Best World International (BEST SP) - Maybank Kim Eng 2018-02-27: Strong Earnings Beat; Better Year Ahead

BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International (BEST SP) - Strong Earnings Beat; Better Year Ahead

Best World International's FY17 earnings rose 61% y-o-y, beating our and consensus estimates by 26%, mainly due to a 91% y-o-y sales increase in China from better demand for DR’s Secret skincare products. Also, the Taiwan market stabilised in 4Q17, with sales growing 110% q-o-q.
Sales in FY17 for China and Taiwan outperformed our estimate by 5% and 14%, respectively. China is expected to lead sales growth for the group from continued geographical expansion, improved service quality and better customer brand recognition.
We raise FY18-19E EPS by 23-30% on stronger China and Taiwan sales. We have raised our Target Price 10% to SGD2.06, based on 17x FY18E EPS (PEG of 0.8x using FY17-20E EPS CAGR of 21%); We ascribed a c.20% discount to the PEG of 1.0x for regulatory risks and competition.
Our target P/E multiple fell from 19x, as our 3-year forward EPS CAGR declined after strong EPS growth in FY17.

After its strong performance, China’s PBT contribution to the Group increased to 65% in FY17 from 47% in FY16. Management expects growth momentum to continue from strong product demand and expansion into more key cities.
The first phase of conversion from an export business to direct selling one should start in 1H18 and might temporarily disrupt the export revenue because Best World International will concurrently export to its export agent and its China subsidiary. However, the export agent has stocked up sufficiently to ensure minimal disruption to consumers.

The good q-o-q performance in Taiwan was due to Best World International’s earlier strategy of halting promotions to prevent subsequent discounted sales by distributors and improving earnings quality. This market should remain stable moving forward but management expects to focus more on China.

After its stellar FY17 results, our revised EPS implies that Best World International is only trading at 11x/9x FY18E/19E EPS, a 35-40% discount to its peer group average. Best World International also trades at a PEG of 0.5x vs the peer average of 1.7x.
Moreover, Best World International is backed by a FY17 net cash position of SGD75m (10% of market cap) and FCF yield of 7-12% for FY18-20E.

Shares re-rate as investor recognition increases. A 2-yr scenario to 17x FY20E EPS suggests 82% upside to SGD2.50 based on a PEG of 0.8x FY17-20E EPS CAGR of 21% (c.21% discount on regulatory risks and competition).
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 World International’s members.
Failure to scale up in China would result in up to 70% downside to the share price valuation.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-27

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.06 Up 1.880