Best World International - DBS Research 2017-05-22: NDR Takeaways ~ Spotlight On China, But Opportunities Still Abound In Other Markets

Best World International (BEST SP) - DBS Vickers 2017-05-22: NDR Takeaways: Spotlight On China, But Opportunities Still Abound In Other Markets BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International (BEST SP) - NDR Takeaways: Spotlight On China, But Opportunities Still Abound In Other Markets

  • We hosted Best World’s management over two days in Hong Kong (18 and 19 May); most funds we met were new to the company.
  • Discussions mainly China-centric, as management addressed concerns over the impending shift from an export to direct selling model in China.
  • Beyond China – with a multi-year growth potential - several other markets also offer untapped opportunities.
  • Reiterate BUY with adjusted TP of $1.65 post share split.

Best World NDR in Hong Kong. 

  • We arranged several meetings for Best World over two days in Hong Kong (18 and 19 May). While most of the funds we met were new to the company, some were already familiar with the industry and operating environment.
  • Attendees from Best World were Mr Huang Ban Chin (Chief Operating Officer) and Mr Benjamin Soh (Investor Relations and Financial Analyst).

Focus was on China. 

  • After spending more than seven years cultivating the Chinese market, Best World’s efforts in raising brand awareness and product acceptance are beginning to bear fruit. With its direct selling license already effective in Hangzhou (China), much of the heavy lifting is already complete. 
  • As Best World prepares to further penetrate its fastest-growing market, questions raised by investors focused on the significance of the direct selling license, motivation for the shift from an export (which has done well) to direct selling model, and strategies to ensure sustainability.

Untapped opportunities. 

  • While Best World’s China business is still at its early stages of growth, there are also several opportunities for management to drive diversification and add to the company’s longer-term value proposition, and these include: 
    1. M&A to gain access to new markets or products/services, and 
    2. tapping into niche markets such as halal skin care.

What’s New 

Takeaways from Best World NDR (18-19 May) in Hong Kong 

Shift from export to direct selling model in China to maximise long-term earnings potential. 

  • Prior to obtaining its direct selling license in China, management saw the export model as an efficient means of raising brand and product awareness among Chinese consumers through the local beauty/wellness community (primarily beauty salon owners).
  • Nearly seven years on, the company’s efforts in cultivating the Chinese market are now bearing fruit.
  • Despite good traction in export sales which carries higher margins, management considers the export strategy - as opposed to direct selling - as a detached way of developing a market, and firmly believes that a shift to the direct selling model (which Best World currently practices in ten other markets) is key to extending its reach and maximising longterm earnings potential in China.
  • To successfully navigate China’s regulatory environment, Best World is still in process of fine-tuning its direct selling model for China, and expects to make a gradual shift from exports to direct selling (from 4Q17) as more cities are added under its direct selling license.

Expanding coverage of direct selling license to include stronghold cities (from just Hangzhou currently). 

  • While Best World was awarded its direct selling license by China’s Ministry of Commerce (MOFCOM) in July 2016, the license to practice direct selling in Hangzhou city was only made effective in November 2016 after the company fulfilled the requirement to establish 8 service centres (one service centre per district per city) in Hangzhou.
  • Moving forward, the option to expand geographical coverage under its direct selling license lies with Best World.
  • Similar to Hangzhou, the expansion of coverage will mainly entail the setting up one of service outlet per district per city, to be audited by local authorities. Leveraging on the network of c.250 stores currently owned by exclusive distributors of Dr’s Secret skincare, management envisions that it will be able to quickly expand coverage with minimal capex by converting some of these stores into service outlets.
  • Priority will be given to several key cities within Hunan (where Best World has a stronger presence) province, followed by Zhejiang, Guangdong, Sichuan and Heilongjiang provinces, which will gradually be added over the next few quarters.

Significance of the direct selling license. 

  • The direct selling license in China essentially accords Best World the right to communicate compensation plans on a larger scale (such as recruitment events which typically attract over a thousand attendees) in areas where direct selling has been approved, i.e. Hangzhou.
  • Meanwhile, distributors’ selling and promotional activities are not restricted to Hangzhou, and they are thus able to leverage on social media, e- and m-commerce platforms to optimise sales and networking efforts.

Strategies to enhance competitiveness. 

  • Investors also raised concerns about the sustainability of the business. Addressing this, management shared its three-pronged approach to enhancing competitiveness: 
    1. Product: While Best World’s flagship skincare products are currently manufactured by third-party OEMs in the US and Korea, Best World’s in-house R&D team is primarily responsible for the formulation of these products. Best World also owns the IPs to all products sold under its direct selling model.
    2. People: Apart from comprehensive training courses focused on essential business skills and personal wellbeing, Best World also actively engages its members through mentorship and peer support.
    3. Plan: Attractive, yet sustainable compensation plan

New skincare manufacturing facility to be commissioned by end-2017. 

  • To retain greater control over raw materials, inprocess and final product quality, as well as to reduce inventory lead time (from c.6 months to 3 months), Best World will work with one of its existing partners to set up its own skincare manufacturing facility in Tuas (Singapore) – easing concerns of a steep learning curve for the group as it executes on the new manufacturing plan.
  • Slated to be commissioned by end-2017, management expects to manufacture at least 7 of its 14 skincare products in-house by end-2018.

Untapped opportunities for Best World outside of China.

  • Beyond China, Best World will also explore M&A opportunities to gain access to new markets (e.g. Japan), or complementary products and services that could be further marketed via Best World’s existing distribution network.
  • Management also discussed opportunities arising from current skincare consumption trends, notably halal skincare.
  • Indonesia passed the Halal Product Certification Bill in September 2014, which stipulates that all products must be halal-certified by 2019. When used in reference to products, the Arabic term “halal” means permissible, with certified products being free from alcohol and certain animal-derived ingredients. According to Euromonitor, this requirement covers product ingredients, production machinery and equipment, as well as the entire value-chain process – even for beauty products.
  • With c.90% of Indonesia’s population estimated to be Muslims, a larger proportion of skincare users are expected to gravitate towards the use of halal skincare post the implementation of this new bill, which represents a substantial opportunity for the skincare industry and a possible avenue of growth for Best World.

Reiterate BUY with adjust TP of S$1.65 post share split.

Singapore Research Team DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-05-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.65 Same 1.65