-
67,690
(17,881)
49,809
98,049
(28,110)
69,939
2012F
587,149
13,205
540
(186,362)
(93,589)
(8,797)
(198,054)
(4,389)
3,280
-
2013F
643,666
14,476
5,087
(202,257)
(102,598)
(10,068)
(217,118)
(4,389)
4,648
-
500
-
2014F
710,941
15,989
7,832
(221,163)
(113,321)
(11,692)
(239,811)
(4,389)
5,783
-
548
-
2015F
792,277
17,819
9,504
(244,001)
(126,286)
(13,295)
(267,247)
(4,389)
7,070
-
605
-
674
-
113,483
(26,393)
87,090
131,994
(30,698)
101,296
150,774
(35,065)
115,709
172,126
(40,031)
132,095
101,296
16%
115,709
14%
132,095
14%
Other comprehensive income:
Net gain in hedging reserve
Reclassification Adjustment
Revaluation reserve
Foreign currency translation
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
(2,513)
(3,824)
(6,337)
43,472
80%
3,393
3,393
73,332
69%
87,090
19%
50,069
(260)
49,809
69,063
876
69,939
81,865
5,225
87,090
95,218
6,078
101,296
108,766
6,943
115,709
124,169
7,926
132,095
43,384
88
43,472
101%
7
7
72,332
1,000
73,332
38%
10
9
81,865
5,225
87,090
19%
12
11
678,314
738,119
678,314
738,119
108,766
6,943
115,709
14%
16
15
16
678,314
738,119
124,169
7,926
132,095
14%
18
17
678,818
758,140
95,218
6,078
101,296
16%
14
13
13
678,314
738,119
Profit attributable to:
Equity holders of the Company
Non-controlling interests
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share (cents)
Basic
Diluted
Weighted Average number of Shares ('000)
For Basic
For Diluted
Key Assumptions (S$'000)
-
678,314
738,119
2012F
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F
Revenue Assumptions
OSIM Revenue Growth %
China
North Asia ex China
South Asia
America/Africa/Europe/Middle East/Oceania
25%
2.8%
2.7%
0.0%
28%
7.0%
8.5%
0.0%
43.5%
28%
7.7%
8.8%
0.0%
29%
7.8%
9.3%
0.0%
20%
7.1%
8.6%
0.0%
13%
7.3%
8.7%
0.0%
9%
4.9%
5.8%
0.0%
6%
3.3%
3.8%
0.0%
4%
2.2%
2.6%
0.0%
Non-OSIM Revenue Growth %
GNC/RichLife
TWG
3.5%
50%
3.5%
27%
3.5%
21%
3.5%
17%
3.5%
15%
1.5%
13%
1.5%
11%
1.5%
10%
1.5%
9%
2
0
0
0
12
3
3
0
20
12
3
3
0
12
3
3
0
12
3
3
0
8
2
0
0
5
1
0
0
4
1
0
0
2
1
0
0
Net New Stores
China
North Asia ex China
South Asia
America/Africa/Europe/Middle East/Oceania
Capex Assumptions
OSIM China
OSIM (outside China)
GNC
RichLife
TWG
Total Capex
120
7,485
968
5,000
13,572
720
1,800
8,624
1,115
4,000
16,258
720
1,800
9,936
1,284
4,000
17,740
720
1,800
11,447
1,480
4,000
19,447
720
1,800
13,189
1,705
4,000
21,413
480
600
10,130
1,309
4,000
16,519
320
400
11,157
1,442
4,000
17,320
213
267
12,289
1,589
4,000
18,358
142
178
13,535
1,750
4,000
19,605
14
Oriental Capital Global Investment Research
9 January 2013
Cash Flow Statement
S$'000
Cash flows from operating activities
Profit before taxation
Adjustments for:
Share of losses of associated companies and a joint venture
Depreciation of fixed assets
Gain on disposal of unquoted equity shares
Depreciation of investment property
Loss on disposal of fixed assets
Gain on disposal of properties held-for-sale
Fair value gain on short term investments
Loss on disposal of a business operation
Loss on disposal of a subsidiary
Loss on liquidation of an associated company
Intangible assets written off
Amortisation of intangible assets
Impairment loss on intangible assets
Impairment loss on fixed assets
Impairment losses on quoted and unquoted equity shares
Reversal of impairment loss on unquoted equity shares
Losses on deemed changes in shareholdings in a subsidiary and a joint venture
Share-based compensation expense
Write-off of fixed assets
Write-off of intangible assets
Financial income
Financial expenses
Provision
Operating profit before working capital changes
(Increase)/decrease in:
Stocks
Trade debtors
Other debtors, deposits and prepaid operating expenses
Due from affiliated companies (trade)
