Best World International (BEST SP) - Maybank Kim Eng 2016-11-07: China outperformed; direct selling licence approved

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BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International (BEST SP) - China outperformed; direct selling licence approved

Results beat; strong momentum in 4Q; Raise EPS/TP 

• 3Q16 earnings grew 121% YoY and beat our expectation by c.10%; core earnings for 9M16 met 79% of our FY16E. 
• China outperformed, where revenue grew 309% YoY. Taiwan, the largest market, was in line, and revenue grew 67% YoY. 
• We expect the growth momentum to continue, as BEST enters into the seasonally strongest quarter in 4Q, where its anniversary promotions take place. 
• We raise FY16-18E EPS by 2-4% after increasing our China sales assumptions. 
• Maintain BUY and raise TP 2% to SGD2.16 from SGD2.11 (the previous TP of SGD2.63 adjusted for 1-for-4 bonus shares issued). Our TP is still pegged to 16x FY17E EPS, on par with peers’ average. 
• BEST is trading at a 26%/31% discount to the average of peers’ FY16E/17E P/E despite having the second highest growth profile.

China outperformed; direct selling licence in the bag 

• The strong growth in China was due to higher demand for DR’s Secret line of skincare products, especially after the initial approval of the direct selling licence announced on 1 Jul 2016. 
• The direct selling licence has been officially obtained after fulfilling the final requirements in verification of nine service centres in Hangzhou. This will allow BEST to scale up quicker by increasing its recruitment activities moving forward.

Taiwan in line, growth momentum continued 

• Taiwan revenue grew 95% YoY, but fell 21% QoQ due to seasonality effect, where distributors prepare for the anniversary promotions during OctNov.
• Our channel check from the Facebook page of its Taiwan distributors suggests the sales in Oct are reflecting the typical seasonal strength.
• Also, BEST’s inventory days have increased to 195 days from 111 days in 2Q16, as it stocked up in anticipation of higher orders and to prevent stock-shortage issues it faced in 4Q15.

Healthy balance sheet to drive further expansion 

• BEST’s balance sheet remains healthy, where net cash stood at SGD30m in 3Q16. This could fund more expansion. 
• Beyond organic growth, BEST constantly explores other inorganic growth opportunities including: 
  1. expanding into new markets; 
  2. acquiring new distribution channels; and 
  3. upstream expansion.

Swing Factors

Upside

• Increasing market discovery could re-rate the stock. A longer-term 3-yr scenario incorporating a 16x peer P/E in FY18 suggests 75% upside to a TP of SGD2.62.
• Robust growth in China after the approval of direct selling licence.
• Successful expansion in Taiwan, Indonesia and Philippines.
• Expansion into new markets such as the Middle East.

Downside

• 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 would result in up to 10% downside to the share price valuation.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-07

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.11 Up 2.16