Best World International Ltd - CIMB Research 2017-05-09: 1Q17 Results Beat From China

Best World International Ltd - CIMB Research 2017-05-09: 1Q17 Results Beat From China BEST WORLD INTERNATIONAL LTD 5ER.SI

Best World International Ltd - 1Q17 Results Beat From China

  • Another huge earnings beat. 1Q17 net profit (+63.1% yoy) blew past expectations at 24% of our FY17F (1Q is seasonally weaker, only formed 17% of FY16 net profit).
  • Key positive: China did extremely well (1Q sales +103% yoy). We lift our FY17-19F EPS by 2-3% on the back of this stronger sales momentum.
  • The only dampener was slightly weaker sales in Taiwan but we are not overly concerned and expect a recovery next quarter.
  • Our target price rises to S$3.05 on our EPS upgrades. Maintain Add.

Another strong earnings beat 

  • Best World (BWL) had another strong quarter. 1Q17 sales (+27% yoy) were mostly driven by the strong showing in China (+102.7% yoy), although slightly offset by softer sales in Taiwan (-7.6% yoy). 
  • The higher proportion of sales from China (48% in 1Q17 vs. 30% in 1Q16) also led to improved OP margins; export sales in China do not carry distribution costs (i.e. commissions for direct sellers). 
  • 1Q net profit was therefore up a stronger 63.1% yoy, ahead of both our and Bloomberg consensus expectations.

Outperformance mainly driven by China 

  • The earnings beat mostly came from a strong showing in China (1Q sales +103% yoy).
  • We are very positive on the strong demand in China for the group’s DR’s Secret skincare solutions and believe this will drive growth for the company over the next two years. Further, China remains a very large market that BWL has yet to fully penetrate.
  • Management is still expanding the geographical coverage of its direct selling licence beyond Hangzhou. Therefore, we continue to see a lot of upside for the group in China.

Taiwan had a slow start, but expected to recover 

  • The only dampener in this set of results is the 7.6% sales decline in Taiwan. However, this comes on the back of two consecutive years of sales growth in excess of 100%.
  • BWL has come a long way and is now the 9th largest direct selling company in Taiwan (as per FY16); a muted pace of sales growth is only to be expected. That said, a new regional centre will be opened in 2Q17 along with new product launches. This gives us confidence Taiwan’s FY17 sales will pick up. Moreover, 1Q is seasonally weaker.

Healthy balance sheet 

  • The group remains in a healthy balance sheet position, with a net cash of c.S$50m at end-1Q17. Therefore, we do not discount the possibility of the group seeking inorganic growth opportunities, especially to gain access into new markets.

Reiterate Add with a higher TP of S$3.05 

  • We lift our FY17-19F EPS by 2-3%, mostly on the back of stronger sales momentum in China. This lifts our target price to S$3.05 (still based on 16.1x CY18F P/E, 2 s.d. above mean). This is in line with when the stock traded at 15-18x forward P/E during its last earnings upcycle. 
  • We maintain our Add rating. 
  • Key risks to our call include poor execution in China and weak sales in Taiwan.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.05 Up 2.970