Best World - RHB Invest 2018-10-23: Put Your Skin In The Best Game; Initiate BUY

BEST WORLD INTERNATIONAL LTD (SGX:CGN) | SGinvestors.io BEST WORLD INTERNATIONAL LTD (SGX:CGN)

Best World - Put Your Skin In The Best Game; Initiate BUY

  • Initiate coverage with a BUY and Street-high SGD1.97 Target Price, 32% upside.
  • Best World is one of the few local consumer firms that have successfully penetrated the Chinese market. As the group transited into a new business model in China at end-2Q18, it is now able to generate higher revenue and earnings for each product unit sold there.
  • We expect earnings to jump at a CAGR of 21% over the next three years, which deems the current 10x FY19F P/E valuation as very compelling.


Company Background


The “Best” products.

  • Best World specialises in the development, manufacturing, and distribution of skincare and wellness products. Close to 85% of its revenue was contributed by its skincare range, with DR’s Secret being the key brand. Its other brands include Aestier, Avance, Miraglo, Optrimax, Pentalab, Pureflo and UberAir.

One size fits all.

  • Best World only has c.20 different SKUs in its skincare range. However, it caters to all skin types as consumers can customise the products through the order of usage and quantity. Lead distributors for the direct-selling market (most markets) or sales managers for its franchisees (China market) would then hold workshops or sharing sessions with new/potential members on how to use the products according their needs. These workshops or sessions also serve as crucial platforms to recruit new members.
  • The limited number of SKUs gives rise to efficiency in production. Ability to customise based on quantity and order of usage enables consumers to continue using the same products, even after their skin has improved.


Geographical breakdown


Regional player with key presence in North Asia.

  • Best World has presence in 12 countries: Singapore, Thailand, Taiwan, Indonesia, Malaysia, Vietnam, Hong Kong, China, South Korea, the Philippines, Myanmar, and UAE. As at 2017, China became the group’s biggest market, accounting for 50% of revenue – this is followed by Taiwan, which contributed 40% of topline.
  • As Best World changed its China business into a franchise model from an export one in mid-2018, we estimate sales in the East Asian nation to contribute c.70% of the group’s total revenue in 2019.



Segmental breakdown


Different business segments.

  • Best World has four business segments: direct-selling, export, manufacturing/wholesale, and franchise. The latter segment was newly-created in 2Q18, and should formally replace the export segment sales for the China market in 2H18.
  • Prior to the change in its China business model, direct-selling contributed 50% of the group’s revenue – export (largely sales to China) contributed 48%, while manufacturing/wholesale contributed 2% in 2017.
  • Post the change in its China business model, we expect franchise sales to dominate and contribute 68% of total 2019 revenue. Direct-selling should contribute c.31%, while manufacturing/wholesale and exports are likely to make up 1% of total revenue.


Investment Summary


A health & beauty play in North Asia.

  • Founded in 1990 with its headquarters in Singapore, Best World is a direct-selling company that distributes premium skincare and wellness products. Its key brands include DR’s Secret (skincare range), Avance (supplements), and Optrimax (weight management products)
  • Over the years, the group’s direct-selling network has expanded into regional markets, including Taiwan, Indonesia, Malaysia, Thailand, Philippines, Vietnam, South Korea, Hong Kong, and United Arab Emirates (UAE). It also distributes to China via franchisees and Myanmar through export agents. 
  • In 2017, China became Best World’s biggest market, contributing 50% of revenue – this is followed by Taiwan, which made up 40% of topline.

Scalable business model.

  • We like the group’s business model, which allows it to scale or expand into new markets without the need to incur major capex and start-up costs. By selling through distributors, franchisees and export agents, Best World is devoid of labour and rental cost pressures. 
  • The group also has a structured compensation plan to keep its distribution costs between 30% and 40% of a products’ retail price.

Unveiling the secret to the Chinese skincare model.

  • The change in Best World’s business model in China – from an export model to a franchise one – should bring about a big jump in revenue and earnings. This is as the group transfers margins earned by export agents to Best World and its franchisees. Prior to Jun 2018, it was selling into the China market via such agents.
  • According to management, Best World is now selling products to its franchisees at a franchise wholesale price that is at least 2x higher than prices charged to export agents. Although part of the margins will be eroded as the group incurs higher distribution and administrative costs with the new franchise model, we expect profits – in absolute terms – to be higher, given the surge in revenue.

Capitalising on Chinese beauty ideals.

  • Best World entered the Taiwan market in 2007 and has a solid track record of penetrating this market. Based on FY17 revenue, we estimate the group holding a c.5% share in the premium skincare market there.
  • Since China’s premium skincare market is 7x larger than Taiwan’s, we see significant growth potential in the former arising from an increase market penetration as well as consumption growth when income levels increase.


Valuation


Initiate coverage with a BUY with SGD1.97 Target Price.

  • Our Target Price is based on 13x FY19F P/E and represents a 32% upside. We ascribe a 15% discount to its 5-year average of 15x, as we think the change in its China business model has led to a temporary weakening of investor confidence and earnings visibility in 1H18. 
  • Nonetheless, we think the stock is compelling, given the big jump in FY19F earnings arising from the full-year impact of the business model change and market growth in China. 
  • We estimate earnings to surge 40% in FY19, as well as a 3-year CAGR of 21% for FY17-20F.

An undervalued gem compared to direct-selling peers.

  • Best World now trades at 10x FY19F P/E. This is a steep discount to its direct-selling peers, which are trading at an average of 16x, despite having superior earnings growth and net margins.





Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-10-23
SGX Stock Analyst Report BUY INITIATE BUY 1.97 SAME 1.97



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