Best World International Ltd - CIMB Research 2017-11-09: 3Q17 Taking A Breather Until Taiwan Stabilises

Best World International Ltd - CIMB Research 2017-11-09: 3Q17 Taking A Breather Until Taiwan Stabilises BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International Ltd - 3Q17 Taking A Breather Until Taiwan Stabilises

  • Best World International's 3Q17 core net profit came in at S$12.2m; 9M core net profit was in line at 76.9%/79.4% of our/consensus FY17F estimates (S$44m/S$42.7m).
  • However, we were slightly taken aback by the decline in Taiwan revenue which fell 35.6% qoq; we believe this is a sign that the market has yet to stabilise.
  • 3Q17 China revenue grew 33% yoy, but this was narrower than the 125% yoy growth seen in 2Q17.
  • We temper our expectations and lower our FY18-19F EPS forecasts by c.4%.
  • Downgrade to Hold from Add with a lower TP of S$1.40, now based on 14.6x CY18F P/E, 1 s.d. above mean (vs. 18x previously, global peer average).

3Q17 net profit helped by lower distribution costs 

  • 3Q17 revenue shrank 15% qoq/10% yoy (vs. 2Q17/3Q16: S$55.3m/S$52.2m), largely due to lower revenue from Taiwan (-35.6% qoq/-46% yoy). 
  • 9M17 revenue of S$146.8m was below expectations at only 52.3% of our FY17F S$280.6m forecast. However, 3Q17 net profit was saved by lower distribution costs (-45% qoq) due to a decline in its direct selling business in Taiwan. 
  • 9M17 net profit rose 52% yoy but slower revenue growth of 6% yoy was a surprise.

China to be driven by shift to direct selling business model 

  • 3Q/9M17 China revenue of S$26.2m/S$74.2m was up 33%/76.5% from 3Q/9M16’s S$19.6m/S$42.0m; which is a sign that business is still gaining traction in China. However, we note that growth has narrowed vis-à-vis yoy growth of 125% seen in 2Q17; a trend we would monitor moving ahead. 
  • Management still plans to begin the conversion of its China export business to a direct selling model by 1Q18F, and targets to implement the shift in phases over the course of two years given the size of the Chinese market.

Taiwan business outlook 

  • Management guides that its Taiwan business is still normalising; as such, revenue weakness could continue until Nov/Dec when there may be reprieve due to annual yearend promotions. Despite this, we think the business may not stabilise until FY18F, in our view. 
  • Management said that despite the softness in sales volumes, it is sticking to the strategies adopted since Jan 17 (i.e. eliminating price discounts).

Tempering expectations 

  • We are taking a more cautious approach towards the company’s future prospects, at least until revenue headwinds dissipate.
  • We lower our FY17-19F revenue forecasts by 24-28% but due to the expected decline in distribution costs, we maintain our FY17F net profit forecast and lower our FY18-19F net profit estimates by only c.4%.

Downgrade to Hold 

  • On the back of uncertainties in the near-term, we lower our target price to S$1.40/share (from S$1.80), now based on 14.6x CY18F P/E, 1 s.d. above mean (vs. 18x previously) as we believe the company is still in growth mode. 
  • Catalysts to our call include quicker-than-expected turnaround in Taiwan and better-than-expected growth in China.
  • Downside risks: weaker-than-expected sales in Taiwan or China.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-11-09
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.40 Down 1.800