Best World International Ltd - CIMB Research 2016-12-05: 2017 to be a year of new highs, driven by China

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BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International Ltd - 2017 to be a year of new highs, driven by China

• Growth momentum in Taiwan remains strong. We expect this to be sustained.
• We see near-term growth drivers coming from China as the company converts to a full direct selling model there. Early signs look very positive.
• Maintain Add; our TP is based on 16.1x CY17 P/E.

Taiwan did well in FY15, but even better in FY16 

• The group’s stellar growth has mostly been driven by Taiwan. Management highlighted that the key drivers were 
  1. increased product acceptance, 
  2. a new lifestyle centre in Kaohsiung and 
  3. its new online store. 
• Investor concerns have centered around the sustainability of sales. While valid, the company’s results have so far given us no reason to be concerned. Further, our on-the-ground channel checks showed strong evidence of product acceptance.

2017 will see Best World convert China into a direct selling model 

• We see earnings growth in 2017 mostly coming from the penetration into China and full conversion to the direct selling model. The group has already completed the verification process of the requisite nine service centres in Hangzhou city and obtained the official go-ahead. 
• Recap that Best World currently only exports to China but sales growth has been explosive on the back of strong demand for its DR’s Secret skincare line of products. Hence, we are excited about China not only because of the already strong demand, but also because the selling price to distributors under the direct selling model is at least twice that of the export price. 
• We expect to start seeing increased profitability from 1Q17 onwards. China formed a significant 30% of 9M16 revenue.

Focus on execution in China

• With the China direct selling licence in the bag, we think the focus will now be on execution. We are positive that it has 
  1. already registered all of its products, 
  2. an established network via export agents, and 
  3. a network of Taiwanese distributors that will form the first level in China. 
• However, we will keep a watchful eye of how the company slowly transitions and phases into the direct selling model in China.

2017 will also see Best World operate its own manufacturing plant 

• Recap that the group purchased its own factory facility in Singapore, with operations expected to begin in 2H17. The rationale is sales are now large enough to justify maintaining its own facility. 
• Further, management wanted to better manage the backend supply and quality as it expects heavy demand from China. 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.

Maintain Add; FY17F likely to see new highs

• Best World used to make S$10m-13m in net profit when it was doing well; however, FY16F is poised to be a record year with 9M16 net profit (S$22m) already far exceeding all the previous years. We believe that FY17F will prove to be another record year. 
• Our TP of S$2.21 is pegged at 16.1x CY17 P/E, 2 s.d. above mean.
• Maintain Add. 
• Key risks include regulatory changes and poor execution in China.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-12-05

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