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

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.
  • Our EPS upgrade lifts our target price to S$2.21. Maintain Add.

Earnings beat 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.

Higher export sales dragged down GPM, but lifted OPM 

  • 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’s qoq drop not a concern, 4Q likely to be a record quarter

  • 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.

Growth drivers in 2017 

  • 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).

Maintain Add with a higher TP of S$2.21 

  • 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 | 2016-11-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.21 Up 2.050