Due from affiliated companies (non-trade)
Due from associated companies (trade)
Due from associated companies (non-trade)
Due from joint venture (trade)
Due from joint venture (non-trade)
(Decrease)/increase in:
Trade creditors
Other creditors and accruals
Due to affiliated companies (trade)
Due to affiliated companies (non-trade)
Due to associated companies (trade)
Due to associated companies (non-trade)
Due to joint venture (trade)
Provision for pension benefits
Bills payable to banks
Cash flows generated from operations
Income tax paid, net of refund
Net cash flows generated from operating activities
Cash flows from investing activities
Purchase of fixed assets
Proceeds from disposal of fixed assets
Proceeds from disposal of a business operation
Proceeds from liquidation of an associated company
Proceeds from disposal of properties held-for-sale
Interest received
Dividend received from an associated company
Purchase of shares in subsidiaries
Acquisition of additional interests in subsidiaries
Increase in investment in an associated company
Increase in investment by a minority shareholder
Acquisition of intangible assets
Loan to an associated company
Repayment of loan from an associated company
Acquisition of an associated company
Purchase of unquoted debt securities
Purchase of unquoted investment
Purchase of quoted equity shares and debt securitites
Proceed from disposal of unquoted equity shares
Net cash flows used in investing activities
Cash flows from financing activities
Acquisition of non-controlling interests
Capital contribution from a non-controlling interest
Receipts from new bank loans
Repayment of bank loans
Repayment of finance lease obligations
Retirement of Covertible Bonds
Purchase of treasury shares
Proceeds from issuance of ordinary shares
Proceeds from issuance of warrants
Proceeds from issuance of rights shares
Proceeds from issuance of convertible bonds (net)
Proceeds from exercise of warrants
Proceeds from exercise of employees’ share options
Dividends paid on ordinary shares
Interest paid
Net cash flows used in financing activities
Net Increase/Decrease in cash and cash equivalents
Net effect of exchange rates changes
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year (Note 22)
2010
2011
2012F
2013F
2014F
2015F
67,690
98,049
113,483
131,994
150,774
172,126
(975)
10,047
(4,962)
(78)
1,229
2,934
2,122
192
(197)
961
1,934
80,897
451
10,958
(7)
187
(82)
514
8,896
(930)
282
23
(1,238)
3,108
1,526
121,737
(500)
8,797
(3,280)
4,389
749
123,639
(548)
10,068
(4,648)
4,389
636
141,892
(605)
11,692
(5,783)
4,389
757
161,224
(674)
13,295
(7,070)
4,389
916
182,982
10,866
(5,433)
(697)
623
(9)
31
(1,422)
-
(5,568)
(2,971)
(3,878)
467
13
(1,016)
(259)
1,828
-
(540)
(3,691)
512
(711)
(5)
493
24
(768)
(52)
(5,087)
(5,064)
(960)
(68)
(0)
(50)
(23)
(74)
(5)
(7,832)
(6,028)
(1,143)
(82)
(1)
(60)
(27)
(88)
(6)
(9,504)
(7,287)
(1,381)
(99)
(1)
(72)
(33)
(106)
(7)
(2,172)
20,251
(35)
3,088
(88)
(124)
4,897
110,673
(16,170)
94,503
1,986
(1,554)
(41)
3,015
74
(99)
2,590
116,324
(17,089)
99,235
3,257
(8,264)
3
22
(4,773)
(37)
353
(31)
4,647
114,077
(34,849)
79,228
2,337
4,737
0
6
1,701
25
34
46
2,012
141,459
(29,669)
111,791
2,782
5,638
0
7
2,025
29
40
55
2,396
158,932
(33,841)
125,092
3,364
6,817
0
8
2,448
35
49
67
2,896
180,176
(38,551)
141,625
(11,842)
6,039
3,368
197
(552)
176
(408)
(12,498)
(15,520)
(12,193)
51
1,015
(449)
(12,800)
(31,360)
(23,755)
937
(78,554)
(13,840)
3,280
(486)
(16,284)
4,648
(532)
(34)
(17,771)
5,783
(588)
(75)
(19,484)
7,070
(655)
(92)
11,630
9,980
10,565
(720)
(12,923)
(857)
(13,507)
(1,036)
(14,197)
(1,856)
(24,890)
(90)
(2,386)
1,538
12,800
(14,382)
(57)
