Best World International Ltd - CGS-CIMB Research 2018-08-08: 2Q18 Tides Yet To Turn

BEST WORLD INTERNATIONAL LTD SGX:CGN

Best World International Ltd - 2Q18 Tides Yet To Turn

Best World’s (BW) 2Q18 headline net profit of S$9.1m took 1H18’s to S$14.9m, accounting for 26.3%/27.2% of our/consensus FY18F (S$56.7m/S$55.2m).
China’s revenue recognition continued to be delayed with ongoing transition in business model. Full impact of franchise revenue may only fully emerge in 4Q18.
A lower interim dividend of 1.2Scts (vs. 1.5Scts in 2Q17) was declared.
Maintain HOLD with an unchanged Target Price of S$1.39.

Best World’s 2Q18 revenue fell to S$35m (-36.6% y-o-y) largely due to lower S$6.2m (-77% y-o-y) revenue from China on the back of delayed revenue recognition due to the conversion to the franchise business model.
Performance in the mature market of Taiwan was also weaker, with revenue falling to S$20.3m (-12% y-o-y); albeit it was slightly buoyed by promotional activities for Mother’s Day in May 18.
Overall, 1H18 revenue fell 40% y-o-y to S$60.4m (vs. S$100m in 1H17), again due to lower revenues in Taiwan and China.

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Best World guided that the franchise segment will formally replace the export segment from 2H18 in China. It had 27 franchisees as at 30 Jun 2018, with operations that cover 10 provinces and one municipality (including Zhejiang, Sichuan, Guangdong, Henan, and Heilongjiang).
Best World guided the remaining inventory with its agent in China will only be completely depleted by mid-3Q18F. As such, the full impact from the transition to franchise model may only be fully reflected in 4Q18F, in our view.

Taiwan’s revenue shrank 28% y-o-y in FY17 on the back of maturing market. While the 2Q18 revenue decrease of 12% y-o-y was narrower vs. 1Q18 revenue decrease of 35% y-o-y, this was largely due to promotional activities in 2Q18. Earnings could be weaker in 3Q18F on both a y-o-y and q-o-q basis, in our view.
Management guided that it hopes Taiwan revenue will be stable when compared to FY17, primarily driven by events, campaigns and product launches in 2H18. However, we are slightly conservative and have penciled in a full-year revenue decline of 20% for FY18F.

We maintain our target price of S$1.39 on unchanged CY19F P/E multiple of 12.5x, close to 1 s.d. above its 2-year average.
Management is confident that the franchise business can pick up at least in the latter quarters of FY18. Till then, we believe investors will remain cautious on the stock.

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

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-08

SGX Stock Analyst Report HOLD Maintain HOLD 1.390 Same 1.390