Best World International Ltd - CIMB Research 2016-09-25: More upbeat post-NDR

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BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International Ltd - More upbeat post-NDR

• We hosted an NDR for Best World (BWL) and visited its lifestyle centres in Taiwan.
• Management elaborated on the drivers for its stellar growth in Taiwan and addressed concerns about channel stocking.
• Management also assured investors that plans to convert its export business model in China to direct selling are on track.
• We lift our TP to S$2.05, now pegged at 16.1x CY17 P/E. Maintain Add.

More positive post-NDR 

• We hosted an NDR for BWL in Taiwan and also took the opportunity to visit its lifestyle centres in Taipei and Taichung. Key discussion topics included 
  1. drivers behind the group’s recent growth, 
  2. the group’s new manufacturing facility, and 
  3. China. 
• Overall, we came away feeling more positive on the company’s prospects.

Sustainable sales in Taiwan 

• The group’s stellar growth has mostly been driven by Taiwan, where sales grew 276% yoy in 1H16. Management highlighted that the key drivers were 
  1. increased product acceptance, 
  2. a new lifestyle centre in Kaohsiung and 
  3. its new online store. 
• During our site visit, we also saw strong evidence of product acceptance and a constant stream of distributors buying products. Based on 1H16’s results, BWL is poised to be among the top ten direct selling companies in Taiwan.

Addressing concerns about channel stocking 

• One concern raised by investors was whether distributors were channel stocking.
• However, there is no incentive for distributors to do so as they pay cash for the products.
• Further, there is no price discrimination across members, regardless of rank, which avoids the possibility of select distributors stocking up in the interest of arbitrage.

Manufacturing facility in Singapore to be up by 2H17 

• Management also said that sales have now reached a scale large enough to justify maintaining its own facility. Further, it would allow it to better manage the back-end supply and quality. It is also important that the facility is located in Singapore and not a cheaper low-cost country as its internal studies show that consumers rank Singapore highly on quality perception. 
• On funding, we are not concerned as total capex will be c.S$15m and the company has net cash of S$46m.

China direct selling plans on schedule 

• Management also said that the company is on track to complete setting up the requisite nine service centres in Hangzhou city by end-16. Following which, the company will convert its export model to a direct selling model. Taiwan currently makes up 68% of the group’s revenue but we expect China to eventually overtake Taiwan.

Reiterate Add with a higher TP of S$2.05 

• We came away feeling more positive on the sustainability of sales in Taiwan and believe earnings delivery in China will further re-rate the stock. We therefore raise our TP to S$2.05, now based on 16.1x CY17 P/E, 2 s.d. above mean (12.4x previously, 1 s.d. above mean). 
• We note that the stock traded at 15-18x in its last earnings upcycle.
• Reiterate Add. Key risks include regulatory changes and a drop in sales in key markets.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-09-25

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.05 Up 1.980