Initiation: the second coming - asiaresearch.daiwacm.comasiaresearch.daiwacm.com/eg/cgi-bin/files/OSIM_International... · Investment case The share price of OSIM, a retailer of premium

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■ Investment case The share price of OSIM, a retailer of premium lifestyle products such as massage chairs and luxury tea, is down by 40.6% in the past year. Poor sales in Asian markets and a contraction in its operating margin, have resulted in OSIM’s quarterly net profit declining by 0.7-53.1% YoY over the same period. Investors have been asking whether and when its earnings will bottom out. In our view, OSIM should see a steady improvement in its earnings trajectory from 2016, led by both the launch of new versions of its popular massage chair and greater diversification/penetration of its premium tea business. We forecast 2016-17E net profit growth of 9.8-15.4% YoY, as we expect sales to rebound from 2016, after falling by 5.6% in 2015E. We expect an earnings recovery in 2016 to be the key share-price catalyst, and accordingly initiate coverage with an Outperform (2) rating.

■ Catalysts New products. OSIM launched its latest massage chair, the uMagic, in 2Q15, and the results have been encouraging, with this product boosting overall revenue growth to 6.4% QoQ for 2Q15 and net profit growth to 66.1% QoQ. In 2H15, OSIM plans to release the uDiva Classic, the sequel to its existing massage sofa. The uDiva Classic would have a lower price of SGD1,999 (vs. SGD2,588 for the uDiva). Stronger tea sales and profitability. We expect TWG Tea to be OSIM’s fastest growing segment in 2014-17E, driven by: 1) new store openings, and 2) higher corporate sales. Apart from delays in Beijing, TWG Tea looks on track to hit its 2015 target of 15 news stores. Management said that, overall, the TWG Tea business was profitable in 1H15, propped up by South Asia. We expect profitability to improve in 2016E, underpinned by: 1) a third of its stores entering the post-gestation period, and 2) better scale economies. ■ Valuation Our 12-month TP of SGD1.88 is based on 2016E PER of 14.5x (OSIM’s past 5-year mean). Our 2015-16E EPS are 4.1% and 8.1% ahead of the Bloomberg consensus,

likely because we are more bullish on its tea business. ■ Risks The key risks to our positive call would be: 1) a poor take-up rate for new products, and 2) delays in store openings.

Consumer Discretionary / SingaporeOSIM SP

10 August 2015

OSIM International

Initiation: the second coming

• Premium retailer in the healthy lifestyle segment; share price is down 40.6% since end-July 2014

• Net profit should pick up by 15.4% and 9.8% for 2016-17E, driven by new product launches and the growing tea business

• Initiating with Outperform (2) rating and 12-month TP of SGD1.88 (13.5% above the consensus mean)

Source: FactSet, Daiwa forecasts

Consumer Discretionary / Singapore

OSIM InternationalOSIM SP

Target (SGD): 1.88Upside: 10.3%7 Aug price (SGD): 1.71

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Share price performance

OSIM Inter (LHS) Relative to FSSTI (RHS)

(SGD) (%)

12-month range 1.44-2.85Market cap (USDbn) 0.963m avg daily turnover (USDm) 2.34Shares outstanding (m) 779Major shareholder Mr. Ron Sim (65.6%)

Financial summary (SGD)Year to 31 Dec 15E 16E 17ERevenue (m) 652 722 768Operating profit (m) 110 129 142Net profit (m) 87 101 111Core EPS (fully-diluted) 0.112 0.130 0.142EPS change (%) (12.5) 15.4 9.8Daiwa vs Cons. EPS (%) 4.1 8.1 10.7PER (x) 15.2 13.2 12.0Dividend yield (%) 3.5 3.5 3.5DPS 0.060 0.060 0.060PBR (x) 2.8 2.5 2.2EV/EBITDA (x) 8.4 7.0 6.0ROE (%) 19.6 20.9 20.5

Shane Goh(65) 6499 [email protected]

How do we justify our view?How do we justify our view?

Consumer Discretionary / Singapore OSIM SP

10 August 2015

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Initiation: the second coming ........................................................................................................ 6

Brief company history ................................................................................................................. 6

Investment thesis ........................................................................................................................ 6

Product launches expected to drive sales recovery .................................................................... 8

Tea business brewing nicely ...................................................................................................... 12

Consumer feedback: what goes into buying a massage chair? ................................................. 14

Industry competitiveness ........................................................................................................... 16

Financial position ....................................................................................................................... 18

Positive FCF model .................................................................................................................... 18

Assumptions .............................................................................................................................. 20

Valuation ................................................................................................................................... 23

Risks to our call ......................................................................................................................... 25

Company background ............................................................................................................... 26

OSIM .......................................................................................................................................... 27

TWG Tea .................................................................................................................................... 29

ONI Global ................................................................................................................................ 32

Minority stakes .......................................................................................................................... 32

SWOT analysis .......................................................................................................................... 33

Management ............................................................................................................................. 33

Shareholding structure ............................................................................................................. 34

Contents


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Growth outlook OSIM: total store count

We expect OSIM’s net profit to recover from 2016, driven by 2 catalysts: 1) new product launches, and 2) new store openings for TWG Tea. OSIM launched its latest massage chair, the uMagic, in 2Q15 and is looking to release the successor to its massage sofa, the uDiva Classic, in 2H15. We also expect a strong contribution from TWG Tea, set to be OSIM’s fastest growing segment over 2015-17E, driven by new store openings. Management aims to open 15 new TWG Tea stores in 2015 north and south Asia. It has opened 4 so far, with 11 more in the pipeline for 2H15. Source: Company, Daiwa forecasts

Valuation OSIM: 12-month forward PER bands

We initiate coverage with a 12-month target price of SGD1.88, based on 2016E PER of 14.5x (equal to OSIM’s past 5-year mean PER). Our target price offers potential upside of 10.3% from current levels, and is 13.5% above the consensus average. The street is mainly neutral on OSIM (Buys: 3, Hold: 5, Sell: 1).

Source: Bloomberg, Daiwa

Earnings revisions OSIM: Bloomberg consensus EPS forecasts (SGD)

The Bloomberg consensus has lowered its 2015-16E EPS for OSIM by 38.3% and 40%, respectively, since the company announced (on 28 October 2014) its first YoY decline in net profit in 24 quarters for 3Q14. We believe this is one factor causing the decline in its share price since then. Our 2015-16 EPS forecasts are 4.1% and 8.1% above those of the Bloomberg consensus because we think we are more bullish on the TWG Tea business contributing to the bottom line. We believe the addition of our numbers to the consensus numbers should result in a technical upward adjustment in the consensus 2015-16 forecasts.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

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Key assumptions

Profit and loss (SGDm)

Cash flow (SGDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ETotal number of stores 854 866 846 861 842 838 856 874OSIM stores 603 586 577 590 561 560 565 570RichLife/GNC stores 251 270 253 245 238 220 223 226TWG Tea stores 0 10 16 26 43 58 68 78Revenue per store (SGD '000) 648 644 703 759 812 816 852 888Gross margin (%) 65.3 68.9 70.0 70.3 70.4 70.6 70.8 71.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ENorth Asia 298 317 335 353 366 357 368 384South Asia 169 205 230 250 279 281 303 330Other Revenue 42 31 37 44 46 14 51 54Total Revenue 509 554 602 648 691 652 722 768Other income 15 13 15 57 19 15 14 15COGS (176) (172) (181) (193) (205) (189) (211) (223)SG&A 0 0 0 0 0 0 0 0Other op.expenses (280) (295) (320) (385) (375) (369) (396) (418)Operating profit 67 99 115 127 130 110 129 142Net-interest inc./(exp.) (1) (2) (3) (0) 2 2 2 4Assoc/forex/extraord./others 1 0 2 3 1 1 1 1Pre-tax profit 68 98 115 129 132 113 133 147Tax (18) (28) (28) (28) (30) (26) (31) (34)Min. int./pref. div./others 0 (1) (0) (0) (0) 0 (1) (3)Net profit (reported) 50 69 87 102 102 87 101 111Net profit (adjusted) 50 69 87 102 102 87 101 111EPS (reported)(SGD) 0.074 0.102 0.118 0.140 0.134 0.112 0.130 0.142EPS (adjusted)(SGD) 0.074 0.102 0.118 0.140 0.134 0.112 0.130 0.142EPS (adjusted fully-diluted)(SGD) 0.066 0.094 0.110 0.129 0.128 0.112 0.130 0.142DPS (SGD) 0.020 0.030 0.060 0.060 0.060 0.060 0.060 0.060EBIT 67 99 115 127 130 110 129 142EBITDA 79 111 127 140 152 132 150 165

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EProfit before tax 68 98 115 129 132 113 133 147Depreciation and amortisation 11 11 11 14 22 22 21 23Tax paid (16) (17) (27) (29) (26) (28) (31) (34)Change in working capital 30 (5) (8) 2 (18) (3) (7) (4)Other operational CF items 2 12 3 (11) (2) (4) (4) (5)Cash flow from operations 95 99 94 104 108 100 112 127Capex (12) (13) (13) (11) (19) (16) (16) (18)Net (acquisitions)/disposals (3) (54) (26) (7) (5) (3) 0 0Other investing CF items 0 (12) 3 14 2 7 7 9Cash flow from investing (16) (79) (36) (3) (22) (12) (9) (9)Change in debt (25) 117 9 5 134 4 4 4Net share issues/(repurchases) (23) 4 (14) (7) (12) (29) 0 0Dividends paid (13) (22) (36) (36) (45) (47) (47) (47)Other financing CF items (3) (1) (3) (2) (3) (5) (5) (5)Cash flow from financing (64) 98 (45) (41) 73 (76) (47) (47)Forex effect/others (5) 2 (4) 6 1 6 0 0Change in cash 10 121 8 66 160 18 57 71Free cash flow 82 87 81 93 90 84 96 109

Financial summary


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Balance sheet (SGDm)

Key ratios (%)


