Best World International (BEST SP) - Maybank Kim Eng 2017-02-23: Strong finish; China to lead growth

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BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International (BEST SP) - Strong finish; China to lead growth

Strong growth in Taiwan & China; TP, EPS raised 

• We raise our FY17-18E EPS by 7-8% to reflect an increase in our sales target. TP raised 8% to SGD2.34, based on an unchanged 16x FY17E EPS (peers’ average). 
• With the recent approval of China’s direct selling license in Nov 2016, management expects China to be its fastest growing market for the next 3-5 years. 
• Also, a 2-for-1 share split has been proposed to increase trading liquidity and accessibility. 
• Maintain BUY.
• FY16 core earnings after excluding a forex gain were in line at 102% of our FY16E. 
• Core earnings tripled YoY to c.SGD30m, as two largest markets, Taiwan and China (90% of total sales), achieved strong revenue growth of 118% and 193% YoY. 
• Taiwan successfully increased the consumption of active members and growth in China continues to be driven by the rising popularity of its DR’s Secret skincare products.

Tapping into the huge China market 

• Strong sales growth in China was driven by the rising popularity of BEST’s skincare products, driven by increases in marketing by distributors and rising consumer confidence/recognition following the recent approval of its direct selling license. 
• We expect China’s sales to grow 56% to SGD90m for FY7E, which is below BEST’s internal target of > 60% CAGR, to achieve its goal of a top-20 position of SGD400m (RMB4b) sales by 2020. 
• Near term priority is to expand the geographical coverage of BEST’s direct selling license beyond Hangzhou to other regions, starting mainly from second-tier cities where it currently has a presence.

Achieved top-10, aiming for top-5 in Taiwan 

• Taiwan’s sales of SGD123m (TWD2.7b) have catapulted BEST into the top-10 position from top-15 previously. It aims to enter the top-5 this year by maintaining strong momentum, with management setting a sales target of SGD204m (TWD4.5b) that requires 66% growth. 
• We conservatively estimate sales growth of 22% YoY in 2017, to SGD150m (TWD3.3b).

Healthy cash balance could fund further expansion 

• Aside from organic expansion, management is also exploring inorganic opportunities to: 
  1. enter new markets; 
  2. acquire new distribution channels; and 
  3. lift upstream integration. 
• Its robust balance sheet of SGD48m net cash could fund further growth initiatives.

Swing Factors

Upside

• Shares could re-rate as investor recognition increases. A 3-yr scenario with the P/E rising to the peer group multiple of 16x in FY18 suggests 94% upside to 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, similar to Indonesia’s restriction on 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/ 2017-02-23

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.34 Up 2.160