Many retail investors shunned OSIM International (OSIM) in 2007 when it became clear to them that the acquisition of Brookstone was becoming more of a liability than an asset to OSIM. The poor results for FY07 and the start of the global economic crisis acted as catalysts to stem OSIM’s profitability despite OSIM continuing to produce positive cashflow and EBITDA growth. The poor market conditions led to OSIM writing off its whole investment in Brookstone in FY08 and the company returned to the black in 1H09 after a year in the red. Through an exclusive email interview with OSIM’s chief financial officer, Peter Lee, Shares Investment (Singapore) ferreted out the reasons for OSIM’s comeback.

Life After Brookstone
The biggest liability of Brookstone was its commitment to pay 12% annual dividends to its cumulative preference shareholders. As the accounts of Brookstone have to adhere to US GAAP standards, the dividends were treated as an expense to Brookstone thus dragging down the profits earned by OSIM’s core businesses. According to Lee, the key objective for Brookstone this year is survival and the indicators are pointing towards this being achieved as Brookstone’s EBITDA has grown from US$32m to US$55m from 2005 to 2007.

Lee explained that it was bad timing that the global recession happened in 2008 and the capital markets went dead thus OSIM was not able to list Brookstone. However, the experience with Brookstone has not deterred interest in future M&As and it has made OSIM much more savvy in M&As which will help build OSIM in the coming years.

Foray In China & Middle East
As of 21 August 2009, OSIM had more than 560 OSIM outlets and more than 20 RichLife outlets in China. By year end, the number of RichLife outlets is expected to increase to 40. OSIM is targeting to open 50 to 80 OSIM outlets per year in China and 60 to 100 RichLife outlets in China in the next 3 to 5 years. Currently, the business in China has been growing well and in a sustainable manner, according to Lee. China is a key market of OSIM and is expected to contribute 20% – 25% of the Group’s revenue.

Counterfeits have been following OSIM ever since it started business in China in 1993 and reports on the counterfeits have been generating bad publicity on OSIM products as consumers are unable to differentiate them. However, OSIM has been able to do well because of its focus on innovation, quality, safety and performance of its products which is especially important during challenging times like now.

With regards to its foray into the Middle East market, OSIM has franchisees in Saudi Arabia, UAE, Iran, Qatar, Oman, Bahrain and Kuwait. Lee said that the Middle East market is still at an infant stage. However, due to the global financial crisis, more time is needed for the franchisees to develop their businesses but the trend is positive.

Top In Asia
As the number 1 healthy lifestyle business in Asia, OSIM’s approach is to focus on its core competence and continue to build the brand and make it stronger. The latest response to its new products (uDream, uDesire and uPapa Hug), were above expectation and customers have to wait for their deliveries as a result. Lee was pleased that OSIM’s customers found the products helpful to them, improving their quality of life during the current economic crisis.

Outperformed STI
OSIM’s share price climbed to a high of $0.575 on 21 July 2009, as compared to a two-year high of $0.690 on 6 November 2007 during the start of the bear market. If we were to compare the performance of the STI against OSIM for the past 2 years, the STI is still trading at approximately 32.8% off its peak whereas OSIM is currently trading below 16.7%, outperforming the STI. Against a low of $0.050 in February 2009, OSIM has risen more than 1100%! What are the reasons for this substantial rise?

According to Lee, OSIM has delivered positive results from quarter to quarter and in 2Q09, OSIM is in net cash position with cash & cash equivalents at $56m. Cash is king and OSIM has been cash positive for the last 20 years every year.

With the write off of Brookstone, OSIM no longer has the burden of paying dividends to preference shareholders of Brookstone and can concentrate on its core business. Although OSIM is raking in profits, it has no plans yet to give out dividends as it does not have a fixed dividend policy and thus dividends are payable based on the performance of the company.

Future Of Lifestyle Products
Lee commented that consumers in Asia are getting increasingly affluent, especially in China. They will continue to want to buy innovative healthy lifestyle products and OSIM is well positioned to continue to service their desires and cater to their wants. He believes that in the future, every home should have at least one OSIM product.

OSIM’s capital expenditure for 2009 would be mainly used for upgrading existing outlets and building new ones as well as to enhance its computerized systems. Its profit margins are returning to pre-2006 levels and the management expects full year earnings to be higher than FY08.