Company profile

OSIM is a retailer of healthy lifestyle products such as massage chairs, premium tea and nutraceutical supplements. Its brands include OSIM, TWG Tea, RichLife and GNC. As of 30 June 2015, OSIM has 827 outlets in Asia Pacific, Europe, the US and the Middle East.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment 73 194 202 267 428 446 503 574Inventory 47 52 54 73 72 78 84 87Accounts receivable 38 41 40 42 43 40 45 47Other current assets 11 35 49 37 47 42 43 44Total current assets 169 323 344 419 588 606 674 752Fixed assets 19 20 21 25 31 34 36 37Goodwill & intangibles 17 17 20 190 181 172 164 157Other non-current assets 35 72 86 45 54 61 62 64Total assets 239 431 471 680 854 872 937 1,010Short-term debt 15 16 25 155 17 17 17 17Accounts payable 31 36 40 49 45 36 40 43Other current liabilities 80 88 82 93 96 103 104 104Total current liabilities 127 141 147 297 158 157 161 164Long-term debt 0 117 117 0 168 173 177 182Other non-current liabilities 2 5 7 39 36 34 34 34Total liabilities 129 263 271 336 362 363 372 379Share capital 72 64 65 65 114 114 114 114Reserves/R.E./others 36 101 132 206 324 341 395 460Shareholders' equity 108 165 196 271 438 456 510 574Minority interests 2 3 4 73 54 53 54 57Total equity & liabilities 239 431 471 680 854 872 937 1,010EV 1,260 1,227 1,226 1,270 1,121 1,102 1,049 984Net debt/(cash) (58) (61) (60) (113) (242) (256) (308) (375)BVPS (SGD) 0.161 0.224 0.270 0.375 0.567 0.602 0.674 0.759

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ESales (YoY) 6.7 8.8 8.7 7.6 6.7 (5.6) 10.7 6.4EBITDA (YoY) 50.7 40.8 14.2 10.9 8.2 (13.2) 14.1 9.5Operating profit (YoY) 73.0 47.4 16.0 9.8 2.5 (15.4) 17.5 10.3Net profit (YoY) 114.6 37.9 25.9 16.9 0.6 (14.4) 15.4 9.8Core EPS (fully-diluted) (YoY) 80.6 41.7 17.1 18.0 (0.7) (12.5) 15.4 9.8Gross-profit margin 65.3 68.9 70.0 70.3 70.4 71.1 70.8 71.0EBITDA margin 15.5 20.0 21.0 21.7 22.0 20.2 20.9 21.5Operating-profit margin 13.3 18.0 19.2 19.6 18.8 16.8 17.9 18.5Net profit margin 9.8 12.5 14.4 15.7 14.8 13.4 14.0 14.4ROAE 48.9 50.5 48.1 43.5 28.8 19.6 20.9 20.5ROAA 21.3 20.6 19.3 17.7 13.3 10.1 11.2 11.4ROCE 51.0 46.6 35.8 30.1 22.1 16.0 17.7 17.9ROIC 77.3 88.6 70.5 53.6 41.7 33.6 39.0 42.8Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate 26.4 28.7 24.0 21.3 22.8 23.0 23.0 23.0Accounts receivable (days) 25.3 26.0 24.6 23.2 22.4 23.2 21.4 21.8Current ratio (x) 1.3 2.3 2.3 1.4 3.7 3.9 4.2 4.6Net interest cover (x) 88.3 53.2 42.6 286.0 n.a. n.a. n.a. n.a.Net dividend payout 27.1 29.5 50.6 42.8 44.7 53.4 46.3 42.2Free cash flow yield 6.2 6.5 6.1 7.0 6.8 6.4 7.2 8.2

Financial summary continued …


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Initiation: the second coming

With OSIM stock down 40.6% since end-July 2014 and quarterly net profit declining by 0.7-53.1% YoY, the question investors are asking is whether and when its net profit will bottom. We expect OSIM to see a turnaround from 2016, led by both new product launches and a greater contribution from its premium tea business.

Brief company history

OSIM International (OSIM) is one of the top lifestyle companies in Asia in terms of brand recognition, manufacturing and distributing massage chairs, fitness equipment, nutritional supplements and luxury tea. Its brands include OSIM, RichLife, GNC and TWG Tea. The company had 827 outlets worldwide as at 30 June 2015, with its 5 key markets constituting Singapore, Malaysia, Hong Kong, Taiwan and China. The company sells its OSIM brand of massage chairs and fitness equipment through self-owned and franchised outlets. About 85% of its stores are directly owned, with the remainder under the franchise model. OSIM earns revenue through the sale of its products, franchise fees or royalty fees. It has a 30% stake in a China production joint venture, from where it sources most of its products. TWG Tea retails premium tea via self-owned and franchise outlets. OSIM owns 69.9% of TWG Tea. As at 30 June 2015, 17 of its 47 outlets were self-owned, and the rest franchised. TWG Tea generates revenue through the retail sale of its tea, F&B offering and franchise fees. It sources its raw materials mainly from China, India and Sri Lanka. The company’s GNC and RichLife brands are held under a company called ONI Global, of which OSIM owns 94.9%. ONI Global acts as a franchisee for US-based GNC. It procures products from the US parent, and resells them to end-consumers in Singapore,

Malaysia, Taiwan and Australia. RichLife is OSIM’s nutraceutical supplement arm in China.

Investment thesis

In our view, OSIM should see steady improvement in its earnings trajectory from 2016, led by both new product launches of its popular massage chair product and greater diversification/penetration of its premium tea business. We forecast 2016-17 net profit growth of 9.8-15.4% YoY as we expect sales to rebound from 2016 after falling by 5.6% YoY for 2015.

Product launches to drive a revenue recovery in 2016/17E OSIM’s sales declined by 0.5% YoY for 4Q14 and by 12.9% YoY for 1H15, with South Asia (40.4% of sales) seeing the most severe decline. (Note: South Asia is OSIM’s second-largest revenue contributor, with North Asia being the biggest, at 52.9%, and the Rest of the World weight in with 6.7%. China, grouped under North Asia, contributes around 20% of overall revenue). We believe this weak performance is the root cause of the tumble in OSIM’s share price since July 2014, while the recent stock-market volatility in Hong Kong/China has not helped. Nonetheless, we look for sales to recover to 10.7% YoY growth for 2016 and 6.4% YoY for 2017, on the back of the launch of new massage chairs in 2015. We note that there has been a strong correlation between sales growth and the launch of new massage chairs in the past. OSIM: quarterly revenue post-product launch (SGDm)

Source: Company

OSIM’s latest massage chair, the uMagic, was released in 4 of its 5 key markets (Singapore, Malaysia, Taiwan and Hong Kong) in April 2015, and in China in June 2015. So far, the results have been encouraging, with this product boosting the company’s overall 2Q15

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revenue growth to 6.4% QoQ, and its net profit growth to 66.1% QoQ. Additionally, OSIM will launch the uDiva Classic, the sequel to its massage sofa, the uDiva, in 2H15. The uDiva Classic should have a lower price point (23% cheaper) compared to the uDiva. We expect the 2 product launches to be a positive revenue catalyst, translating into 10.9% HoH stronger sales in 2H15. Tea forecast to fuel future earnings growth We expect TWG Tea to be OSIM’s fastest revenue-growth segment over 2015-17E. For 2014, we estimate that TWG Tea accounted for 12% of revenue. We expect it to make up 17.6% of revenue in 2017E. This increase is likely to be driven by: 1) new store openings, and 2) higher corporate sales. We expect 35 new outlets to open over 2015-17E. Management targets 15 new outlets in 2015. It has opened 4 so far in 2015. TWG Tea: revenue and YoY revenue growth (SGDm)

Source: Company, Daiwa forecasts and estimates (for 2011-14)

TWG Tea: number of outlets

Source: Company, Daiwa forecasts

We also expect stronger profitability from TWG Tea compared to 1H15 due to: 1) a third of its stores opened in 2014 reaching the post-gestation period, and 2) improved economies of scale.

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Product launches expected to drive sales recovery

It is well known that China’s economy is slowing, and that this, coupled with a volatile stock market and its anti-graft campaign, has seen discretionary spending take a hit. China is one of OSIM’s key markets, contributing about 20% of the company’s overall revenue. And in recent years OSIM has been focusing its expansion in China. Despite the China slowdown, we think there are several factors working in OSIM’s favour: 1) product launches at a range of price points (SGD428 for the uSqueez Air leg massager to SGD1,999 for the uDiva Classic massage sofa), 2) it is an established brand, and 3) consumers are switching to healthier lifestyles. Product launches at affordable prices We expect a sales and earnings recovery in 2H15 (vs. 1H15) on the back of new product launches. OSIM rolled out its latest massage chair, the uMagic, in its 5 key markets (Singapore, Malaysia, Taiwan, Hong Kong and China) in 2Q15. The uMagic was launched in China in June 2015, having been released in the other 4 markets in April 2015. OSIM: massage chairs launched since 2003 and forthcoming launches Date launched Massage chair Description Apr-03 iSymphonic Massage chair that synchronises massage and music Apr-04 iSymphonic AV Massage chair that synchronises to audio-visual signals Mar-05 iDesire Full-body massage chair Mar-06 iDesire ROBO Voice-controlled full-body massage chair Aug-06 iMedic Pro Mid-range full-body massage chair Jan-07 uPilot Designer massage chair with patented ROBO-Stic technology Dec-07 uSpace Well-being chair Feb-08 uYoyo Massage and exercise chair Jul-08 uMedic Multi-purpose full-body massage chair with retractable foot

rest Apr-09 uDream Hybrid 3-system family massage chair Jul-09 uDesire Convertible massage chair Jan-10 uSoffa Petit Massage sofa Jun-10 uSoffa Massage sofa with customisable design Nov-10 uDivine Human-3D massage chair Aug-11 uDivine Sport Massage chair with appearance of sports car interior Aug-12 uDivine App Massage chair combined with mobile app technology Jan-13 uAngel Massage chair Jul-13 uInfinity Massage chair that lets you download new massage

programmes Apr-14 uDiva Massage sofa; sequel to the uAngel Nov-14 uInfinity Luxe Massage chair that lets you download new massage

programmes Apr-15 uMagic Massage chair with magic-hand technology 2H15 uDiva Classic Massage sofa; sequel to the uDiva

