Best World International Ltd - CGS-CIMB 2018-05-15: 1Q18 See You In 2H18

Best World International Ltd - CGS-CIMB 2018-05-15: 1q18 See You In 2h18 BEST WORLD INTERNATIONAL LTD SGX: CGN

Best World International Ltd - 1q18 See You In 2h18

  • Best World’s (BW) 1Q18 headline net profit of S$5.6m was at only 9.2% of our and 8.9% of Bloomberg consensus full-year estimates (S$61m/S$63.4m).
  • Earnings were skewed by delayed recognition of some China takings as BW is still in the process of transitioning its China operations to China wholesale business model.
  • BW guides for better China prospects in 2H18 and is cautiously optimistic of stable Taiwan revenue y-o-y.
  • We reduce our FY18-19F net profit forecasts as we become more conservative on BW’s near-term prospects.
  • Downgrade to HOLD with a lower Target Price of S$1.39, now based on 12.5x CY19F P/E.




1Q18 revenue down on delayed China, reduced Taiwan revenues

  • Best World’s (BW) 1Q18 revenue fell to S$25.4m (-66% q-o-q, -20% y-o-y) largely due to the plunge in Chinese revenue to S$6.8m (-81% q-o-q, -68% y-o-y) on the back of delayed revenue recognition with the conversion of its China operations to a wholesale business model. 
  • Performance in the matured market of Taiwan was also weaker, with revenue falling to S$12.1m (-61% q-o-q, -35% y-o-y) as sales growth tapered amid the lower retention rate of its direct selling membership base and reduction in price promotions for core products.


FY17 net profit down 42% y-o-y

  • Best World’s (BW) 1Q18 operating profit declined 41.4% to S$7.0m on the back of lower revenue. However, its impact on bottomline was offset by higher other operating income of S$3.9m (vs. S$1.5m in 1Q17) from charges to BW’s China agent for marketing support which is a function of the agents’ sales in 1Q18.


Cutting expectations; 2Q18F guided to be lower y-o-y

  • In 4Q17, management guided for higher 4Q17 revenue as Chinese export agents pre-stocked 3-6 months’ worth of orders ahead of the long Chinese New Year holidays in Feb 18, and hence lower 1Q18 revenue. 
  • We were surprised that BW in its latest guidance indicated that revenue would stay lower y-o-y in 2Q18, with China wholesale revenue may register from 2H18. 
  • We believe Taiwan could also see sales decline. We thus trim our FY18-20 core EPS forecasts by 7%/8%/5%.


Downgrade to Hold; come back in 2H18

  • Our target price declines to S$1.39 as we now ascribe a P/E multiple of 12.5x (vs. 14.0x previously) on CY19F EPS, close to 1 s.d. above its 2-year average mean. 
  • Whilst the stock offers some growth ahead, we believe this will largely be from 2H18F. Till then, we believe investors will shy away from the stock.


Risks

  • Upside risks to our call include a quicker-than-expected turnaround in Taiwan and better-than-expected growth in China. 
  • Downside risks are weaker-than-expected sales in Taiwan or China.





Cezzane SEE CGS-CIMB | LIM Siew Khee CGS-CIMB | https://research.itradecimb.com/ 2018-05-15
SGX Stock Analyst Report HOLD Downgrade ADD 1.39 Down 1.700



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