(41,608)
17,745
779
(13,261)
(967)
(64,148)
(26,511)
118,300
30,277
464
(21,913)
(594)
97,536
20,655
(4,389)
(25,237)
(8,971)
1,988
(4,389)
(29,353)
(31,754)
2,367
(4,389)
(33,530)
(35,552)
2,861
(4,389)
(38,278)
(39,806)
14,835
(4,912)
63,234
73,157
118,217
2,439
73,157
193,813
80,822
193,813
274,635
67,113
274,635
341,748
76,032
341,748
417,781
87,622
417,781
505,403
15
Oriental Capital Global Investment Research
9 January 2013
Appendix B: Method for Calculation of China’s
Market Size and OSIM’s Share of Market
Overview of Methodology
To better understand the size of China’s market potential and assess the headroom for growth of
OSIM in China, we embark on a three stage process to derive three key outcomes: (a) China’s market
potential, (b) OSIM’s share of the pie and (c) potential headroom for growth.
The three stage process is outlined as follows:
1) Estimating the size/ annual spend of China’s massage chair market by 2015E (based on key 8
cities by GDP)
2) OSIM’s current share of potential pie
3) Competitor’s current share of potential pie
Key Formulae:
Untapped market (2015E) = Total potential market spend (2015E) – OSIM’s share of pie (2012) –
Competitors share of pie (2012)
Step 1: Estimating the size/ annual spend of China’s massage chair market
In deriving a city breakdown of annual spend on massage chairs for China, we rely on a key formulae:
Size of City Spend (2015E) = CP x WHH x AHHS
CP: City Penetration (Derived from ~GDP per capita by 2015E) x China’s Working Population
Households
WHH: Working Household/ China’s Working Population Households
AHHS: Annual Household Spend (if within population who can afford massage chairs – based on
proxy from Hong Kong)
Variable 1: CP (City Penetration)
Referring to the breakdown of GDP per capita according to cities by China Statistical Yearly, we relied
on IMF China’s GDP growth rate forecast of 8.2% (2013E), 8.5% (2014E), and 8.5% (2015E) and
conservatively adopted an ~8% growth rate across different cities. Looking at the 2015E snapshot
GDP per capita of the 8 key cities we match these levels with peer countries on the later stage
massage chair market cycle and approximate the relevant penetration rates by 2015E.
Country
Malaysia
Taiwan
Hong Kong
Singapore
Japan
US$
10,085
20,083
34,457
50,800
45,870
RMB
62,830
125,117
214,667
316,484
285,770
Penetration Rates
<5%
5%
7%
7%
20%
Variable 2: WHH (Working Household Spend/ China’s Working Population Households)
Referring to EIU approximation of working population households at an individual city level, they avail
the total size of households that can potentially afford should their income levels rise above the
hygiene level.
Variable 3: AHHS (Annual Household Spend)
Understanding that Hong Kong’s annual household spend for massage chair equipment based on
Frost and Sullivan is S$728, we assume that Hong Kong is a market in steady state (i.e. purchase
only because of renewals – this assumption errs on the conservative side considering the Hong Kong
market is still expanding). A sense check with a ~S$5,000 massage chair will give a lifespan of ~7
years which tie in with our above estimates.
Step 2: OSIM’s current share of pie
In deriving OSIM’s current share of the pie, we rely on another key formula:
OSIM’s current share of pie at individual city level = Ns x ARPS
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9 January 2013
Ns: Number of OSIM stores within the City (based on Dianping.com)
ARPS: Average revenue per store (derived based two separate methods)
Variable 1: Ns (Number of OSIM stores within the City)
Dianping.com is one of the most popular sites for review of retail, F&B and consumer related goods.