Source: Company, Daiwa

Management said that compared with smaller-ticket items, sales of massage chairs tend to hold up better during times of economic uncertainty, given that the

target audience for massage chairs (more well-to-do), are less affected by economic uncertainty. According to management, massage chairs account for about 60% of the sales for its OSIM segment. Historically, the launch of a new massage chair has been followed by acceleration in the company’s top-line growth. We expect this trend to continue going forward. In 2H15, OSIM expects to launch its next generation of massage sofa, the uDiva Classic, to replace the uDiva (launched in April 2014). Management said sales of the uDiva had fared similarly to those of its predecessor, the uAngel (ie, nothing to shout about). In our opinion, the key issue is price — at SGD2,588, the uDiva is about 37% more expensive than the uAngel (SGD1,888). The uDiva Classic would be priced at SGD1,999, in line with the price of recent product launches (ie, the uMagic and uSqueez Air). As a result, we think the sales volume for the uDiva Classic will be stronger than for the uDiva. OSIM: lower price points Previous model Price New model Price VarianceuDiva SGD2,588 uDiva Classic SGD1,999 (28%)uDivine SGD5,488 uMagic SGD5,288 (4%)uSqueez SGD648 uSqueez Air SGD428 (34%)


Established brand As with any luxury brand, perception is key. We think OSIM has done an excellent job in cultivating its premium status. OSIM was cited as being the No.1 healthy-lifestyle product brand by consumers across Asia in a 2008 survey conducted by market research firm Synovate and supported by the International Enterprise Singapore (IE Singapore).

On its website, OSIM claims to be the most preferred massage-chair brand in Asia and the top mind recall healthy-lifestyle brand in Asia. And we attribute this to years of annual advertising and spending on promotions (7% of revenue). Management said it expects to maintain this allocation going forward. However, the channel it spends it on is not fixed. OSIM usually opts for print and TV advertising, and it has consistently used celebrity endorsements to generate interest in its products. Popular celebrities include Andy Lau and Lee Min Ho.


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OSIM: celebrity endorsements Celebrity Occupation Device Jeanette Aw Actress uSqueez Warm Andy Lau Actor uDivine Lee Min Ho Actor uDiva Lin Chi-Ling Actress Usoffa, uSqueez Sammi Cheng Actress uAngel S.H.E. Singer uKimono Fiona Xie Actress uZap Louis Koo Actor iMedic PRO Xiao S Talk show host uPhoria Olivia Ong Singer uPapa Music Sync Dennis Chew Actor uSqueez Air


For its latest uMagic ads, we note that OSIM has deviated from its past product launches by not incorporating a celebrity endorsement. Instead, it used an unknown child to front its marketing campaign. OSIM said it had wanted to highlight the product features and thought that a celebrity would distract customers from the main message. OSIM: child used to front launch of the latest uMagic

Source: Company

However, management said it is looking to relaunch the uMagic in 2H15, potentially with a celebrity fronting the next leg of the marketing campaign. Additionally, OSIM plans to roll out a marketing campaign on social media platforms in 2H15, which we think will further cement its reputation as the leading massage-chair brand in Asia. We view this move as a positive, as at least 77% of consumers in OSIM’s key markets go online daily, according to Google’s Consumer Barometer. At least 56% of consumers go on social networks via their smartphones once a week, and 28% via their computers. Hence, online advertising is the No.1 way for many consumers to gain their first exposure to the products they purchase.

OSIM: percentage of consumers in key markets who go online daily

Source: Google’s Consumer Barometer

Note: data for 1 January to 31 March 2015

OSIM: percentage of consumers who visit social networks on their smartphone once a week



OSIM: percentage of consumers who visit social networks on their computers once a week



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OSIM: online advertising is the number one way to reach out to consumers



Currently, OSIM stands ahead of its massage-chair peers on major social media platforms, according to Google’s Consumer Barometer. On Facebook, OSIM Singapore and OSIM HK had 24,000 and 23,300 likes, respectively, as of 3 August 2015, compared with Ogawa World’s 5,200 and OTO Singapore’s 5,000. On Weibo, a popular social-media platform in Hong Kong/China, OSIM has 9,100 followers, vs. 5,500 for Ogawa and OTO’s 1,100. Social media: how OSIM stacks up Platform No. of likes/followers

Facebook OSIM Singapore 24,000OSIM HK 23,300Ogawa World 5,200Ogawa Hong Kong 2,200OTO Singapore 5,000OTO Bodycare Hong Kong Ltd 2,300Weibo OSIM 9,100Ogawa 5,500OTO 1,100

Source: Facebook, weibo. As at 3 August 2015

We expect OSIM’s strong brand presence in China to enable the company to capture new city dwellers, on the back of China’s ongoing urbanisation, as rural households move into new urban homes and strive for luxury goods that were previously unattainable. In March 2014, China’s leaders unveiled a “National New-type Urbanisation Plan” to lift the number of people living in cities. The government intends to raise the urbanisation rate from around 53% in 2014 to 60% by 2020. According to consultancy EY, China’s urbanisation rate grew from 17.9% to 52.6% between 1978 and 2012.

Asia’s middle-class prioritises health In November 2013, an AIA survey found that more than half of the middle class in Greater China put health and quality of life ahead of wealth or a successful career. By market, the percentages were as follows: 56% in Hong Kong, 69% in Mainland China, and 62% in Taiwan. Greater China: proportion of middle class prioritising health over wealth

Source: AIA Survey – Hopes and Aspirations of the Middle Class in Greater China

Another AIA survey in October 2014 found a similar emphasis across 6 ASEAN markets placed on health and quality of life (61% placed it as one of their top life goals) ahead of wealth. Two of them are key markets for OSIM – Singapore and Malaysia. The others were Indonesia, the Philippines, Thailand and Vietnam. In our opinion, the priority placed on one’s well-being will fuel demand for premium lifestyle products, such as those offered by OSIM. Growing urban private consumption in China McKinsey, a global consulting firm, projects China’s urban private consumption to hit CNY26.8tn in 2022, a 10.3% CAGR from 2012, driven by affluent and upper middle-class households. Affluent households in China are defined as those with annual disposable income per household of more than USD34,000, while upper middle-class households earn USD16,000-34,000. We think these are 2 of the segments that OSIM is targeting. In a separate report, McKinsey estimates that the average household allocates 8% of its annual consumption to recreation equipment. We think massage chairs and its smaller peripherals fall into this category.

49%

26% 31% 35% 33%

11%

17%21% 15% 24%

0%

20%

40%

60%

80%

100%


Online Television Poster In-store ads Magazine/Newspaper Others 56%

69%

62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Hong Kong Mainland China Taiwan


10 August 2015

- 11 -

Assuming the entry price for OSIM’s massage chair is USD1.9k, we estimate a household would need an annual income of around USD38k to be able to afford it, ie, the affluent segment, according to McKinsey. OSIM’s smaller-ticket items would also appeal more to the upper middle class, in our view. This bodes well for OSIM, given its strategy of targeting various segments of the market through multiple price points. Management said that the penetration rate of massage chair in households is low for its 5 key markets, with an estimated 10% in both Singapore and Hong Kong, 5% in Malaysia and Taiwan, and less than 1% in China. The penetration rate in a developed market such as Japan is over 20% of households. This implies great revenue growth potential in OSIM’s markets, and the rise of affluence in its key markets, China in particular, should fuel the increase in the penetration rate going forward, in our opinion. Management said that about 90% of its clientele in China pay for goods in cash, compared with only 20% in Hong Kong or Singapore. We think that the aspiration for luxury products in China and shift in mentality to accept monthly instalment plans bodes well for OSIM. OSIM: proportion of credit card sales in China vs. Singapore and Hong Kong


Note: data as a of 31 July 2015

90%

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10 August 2015

- 13 -

Specialty tea: 60% of tea’s market share

Source: TCTJ, Nielsen Market Track 2011

China overtook India as the largest tea producer in 2006, and the gap has been expanding every year since then. According to TCTJ, China produced around 40% of the world’s tea, approximately 1.9m metric tonnes, in 2012. It exports less than 20% of this amount. This implies an annual consumption per head of about 1.1kg of tea. We think this supports TWG Tea’s expansion efforts with 9 of its upcoming 11 stores slated to open in 2H15 located in North Asia. Brand perception of the utmost importance in China We think the market’s perception of a brand will remain important in China’s tea market. According to Food Navigator Asia and Euromonitor, Nestlé, an international food and beverage company, holds 50% of the ready-to-drink tea market share in China. This is substantially higher than Nestlé’s global market share of 3%. The heightened status of Nestlé’s brand in China has offered it the majority market share it enjoys in China. In terms of the marketing and positioning of its products, we think OSIM’s years of experience with its OSIM and TWG Tea brands outside of China are relevant. In Singapore, TWG Tea eschews selling its products through supermarkets; unlike other tea brands like Dilmah Tea and Gryphon Tea Company, whose goods retail in supermarkets such as Cold Storage, NTUC Finest and Four Seasons Gourmet. This enables TWG Tea to create an air of exclusivity, underlying its premium status.

Acquisition of tea companies The rising demand for tea has resulted in big businesses acquiring small, high-profile companies. Coca Cola bought 95% of Honest Tea between 2008 and 2011. Sara Lee acquired Tea Forte in January 2012. A month later, Jamba Juice purchased Talbott Teas. More recently, AccelPath took up a 70% interest in Village Tea in November 2014. We think this is a sign of confidence in the brewing tea segment. Recent M&A activity of tea companies Purchaser Target Year The Coca-Cola Company Honest Tea, Inc (40% stake) Feb-08 The Coca-Cola Company Honest Tea, Inc (60% stake) Mar-11 Sara Lee Corp. Tea Forte Jan-12 Jamba Juice Co. Talbott Teas Feb-12 AccelPath, Inc. Village Tea Company Distribution, Inc. Nov-14

Source: Various news sources

We also note the emergence of tea companies in Singapore. Pryce started an online presence in 2012. Chaiholics, a retailer of specialty tea with shops similar to TWG Tea (luxurious feel), started its business in 2013. Currently, Chaiholic has 4 outlets in Singapore. We note that it closed 2 outlets – AXA Tower and Asia Square recently. We think this exemplifies the intensity of competition in Singapore’s specialty tea market.

