Best World International Ltd - CIMB Research 2016-04-21: A new world beckons in China

Best World International Ltd - CIMB Research 2016-04-21: A new world beckons in China BEST WORLD INTERNATIONAL LTD 5ER.SI 

Best World International Ltd - A new world beckons in China 

  • Best World, a direct selling company, is a play on discretionary consumer spending in North Asia that is void of the traditional retailing pressures of rents and staff costs. 
  • Continued strong earnings momentum in Taiwan is likely to drive near-term profits. 
  • A direct selling licence in China (timeline guided is 4Q16-1H17) could be a game changer and propel the company to its next earnings growth trajectory. 
  • Initiate with Add and TP of S$0.97, based on 10.6x CY17 P/E. Stock offers 4% yield. 

■ ‘Rental/staff cost proof’ play on discretionary 

  • North Asian retail Best World is a direct selling company which specialises in premium skincare, personal care, and nutritional and wellness products. Its direct selling model means that it does not face the rental and staff cost pressures that hamper traditional retailers. 
  • With sales in new markets (Taiwan and China) now picking up rapidly after the initial gestation period, we think BWL is an interesting play to gain exposure to a growing health and beauty market while being sheltered from the operational pressures of rents/staff costs. 

■ Strong earnings momentum in Taiwan and China 

  • We forecast core earnings to grow at 25% CAGR over FY15-18F on the back of increased product acceptance in Taiwan and continued export sales in China. 
  • Traction in the Taiwanese market has been growing steadily (52% topline CAGR over FY11-14), but imploded in FY15 (+148% yoy) as product acceptance reached a tipping point. 
  • FY16 promises to be another stellar year as the company targets to be among the top 10 direct selling companies in Taiwan (currently top 15). 

■ China could be a game changer 

  • The other catalyst is the company successfully obtaining a direct selling licence in China (management expects 4Q16-1H17). China is currently the group’s second largest market (19% of FY15 sales, +52% yoy), with the bulk of sales coming from exporting products to local agents. 
  • The potential therefore comes from converting these exports to sales under a direct selling model, which could double sales in China as selling prices to distributors are significantly higher than export prices. 

■ More diversified now and less susceptible to country specific risks 

  • BWL’s strong FY15 net profit of S$10m (+149% yoy) was in line with the range of profits (S$10m-13m) the company was making in its heyday pre-GFC. The big difference, however, is that the company is now more diversified both in markets and in product range. 
  • By region, revenue contribution is Taiwan (56%), China (19%), Singapore (7%), Indonesia (6%), the Philippines (3%), with other markets making up the remainder (9%). 

■ TP of S$0.97; further upside exists from China direct selling licence 

  • We initiate coverage on BWL with an Add and TP of S$0.97, based on 10.6x CY17 P/E (0.5 s.d. above historical mean). 
  • The stock is cheap. 
  • At the current 8.7x CY16 P/E, the stock trades at a 50% discount to peers’ average of 17.1x but with higher EPS growth. 
  • Our forecasts also exclude the impact of a direct selling licence in China, which we expect will provide further upside and potentially add 21% to our TP (or a TP of S$1.17). 
  • BWL has net cash/share of 21 Scts (c.1/3 of market cap) and offers a 4% yield. 

Jonathan SEOW CIMB Securities | Roy CHEN CIMB Securities | 2016-04-21
CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 0.97 Same 0.97