Best World International (BEST SP) - Maybank Kim Eng 2017-11-09: China Continues To Deliver

BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International (BEST SP) - China Continues To Deliver

Best World International's 9M17 earnings were in line at 77-78% of ours and consensus FY17E.
3Q17 earnings grew 36% YoY and 2% QoQ, from 33% YoY revenue growth in China, offsetting the continued weakness in Taiwan (-46% YoY).
China is expected to lead growth for the group from continued geographical expansion, improved service quality and better brand confidence. On the other hand, Taiwan should start to recover in 2018 as BEST seeks to improve earnings quality.

Maintain BUY and TP of SGD1.88, based on 19x FY18E EPS (PEG of 0.7x using FY16-19E EPS CAGR of 27%); We ascribed a c.30% discount to the PEG of 1.0x for regulatory risks and competition.

China is expected to deliver healthy future growth as BEST seeks to expand geographically to other key cities. Also, we estimate the earnings contribution from China is now far larger than from Taiwan, at c.80% in 3Q17 as revenue is still being recognised based on the export price instead of retail price.
The application for direct selling license beyond Hangzhou City has already started and should include at least 7 provinces by end-2018. Cities in Hunan province are expected to be approved first, followed by other provinces.
In addition, China operations have not been impacted by any pyramid scheme crackdown; growth was supported by steady China revenue in 3Q17 (-1% QoQ). 4Q17 should record a better QoQ growth as distributors attempt to meet their full year sales target.

Sales weakness in Taiwan, which started in 1Q17 continued as BEST halted promotions to prevent subsequent discounted sales by distributors and improve earnings quality. Net margin for Taiwan has improved, despite weaker sales.
Management expects a gradual recovery from 2018 onwards, due to the low base and after weeding out discounted goods.

Indonesia recorded healthy double-digit YoY and QoQ sales growth in 3Q17. This resulted from a switch in strategy from weight management to skin care products, which could transform into a key growth market as BEST taps into the Halal market in 2019, after the opening of its factory.

Shares could re-rate as investor recognition increases. A 2-yr scenario with the P/E rising to 1.0x PEG of 25x FY19E EPS suggests 90% upside to SGD5.31.
Robust growth in China after the approval of direct selling licence.
Successful expansion in Taiwan, Indonesia and Philippines.
Expansion into new markets, such as the Middle East.

Regulatory changes detrimental to direct selling in its markets, similar to Indonesia’s restriction on healthcare imports in 2009.
Reputational risks caused by fraud or fake-product scandals for other direct-selling players or BEST’s members.
Failure to scale up in China would result in up to 10% downside to the share price valuation.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-09

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.880 Same 1.880