Best World International Ltd - CIMB Research 2017-02-22: Record profits and record dividends

Best World International Ltd - CIMB Research 2017-02-22: Record profits and record dividends BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International Ltd - Record profits and record dividends

  • Huge earnings beat. 4Q16 net profit (+231% yoy) blew past our expectations. FY16 formed 114% of our and consensus full-year forecasts.
  • Best World’s twin growth engines (Taiwan and China) continue to drive the group and we do not see them slowing down.
  • Final dividend of 3.0 Scts declared. 2-for-1 share split proposed.
  • We raise our FY17-18F EPS on higher sales growth in both Taiwan and China. Our current EPS and TP do not yet account for the proposed share split.
  • Our TP rises to S$2.97 on our EPS upgrades and as we roll forward to CY18.
  • Maintain Add.

Huge earnings beat as sales outperform 

  • Best World (BWL) exceeded expectations in every quarter in FY16. 
  • 4Q16’s net profit grew 231% yoy, bringing FY16’s net profit to a new record high of S$34.6m (+242% yoy). The earnings beat was mostly driven by higher sales (underpinned by higher demand for its DR’s Secret skincare range), and helped further by operating leverage.

Taiwan continues to do well; now a top 10 direct selling company 

  • Taiwan continues to do well. 
  • Recall that management had intentionally withheld major promotions in 3Q to gear up for anniversary promotions and celebrations in 4Q, and sales did not disappoint. 4Q16 sales rose 45% yoy and 45% qoq. 
  • We estimate Best World’s FY16 performance puts it among the top 10 direct selling companies in Taiwan (from top 15 in 2015). 
  • We think BWL’s strong product acceptance puts the company in a strong position to reach the top 5 in the next two years.

Outperformance in China driven by higher skincare products sales 

  • The excitement surrounding the stock’s earnings growth over FY17-19F has mostly been on further penetration into China upon full conversion to a direct selling model.
  • Using the company’s export sales in China as an indicator of product acceptance, we are excited about BWL’s prospects in China, which is also the second-largest direct selling market in the world. 
  • 4Q/FY16 sales in China grew a strong 143%/193% yoy.

Update on China direct selling plans 

  • The group’s focus is now to strengthen its market presence in China and to actively expand the geographical coverage of its direct selling licence beyond Hangzhou to other regions. We think this is a 12-month plan and we like the management’s prudent phased expansion into China.

Record high dividends 

  • The group declared a final dividend of 3.0 Scts, bringing total dividends for the year to 4.6 Scts (ahead of our 3.2 Scts expectation; and FY15’s 1.6 Scts). This translates to a 37% payout ratio and healthy 2-3% yield given the company’s strong growth prospects.

Reiterate Add with a higher TP of S$2.97 

  • We lift our FY17-18F EPS by 3-8% mostly on the back of stronger sales momentum in China. We also roll forward our TP basis to CY18. This lifts our TP to S$2.97 (based on 16.1x CY18 P/E, 2 s.d. above mean). This is in line with the 15-18x historical trading band during its last earnings upcycle and with peers (trading at c.16x forward P/E).
  • Maintain Add. 
  • Key risks include poor execution in China

Jonathan SEOW CIMB Research | 2017-02-22
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.97 Up 2.210