Best World International - DBS Research 2017-05-11: Multi-Year Growth Potential In China

Best World International - DBS Vickers 2017-05-11: Multi-Year Growth Potential In China BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International - Multi-Year Growth Potential In China

  • Strong report card in 1Q17, as earnings surged 63% y-o-y.
  • China to be key growth driver for the next few years.
  • Taiwan, despite having decent scale, still holds growth potential.
  • Maintain BUY; TP raised to S$3.31 based on 18x FY18F earnings (vs 16x FY17F previously).



Maintain BUY with higher TP of S$3.31; rolled forward earnings base to FY18F and raised earnings peg to 18x, as peers have rerated.

  • Best World had a good showing in its seasonally weakest first quarter. 
  • Record sales in China (+102.7% y-o-y), and higher contributions from Singapore, Hong Kong and Korea, partly mitigated by a 7.6% decline in Taiwan sales, resulted in a 63.1% yo-y surge in 1Q17 earnings. 
  • Net profit surges 63.1% y-o-y to S$9.6m in 1Q17. 
  • Earnings estimates for FY17F unchanged, but lifting FY18F earnings slightly by 1.2% as we assume higher contributions from China.  After rolling forward our earnings base to FY18F and raising our earnings peg to 18x (from 16x, as peers have re-rated from 19x to 21x), we raised our TP for Best World to S$3.31. 


Great success in Taiwan. 

  • Best World’s flagship Dr’s Secret range of premium skincare, which represents nearly 70% of group sales, has been an immense successful in Taiwan. Operations in Taiwan have already achieved decent scale but still holds growth potential.
  • Looking ahead, we believe that earnings growth will likely be sustained by Best World’s efforts to further cultivate its existing networks in stronghold areas in Central and Southern Taiwan, and plans to leapfrog into the Northern region.


Obtains direct selling licence in China, a market > 50x larger than Taiwan, expect many years of strong growth. 

  • Best World hopes to emulate its success in China, where the cosmetics sector is forecast to grow at 12.9% CAGR into 2019. With much of the groundwork already laid in China, the Ministry of Commerce of the People’s Republic of China (MOFCOM)’s indirect endorsement through the recent award of a rare direct selling licence provides Best World with the credibility and platform needed to gain scale in the world’s most populous nation and second-largest direct selling market.
  • Stronger participation rates at Best World’s post-licence recruitment events also confirm this.


Valuation

  • Maintain BUY with higher TP of S$3.31, based on 18x FY17F PE. 
  • As Best World enters a period of strong growth, we opine that the stock should trade at 18x FY18F earnings (at a smaller discount to global peers’ 21x). At current price, the stock also offers a prospective 2.2% yield.


Key Risks to Our View

  • Key risks include lack of control over individual distributor’s selling process, discretionary spending levels, and impact of unanticipated changes in local regulations and restrictions.




Singapore Research Team DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-05-11
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.31 Up 2.440



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