Best World International - DBS Research 2018-02-27: China Takes Centre Stage

BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International - China Takes Centre Stage

Record FY17 partly lifted by one-off tax benefit, but strong underlying growth momentum (+19.1% q-o-q) in 4Q17 must not be ignored.
Export sales surge as Best World prepares for the anticipated shift to a direct-selling model for China.
Firm growth in membership and active distributor pool also bode well for future prospects.
Upgrade to BUY; Target Price of S$1.79.

Best World International’s strong showing in 4Q17 and recovery in Taiwan allayed concerns over near-term pressures on growth. As contributions from Taiwan steady, we project growth to come mainly from China as Best World further extends its reach and raise FY18F EPS by c.23% to 10.5 Scts.
Furthermore, the impending conversion from an export to direct-selling model in China should facilitate better tracking of sales against underlying consumption by investors, which could be positive for the stock.

Given higher geographical concentration risk on the group’s fast-growing exposure to the China market, we have assumed a higher discount to global peers’ c.21x FY18F PE for Best World, compared to consensus.

Growth prospects underpinned by steadily expanding membership and geographical coverage. China’s cosmetics sector is forecast to grow at 12.9% CAGR into 2019. With much of the groundwork already laid in China, the award of a rare direct-selling licence by the Ministry of Commerce of the People’s Republic of China (MOFCOM) provides Best World with the credibility and platform needed to gain scale in the world’s most populous nation and second-largest direct-selling market.
Over FY14-17, Best World’s membership pool and average sales per member had grown quickly at a CAGR of 6.7% and 34.3% respectively, driving significant bottom-line expansion of over 5x. As Best World ramps up on its outreach efforts in China and strategies to further increase members’ wallet share, we project core earnings to grow at a c.13% CAGR from c.S$47.9m in FY17 to c.S$60.8m by FY19F.

Upgrade to BUY with higher Target Price of S$1.79, based on 17x FY18F PE (vs global peers’ c.21x) after raising our earnings projections by 23% for FY18F to account for stronger growth in China.
A decent prospective 3.3% yield is also on offer.

Key risks include lack of control over individual distributor’s selling process, discretionary spending levels, and impact of unanticipated changes in local regulations and restrictions.

Best World saw a significant 82% q-o-q/77% y-o-y jump in headline profit numbers to S$21.8m in 4Q17 – surpassing its previous quarterly record of S$12.3m achieved in 4Q16. FY17 profits of S$55.7m beat both our and consensus numbers by 36.2% and 29.5% respectively and were even ahead of consensus FY18F estimates.
Apart from higher forward sales to China, the recovery in Taiwan (+110% q-o-q) and traction in Indonesia (+20.3% qo-q) helped drive revenues higher to S$74.1m in 4Q17.
While we acknowledge that the strong bottom-line performance was partly driven by a one-off tax benefit (comprising tax credit of S$1.5m due to adequate provisions made over 9M17 and an undisclosed tax refund), which we estimate to be c.S$7.5m, core earnings growth of 19.1% q-o-q remains impressive.

Having declined sharply in 9M17 on the back of efforts to eradicate unhealthy online discounting practices, the strong recovery in Taiwan sales numbers by 110% q-o-q to c.S$31.3m implies that Best World’s revised strategy – implemented in early 2017, is starting to bear fruit.
The continued expansion in its member pool and sales per member by 12.5% and 10% y-o-y respectively, provides further affirmation.

Historically, export sales tend to peak in the 4Q as the local team orders ahead to ensure sufficient inventory to tide through the festive season. Bearing in mind that export sales are currently captured by Best World upfront, the record export sales of S$35.1m (more than 2x compared to S$14.4m a year ago) seen in 4Q17 could raise concerns over possible “front-loading” to shore up FY17 numbers.
Addressing the surge in export numbers, management shared that higher inventories (of c.5-6 months vs 3 months historically) included contingency stock, as Best World prepared for possible importation delays from the upcoming transfer of import licences from a third-party export agent to Best World’s Zhejiang subsidiary in 1H18 – ahead of Best World’s anticipated shift to a direct-selling model for China from 2H18. Upon completion of the transfer, inventory for China (which is currently held by the export agent) would be consolidated under Best World.
Compared against 4Q16 and 1Q17 combined export sales levels of c.S$35m, which were sold over 1H17, 4Q17 export sales of S$35.1m appears reasonable.

In August 2017, Best World revised its dividend policy to distribute at least 40% of NPAT vs a minimum of 30% in FY16.
Adjusting for bonus shares issued in late 2016, Best World’s dividend payout was effectively raised by 78%, from 2.3 Scts per share in FY16 to 4.1 Scts for FY17.

With FY17 earnings surpassing our FY18F estimates, we raise our projections by 23% to S$57.9m after imputing
1. higher growth from China, and
2. improved sales levels in Taiwan and Indonesia.
While this figure is modest compared to FY17 PATMI of S$55.7m given the one-off tax impact, it effectively represents c.21% y-o-y growth from a PBT perspective.
Maintaining our valuation peg of 17x FY18F PE (vs larger peers’ 21x) for Best World, we arrive at a higher Target Price of S$1.79. Upgrade to BUY

Carmen TAY DBS Vickers | http://www.dbsvickers.com/ 2018-02-27

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