Best World International Ltd - CIMB Research 2017-08-16: I Am Not A Pyramid Scheme

Best World International Ltd - CIMB Research 2017-08-16: I Am Not A Pyramid Scheme BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International Ltd - I Am Not A Pyramid Scheme

  • China’s crackdown on pyramid schemes has minimal effect on Best World as its direct-selling model is unlike a pyramid scheme, according to management.
  • Its Chinese revenues are currently on an “export” business model and hence unlikely to be affected by the campaign.
  • Maintain Add and TP of S$1.80. Current Best World International' share price an attractive entry point.

Chinese administration kick-starts three-month campaign

  • News emerged that China’s State Administration for Industry & Commerce (SAIC) has announced a special three-month (15 Aug-15 Nov) campaign to police pyramid schemes.
  • According to Best World, key points of SAIC’s campaign are:
    1. to crack down on pyramid selling schemes disguised as investment opportunities, job offers, job referrals and recruitment activities, especially those targeted at new graduates;
    2. to investigate and deal with illegal activities; and
    3. to increase the awareness on pyramid selling schemes amongst students.

Best World’s direct-selling model not a pyramid scheme

  • Hallmarks of pyramid schemes, according to Best World, include:
    1. profits which are largely derived from the act of recruitment instead of the sale of products/services; 
    2. low-quality products sold at high prices; and
    3. high startup/entry fees.
  • In our view, Best World’s business model differs from that of a pyramid scheme as
    1. its products are of quality;
    2. it has set very low hurdles for members to sustain their memberships (bought a product in the past 12 months to retain membership); and
    3. charges little to no joining fee to become a member.
  • The company highlighted that all its current preparations for conversion to direct selling are in line with the SAIC statement -- all service outlets for its future direct selling business in China will be subjected to verification and approval by local authorities before they can commence operations, and none will be located within near school compounds; the latter to allay concerns about targeting students.
  • Best World also stressed that its future direct selling business in China will not accept students, civil servants, police and military personnel as members.

No impact on our existing forecasts

  • While it has holds a direct selling licence, Best World’s existing China revenues are currently based on an “export” model, hence we believe it is unlikely to fall under the purview of this campaign. As such, we maintain our forecasts.
  • In a worst case scenario, we envisage a delay in the conversion of its China business into a direct-selling model, initially targeted to happen by end-17/early-18.
  • That said, Best World is currently enjoying higher GP margins under its existing export model, but has opted to slowly switch to a direct-selling model to enhance control over its product sales in China.

Maintain Add and TP

  • We reiterate our Add call and TP of S$1.80/share (based on 18x CY18F P/E, global peers’ average)
  • The stock has re-traced to 12.6x CY18F P/E, close to its average mean of 12.8x during the last earnings upcycle. This is an attractive entry point given its stellar forward earnings momentum, in our view.
  • Potential re-rating catalysts are inorganic growth. 
  • Downside risks are weaker-than-expected sales in Taiwan or China

Jonathan SEOW CIMB Research | 2017-08-16
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.800 Same 1.800