Using reviews provide us with the number of OSIM stores in each city coupled with their location and
even how the store front looks like. Relying on this informal method has provided us with greater view
into OSIM’s store count in each city for the 8 key cities.
Variable 2: ARPS (Average revenue per store)
Though management has no disclosure on OSIM’s ARPS in China specifically, they have given
indication that current sales per store remain low as compared to the other markets. We have sought
to derive ARPS via two different methodologies.
Method 1
Understanding from Hejun Consulting Group that OSIM China’s revenue is ~250 mil RMB, we
approximate OSIM sales in China to have hit ~339 mil RMB by 2012. This is derived from a growth in
massage chair quantity 10.5% (2011) and 12.9% (2012). , coupled with a growth in inflation at rates of
an average 4.21% (based on IMF for past two years). These growth rates in quantity and inflation give
us an ARPS of ~S$250,000 in 2012.
Method 2
Furthermore, we took an average of A class stores and B class stores of RMB 170m and RM 90m
respectively. This gives an average of ~S$260,000 per store which is in line with method 1.
We have employed the statistic in method 1 for conservatism purposes.
Step 3: Competitor’s current share of pie
Management has projected that current market share in China remains low (20 to 30%). Based on
Hejun Consulting Group, we derive OSIM’s market share of 14.5% that is approximated to hold
constant in 2012. Competitors occupy the rest of the current pie.
Conclusion
The total Chinese market/ annual spend by 2015E for the key 8 cities will avail S$894m. With OSIM
maintaining share of pie, this will constitute a high level of growth for OSIM China.
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9 January 2013
Appendix C: Company Specifics
SWOT – OSIM’s Internal & External Operating Environment
Porter’s 5 Forces Analysis – OSIM, GNC, Richlife, TWG
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9 January 2013
Appendix D: OSIM’s Strategic Store Locations
Beijing’s OSIM stores locality
Most OSIM stores in Beijing are located in the around the CBD and along the ring roads which are the
traditional urban or suburban markets with established demand.
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9 January 2013
Shanghai’s OSIM stores locality
OSIM has large amount of stores in the Puxi area where most locals reside with a small cluster at Wu
Jiao Chang area (along metro line 10), a prominent suburban market with 4 large retail developments
and an upcoming office cluster with hospitality development slated in 2014.
Strong store position within malls (based on primary due diligence)
Based on our store visits in Shanghai, we note that OSIM places its outlets in areas of high footfalls
surrounded by lifestyle brands. There are few massage chair competitors in the vicinity and Andy Lau
is featured prominently as the celebrity endorsement figure for OSIM appealing to the Chinese market.
Appendix E: China Health and Wellness
Equipment Projections
According to Frost and Sullivan, China health and wellness equipment market is expected to grow
strongly in line with the growth in luxury market. By 2015E, the market would have had RMB
28.7billion in annual spend.
