Best World International Ltd - CIMB Research 2017-08-07: Positive Surprise From China And Dividends

Best World International Ltd - CIMB Research 2017-08-07: Positive Surprise From China And Dividends BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International Ltd - Positive Surprise From China And Dividends

  • Best World continues to defy gravity and beat our expectations on the back of another strong showing in China. 2Q/1H net profit formed 29%/52% of our FY17F forecast.
  • Only dampener was Taiwan’s headline revenue which fell 34% yoy, but this was mainly due to 2Q16’s high base effect. We are not concerned given strong +24% qoq.
  • Interim dividend of 1.5 Scts declared, ahead of our expectations. We were also pleasantly surprised with the group’s new dividend payout policy of 40% (previously 30%).
  • We raise our FY17-19F EPS by 5-6% on continued momentum in China.
  • Accordingly, our TP is now lifted to S$1.8 (still based on 18x CY18 P/E). Maintain Add.

Earnings beat from China 

  • The group delivered another strong quarter. 2Q17 net profit was up a strong 62.4% yoy, ahead of both our and Bloomberg consensus expectations. This was driven by
    1. stronger overall sales (+7% yoy), which mostly came from China (+125% yoy), and
    2. better OP margins (2Q17: 34.7%, 2Q16: 20.2%), driven by operating leverage and sales mix. 
  • Accordingly, 1H net profit formed a strong 52% of our FY17F, even though 1H is seasonally weaker.

Raising our EPS on China 

  • We were already positive on the group’s potential in China after our recent site visit in Jul 17, and this set of results only reinforces our confidence. China had a stellar showing (2Q sales +125% yoy) and was the main reason for this quarter’s results beat. 
  • We remain confident China can continue to deliver that magnitude of growth, driven by strong product acceptance and an expanding distributor base. Accordingly, we raise our FY17- 19F EPS on this.

Taiwan revenue was down yoy but no market share changes 

  • Apart from China, we were also keen to see how the group would perform in Taiwan after Taiwan saw its first blip in 1Q17 with a 7.6% sales decline. While Taiwan’s 2Q sales dropped a bigger 34% yoy, this was more due to a high base effect and fewer promotional activities. 
  • We are comforted that sales were up 24% qoq. Based on our channel checks, we are also positive that Best World is still among the top 10 direct selling companies in Taiwan. Accordingly, the yoy drop does not concern us.

Higher interim dividends and payout ratio were positive surprises 

  • The group declared an interim DPS of 1.5 Scts (1H16: 0.8 Scts after adjusting for bonus and share split), translating to a 38% payout ratio. This is way ahead of our expectations of 0.8 Scts, and we view the higher dividends as a big positive. 
  • We were also pleasantly surprised by the group’s decision to raise its payout ratio to 40% (from 30%).

Where are the potential spots for future EPS upgrades? 

  • We see two ‘low-hanging’ fruits for the group:
    1. full conversion of export sales in China to direct selling sales, which could lift China’s revenue by c.2x as export prices are significantly lower than distributor prices and for which our current earnings model does not fully account for; and
    2. M&A, as the group looks to better utilise its balance sheet strength (2Q17 net cash of S$42.7m).

Earnings momentum to drive share price outperformance 

  • We reiterate our Add call on Best World, with a higher target price of S$1.80 (still based on 18x CY18F P/E, global peers’ average) after lifting our FY17-19F EPS by 5-6% as we model in higher growth from China. 
  • We expect strong earnings momentum to be the key share price driver. Another potential secondary catalyst for the stock is inorganic growth.
  • Downside risks: weaker-than-expected sales in Taiwan or China.

Jonathan SEOW CIMB Research | 2017-08-07
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.80 Up 1.700