This Growth Share Has Gained 424% in 5 Years: What’s Next?

OSIM International Ltd. (SGX:O23) has been a big winner over the past five years. From 10 September 2009 to its closing price yesterday, it has brought home sweet capital gains of around 424%.

By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 24.8% for the same duration. In fact, investors who were fortunate enough to purchase Osim’s shares at its lowest point in 2009  would be sitting on a 51-bagger (in other words,  Osim could have returned 51 times your initial investment).

While the returns from Osim has likely helped make its shareholders very relaxed, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price has been.

A closer look

The business of Osim can be divided into three major buckets. The first segment would be its flagship brand OSIM, followed by Richlife/GNC , and then rounded up by TWG Tea.

Currently, the massage chair retailer owns 70% of TWG Tea Company, which covers Singapore and UK and 88% of TWG Tea (North Asia) for North Asian markets. The Richlife/GNC brands are housed under Osim’s subsidiary ONI Global.

Despite having a number of different moving parts, the company does not, however, break down its business segments in a useful way for the individual investor to follow. That said, we can still get some clues from the number of outlets for each business. Below is the number of outlets by geographical location for the different businesses Osim has.

Osim Outlet Count

Source: Company annual report

Suffice to say, most of Osim’s revenue is coming from the North Asia region which houses 46% of the company’s total OSIM outlets as of the end of 2013.  This is confirmed by the graph below which shows the revenue by geographical region. Meanwhile, from a brand perspective, OSIM outlets as a whole represent 68% of the number of stores, while on other end of the spectrum, TWG Tea represented a little over 3% of the company’s total retail outlets in 2013.

Osim revenue breakdown

Source: Company annual report

The North Asia geographical region provided 54.5% of Osim’s revenue for 2013 while the South Asia region contributed 38.6%. The rest of the world, which includes America, Africa, Europe, Middle East, and Oceania, made up less than 7% of Osim’s revenue for the same financial year.

Beyond revenue, we would ideally like to see profit rise together with the revenue increases. For that, we look into the profitability of the company.

Osim profit growth

Source: Company annual report

Osim’s pre-tax profit has been rising together with its revenue so it’s a good sign. Finally, Foolish investors would look for the accumulated profits to end up on the balance sheet in the end. To do this, we look at the development of cash and debt.

Osim balance sheet

Source: Company annual report

Osim’s balance sheet has also been healthy with growing amounts of cash and fixed deposits with very modest amounts of debt. Keen-eyed Foolish investors though, may point to Osim’s issuance of S$120 million worth of convertible bonds in 2011 which would have added to the company’s cash hoard from that year onwards. That comes at a cost though, as the company’s share count might have grown. As such, it would be worth digging further into the company’s share count development over the years.

A quick look ahead

According to a research report from brokerage firm CIMB in July 2014, the TWG Tea Company is estimated to have contributed approximately 5% to 15% of Osim’s total revenue. That would be a significant percentage sum contribution given the current tiny TWG store count. An interview on CNBC in 2012 sees Taha Bouqdib, President for TWG Tea, set his sights on achieving $1 billion in revenue for the brand over the next ten years.

On the flipside, individual investors may want to follow the developments of the court case brought on Osim and TWG Tea by the one of the co-founders of TWG Tea, Manoj Mohan Murjani.

Foolish investors should also take note that the company has issued another S$170 million in convertible bonds on 27 August 2014. The bonds have a term of five years and may dilute the share count by 6.2% based on the company’s share count on 26 August 2014. My colleague Stanley Lim dives deeper into this bond issue (pun intended!).

Foolish bottom line

As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

The growth in North Asia may be where Foolish investors want to keep their eyes on. TWG Tea may also represent a good opportunity for growth by virtue of its current small base of stores. It should be noted that global coffee giant Starbucks is also moving into the area of luxury tea through its Teavana acquisition. Starbucks’ Teavana stores are mainly in the US, Canada and Mexico right now. So, the focus on Asia for TWG Tea might prove to be the right approach, at least for now. Lastly, Osim’s share count – given its convertible bonds – would also be something to keep an eye on.

Osim trades at a price-to-earnings ratio of 18 and has a dividend yield of 2.3% based on yesterday’s close. Stay tuned as I look into its operating cashflow, capital spend, and share count in the next installment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.