Best World International (BEST SP) - Maybank Kim Eng 2017-08-08: Strong Momentum In China

Best World International (BEST SP) - Maybank Kim Eng 2017-08-08: Strong Momentum In China BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International (BEST SP) - Strong Momentum In China


c.5% EPS beat from China strength; raise Target Price by 7% 

  • Best World's 1H17 EPS beat our estimate by c.5%, at 52% of our FY17E, as higher net margin China sales outperformed. 4Q is the seasonally strongest quarter.
  • In 2Q17, China sales grew 125% YoY and 24% QoQ, due to strong demand for DR’s Secret skin care products. This more than compensates the softer sales in Taiwan, which fell 34% YoY, due to more promotions done in 2016. 
  • We expect China’s momentum to continue from further geographical expansion. We raised our FY17-19E EPS by 6-7% after increasing out China sales forecast. 
  • Maintain BUY and our TP increased by 7% to SGD1.88, pegged to an unchanged 19x FY18E EPS (PEG of 0.7x using FY16-19E EPS CAGR of 27%). 
  • We ascribed c.30% discount to the PEG of 1.0x for regulatory risks and competition.


Strong China sales lifted net margin significantly 

  • China outperformed for the 2nd consecutive quarter due to strong demand. Due to the export model, revenue recognised for China are recognised at wholesale prices against retail prices from direct selling in other geographies. This masks the actual sales volume in China, which could be around 3x larger than the Taiwan market for 2Q17, we estimate. 
  • Underlying revenue growth of 7% for 2Q17 may be stronger than stated.


Taiwan sales declined 34% YoY but grew 24% QoQ 

  • Sales from Taiwan declined YoY due to more promotions done in 2016; on the bright side there was some improvement QoQ. The rapid triple-digit growth in sales for 2016 has impacted the ability of distributors to service their members and led to some members’ attrition. 
  • Management targets to improve its service quality and tap into the market north of Taichung, which could potentially be a much larger market.


Raised dividend and planning factory for longer term 

  • After reviewing its financial prospects, the dividend policy has been raised from “at least 30%” to 40% of core earnings. 
  • Also, to ensure that there is sufficient manufacturing capacity for the next 15 years, major alteration and addition works will be undertaken for its Tuas facility.


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/ 2017-08-08
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.88 Up 1.76



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