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9 January 2013
Appendix F: OSIM’s Product Pyramid and
Timeline
2003
iSymphonic
2003
iTwin
2006
uPilot
2008
uCrown
2010
uSoffa Petit
2007
uSqueez
2009
uKimono
2009
uDesire
2011
uDivine Sport
2004
iDesire
2011
uPhoria
2007
uPapa
2009
uSqueez Warm
2011
uCrown Pro
2010
uMama Warm
2011
uPapa Music Sync
2012
uSoffa Runway
Relax + Relieve
Massage Chairs
Date
Product
Feb-02
iMedic
Apr-03
iSymphonic
Apr-04
iSymphonic AV
Aug-04
NORO range
Nov-04
iDesire
Mar-06
iDesire ROBO
Sep-06
iMedic Pro
Dec-06
uPilot
Dec-07
uSpace
Feb-08
uYoyo
Jul-08
uMedic
Apr-09
uDream
Jul-09
uDesire
Nov-10
uDivine
Aug-11
uDivine Sport
Sep-12
uDivine App
Massage Sofas
Date
Product
Jan-10
uSoffa Petit
Jun-10
uSoffa
Feb-12
uSoffa Runway
Leg Massagers
Date
Product
Feb-03
iTwin
Dec-03
iSense
Feb-05
iSqueeze
Sep-07
uSqueez
Feb-09
uSqueez Warm
Nov-11
uPhoria
Upper body Massagers
Date
Product
Dec-06
uZap Papa
Feb-07
uPapa
Jun-09
uPapa Hug
Apr-10
uMama Warm
Jul-11
uPapa Music Sync
Head Massagers
Date
Product
Aug-08
uCrown
May-11
uCrown Pro
Tone + Shape
Slim Belts
Date
Oct-05
Dec-06
Oct-09
Product
uZap
uZap Mini
uKimono
Pulse Massagers
Date
Mar-05
Mar-05
Product
iCheck 500
iTango
Source: Company data
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9 January 2013
Appendix G: China’s GDP per Capita (By Region)
GDP per Capita (RMB)
2011
2012
2013
2014
2015
Beijing
94,236
101,775
109,917
118,710
128,207
Tianjin
97,670
105,484
113,923
123,036
132,879
Hebei
39,630
42,801
46,225
49,923
53,917
Shanxi
36,607
39,535
42,698
46,114
49,803
Inner Mongolia
67,726
73,144
78,995
85,315
92,140
Liaoning
59,355
64,103
69,232
74,770
80,752
Jilin
47,519
51,321
55,426
59,860
64,649
Heilongjiang
38,410
41,483
44,802
48,386
52,257
Shanghai
95,710
103,367
111,637
120,568
130,213
Jiangsu
72,772
78,594
84,881
91,672
99,006
Zhejiang
69,244
74,783
80,766
87,227
94,205
Anhui
30,008
32,408
35,001
37,801
40,825
Fujian
56,423
60,937
65,812
71,076
76,763
Jiangxi
30,517
32,959
35,596
38,443
41,519
Shandong
55,094
59,501
64,261
69,402
74,954
Henan
33,576
36,263
39,164
42,297
45,680
Hubei
40,999
44,279
47,821
51,647
55,778
Hunan
34,905
37,698
40,714
43,971
47,488
Guangdong
59,287
64,030
69,153
74,685
80,660
Guangxi
29,534
31,897
34,448
37,204
40,181
Hainan
33,653
36,346
39,253
42,394
45,785
Chongqing
40,143
43,355
46,823
50,569
54,615
Sichuan
30,572
33,018
35,659
38,512
41,593
Guizhou
19,240
20,779
22,441
24,236
26,175
Yunnan
22,478
24,276
26,218
28,316
30,581
Tibet
23,382
25,253
27,273
29,455
31,811
Shaanxi
39,130
42,261
45,642
49,293
53,236
Gansu
22,916
24,749
26,729
28,867
31,177
Qinghai
34,414
37,167
40,140
43,351
46,819
Ningxia
38,481
41,559
44,884
48,475
52,353
Xinjiang
35,028
37,830
40,856
44,125
47,655
Source: China Statistical Yearly, Oriental Capital Estimates (based on 8% GDP growth rates)
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9 January 2013
Appendix H: Asia Pacific Geographical
Consumer Health Growth
Appendix I: Measurement of Asia Pacific
Markets Healthcare Performance
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9 January 2013
