Best World International Ltd - CIMB Research 2016-11-04: Heading towards another record year

BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International Ltd - Heading towards another record year

Best World’s (BWL) 3Q16 net profit of S$8.9m (+121% yoy, +21% qoq) was above our expectation. 9M16 came in at 81% of our FY16 forecast.
Sales in China (+309% yoy) far exceeded our expectations, driven by strong product acceptance and demand for their DR’s Secret skincare products.
Verification of the requisite service centres has been completed. This is in line with expectations and we expect transition to direct selling to take place in early 2017.
We lift our FY16-18 EPS forecasts on higher sales, mostly from China.

BWL delivered stellar net profit of S$8.9m in 3Q, up 121% yoy on the back of strong revenue growth (+99% yoy).
The star markets were again Taiwan and China. Taiwan’s strong sales growth (+95% yoy) was slightly ahead of our estimate, while China (+309% yoy) far exceeded our expectations on the back of strong demand for their DR’s Secret skincare line.
We lift our FY16 EPS forecast mostly on better than expected sales in China. 9M16 was above our estimate at 81% of our FY16F.

3Q’s lower gross margins of 71.6% (2Q16: 74.8%, 3Q15: 77.1%) merely reflected the higher mix of export sales to China. This is not a concern. Instead, the higher export sales also translated into lower distribution expenses (since export sales do not incur distributor commissions).
Together with better operating leverage, BWL’s PBT margins were lifted to a record high of 26.5% (2Q16: 21.5%, 3Q15: 17.7%).

Taiwan had a strong quarter yoy (+95% yoy) as it continued to see growth from its online store and Kaohsiung RC (opened 1Q16), but sales did drop 21% qoq. That said, the silver lining is that management intentionally withheld major promotions this 3Q in anticipation of anniversary promotions and celebrations in 4Q.
Our channel checks suggest sales did particularly well in the month of Oct.

Earnings growth will mostly come from penetration into China and full conversion to a direct selling model. The group has already completed the verification process of the requisite nine service centres in Hangzhou city.
In addition, BWL’s biggest market Taiwan (60% of 9M16 revenue) is also poised for growth, backed by a growing membership base. Indonesia has also done well and could surprise positively, although it is still currently a small contributor (3% of 9M16).

FY16F will be a record year as 9M16 net profit (S$22m) already exceeded FY15’s S$10m. We believe that FY17F will again prove to be another record year.
We lift our target price to S$2.21 (still based on 16.1x CY17 P/E, 2 s.d. above mean). This is in line with the 15-18x historical trading band during its last earnings upcycle. Peers are trading at 16x forward.
Maintain Add. Key risks include poor execution in China.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-11-04

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.21 Up 2.050