Best World International - Maybank Kim Eng 2016-08-24: The Best is Still Ahead

BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International (BEST SP) - The Best is Still Ahead

BEST is a multi-channel distributor of skincare and wellness products with presence in 12 countries in Asia.
Growth prospects are attractive as BEST scales up in the fastest growing markets and we expect FY16E earnings to reach a record high with 180% YoY growth. Strong growth in BEST’s largest market, Taiwan, should continue as it reaches inflection point, after years of nurturing.

Recent approval of China license will support rapid expansion. BEST trades at 45% discount to peers’ FY17E P/E despite having the highest EPS growth.
Initiate BUY with SGD2.63 TP.

With BEST’s entrenched position in ASEAN and growing presence in China and Taiwan, it is well-positioned to scale up in its fast-growing key markets.
Key strengths include emphasis on comprehensive training, new products and online platform. Industry outlook in China is improving from easing regulations and hence more direct sellers are thriving.
The growth in the global direct selling market is largely fuelled by Asia/China, with 9.1%/18.6% 3-yr CAGR from 2011-14 vs the industry’s 6.4%, the WFDSA estimates. The world’s largest markets are US (19%) and China (17%).

We expect Taiwan to sustain its impressive growth, with 3-yr sales CAGR of 46% from 2015-18. Taiwan’s growth ramped up since 2012 and has become BEST’s largest market in 2013; sales grew by 49%-148% in 2012- 15.
It was due to strong emphasis on members’ training since 2013, expansion into new cities, new products and technology adoption.
In addition, approval of China’s direct selling license in Jul 2016 will allow it to scale up exponentially and turn China into its largest market.
It has laid a good foundation there since 2014 via exporting and it now has a robust distribution network of beauty salons, nail & hair salons and spas.

Our TP is based on 16x FY17E P/E, pegged to its peers’ average and it implies 0.5SD above the stock’s 5-year P/E mean of 13x.
BEST is under researched, increasing market discovery, ROE expansion and scaling up in China could re-rate the stock closer to its peers’ P/E, where most have China presence and notable market share.
A longer-term 2-yr scenario incorporating a 16x FY18E suggests 83% upside to a TP of SGD3.20.
Risks to our call are competition, regulatory changes, reputational risks and economic shocks affecting consumer spending.

Increasing market discovery could re-rate the stock. A longer-term 3-yr scenario incorporating a 16x peer P/E in FY18 suggests 83% upside to a TP of SGD3.20.
Robust growth in China after the approval of direct selling license.
Successful expansion in Taiwan, Indonesia and Philippines.
Expansion into new markets such as Middle East.

Regulatory changes detrimental to direct selling in its markets eg Indonesia’s restriction of 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. Assuming China’s sales falls to 0 and pegging 13x long-term mean P/E in FY17 suggests only 4% downside to a TP of SGD1.68.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-24

Maybank Kim Eng SGX Stock Analyst Report BUY Initiate BUY 2.63 Same 2.63