Best World International Ltd - CIMB Research 2018-02-27: 4Q17 Better On Lower Tax; FY18 Fuelled By China

Best World International Ltd - CIMB Research 2018-02-27: 4Q17 Better On Lower Tax; FY18 Fuelled By China BEST WORLD INTERNATIONAL LTD CGN.SI

Best World International Ltd - 4Q17 Better On Lower Tax; FY18 Fuelled By China

  • Best World International's FY17 core net profit of S$55.7m was above expectations at 126.4%/127% of our/consensus estimates (S$44m/S$44.1m). This was a result of slightly higher-than-expected revenue (+9.7% vs. forecasts) and lower-than-expected tax expense (c.37% below our forecast).
  • 4Q17 DPS of 2.6 Scts took FY17 DPS to 4.1 Scts, which was within management’s commitment of at least 40% payout and our expectation of 2.3 Scts.
  • Outlook for 2018 is mainly driven by China. We lift our FY18/19F EPS by 16.2%/2.2%.
  • Upgrade to ADD from Hold with a higher Target Price of S$1.70, now based on 14.0x (vs. 14.6x previously) CY19F P/E, in line with the global peer average.

4Q17 net profit up on higher revenue, lower tax expense 

  • Best World International's 4Q17 revenue jumped 58% q-o-q and 20% y-o-y, largely on the back of improved sales from China (+129.2% y-o-y), with Chinese export agents pre-stocking 3-6 months worth of orders ahead of the long Chinese New Year holidays in Feb 18. 
  • A tax credit of S$1.5m (vs. a tax expense in 3Q17/4Q16) due to lower provisions and a small tax refund brought 4Q17 net profit to S$21.8m (+79% q-o-q/+77% y-o-y).

FY17 net profit up 61% y-o-y on lower distribution costs and tax expense 

  • Best World International's FY17 revenue grew marginally by 10% y-o-y to S$220.9m (vs. S$200.8m in FY16) as Best World’s largest direct selling business in Taiwan narrowed by 28.5% y-o-y on stiffer market competition, capping the gains in the China market, which grew by 90.9%. 
  • The impact on FY17 net profit (+61% y-o-y) was enhanced by lower distribution costs of S$48.4m (-27% yoy) due to a decline in its direct selling business in Taiwan and lower tax expense of S$12.6m (-23.7% y-o-y).

2018F driven by China; Taiwan business moderates 

  • The conversion of its China export business to a direct selling model is expected to commence in phases during 1H18F. Efforts to widen the coverage of its direct selling licence beyond Hangzhou to other cities are proceeding as planned. The company expects approvals for key cities in at least seven provinces to be obtained by the end of FY18F. 
  • For Taiwan, management guided for stable sales in FY18F, led primarily by events and campaigns to be held in 2H18F.

Lifting expectations 

  • We lift our FY18-19F net profit by 2.2-16.2%, largely due to lower tax expense provisions.
  • We introduce FY20F net profit of S$73.8m. 
  • We also lift our FY18-19F DPS to 4.5-4.9 Scts (from 2.8-3.5 Scts previously).

Upgrade to ADD; earnings momentum to fuel share price 

  • The higher FY18-19F EPS results in a higher Target Price of S$1.70/share (from S$1.40). We now ascribe 14.0x P/E on CY19F EPS, in line with the global peer average. 
  • The stock offers high recurring ROE, coupled with a strong balance sheet (13.6 Scts/share), which could enable it to pursue M&A opportunities for inorganic growth. 
  • Catalysts to our call include a 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 | http://research.itradecimb.com/ 2018-02-27
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.70 Up 1.400