Should Investors Be Worried About Reputational Risks With OSIM International Ltd?

Late last week, the Business Times reported that TWG Tea’s “Chamomile Green Tea” product had failed regulatory tests in Taiwan because it had excessive levels of pesticide residues.

TWG Tea, which retails luxury tea products, is majority-owned by high-end massage chair maker OSIM International Ltd (SGX: O23). To date, there has been no official statement from OSIM on the issue, although TWG Tea’s spokesperson, Maranda Barnes, did speak to the Business Times.

While TWG Tea is currently still a small part of OSIM’s business (for perspective, there are currently only 47 TWG Tea outlets worldwide as compared to 560 OSIM stores), could there be a wider reputational risk to the entire OSIM company if this matter remains unresolved for an extended period of time?

The situation reminds me of two common investing adages.

1. “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.” – Warren Buffett

Buffett had said those words back in 1991 when he gave testimony in a case involving investment bank Salomon Brothers. Buffett recognises the importance of having a strong reputation in the world of business as that is what gives consumers, as well as investors, confidence in a company.

According to Barnes’ conversation with the Business Times, the pesticide issue had been overblown by the media in Hong Kong. The tea product in question had passed Singapore’s tests but was rejected in Taiwan. Countries and territories often have differing tests that agricultural products have to go through.

Barnes’ words may help soothe some concerns, but I still have my reservations. Just because a product passes a test in one country does not mean it does not have to pass the tests of another. A company that places high significance on its reputation, would, in my opinion, hold itself to higher standards than just passing regulatory tests in only certain countries.

To be fair to TWG Tea, it is working with Taiwan authorities on the matter; it has also been sending 800 types of tea to Taiwan in each year without any problems before said pesticide issue cropped up. But, investors may still want to continue monitoring how the company responds to the whole issue before it is resolved.

2. There is never just one cockroach in the closet

Whenever we find one cockroach in our closet, it is rarely the case of it being the only one around. It’s the same with investing – the surfacing of one dirty issue may be an indication of more troubles ahead.

I’m not saying that TWG Tea has far more serious issues just waiting to be uncovered. But, investors would have to keep an eye on the company’s supply chain.

How did a product which failed regulatory standards pass through the supply chain? Could it be a sign of weakness in the company’s quality control or supply chain management? Did management know about any potential problems beforehand and yet allowed at-risk products to pass through quality checks? Or is this just an honest mistake on the part of management?

These are questions that OSIM may want to answer in order to ensure that its reputation remains intact.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.