OSIM

OSIM: posted record bottomline profits of $29.4m for 2Q14, increase of 12.1% from a year earlier on increase in sales and better productivity. Net profit is in line with lower range of house expectations and is on track to our $121m FY14 estimate. An interim dividend of 2 cents per share was declared, unchanged from 2Q13. Revenue increased 10.4% y/y to $182.7m as sales rose across all geographical regions and for all key OSIM products. Performance of GNC and TWG Tea is also in line with management expectations. Working capital management shows improvement, as cash flow from operating activities rose 14% to $35m and working capital more than doubled to $264.8m but mainly due to conversion and redemption of bonds and increase in cash and deposits. The company is in net cash position of $239m excluding fixed income investments of $32m. Looking ahead, we expect profits to accelerate in 2H14 as management is focused on increasing sales per store instead of indiscriminate expansion. OSIM will be closing underperforming outlets. Meanwhile, TWG is opening new outlets in Taipei, Shanghai and Guangzhou where tea culture is more dominant. Currently trading at 18.3x annualized PE with 2Q14 EPS of 3.87 cents, OSIM looks fairly valued given 2Q14 results. Potential upside is contingent upon 3Q14 results, beating which may present upside in excess of 15% based on house estimates of 20x FY14E ex-cash P/E valuation.