Best World International (BEST SP) - Maybank Kim Eng 2017-05-10: Earnings Beat From China, Raised TP To SGD3.53

Best World International (BEST SP) - Maybank Kim Eng 2017-05-10: Earnings Beat From China; Raised TP To SGD3.53 BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International (BEST SP) - Earnings Beat From China; Raised TP To SGD3.53


China outperformed; TP raised by 51% 

  • 1Q17 EPS grew 63% YoY, beating our expectation and consensus, as sales from China outperformed, up 103% YoY. 
  • 1Q17 EPS met 24% of our FY17E, in the seasonally weakest quarter, which typically forms 20% or less of full year earnings. 
  • Strong performance in China was attributable to increased product acceptance, after the approval of direct selling license in Nov 2016. However, sales in Taiwan fell 8% YoY, as 1Q16 was boosted by several growth initiatives that will only take place in 2Q17.
  • We raise our FY17-19E EPS by 4-8% for higher sales in China. 
  • Our TP increased 51% to SGD3.53, based on 19x FY18E EPS (up from 16x). This is based on a PEG of 0.75x using FY16-18E EPS CAGR of 25%. We ascribed a 25% discount to the PEG of 1.0x for regulatory risks and competition. 
  • The change in our valuation methodology from peer comparison is to reflect better level of comfort, from good earnings delivery and improving track record in the high growth China market. 
  • We believe the good execution will be more appreciated by the market. Although the peers are more established, they have lower growth profile due to higher maturity level.


China became the top market; momentum to sustain 

  • 1Q17 is the first quarter where revenue from China overtook Taiwan, at 48% vs 42% of group revenue. 
  • Also, we estimate that the earnings contribution from China is now far larger than Taiwan as revenue is still being recognised based on export price instead of retail price. The strong growth was attributable to increased product acceptance from more new users and repeat consumption among existing users of DR’s Secret skincare products. BEST targets to expand into more cities across China in the coming months to boost sales. 
  • We note that the spike in China’s sales has lowered gross margin but lifted net margin as China is still operating under an export model. However, this will not impact net profit and will normalise as BEST switch to a direct selling model.


More growth initiatives for Taiwan to catch up 

  • Sales fell 8% YoY in Taiwan for 1Q17 due to fewer promotional activities and a slowdown in new member acquisitions. In addition, 1Q16 was boosted by several growth initiatives: 
    1. opening of a new regional centre in Kaoshiung; 
    2. new product launch; and 
    3. launch of online store. 
  • To boost demand for 2017, several growth initiatives will take place in 2Q17: 
    1. opening of a new 6.3k sf Taipei Regional Centre; 
    2. launch of “BWL Mobile” iOS application; and 
    3. new product launches.






Swing Factors


Upside

  • Shares could re-rate as investor recognition increases. A 2-yr scenario with the P/E rising to 1.0x PEG of 25x FY19E EPS suggests 90% upside to SGD5.31.
  • Robust growth in China after the approval of direct selling licence.
  • Successful expansion in Taiwan, Indonesia and Philippines.
  • Expansion into new markets, such as the Middle East.

Downside

  • Regulatory changes detrimental to direct selling in its markets, similar to Indonesia’s restriction on healthcare imports in 2009.
  • Reputational risks caused by fraud or fake-product scandals for other direct-selling players or BEST’s members.
  • Failure to scale up in China would result in up to 10% downside to the share price valuation.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-10
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.53 Up 2.340



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