OSIM International

[Some-one]

I think OSIM has many red flags

1) outstanding lawsuit
2) net cash position but still sell bonds
3) lots of competition.. OTO, OGAWA

Number 2 is interesting. Anyone asks why they still sell bonds when they are in net cash position during the AGM? Do share with us the answer. Not vested.

[Clement]

I think OSIM has many red flags

1) outstanding lawsuit
2) net cash position but still sell bonds
3) lots of competition.. OTO, OGAWA

Number 2 is interesting. Anyone asks why they still sell bonds when they are in net cash position during the AGM? Do share with us the answer. Not vested.

Hi,

They are adjusting their capital structure to reduce the weighted average cost of capital by taking on debt to buyback shares.

The bonds are convertible at rather high strike prices, so Osim got a deal where they either substituted equity capital with low cost debt, or ended up buying cheap shares and issuing expensive ones if the conversion option is exercised.

[sykn]

Hi,

They are adjusting their capital structure to reduce the weighted average cost of capital by taking on debt to buyback shares.

The bonds are convertible at rather high strike prices, so Osim got a deal where they either substituted equity capital with low cost debt, or ended up buying cheap shares and issuing expensive ones if the conversion option is exercised.
[/quote]

Yes, I agree with your reasoning. Equity cost of capital is typically 10% whereas debt cost of capital can be as low as 2 - 3%. Taking on some debt financing means that the Weighted Average Cost of Capital (WACC) will be lower. For those of us that use WACC to compute Intrinsic Value (IV), the resulting IV will be higher.

The argument that taking on debt after holding so much cash appears "suspicious" should apply more to S-chips. If even a Singaporean company like OSIM engages in "hanky pinky", I would be deeply disappointed, but that is my personal view.

[Forestchan]

Another reason from the management is because of the bad experience they had dealing with the banks during the brookstone incidents.

[roxhockey]

Noone minds debt funding a buyback but the question people are raising is why don't they use the existing cash on their balance sheet (earning close to 0%) rather than raising new debt?

[Clement]

Noone minds debt funding a buyback but the question people are raising is why don't they use the existing cash on their balance sheet (earning close to 0%) rather than raising new debt?

Hi,

Osim is not paying much for it's borrowing. The bonds carry effective interest costs of 2.643% per annum (bond holder has option to redeem at par + accrued interest in sep 2017, likely if interest rates rise and Osim's share price does not improve.)

Meanwhile, the 2014 annual report disclosed that Osim has fixed deposits of maturities ranging from 1 day to 3 months that earn effective interest of between 1.13% and 3.97%.

Looks like pretty good treasury management to me.

[roxhockey]

You and I both know that noone is lending to Osim at a cheaper rate than you can get on a fixed deposit.

The upper ends of those rates are different currencies (with higher base rates) and the conversion option has real value which you're not including in your effective interest rate.

No view on Osim but it is a valid question what all the debt is for, and its not improving the capital structure like an above poster said if its just going to sit in excess cash.

[CityFarmer]

You and I both know that noone is lending to Osim at a cheaper rate than you can get on a fixed deposit.

The upper ends of those rates are different currencies (with higher base rates) and the conversion option has real value which you're not including in your effective interest rate.

No view on Osim but it is a valid question what all the debt is for, and its not improving the capital structure like an above poster said if its just going to sit in excess cash.

I am more aligned with roxhockey. Funding with debt, while cash is idling, is not logical, unless there are more into the equation. For example, Apple borrowed with its huge cash reserve, is mainly due to tax issue.

(not vested, but Osim is always a good case study)

[opmi]

You and I both know that noone is lending to Osim at a cheaper rate than you can get on a fixed deposit.

The upper ends of those rates are different currencies (with higher base rates) and the conversion option has real value which you're not including in your effective interest rate.

No view on Osim but it is a valid question what all the debt is for, and its not improving the capital structure like an above poster said if its just going to sit in excess cash.

I am more aligned with roxhockey. Funding with debt, while cash is idling, is not logical, unless there are more into the equation. For example, Apple borrowed with its huge cash reserve, is mainly due to tax issue.

(not vested, but Osim is always a good case study)

Money in PRC, Shares listed in SGX?

'Cannot take out money of PRC' reason will soon be put to test with the RMB internationalization.

[Clement]

You and I both know that noone is lending to Osim at a cheaper rate than you can get on a fixed deposit.

The upper ends of those rates are different currencies (with higher base rates) and the conversion option has real value which you're not including in your effective interest rate.

No view on Osim but it is a valid question what all the debt is for, and its not improving the capital structure like an above poster said if its just going to sit in excess cash.

We don't know what the currency breakdown or product structure the fixed deposits comprise of. Per the AR, most of the fixed deposits are held at parent company level, but we are unable to get a breakdown on the interest on those deposits.

The conversion option means that Osim is indirectly short call options on its own shares, indirectly a hedge against stalling growth. The transaction took place when Osim shares were trading at $2.80, so management was taking advantage of low cost equity funding. The low share price now offers the company a chance to hedge its exposure cheaply by performing buybacks, which the company is doing.

If interest rates rise and growth continues to stall, bond holders might redeem the bonds in 2017 instead of being locked in at low yields till Sept 2019. The conversion option is of course of significant value when the bonds were first issued. The value is significantly lower now with growth sputtering. I would think that management probably knew about the coming slowdown when issuing the bonds.

I view the bond issue as an opportunistic transaction by the management. Taking advantage of the chance to secure funding at favourable terms.