What might the new OSIM be worth?
Singapore
IT'S business, nothing personal.
But Singapore and former OSIM shareholders will feel the sting, if the lifestyle products firm relists in Hong Kong at a far richer valuation than what shareholders were bought out for in the depths of the global economic gloom last year.
The eventual price can go in only one direction: Up. Expectations will be higher, given how sentiment in China and other parts of the world has recovered significantly.
The new OSIM, or V3 Group, looks to be powered by two growth engines: luxury tea retailer TWG Tea and Futuristic, a homegrown store fixtures manufacturer that the group is adding.
From what we learn from the prospectus, TWG is still growing at a steady clip, with revenues crossing the S$90 million mark in 2016, up 17 per cent from 2015.
TWG is split into two segments, a growing tea retail and corporate distribution business, and a smaller, flat food and beverage business, which nevertheless provides a visible branding to its products.
Margins aren't disclosed, and the company was having trouble making money from China. But when stable, the tea distribution business alone can have net margins as high as 20 per cent.
TWG might thus eventually contribute at least S$15 million to V3's bottom line every year from a far lower base today. Judicious expansion can mean that profits for shareholders will not be compromised.
Another solid contributor will be Futuristic. Its revenue was up 29 per cent last year to S$68 million. It had an impressive net profit margin of around 20 per cent in the last two years, or above S$10 million a year.
Both TWG and Futuristic can mitigate the recent slump in OSIM's core massage chair and relaxation products business. That business declined from some S$460 million of revenue a year in 2014 to S$340 million in 2016, with double-digit annual declines in its key Greater China market.
The core massage products business went through a significant reorganisation in 2016, shedding almost 90 stores net of additions to about 450 in total.
Given the higher price points of most massage chairs and OSIM's premium branding, we should be using at least a double-digit net margin in our assumptions, with significant upside should business pick up.
Finally, GNC has been flat and does not appear to be as exciting anytime soon. But with segment revenues of roughly S$150 million and a steady 13 per cent of profit before tax, it's likely generating S$10-15 million a year of net profit as well.
Add it all up and a story can be spun of how OSIM is bottoming out. Including the new Futuristic business, V3's pro forma 2016 net profit, at S$65 million, is already back to OSIM International's 2015 adjusted net profit levels of S$67 million.
Hong Kong multiples, driven by investors drooling over the China consumer, can be higher than the 13 times adjusted ex-cash earnings that OSIM delisted at in 2016.
The general market sentiment is buoyant. Share prices of Hong Kong jewellery retailers Chow Tai Fook, Luk Fook and Chow Sang Sang are all up 60 to 90 per cent from their January lows a year ago. Luxury retailers like LVMH, Richemont and Prada, which have benefited from Chinese spending, have also recovered.
For example, at Chow Sang Sang, jewellery same store sales growth in China has been consistently positive throughout 2016. The company is trading at a historical multiple of 17 times earnings, and a forward multiple of 14 times. Chow Tai Fook, the dominant China player, is trading at over 20 times projected earnings.
Potential investors, however, have to resolve two worries in their minds.
The first is that the long-anticipated China hard landing continues to hang over China plays. Unabated credit and property price growth does not offer comfort. The second is a potential conglomerate discount.
It remains anyone's guess if the current stock market rally will end in tears soon.
It will be an irony if V3 Group's valuations slip below the roughly S$1 billion that OSIM delisted at. But for now, the boom is on. And OSIM has to grab the relisting opportunity.
READ MORE: After SGX exit, OSIM heads for HK listing as V3 Group