Specialty tea60%

Others40%


10 August 2015

- 14 -

Consumer feedback: what goes into buying a massage chair?

We recently carried out on-the-ground checks of OSIM’s outlets in Singapore and its peers’ Ogawa and OTO. Anecdotally, we interviewed several users for their feedback on OSIM’s massage chairs and non-users, to understand the key reasons preventing them from owning one. Key considerations for massage-chair purchasers include: 1) past experience, 2) intended user, 3) price point, and 4) brand perception. We think OSIM has addressed every one of the criteria. 1) Past experience: Customers tend to buy products

they are familiar with and where they have had a positive user experience. OSIM engages in customer feedback and incorporates features sought after by its users. For example, Ogawa’s latest model possesses leg sensors to calibrate the length according to the user, while OSIM discontinued this feature about 6 years ago. An OSIM store attendant told us that OSIM had introduced this feature in 2004, but was met with unfavourable user feedback. This led them to replace the sensors with manual leg-length adjustments instead. We think such changes, while seemingly a backward shift in innovation, will resonate well in building a long-term positive user experience with its customers. Additionally, OSIM calls its customers after their purchase. This allows OSIM to gain feedback on their product and fosters a relationship with their customers. These steps will lead to repeat purchases, in our view. Management said that about 30-40% of its premium massage chairs were sold to existing customers.

2) Intended users: We have identified 2 key user profiles: 1) busy professionals, and 2) the elderly. White-collar professionals often have little free time, particularly on weekdays. Some of the respondents we spoke to said they had signed up for spa/massage packages previously, but did not have the time to use them. Having a massage chair at home allows them the luxury of a massage when it is convenient to them.

For the elderly, the hassle of travelling and lack of past experience are the usual reasons preventing them from signing up with a spa. Purchasing a massage chair enables them to enjoy the benefits of it in the comfort of their homes. China’s population displays 2 peaks, at ages 20-24 and 40-44, which we think fits into OSIM’s target market of upcoming professionals.

China’s population by age (m)

Source: Undata’s 2010 data, Daiwa

3) Price point: Young adults and first-time buyers

tend to be more price-sensitive, especially for discretionary goods like health and lifestyle products. We think this emphasises the significance of OSIM’s strategy in offering products across multiple price points, from SGD38 for a handheld massager to SGD7,488 for its premium massage chairs. The relatively lower outlay for some of its products enables OSIM to capture and build a relationship with young adults and first-time buyers. As their spending power and familiarity with the brand and product improves, backed by a positive user experience, their willingness to upgrade to a larger ticket item increases. This fits in with OSIM’s plan to cultivate its users from a young age. Management said that in order to capture first-time purchasers, it cannot afford to raise its prices too steeply. The uDiva Classic, the sequel to the uDiva is priced at SGD1,999. This is 23% cheaper than the previous uDiva model’s SGD2,588. This is also a reversal on uDiva’s pricing, which is a 37% increase vs. its predecessor, the uAngel. We think this will be viewed favourable by consumers.

0

20

40

60

80

100

120

140

0-4

5-9

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

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40-4

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45-4

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80-8

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85-8

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90-9

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100+

Total 2010 China population (m)


10 August 2015

- 15 -

OSIM: current product portfolio Product Product type Price (SGD)uMagic Massage Chair 5,288uInfinity Massage Chair 6,988uInfinity Luxe Massage Chair 7,488uChill Massage Office Chair 1,499uDiva Massage Sofa 2,588uBio Leg Massager 788uPhoria Warm Leg Massager 698uSqueez Air Leg Massager 428uCozy 3D Upper Body Massager 138uCaress 3D Upper Body Massager 328uHip Lower Body Massager 328uPen Handheld Massager 45uPamper Handheld Massager 148uGem Handheld Massager 38uDurian Handheld Massager 138uVision Eye Massager 68uGalaxy Eye Massager 258uMask Eye Massager 38uSnooz Massager Wrap Neck Pillow 68uSnooz Neck Pillow Neck Pillow 48uNek Neck Pillow 218uMoments Sleep Well 135uNap Cuddle Blanket Sleep Well 68uGoGo Pulse Massager 388uPixie Laptop Massager Pulse Massager 199uShape Innovative Fitness 699uTrek Innovative Fitness 598uShape Music Innovative Fitness 899uCorset Slim Belt 349uCheck 200 Blood Pressure Monitor 158uVenus Air Purifier 798uAlpine Air Purifier 598uPure 2 Water Purifier 128

Source: Company

4) Branding: People recognise OSIM due to its

advertising and promotional spending. It frequently uses celebrities to endorse its products. We note that OSIM opted for Lee Min Ho to front the launch of the uDiva in April 2014. Mr Lee appeals to the younger generation and shot to fame through the Korean drama series he took part in. According to management, a 2014 research study conducted by OSIM and a brand consultant found that OSIM’s marketing strategy should take the online route. This has encouraged OSIM to focus its advertising efforts on social media platforms. And in recent years, OSIM has begun utilising online content marketing with the help of celebrity bloggers. In line with its healthy lifestyle promotions, OSIM tied up with the Sundown Marathon 2015, which attracted 26,000 runners. The event started in 2008 with 6,000 participants. Previously, OSIM sponsored the OSIM International Triathlon from 2001-11, the OSIM Singapore Golf Masters from 2005-08 and the BMF World Super Series from

2011-13. We think these associations will bolster consumers’ perception of OSIM as a healthy-lifestyle company.

We also spoke to non-users to understand their reservations about owning a massage chair. Key gripes: 1) Lacks perceived benefits, 2) pricing, and 3) size. 1) Lacks perceived benefits: For people with no prior

experience of a massage chair are unable to relate to the benefits such chairs offer. We think OSIM’s marketing efforts will help to educate consumers, but there is scope to raise awareness.

2) Pricing: As some customers lack experience of massage chairs, they are unwilling to spend a lot on such a device. OSIM addresses this stickler by offering products across different price points, including relatively low-priced offerings such as leg massagers and hip massager. This approach allows customers to buy an item that suits their budgets at the time; for example, a young couple with relatively modest purchasing power may opt for the uHip, costing SGD328. This was one factor behind the introduction of the uAngel, in our view. The price point for the uAngel (SGD1,888) was 65% cheaper than for the uDivine. This caters to a different customer segment altogether. Comparatively, Ogawa’s newest basic model retails for SGD5,299 before discount, twice the price of OSIM’s uDiva. However, we note that uDiva offers fewer features than does the Ogawa chair. As the uDiva is an entry-level product, it is designed to look similar to an actual chair, so that it can fit in with the rest of the furniture. Again, this is in an effort to encourage consumers to start with a smaller ticket item and build familiarity with massage chairs and the OSIM brand.

3) Size: Public housing units are not big, and they are

shrinking. New houses in Singapore are getting smaller. The typical size of a 4-5-room flat in the 1990s was 100-120 sq m vs. 90-110 sq m in the 2000s.


10 August 2015

- 16 -

Singapore: houses are getting smaller Period Flat type (a) Floor area (b) Average

household size Living space per person = (a) / (b)

1980s

3-room 69 sq m

4.6

15 sq m 4-room 105 sq m 23 sq m 5-room 123 sq m 27 sq m

Executive 145 sq m 32 sq m

1990s

3-room n/a

3.9

n/a 4-room 100 sq m 26 sq m 5-room 120 sq m 31 sq m

Executive 140 sq m 36 sq m

2000s

3-room 65 sq m

3.4

19 sq m 4-room 90 sq m 26 sq m 5-room 110 sq m 32 sq m

Executive n/a n/a

Source: Housing Development Board, The Straits Times

During our walkabout, OSIM’s chairs were visibly more compact than Ogawa’s. We think this is a positive factor for OSIM, as consumers will tend to opt for space-friendly equipment that takes up less room in their homes.

OSIM massage chairs vs. those of its peers in Asia Massage sofa Specifications OSIM uDiva OTO Elvi EV-01 Upright position 90 x 70 x 85 102 x 62 x 89 Reclined position 162 x 70 x 95 Entry-level range Specifications OSIM uMagic OTO Chiro CR-01 Ogawa Smart DeLight Plus Upright position 108 x 73 x 114 136 x 87 x 129 136 x 87 x 129 Reclined position 176 x 73 x 79.5 200 x 87 x 96 182 x 87 x 96 Premium range Specifications OSIM uInfinity OTO Cyber Wave Plus Ogawa Smart Sense Upright position 111.5 x 71 x 120.5 153 x 90 x 130 152 x 84 x 112 Reclined position 184 x 71 x 95.5 210 x 90 x 120 180 x 84 x 95

Source: Companies, Daiwa

Note: Measurements in centimetres (length x width x height)

Industry competitiveness

It is common to find an Ogawa and OTO store within walking distance of an OSIM outlet. OSIM has the most stores in its 5 key markets, at 2.5 times the combined number of outlets for Ogawa and OTO. OSIM stores vs. competitors in its key markets Country OSIM Ogawa OTOSingapore 30 14 5Malaysia 54 64 20China/Hong Kong 269 23 27Taiwan 60 0 0Total 413 110 52Source: Companies’ website, Daiwa, As at 3 August 2015

OSIM was ahead of its peers in terms of gross margin, at 70.4% for 2014 (5-year average: 69%). Ogawa’s 4-year average (FY10-13) was 65.8%, while OTO’s 5-year average as at end-FY14 was 67.4%.

We note that OSIM’s gross margin has been rising since 2010. The shift in supplier, from a third party to its own production joint venture, enabled this increase. We expect this trend to continue as its scale expands. Conversely, its peers have encountered declining gross margins since FY11. OSIM: gross margin vs. that of its peers


The difference in profitability is more apparent at the EBITDA level. OSIM’s 2014 EBITDA margin was 22%, far above Ogawa’s 9.9% (FY13) and OTO’s 4.3% (FY14). OSIM: EBITDA margin vs. that of its massage-chair peers


We think this highlights OSIM’s strength in terms of operating efficiency for both staff and rental aspects. The latest 3-year averages for OSIM’s staff/rent costs were 8.5%/17.1%, below Ogawa’s 13.8%/21.5% and OTO’s 22.7%/18.6%, respectively.