Appendix J: Spread of Luxury Brands Presence
in China
City
Brands Classification
City
Brands Classification
Beijing
62
Emperor's city
Hefei
2
Nascent
Shanghai
55
Emperor's city
Hohhot
2
Nascent
Hangzhou
27
Rising bishops
Tangshan
1
Nascent
Chengdu
21
Rising bishops
Nanchang
1
Nascent
Shenzhen
19
Rising bishops
Taizhou
1
Nascent
Shenyang
18
Rising bishops
Shaoxing
1
Nascent
Harbin
16
Rising bishops
Jinhua
1
Nascent
Guangzhou
13
Rising bishops
Xuzhou
1
Nascent
Tianjin
13
Rising bishops
Lanzhou
1
Nascent
Suzhou
13
Rising bishops
Zhenjiang
1
Nascent
Nanjing
12
Rising bishops
Handan
1
Nascent
Dalian
12
Rising bishops
Haikou
1
Nascent
Qingdao
11
Rising bishops
Huzhou
1
Nascent
Kunming
11
Rising bishops
Foshan
0
Nascent
Wenzhou
11
Rising bishops
Yantai
0
Nascent
Xi'an
10
Exploratory markets
Dongguan
0
Nascent
Wuhan
9
Exploratory markets
Nantong
0
Nascent
Changsha
8
Exploratory markets
Zibo
0
Nascent
Ningbo
8
Exploratory markets
Weifang
0
Nascent
Fuzhou
8
Exploratory markets
Linyi
0
Nascent
Xiamen
8
Exploratory markets
Jining
0
Nascent
Zhengzhou
7
Exploratory markets
Jiaxing
0
Nascent
Wuxi
7
Exploratory markets
Baotou
0
Nascent
Changchun
7
Exploratory markets
Baoding
0
Nascent
Taiyuan
7
Exploratory markets
Weihai
0
Nascent
Chongqing
6
Exploratory markets
Zhongshan
0
Nascent
Nanning
6
Exploratory markets
Luoyang
0
Nascent
Urmqi
6
Exploratory markets
Daqing
0
Nascent
Jinnan
5
Exploratory markets
Nanyang
0
Nascent
Shijiazhuang
5
Exploratory markets
Yangzhou
0
Nascent
Guiyang
5
Exploratory markets
Yancheng
0
Nascent
Changzhou
4
Exploratory markets
Shantou
0
Nascent
Source: JLL REIS
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9 January 2013
Appendix K: Growth in Households with
Income >US$25k
Number of HHs in key markets with nominal income >US$25k (millions)
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Oriental Capital Global Investment Research
Appendix L: OSIM’s Rise to Price Point Leadership
Across Time
OSIM
Products
iSymphonic AV
iDesire
iDesire ROBO
iMedic Pro
uPilot
uSpace
uYoyo
uMedic
uDream
uDesire
uDivine
uDivine Sport
uDivine App
SGD
$6,250
$7,800
$6,888
$3,888
$7,800
$6,000
$5,688
$3,888
$9,588
$3,888
$5,488
$7,399
$6,088
Oriental Capital Global Investment Research
Panasonic
Panasonic
EP3513KU
EP30005
EP1273
EP3222
EP1080K/L
EP1082KL-TL
EP1285KL/TL
EP30007
EP-MS10
EP-MS40
EP-MA10
EP-MA70
EP-MS41
OTO
SGD
$7,155
$6,780
$3,766
$5,517
$2,471
$3,926
$3,926
$8,180
$2,045
$3,409
$4,720
$9,990
$2,299
OTO
OTO Cyber Lounge
Master Relax MR-1390
OTO CYBER Plus CP-2500
OTO CYBER-Pro CX190
Master Relax MR-1398
Cyber Indulge Massage Chair
OTO Master Sense
OTO Adelle One AD-01
Cyber Wave CW-2800
Cyber-Pro CX-290
SGD
$3,280
$1,180
$4,380
$3,680
$1,680
$3,280
$2,480
$2,980
$5,380
$2,980
Ogawa
Ogawa
Smart 10
Smart 2000
Ogawa Fujiiryoki SKS 1800
Sensual Massage Chair
Smart Aire 2D Plus
Smart Ace Massage Chair
Smart Mate
Smart Aire 3D Plus
Smart Sense Trinity 3D
Smart DeLight Quadro Tech
Ogawa Smart Space XD Tech
SGD
$2,650
$1,760
$9,211
$6,362
$6,988
$4,888
$4,063
$7,398
$6,575
$5,988
$2,017
Appendix M: OSIM Comparables Table
Company
Anta Sports Products
Belle Int'l
