Best World International - Maybank Kim Eng 2018-05-16: Business In Transition; Expect Eps To Improve From 3Q18

SGinvestors.io

BEST WORLD INTERNATIONAL LTD SGX: CGN

Best World International - Business In Transition; Expect Eps To Improve From 3q18

1Q18 a big miss; We cut FY18-20E EPS and lower TP

• Best World International's 1Q18 core earnings were a big miss as it met only 9-10% of our and consensus FY18 estimates. 
• We are not overly concerned as management already warned in 4Q17 of the possible impact of weak export sales during its business transition, and the demand for BestWorld’s products in China remain healthy. 
• We expect earnings to improve from 3Q18 onwards. However, we cut FY18-20E EPS by 6-8% to reflect weaker Taiwan sales and potential risk of longer-than-expected transition. 
• Accordingly, we cut our Target Price 23% to SGD1.56, pegged to a lower P/E multiple of 14x (from 17x) FY18E EPS (still based on 0.8x PEG using FY17- 20E EPS CAGR of 18%); We ascribed a c.20% discount to the PEG of 1.0x for regulatory risks and competition. Our target P/E fell from 17x as our 3-year forward EPS CAGR declined after our EPS cut.

China: growth in actual sales remained robust in fact

• In China, 1Q18 sales were weak, declining 68% y-o-y due to the change in its business model from export to wholesale. 1Q18 sales were low as export agents had already placed orders in advance for the next 3-6 months in 4Q17 (they have to deplete export inventories before being able to recognise revenue under the new wholesale model). However, actual demand for BestWorld’s products in China is still robust. 
• Management expects this trend to continue and contribute to double-digit earnings growth for FY18E. Once the transition is completed, it will expand BestWorld’s geographical presence more quickly, allow it to run its own management team on the ground, and improve revenue-recognition efficiency. 
• Best World expects 2Q18 earnings to remain weak as the transition won’t be complete and as export agents continue to work down their inventory.

Best World expects Taiwan sales to recover in 2H18

• In Taiwan, sales declined for the fifth straight quarter as BestWorld continued to reduce price promotions to prevent discounted goods from flooding into the market. 
• Management expects its sales in Taiwan to stabilise in 2Q18 as it will launch more events and products in 2H18.

Swing Factors 

Upside 

• Successful expansion in Taiwan, Indonesia and Philippines. 
• Expansion into new markets, such as the Middle East. 

Downside 

• 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’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 | https://www.maybank-ke.com.sg/ 2018-05-16

SGX Stock Analyst Report BUY Maintain BUY 1.56 Down 2.060