65.3%

68.9%

70.0% 70.3% 70.4%

64.1%

67.9%

65.9%

65.5%

70.4% 70.0%

66.5%

64.9%

65.2%

60%

62%

64%

66%

68%

70%

72%

2010 2011 2012 2013 2014

Osim Ogawa OTO

15%

20% 21% 22% 22%

8%

-3%

3%

10%

29%

22%

9%

2%4%

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

Osim Ogawa OTO


10 August 2015

- 17 -

OSIM: % of revenue allocated to rental and staff costs vs. its massage-chair peers

Source: Companies

Note: 2012-14 average for OSIM and OTO; FY11-13 average for Ogawa

Based on our on-the-ground checks, we understand that Ogawa and OTO introduce discounts on their products soon after their release. But OSIM does not offer discounts until the tail-end of a product’s life cycle. This strategy is similar to those of luxury brands like LVMH, which goes out of its way to maintain its premium status. We think this move will allow OSIM to sustain higher gross and operating margins than its peers. The flip side is that OSIM may lose market share to its peers due to their more affordable prices, which would appeal to price-sensitive customers. Peers cashed out In 2013, Ogawa World Bhd was sold to Xiamen Comfort Science & Technology Group Co Ltd. (002614 CN) for MYR126.2m, implying an exit PER multiple of 8.8x using its FY13 net profit of MYR14.4m. Separately, in 2014, OTO’s major shareholders disposed of 179.1m shares (equivalent to a 56% holding) for HKD374.4m. Based on the renamed Tempus Holdings’ (6880 HK, Not rated)FY14 net profit of HKD8.7m, the disposal price implies an exit multiple of 76.7x PER.

8.5%

17.1%

13.8%

21.5%22.7%

18.6%

0%

5%

10%

15%

20%

25%

Rental StaffOsim Ogawa OTO


10 August 2015

- 18 -

Financial position

Current ratio OSIM’s current ratio has been above 1x since 2009. As at 30 June 2015, the ratio was 4x. We also note that 73.8% of its current assets comprise cash and equivalents. This implies that OSIM is in a good position to take advantage of any expansion or acquisition opportunities that may arise. OSIM: Current ratio (x)


Net cash since 2009 We are comfortable with OSIM’s cash position, which has been a growing net cash position since 2009. As at 30 June 2015, its cash and cash equivalents stood at SGD404.5m, or 2.4x its total debt of SGD170.5m. OSIM: total cash vs. total debt


Bond issuance in 2011 and 2014 Despite OSIM’s net cash position, it issued 2 convertible bonds for SGD120m in 2011 and SGD170m in 2014. Both bonds were placed with institutional and accredited investors. The purpose was to fund its expansion plans, strategic acquisitions and general working capital. However, we

do not see any issues with the latter, and thus we believe the true purpose was the former two. We note that in January 2012, OSIM acquired the majority of a controlling stake in GNC Taiwan for SGD6.6m. In December 2012, OSIM acquired a 30% stake in Suzhou Daitec Exercising Machine Co., Ltd for USD1.1m. For both bonds, the conversion price had a premium of 25% over the prior closing price. The bond issued in 2011 had an interest rate of 2.75%, while the bond issued in 2014 does not bear interest. Instead, its yield to maturity is at the rate of 2% per annum. We view these rates favourably relative to Singapore’s 10-year government bond yield of about 2.7%. Given OSIM’s strong cash position, and that the bond issuance in 2014 is the only significant debt on its balance sheet, we do not see the company having any problem paying down the full loan amount.

Goodwill and intangibles On 16 October 2013, OSIM increased its stake in TWG Tea from 45% to 53.7%. This led to a consolidation of goodwill and intangibles on OSIM’s balance sheet. Goodwill and intangibles grew from SGD19.8m at end-2012 to SGD189.9m at end-FY13, as a result. This will be amortised over its lifespan, which we estimate to be 20 years.

Positive FCF model

OSIM has generated positive FCF (CFO – Capex) for the past 26 quarters (since 1Q09), and we expect the trend to continue. Its FCF yield (FCF/Enterprise value) improved from 5.4% to 9.9% between 2009 and 2014. Despite its subdued 3Q14 and 1H15 financial results, OSIM still produced positive FCF in those periods, enabling it to maintain its dividend payments and build up its cash hoard.

1.4 1.3

2.3 2.3

1.4

3.7 3.94.2

4.6

0.0

1.0

2.0

3.0

4.0

5.0

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Current ratio

63 73

194 202267

428 446503

574

35 15 133 142 155185 190 194 199

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Total cash Total debt

(SGDm)


10 August 2015

- 19 -

OSIM: FCF and FCF yield


One factor driving OSIM’s positive FCF generation is its operating margin, which rivals those of luxury players such as LVMH Moet Hennessy Louis Vuitton (MC FP, Not rated) and Burberry Group (BRBY LN, Not rated). We attribute OSIM’s high operating margin to consumers’ perception of OSIM as a high-end brand. OSIM’s EBIT margin is comparable to international luxury players


War chest ready; little need for debt OSIM saw its cash and equivalents increase from SGD63.2m as of 31 December 2009 to SGD404.5m as of 30 June 2015. We expect this upward trend to continue for 2015-17. Apart from the 2 bond issuances in 2011 (SGD120m) and 2014 (SGD170m) for expansion purposes that we mentioned earlier, OSIM has no other significant debt. We do not foresee a change in this position. What to do with all that money? We think OSIM has 3 options: 1) dividends, 2) share buyback, and 3) acquisitions. 1) Dividends: OSIM has distributed dividends

consistently in the past 5 years. It increased its dividend per share (DPS) from SGD 1 cent in 2009

to SGD 6 cents (including a SGD 2 cents special dividend) in 2012. OSIM then maintained its DPS at SGD 6 cents for 2013/14. We expect OSIM to maintain its DPS moving forward, but do not expect an increase. In our view, OSIM has sufficient cash to support the dividend payments.

OSIM: dividend per share and payout ratio


2) Share buyback: Since 8 October 2014, OSIM has spent SGD40.7m to buy back 22.7m of its shares at an average price of SGD1.79/share (high: SGD2.39, low: SGD1.66). This represents about 2.9% of the outstanding ordinary shares, ie, before the first purchase on 8 October 2014. We expect share buybacks to continue if the share price remains attractive.

59

82 8781

93 9084

96109

5%

7% 7% 7%8%

9% 8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Free cash flow FCF/EV (RHS)

(SGDm)

13%

18%19%

20%

19%

21%22%

21% 21%

20%

11%

16%17% 17%

18%

18%

20% 20%

17%19%

10%

15%

20%

25%

2010 2011 2012 2013 2014

Osim LVMH Salvatore Ferragamo Burberry

1 2 3 6 6 6 6 6 6

27% 27% 29%

51%43% 45% 53% 46% 42%

0%

10%

20%

30%

40%

50%

60%

0

1

2

3

4

5

6

7

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Dividend per share (cents) Dividend payout ratio (RHS)

(SGD cents)


10 August 2015

- 20 -

OSIM: share buybacks Date Quantity Price per share (SGD) Consideration (SGD)8-Oct-14 650,000 2.33 1,511,90010-Oct-14 100,000 2.39 239,0004-Nov-14 226,000 1.69 381,9405-Nov-14 300,000 1.72 514,50010-Nov-14 1,210,000 1.80 2,174,37011-Nov-14 1,265,000 1.79 2,266,88012-Nov-14 200,000 1.80 359,00017-Nov-14 5,000 1.95 9,77021-Nov-14 278,000 1.98 550,4408-Dec-14 400,000 2.04 814,00018-Dec-14 101,000 2.01 203,01019-Dec-14 11,000 1.99 21,83529-Dec-14 1,488,000 1.97 2,926,8966-Apr-15 1,276,100 1.87 2,379,9277-Apr-15 700,900 1.87 1,313,48714-Apr-15 27,400 1.88 51,51216-Apr-15 447,200 1.88 838,94717-Apr-15 1,208,400 1.88 2,276,62620-Apr-15 1,506,100 1.88 2,828,4567-May-15 620,200 1.67 1,033,2538-May-15 3,232,900 1.67 5,405,40911-May-15 822,800 1.66 1,368,31612-May-15 2,654,400 1.69 4,475,31813-May-15 2,280,700 1.70 3,868,06714-May-15 1,707,600 1.70 2,896,090Total 22,718,700 40,708,948Average 1.79


3) Acquisitions: OSIM acquired minority stakes in 2

companies in June 2015. It paid SGD2m for a 21% stake in cosmetic start-up Laboratoires Du Palais Royal Limited. And it increased its stake in Trek 2000 International (TREK SP, Not rated) to 8.8% for SGD10.9m. We think this activity may be a sign of things to come. OSIM’s last purchase of significance was arguably that of TWG Tea in April 2011.

Dividends and share buyback most likely In our opinion, the most likely scenarios are dividends being sustained and share buybacks continuing in the near term. For 1H15, OSIM declared a dividend of SGD 3 cents per share, similar to 1H14. The last time OSIM paid a special dividend was in 2012. Our forecasts do not incorporate any special dividends, as we believe OSIM will be prudent and hold onto cash for share buybacks or acquisition opportunities. As it stands, we think it is unlikely that OSIM will make a significant purchase of another brand, given it is still ramping up TWG Tea’s outlets and won’t want to over-diversify. Also, we think OSIM is still mindful of its failed acquisition of Brookestone in 2005, which led to a writedown in 2008. Thus, we think OSIM will be cautious in its future pursuits.