Chow Sang Sang
Chow Tai Fook Jewellery
Daphe Int'l
Emperor Watch & Jewellery
FJ Benjamin
Giordano
Hengdeli Holdings
Hour Glass
Li Ning
Lifestyle Int'l
L'occitance Int'l
Luk Fook Holdings Int'l
Ogawa World Bhd
Oriental Watch
OTO Holdings
Parkson Retail
Ports Design
Prada
Sa Sa Int'l
Samsonite Int'l
Trinity Limited
Curr
HKD
HKD
HKD
HKD
HKD
HKD
SGD
HKD
HKD
SGD
HKD
HKD
HKD
HKD
MYR
HKD
HKD
HKD
HKD
HKD
HKD
HKD
HKD
Price
7.55
18.06
21.05
13.22
11.16
1.03
0.315
7.61
2.96
1.69
5.71
20.05
24.6
27.4
0.35
2.97
0.53
6.74
7.42
75.2
6.52
15.9
5.3
Market
Cap
(US$'m)
2,429.20
19,649.70
1,838.20
17,053.90
2,372.90
892.7
146.7
1,515.00
1,677.20
325.3
777.8
4,306.30
4,687.00
2,082.30
13.8
218.6
21.9
2,443.60
530.4
24,822.80
2,377.60
2,886.20
1,178.50
PER
(x)
9.6
27.3
13.7
19.3
18.8
11.7
14.4
15.8
11.3
7.2
35.4
16.9
28.2
13.4
69.7
11.1
8.8
14.4
9.2
43.4
24.5
18.3
16.8
Est PER Est PER
Curr Yr Nxt Yr
(x)
(x)
11
14.2
25.8
22
14.1
11.1
22
17.6
19.4
15.9
13.9
11.2
12.1
11.7
16.7
14.6
13.5
12.1
N.A.
N.A.
N.A.
45
17.8
16.1
25.9
21.7
13
10.8
N.A.
N.A.
9.3
8.6
13.3
17.7
16
14.5
9.6
8.4
30.5
24.1
22.3
18.5
17.1
14.3
16.1
14.4
PBR
(x)
2.3
5.8
2.2
4.6
4.2
1.7
1.3
4.2
2
1.3
1.3
3.8
5.5
2.9
0.7
0.8
0.6
2.8
1.8
10.4
11.4
2.9
2.8
Est.
Est. Net
EV/EBIT Margin
DA
(%)
6.3
17.8
17.6
14.1
11.3
5.4
15.5
9.5
10.6
9.6
10.3
7.6
9.2
3.5
10.5
12.4
9.1
6.6
N.A.
N.A.
34.7
-3.6
13
33.6
15
12.5
9.2
9.2
N.A.
N.A.
7.6
5.1
N.A.
4.6
9.2
19.7
5.3
17.1
17.7
18.5
15.4
10.7
9.6
9.4
11.8
18.6
Source: Bloomberg, Oriental Capital Estimates
Appendix N: Risks Assessment Matrix
Impact
•
Major
•
•
Moderate
Weaker than
expected demand
for products
Corporate
governance issue
arising from poor
disclosure
Lack luster
performance of
advertising
campaigns
•
•
•
Minor
Misunderstanding
customer
demographics in
markets
US Fiscal Cliff
Higher than
expected
inflationary
pressures
•
Slowdown in the
Chinese economy
Probability
Low
Oriental Capital Global Investment Research
Medium
High
ROE
(%)
24.7
23.2
16.9
31.5
24.6
15.7
9.1
27.3
19.1
19.8
3.8
23.9
20.7
29.6
0.6
8.3
7.7
20.6
20.8
28.5
51.1
16.3
16.9
9 January 2013
Appendix O: OSIM Ranking in Hong Kong
Ranking of players in Hong Kong by Units Sold
Rank
Brand
Units Sold
Market Share (%)
1
OSIM
18,500
67.7
2
OTO
4,800
17.6
3
OGAWA
2,250
8.2
4
Panasonic
1,350
4.9
5
Sanyo
75
0.3
6
Others
350
1.3
27,325
100.0
Total
Ranking of players in Hong Kong by Sales/ Revenue
Rank
Brand
Sales (HK$m)
Market Share (%)
1
OSIM
325.2
74.0
2
OTO
48.3
11.0
3
OGAWA
32.8
7.5
4
Panasonic
27.4
6.2
5
Sanyo
1.8
0.4
6
Others
3.9
0.9
439.4
100.0
Total
Source: Frost and Sullivan
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Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report holds a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias
the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject
company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by any individual affiliated with CFA Singapore, CFA Institute or the CFA Institute
Research Challenge with regard to this company’s stock.
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Oriental Capital Global Investment Research