Best World International Ltd - CIMB Research 2017-07-18: Growth In China Has Only Just Begun

BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International Ltd - Site Visit: Growth In China Has Only Just Begun

We reiterate our Add call on Best World (BWL), with the 13% share price decline from its recent peak of S$1.56 on 8 Jun offering an attractive entry price.
Its sales in China grew by strong 103% yoy in 1Q17. China is now the group’s largest market. Our on-the-ground checks give us conviction the growth can be sustained.

Further upside could come from full conversion from export sales to direct sales in 4Q17F/1Q18F, which is not yet fully reflected in our estimates.
We lift our Target Price, now based on 18x CY18F P/E (global peers’ average) vs. previous 16x.

China currently accounts for 48% of group sales (as per 1Q17), having just overtaken Taiwan as the group’s largest market. While the group’s phenomenal earnings growth of more than 100% p.a. in FY15 and FY16 was led by Taiwan, we expect China to provide the next phase of expansion, driven by increased product acceptance and distributor penetration.
China’s 1Q17 sales grew by a robust 103% yoy and we believe China can continue to deliver that magnitude of growth for at least the next 1-2 years.

We are optimistic on the group’s growth prospects in China after our visit to Best World’s sales convention in Changsha, because of:
1. the clear systems it has in place to educate distributors on sales generation,
2. the strong company culture,
3. the highly-motivated distributors, and
4. the wide product acceptance.
We were impressed by the scale and breadth of Best World’s distributor network (close to 1,000 from all over China) we observed during our site visit.

Based on management’s target to be one of the top 15 direct-selling companies in China by 2021F, this implies a 5-year sales CAGR of 33% for China. However, we think this timeline may be conservative, given 1Q17’s strong sales growth (+103% yoy).

There is also additional upside potential from full conversion of export sales in China to direct sales. Recall that the majority of current sales in China are recognised as export sales and export prices are significantly lower than distributor prices.
We project full conversion by 4Q17F/1Q18F. Our current earnings forecasts do not yet fully account for the additional revenue that the company could recognise once it starts selling products at the higher distributor price.

Management highlighted M&A as another potential growth strategy, with direct-selling companies that offer access to new markets being especially attractive.
We are positive on such earnings-accretive M&A developments and think Japan represents a potential new market for the group because apart from China and Korea (markets in which Best World already has a presence),
1. Japan is the next biggest direct-selling market in Asia, and
2. 2Japan is geographically closer to Best World’s current markets than the US or Germany (two of the five largest direct-selling markets globally in 2016).
The group has net cash of c.S$50m (as at end-1Q17) to seize any M&A opportunities.

We reiterate our Add call on Best World, with a higher target price of S$1.70, based on 18x CY18F P/E. Our target CY18F P/E multiple is pegged to the average of its global peers’, which we think is fair even though its peers are larger as Best World’s earnings growth is expected to be higher (27% 2-year EPS CAGR vs. peers’ 14%).
In our view, Best World’s earnings growth momentum in FY17-19F could beat our forecasts on the back of higher growth from China. This is a potential key share price driver for Best World. A potential secondary catalyst for the stock is inorganic growth.
Given that Best World is now one of the top ten direct-selling companies (by sales) in Taiwan, we believe the company has a stable and strong base of earnings. On top of this, we expect the next phase of growth to come from further penetration into China.
In our view, the full conversion of China sales from an export sales model to a direct-selling could provide a big boost to earnings in FY18-19F. We think our target CY18F P/E of 18x is justified, although it is more than 1s.d. above the historical average, because Best World is in a strong position in terms of earnings performance, with solid prospects. Furthermore, our target P/E is in line with the higher end of the stock’s P/E trading range during its last earnings upcycle in 2007-08.
Best World is poised to release its 2Q17 results on 7 Aug 2017.
Downside risks: weaker-than-expected sales in Taiwan or China.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-07-18

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