Assumptions

Number of outlets per brand We expect OSIM’s store count to be little changed in 2015 before increasing by 5 outlets in 2016/17. We expect a decline in the number of ONI Global outlets (RichLife/GNC) in 2015, as management continues to rationalise RichLife stores in China. We expect an increase of 3 stores in 2016/17. Management is targeting 15 new stores for TWG Tea in 2015, of which it has opened 4 so far. For 2016-17, we assume it will open 10 stores pa. OSIM: total store count


Revenue per outlet per brand Although OSIM does not provide a breakdown of sales by brand, we estimate OSIM contributes 65% of revenue, TWG Tea (12%) and ONI Global (23%). We expect TWG Tea to contribute 17.6% of revenue in 2017, supported by faster store-count growth. We forecast a 4% CAGR in revenue per store for 2015-17, driven by mainly by OSIM and ONI Global. We expect lower revenue per store relative to 2014 for TWG Tea during this period, as its new stores go through the gestation phase.

529 603 586 577 590 561 560 565 570

188

251 270 253 245 238 220 223 226

10 16 26 43 58 68 78

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2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

OSIM RichLife/GNC TWG Tea


10 August 2015

- 21 -

OSIM: revenue per store (in SGD ‘000)


Cost structure The cost of goods sold and employee benefits are OSIM’s two biggest cost components. As a percentage of revenue, COGS has been falling (2009: 37.2%, 2014: 29.6%) while the employee benefits component has been rising (2009: 16.5%, 2014: 17.7%). We expect these trends to continue as OSIM further enhances its production efficiency, while staff costs face pressure from rising wages and a bigger headcount due to store expansion. However, as 30-40% of the sales staff’s salaries are variable, we think OSIM will face a smaller staff cost increase during the initial phase of a store opening. OSIM: cost structure


Operating margin OSIM has recorded weaker operating margins in the past 4 quarters relative to the prior 4, due to: 1) lower sales YoY in 1H15, 2) legal costs, and 3) start-up costs related to the opening of TWG Tea outlets.

OSIM: quarterly operating-margin trend

Source: Company

We forecast the operating margin to narrow by 2pp YoY to 16.8% in 2015, as we anticipate more legal and start-up expenses in 2H15. Thereafter, we look for the EBIT margin to rise by 1.1/0.6 pp in 2016/17 to 17.9%/18.5% in the absence of legal costs and assuming improved operational efficiency for TWG Tea. OSIM: operating margin forecasts


Capital expenditure Management does not anticipate significant changes in the number of OSIM and GNC outlets in 2015. It said that while it intends to open new OSIM and GNC outlets, it will also look to shut down unprofitable ones. Management expects to open 15 new TWG Tea outlets in 2015. So far, it has opened 4. The capital expenditure for one new outlet varies according to the brand: OSIM (SGD150k-250k), ONI Global (SGD100k-150k) and TWG (SGD1m). The cost of 1 central kitchen and warehouse exceeds SGD1m. For full-year 2015, we forecast capex of SGD16m; in 1H15, the company spent SGD6.9m. For 2H15, we expect higher capex spending HoH as OSIM ramps up its TWG Tea store expansion plans. We note that some of the SGD170m bond issue proceeds from 2014 were slated for capex requirements. In our view, the bond amount is more

665 648 644703

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1,000

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

38% 37% 34% 34% 32% 33% 32% 33% 33%

17% 17% 18% 19% 18% 20% 20% 20% 20%

32% 32% 31% 31% 35% 30% 31% 30% 31%

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2009 2010 2011 2012 2013 2014 2015E 2016E 2017ECOGS Employee benefitsDepreciation and amortisation Interest expenseMarketing TaxesOthers

19.3% 18.9%

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14.2%

18.8%

12.0%

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3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

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16.8%17.9% 18.5%

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10%

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25%

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

EBITDA margin EBIT margin


10 August 2015

- 22 -

than sufficient to cover OSIM’s capex needs for 2016-17, which we estimate at SGD34m in total. OSIM: capital expenditure (in SGDm)


Working capital OSIM’s working capital cycle (WCC) ranged from 52 days to 80.5 days between 2009 and 2014. We expect it to increase to 102.5 days in 2015 due to 2 factors: 1) increased inventory, and 2) shorter payable days. Thereafter, we expect a fall in the WCC to 97.5/94.5 days in 2016/17. Increased inventory: We expect OSIM to take on more inventory in view of uMagic’s launch in 2Q15 and the forthcoming release of uDiva Classic in 2H15. Also, TWG Tea will require more inventory to support its 11 new stores slated to open in 2H15. As such, we forecast an increase in inventory days from 127.7 days in 2014 to 150 days in 2015, before a gradual reduction in 2016/17 as OSIM reduces inventory following the initial phase after the launch of its new massage chairs. Shorter payable days: Management said it had paid its creditors ahead of schedule in 1H15. Thus, we have reduced our payable days assumption from 79.8 days in FY14 to 70 days in 2015-17E. In our view, the longer WCC is not a cause for concern. OSIM manages its inventories according to the demand and product life cycle. Thus, we may see inventory days come down in 2016-17 after the initial phase of uMagic and uDiva Classic is over, which would lower the WCC accordingly.

OSIM: working capital cycle


Dividend policy OSIM does not have a fixed dividend policy, but it has paid dividends for the past 6 financial years. The last time it raised dividends per share was in 2012. In 2014, OSIM paid SGD 6 cents per share. We do not expect OSIM to raise its dividend per share in the near term. Rather, we expect it to maintain the amount over 2015-17, as we believe it has sufficient cash to do so.

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10.9

18.5

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2

4

6

8

10

12

14

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2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

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2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Inventory days Receivable daysPayable days Working capital cycle


10 August 2015

- 23 -

Valuation

Our 12-month target price of SGD1.88 is based on 14.5x PER, in line with the stock’s past-5-year mean, applied to our 2016 EPS forecast. The potential upside to our target price stands at 10.3%. Our 2015/16 EPS forecasts are 4.1%/8.1% above those of the Bloomberg consensus. OSIM: 12-month forward PER


Our target price is 13.5% above the Bloomberg consensus figure (9 analysts). While the street is mainly neutral on OSIM (Buy: 3, Hold: 5, Sell: 1), we think it is underestimating the scope for stronger sales in 2016, led by new product launches and TWG Tea store expansion. On our 2015 DPS estimate, the stock offers a 3.5% dividend yield. DCF valuation supports target price Our target price is backed by our DCF valuation of SGD1.95 per share. In our DCF valuation, we assume a WACC of 12.9% and terminal growth of 3%. Plus, we assume a 2.7% risk-free rate based on the current yield of Singapore’s 10-year government bond. Our adjusted beta of 1.2 is derived from Bloomberg. We assume a market risk premium of 8.5% to account for uncertainty in the economic outlook. And we use a 6.7% cost of debt, based on 4pp premium to the risk-free rate. A tax rate of 17% is used in line with Singapore’s prevailing tax rate.

We assume OSIM’s capital structure will be fully funded by equity. Currently, debt makes up 11.8% of OSIM’s capital structure, derived mainly from a bond due 2019. Given OSIM’s strong cash position, we do not see a need for debt and have reduced it accordingly. OSIM: DCF valuation WACC 12.9%

Total value (SGD m) 1,423.3 Market capitalisation (SGD m) 1,250.5 Number of shares ('000) 779,152 Share price (SGD) 1.605Total debt (SGD m) 172.8 Equity percentage 100.0%Debt percentage 0.0%Cost of equity 12.9%Risk free rate 2.7%Beta 1.2Market risk premium 8.5%Cost of debt 6.7%Tax 17.0%Terminal growth rate 3.0%

Source: Daiwa forecasts

OSIM: DCF valuation sensitivity analysis Terminal growth 2.0% 2.5% 3.0% 3.5% 4.0%Discount rate 10.9% 2.29 2.36 2.43 2.52 2.6211.9% 2.06 2.11 2.17 2.23 2.3012.9% 1.88 1.91 1.95 2.00 2.0513.9% 1.72 1.75 1.78 1.82 1.8514.9% 1.59 1.62 1.64 1.67 1.70

Source: Daiwa estimates

0

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10 August 2015

- 24 -

Valuations: peer comparison

Company Ticker

Market cap (USDm)

Current price (l.c.) Rating

PER (x) PBR (x)

ROE (%)Div Yield

Actual FY15E FY16E Actual FY15E FY15E (%)OSIM INTL LTD OSIM SP EQUITY 931 1.71 BUY 16.5 15.2 13.2 3.0 2.8 19.6% 3.5 Massage Chair Peers TEMPUS HOLD 6880 HK Equity 214 4.65 NR 118.8 n.a. n.a. 5.5 n.a. 4.4% n.a.XIAMEN COMFORT-A 002614 CH Equity 1,439 15.33 NR 61.9 41.3 31.0 4.0 3.3 6.6% n.a.Average 90.3 41.3 31.0 4.7 3.3 5.5% n.a. Regional specialty retailers ESPRIT HLDGS 330 HK Equity 1,893 7.55 NR 95.2 2516.7 62.9 0.9 0.9 1.0% 0.4%SAMSONITE INTL 1910 HK Equity 4,555 24.80 NR 24.4 20.5 17.6 3.6 3.2 15.1% 2.2%L'OCCITANE INTL 973 HK Equity 3,768 19.74 NR 28.0 23.3 20.4 4.0 3.7 15.2% 1.8%LIFESTYLE INTL 1212 HK Equity 2,672 13.04 Outperform 9.1 9.5 9.1 1.8 1.7 21.0% 4.6%Average 39.2 642.5 27.5 2.6 2.4 13.1% 2.3% Global luxury brands PRADA 1913 HK Equity 12,510 37.80 NR 28.3 25.9 23.2 3.7 3.6 13.8% 2.2%LVMH MOET HENNE MC FP Equity 96,635 173.45 NR 15.2 22.7 19.9 3.8 3.6 22.6% 2.1%TIFFANY & CO TIF US Equity 12,060 93.37 Hold 23.1 22.1 19.5 4.2 3.9 16.2% 1.7%FERRAGAMO SPA SFER IM Equity 5,596 30.23 NR 32.5 28.3 24.3 10.9 8.9 37.7% 1.6%HERMES INTL RMS FP Equity 40,580 350.50 NR 42.5 36.0 31.7 10.7 9.8 27.4% 1.0%TITAN CO LTD TTAN IN Equity 4,616 334.00 NR 36.1 32.7 26.7 9.5 8.0 29.1% 0.9%TOD'S SPA TOD IM Equity 3,139 93.50 NR 31.3 27.5 24.6 3.5 3.3 11.6% 2.3%BURBERRY GROUP BRBY LN Equity 11,078 1,608 NR 20.9 20.5 18.5 5.1 4.5 26.2% 2.4%Average 28.7 26.9 23.6 6.4 5.7 23.1% 1.8% Simple average (excl. OSIM and Esprit) 40.5 25.8 25.3 5.1 4.5 17.7% 1.9%


