OSIM

OSIM ($2.020): 3Q14 earnings disappoint. Profits declined 27.8% to $16.4m, bringing EPS down 32.8% to 2.11 cents while interim dividend of 1 cent is maintained. 9M14 EPS is 9.87cents, making 65.8% of Bloomberg full year EPS estimates. Top-line revenue grew 3.4% y/y to $158.2m, lifted solely by sales in South Asia region (approx. +17.5% to $67m) as sales in North Asia (approx. -1.2% to $80m) and rest of world (approx. -15.4% to $11m) dipped. Without the consolidation of TWG, the results could be worse. Gross profit margin improved 2.3ppt to 70.9%, but total operating expenses ballooned 12.8% due to new-store start-up costs, legal costs incurred at TWG Tea and higher employee wages. OSIM has been consistently shutting non-performing stores faster than it is opening new stores. This could be seen both ways. Optimistically, the Company is managing its operations efficiently by promptly cutting losses at underperforming stores. Not so optimistically, the management has poor foresight and has been incurring unnecessary new-store start-up costs. Looking ahead, the guidance given is positive, especially for massage equipment. The picture painted for TWG Tea is also rosy, with the management targeting 45 TWG outlets by year-end, up from 37 now. Balance sheet management is mostly prudent, OSIM is in net cash position of $237m as at 30 Sep, debt is funded mainly be convertible bonds. After falling more than 10% this morning, the stock now trades at 23.9x annualized 3Q14 P/E. We expect downward adjustments in TPs ahead.