Note: based on 7 August 2015 closing prices


10 August 2015

- 25 -

Risks to our call

Weak take-up rate of new products Although OSIM’s key markets are in Asia, a global economic meltdown would almost certainly affect OSIM’s performance, in our view. For example, during the global financial crisis, OSIM’s sales in North Asia fell to SGD225.1m in 2008, from SGD341.9m in 2006. South Asia was not spared either, with revenue declining to SGD159.9m in 2008, from SGD203.5m in 2006. Both geographical segments recovered from 2009 onward. We think that, among other factors, the ongoing anti-graft campaign in China has led to subdued discretionary spending. If consumer sentiment remains weak, OSIM’s performance in North Asia may remain sluggish, which could lead to its sales of new products being weaker than we expect. Poor execution in expansion One of the key revenue drivers in our model for OSIM is an increase in its store count. If OSIM is unable to expand to the extent that we expect, perhaps due to an inability to find suitable store locations, or has to close down outlets unexpectedly, our revenue and earnings forecasts would face downside risk. Product imitation In order to keep innovating and developing new products to meet consumers’ changing tastes, OSIM has about 40 in-house professionals and engineers conducting research and development. Developing a copy-cat product would require less time and less investment in staff. Hence, a competitor could bring to market a knock-off product at a lower price, which would blunt OSIM’s competitive edge. We think this poses a big risk to OSIM as price-sensitive consumers may opt for a more affordable imitation product. One way OSIM can tackle this issue is to enhance consumers’ perception of the brand, essentially enticing customers to pay more for a superior product. Another way would be to ensure it has a steady stream of new product rollouts, particularly for smaller-ticket items. One advantage of having short product life cycles is that products have a smaller window of exposure to possible imitations.

Rise in staff costs OSIM incurs higher staff costs when it opens new outlets. It is also subject to wage adjustments to account for inflation. While we have factored into our forecasts an increase in wages, higher-than-expected staff costs would pose a downside risk to our margin and earnings forecasts. TWG Tea litigation TWG Tea is involved in 2 legal cases: 1) a shareholders’ dispute in Singapore, and 2) a dispute over the use of “1837” in its logo in Hong Kong. We understand that the first case will have a court hearing in August 2015, while legal proceedings on the latter case will resume in January 2016. If these cases become protracted affairs, OSIM’s legal expenses could weigh on its financial performance going forward. Separately, an unfavourable legal decision in the shareholders’ dispute could pose a risk to OSIM.


10 August 2015

- 26 -

Company background

Listed in 2000, OSIM sells branded healthy lifestyle products. The company was founded in 1980 by Mr Ron Sim, its largest shareholder (65.6%). OSIM started out selling household goods such as knife sharpeners, and in 1982 it began marketing healthy lifestyle products like handheld massagers. Faced with a recession in 1985, Mr Sim resolved to build up a brand and establish a regional presence. OSIM ventured into Hong Kong in 1986, followed by Taiwan, Malaysia, Indonesia, Thailand and China in subsequent years. The OSIM brand name was officially launched in 1996. The company’s subsequent diversification into brands like TWG Tea and GNC reflects Mr Sim’s goal of having 4 healthcare lines: Health, Hygiene, Fitness and Nutrition. It now has 3 business segments: 1) OSIM, a retailer of massage chairs and lifestyle products, 2) ONI Global (GNC/RichLife), which sells nutraceutical products, and 3) TWG Tea, a retailer and distributor of premium tea. OSIM does not disclose revenue broken down by brand. However, we estimate OSIM contributed 65% of 2014 revenue, with the remainder coming from TWG Tea (12%) and ONI Global (23%). OSIM: 2014 revenue by business

Source: Daiwa estimates

Geographically, OSIM derived around 53% of its 2014 revenue from North Asia, 40% from South Asia, and 7% from the rest of the world.

OSIM: 2014 revenue by geography

Source: Company

OSIM has 2 sales channels: 1) retail, and 2) distribution. In 2014, it derived 90.1% of its revenue from retail and 9.9% from distribution. OSIM: 2014 revenue by sales channel

Source: Company

As of 30 June 2015, OSIM has 827 outlets worldwide: OSIM (560), ONI Global (220) and TWG Tea (47). Of the 560 stores, about 45% are in China. OSIM: number of outlets as of 30 June 2015

Source: Company

OSIM65.0%

RichLife/GNC23.0%

TWG Tea12.0%

North Asia52.9%

South Asia40.4%

Rest of World6.7%

Retail90.1%

Distribution9.9%

OSIM560

RichLife/GNC220

TWG Tea47


10 August 2015

- 27 -

OSIM

OSIM is a retailer of massage chairs and lifestyle products. Its products include massage chairs, handheld massagers and air purifiers, and it has direct-owned and franchise stores. We estimate direct-owned outlets to make up about 85% of total store count, with franchisees accounting for the remainder. OSIM store front

Source: Company

According to Frost & Sullivan, OSIM held a leading market share of 59.1% in Hong Kong for sales of relaxation equipment by value in 2010. Its closest peers were Ogawa and OTO. Because OSIM strives for quality in its products, they tend to be durable. Although management expects the lifespan for its products to be 10 years, it said that some customers use the products for longer than a decade. New massage chair every 12 to 18 months Massage chairs account for 60% of OSIM’s sales in this segment. OSIM has 3 price levels for its massage chairs: 1) SGD2,000, 2) SGD5,000, and 3) SGD7,000. Typically OSIM releases 1 massage chair model in the SGD2,000 and SGD5,000 bracket every 12 to 18 months, including model variants. For the premium range (SGD7,000), management notes that customers tend to be more loyal. Hence, OSIM spaces out its high-end model launches compared with the 12- to 18-month cycle for the lower price points. It also launches about 4 to 5 smaller items every year.

This steady flow of products ensures that OSIM’s stores are refreshed consistently and customers are given new choices. Management shared that the sweet spot for massage chair trade-ins is between 3 and 5 years, which we think bodes well for the company’s new releases. OSIM: massage chairs launched over the years Date launched Massage chair Description Apr-03 iSymphonic Massage chair that synchronises massage and music Apr-04 iSymphonic AV Massage chair that synchronises with audio-visual signals Mar-05 iDesire Full body massage chair Mar-06 iDesire ROBO Voice-controlled full body massage chair Aug-06 iMedic Pro Mid-range full body massage chair Jan-07 uPilot Designer massage chair with patented ROBO-Stic technology Dec-07 uSpace Well-being chair Feb-08 uYoyo Massage and exercise chair Jul-08 uMedic Multi-purpose full body massage chair with retractable foot

rest Apr-09 uDream Hybrid 3-system family massage chair Jul-09 uDesire Convertible massage chair Jan-10 uSoffa Petit Massage sofa Jun-10 uSoffa Massage sofa with customisable design Nov-10 uDivine Human-3D massage chair 2011 uDivine Sport Massage chair clothed with sports car interior 2012 uDivine App Massage chair combined with mobile app technology Jan-13 uAngel Massage sofa Jul-13 uInfinity Massage chair that lets the user download new massage

programmes Apr-14 uDiva Massage sofa; sequel to uAngel Nov-14 uInfinity Luxe Massage chair that lets users download new massage

programmes Apr-15 uMagic Massage chair with magic hands technology 2H15 uDiva Classic Massage sofa, sequel to uDiva

Source: Company

Management said that it refrains from offering price discounts, an approach that we believe helps to retain OSIM’s premium standing in the market. However, management noted it will reduce prices near the tail-end of a product’s life cycle in order to clear unsold inventory and pave the way for new products. During the initial launch period, OSIM aims to attract new customers. After 3 to 6 months, it tends to relaunch the product and may shift its focus to trade-ins. OSIM contacts its existing customers to inform them when it has a new product offering. Its interaction with existing customers does not end there. Rather, it reaches out to clients 30 days after they have purchased a product, with the twin goals of: 1) soliciting customers’ feedback, and 2) providing a positive service experience.

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- 28 -

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10 August 2015

- 30 -

In April 2011, OSIM bought a 35% stake in TWG Tea Company Pte Ltd. The 2 formed a joint venture, TWG Tea North Asia, to expand into China, Korea, Taiwan and Hong Kong by replicating its Singapore business model. OSIM has since increased its stake in TWG Tea to 69.9%. TWG Tea: shareholding structure

Source: Company

TWG Tea: products

Source: Company

TWG Tea stores are located in tourist-rich spots such as premium hotels, airports and high-class department stores (eg, The Shoppes at Marina Bay Sands). Clients include Singapore Airlines and All Nippon Airways. Outside of Singapore, TWG Tea is often franchised by a luxury brand distributor. As of 24 July, it has 47 outlets in 19 countries. Seventeen of the outlets are directly-owned and the rest are under franchisees.

TWG Tea: ION Orchard outlet

Source: Company

In Singapore, TWG Tea has a presence in around 85% of luxury hotels and is strongly positioned at the airport, with a store in each of the 3 terminals. According to management, nearly all of the stores in Singapore enjoy high footfall and are profitable. Distribution channels TWG Tea has 3 distribution channels: retail outlets, hotels and airlines. TWG Tea can either go direct or through a franchisee. 1) Retail: TWG Tea sells its products to consumers via

its retail outlets. Some of TWG Tea’s retail establishments double up as tea salons providing F&B offerings. In such establishments, we estimate the F&B component contributes 30% of revenue and retail 70% of revenue in a stable state (2 to 3 years after opening). Management noted that the tea salons tend to generate more revenue compared with the retail-only outlets. However, in terms of profitability, the retail-only stores come out on top. TWG Tea franchisees must operate a tea salon, ie, similar to the self-owned retail segment. TWG Tea earns a franchise fee of USD250,000 and takes a 2-3% sales cut from franchisees. TWG Tea also generates revenue by selling the products to the franchisees. Over a 5-year contract, franchisees must buy a minimum amount of tea from TWG Tea, ensuring a steady flow of income for the company. TWG Tea products are sold in certain upmarket retailers overseas, such as Dean & DeLuca in the US.

2) Hotels/Airlines: TWG Tea has a sales team that focuses on its corporate clients, which include

OSIM

TWG Tea Company Pte Ltd TWG Tea North Asia

Owns 70% Owns 60%

Effective ownership: 88%

Owns 40%


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luxury hotels, fine dining establishments and airlines. Sales to corporate clients make up about 10% of TWG Tea’s revenue. Franchisees can approach corporate clients as well, but they must first seek approval from TWG Tea to ensure that products are sold to appropriate clients.

TWG Tea places a strong emphasis on its choice of partners and store location. Hence, franchise outlets are positioned in high-end department stores, such as in the IFC mall in Hong Kong, Dubai mall in UAE, Pavilion Kuala Lumpur in Malaysia, and The Emporium in Thailand. TWG Tea: Jiyūgaoka (Tokyo) outlet

Source: Company

In our view, the positioning of the product in high-end hotels and airports serves as a brand-building platform, ie, through association with premium names. Central kitchens TWG Tea owns 5 central kitchens located in Shanghai, Guangzhou, Hong Kong, Taiwan and Singapore. According to management, a city needs a minimum of 4 stores before the company will consider opening a central kitchen to support them. A central kitchen can support up to 15 stores. Currently there are 11 stores in Singapore using the central kitchen there. The cost of setting up a central kitchen equipped with a warehouse and corporate office exceeds SGD1m, according to management. Emergence of speciality tea in Singapore TWG Tea is not the only player looking to carve out a niche in Singapore’s luxury tea market.

Chaiholics is a specialty tea company that started out in Singapore 2 years ago. Its concept is similar to TWG Tea, with retail outlets selling brewed tea/coffee, pre-made food such as bento sets for lunch, and tea leaves in loose or sachet forms. It specialises in the sale of chai, or Indian spiced tea. We understand that the company imports most of its tea from India and creates unique blends in-house. It has 4 outlets in Singapore located in commercial areas such as MBFC Tower 3 and Chevron House, as well as a tie up with 2 mid-market restaurants, The Namly Club and The Tiong Bahru Club. The shops at MBFC Tower and Chevron are similar to TWG Tea outlets in offering a luxury atmosphere (spacious, warm lighting, attractive fixtures and fittings). Chaiholics: Chevron House outlet

Source: Chaiholics

Chaiholics used to have 2 other outlets in office buildings AXA Tower and Asia Square Tower 2 but closed them down in late 2014. One staff member we spoke to said that footfall at Chevron House was “great” while MBFC Tower 3 enjoyed “decent” traffic. We think the closure of the 2 outlets by Chaiholics underlines just how competitive the segment is, as well as the importance of having stores in high-traffic locations. Also, it highlights the need for companies to have strong balance sheets in order to support the business before it breaks even and become self-sustaining. Legal issues concerning TWG Tea TWG Tea is involved in 2 law suits currently. The first case in Hong Kong regards the use of “1837” in its logo. The second is a shareholders’ dispute in Singapore. 1) Hong Kong: The numbers “1837” feature

prominently in TWG Tea’s logo. 1837 was the year in which free tea trading started in Singapore


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through the creation of the Chamber of Commerce, but the legal case against TWG Tea alleges that the logo implies that the company itself dates back to 1837. A court hearing is scheduled for January 2016. In our view, removing “1837” from its logo might cause TWG Tea to lose some brand equity, but we doubt that consumers’ perception of the products’ quality and luxury status would be greatly affected. Hence, we do not believe the case poses a significant threat to TWG Tea’s brand status or sales.

2) Singapore: A former founder of TWG Tea, Mr Manoj Murjani, has alleged that OSIM and other TWG Tea directors conspired to dilute his stake in TWG Tea. Mr Murjani is seeking to reverse a corporate action undertaken in January 2014 that raised OSIM’s stake in TWG Tea from 53.7% to 69.9%. A court hearing on the shareholders’ dispute is expected to be held in August 2015.

Management expects the legal disputes to be resolved by early 2016. It believes the company’s legal costs in 2015 will be similar to those for 2015, ie, low single digits in millions of Singapore dollars.

ONI Global

OSIM owns 94.9% of ONI Global Pte. Ltd, a specialty retailer of “nutraceutical” vitamin and energy products sold under the GNC and RichLife brands. ONI Global is the sole franchisee for the GNC brand in Singapore, Malaysia, Taiwan and Australia. According to ONI Global’s website, GNC is the world’s largest chain of healthfood stores, and has been the largest nutritional supplement manufacturer in the US since the 1960s. GNC has more than 8,000 stores worldwide. Through ONI Global, OSIM entered the nutrition market in China in 2008 with the launch of RichLife outlets after it had failed to obtain GNC franchise rights for China. RichLife is China’s first specialty chain store offering premium and fully imported nutritional supplements. RichLife’s products are all manufactured in the US. ONI Global has received awards from GNC US, including Best International Store of the Year and Highest Sales per Square Foot Worldwide.

OSIM first acquired a 29.9% stake in ONI Global (formerly known as Global Active) in April 2003, and increased its holding in subsequent years. GNC outlet in Singapore

Source: Company

RichLife outlet in China

Source: Company

In recent years, OSIM has been closing its RichLife stores due to the challenging operating environment in China. Management noted that it is unable to bring GNC products into the China market due to government restrictions, and as 30 June 2015 only 2 RichLife outlets remained.

Minority stakes

OSIM acquired minority stakes in 2 companies in June 2015, and we believe it may make more acquisitions in the future. OSIM’s last purchase of significance was that of TWG Tea in April 2011. Laboratoires Du Palais Royal Limited On 26 June 2015, OSIM bought a 21% stake in Laboratoires Du Palais Royal Limited (LDPRL) for about USD2m. LDPRL is a cosmetic product start-up that uses tea extract in its products. With the purchase, LDPRL became an associate company of OSIM.


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Trek 2000 International On 24 June 2015, OSIM proposed to subscribe to 24m new ordinary shares and 1m treasury shares in Trek 2000 International Ltd (TREK SP, Not Rated) for SGD10.9m. The move will take OSIM’s stake in Trek to 8.8%. Trek is an inventor of Internet of Things (IoT) products, and its patents include ThumbDrive and Flucard. The proposed purchase should strengthen ties between the 2 companies as they work on the commercial application of OSIM’s patents and technology for products in the wellness and healthy lifestyle sector. The net proceeds will be split evenly between R&D (particularly for medical diagnostic technology) and general working capital.

SWOT analysis

Strengths

Strong brand. According to a survey by Synovate undertaken in 2008, OSIM is the leading healthy lifestyle product brand in consumers’ minds across Asia. Scalable business. As TWG Tea opens more outlets, the business can leverage the central kitchens, giving scale to the segment. Low-risk expansion via franchise. OSIM’s expansion using the franchisee model is a low-risk approach that provides a visible stream of recurring income through franchise and royalty fees. Weaknesses Susceptible to weak consumer sentiment. Any softness in the global outlook among consumers would likely lead to a reduction in spending, particularly for consumer discretionary items such as OSIM’s products. Unable to raise prices significantly due to elastic demand. As evidenced by its pricing u-turn for the uDiva Classic line, OSIM may not be able to raise prices too steeply without weighing on demand. Opportunities Deeper penetration in countries outside its core markets. OSIM should be able to expand its presence in countries beyond its 5 key markets.

Product innovation. Management aims to introduce products that meet customers’ changing requirements and fill in gaps in its price-point range. One example is the introduction of uAngel, an entry-level massage chair. Threats Counterfeit products. The launch of counterfeit products would lessen OSIM’s advantage from using proprietary technology and give price-sensitive customers more affordable options. Product defects leading to recalls. Product recalls could lead to a loss of sales and damage OSIM’s reputation. Competition. A revolutionary product from OSIM’s competitors could shift demand away from OSIM.

Management

Mr Ron Sim – Founder, Chairman and CEO. Mr Sim is the founder of OSIM. As of 15 July 2015, Mr Sim holds a 65.6% stake in the company. Mr. Sim has won multiple management awards and actively participates in public service. Mr Peter Lee Hwai Kiat – CFO. Mr Lee is a certified public accountant who looks after OSIM’s finance strategy and control, information systems, human resources and investor relations. Mr Lee joined OSIM in 2000 and has been a board member since 2006. Mr Lee is also the Chairman of the Edusave Advisory Council (Ministry of Education) and an Advisory member of the Republic Polytechnic CIE (Centre for Innovation and Enterprise). Mr Charlie Teo Chay Lee – Executive Director and COO (HQ). Mr Teo has over 20 years of leadership experience at OSIM, covering sales, marketing and operations. He joined OSIM in 1989 and was appointed to the board in 2000. Mr Teo is a council member of the Singapore Retailers Association. Mr Richard Leow Lian Soon – Executive Director and COO (China). Mr Leow has spent most of his time outside of Singapore since joining OSIM in 1987, and is based in Beijing, China. Mr Leow was appointed to the board in 2000.


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Shareholding structure

OSIM’s largest shareholder is Mr. Ron Sim, with a 65.6% interest. Capital Group Companies Inc. is the second-largest shareholder, with a 5.1% stake. OSIM: shareholding structure

Source: Company, Bloomberg

OSIM

Mr. Ron Sim65.6%

Capital Group Companies Inc

5.1%

Morgan Stanley 2.6%

Other public 26.7%


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Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected] Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Becky HAN (852) 2848 4464 [email protected] Small/Mid Cap (Regional)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected] Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected] Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


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10 August 2015

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This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000). Ownership of Securities

For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships

For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making

For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts

For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification

For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 60.4% Hold** 26.0% Sell*** 13.6%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.


10 August 2015

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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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