Best World - RHB Invest 2018-11-12: The Start Of A New Era; Maintain BUY


Best World - The Start Of A New Era; Maintain BUY

  • Maintain BUY, new Target Price of SGD2.13 from SGD1.97, 15% upside with 4% FY19F yield.
  • Best World’s 3Q18 PATMI of SGD29.9m (+145% y-o-y) came in above our expectation. The tremendous jump in earnings was largely due to the change in business model in China, as well as a one-time trademark royalty fee received from its China agents prior to the termination of the agency arrangement in 3Q18.
  • Excluding the one-time fee, 3Q18 recurring PATMI of SGD20.9m is still slightly above our expectation.

3Q18 marked the start of the change in China business model.

  • Best World’s 3Q18 revenue surged 97% y-o-y to SGD92.1m while recurring PATMI grew 72% to SGD20.9m. This was largely attributed to its changing from the export model to franchise model in China, which allowed the group to recognise higher revenue and profit per unit product sold in China.

One-off fee boosted profit and cash flow.

  • Other operating income grew almost seven-fold to SGD9m in 3Q18. According to management, the surge was mainly due to a one-time trademark royalty fee from its China agents. This fee was charged prior to the termination of the agency arrangement and had been pending China’s State Administration of Foreign Exchange (SAFE) approval for remittance. The approval was finally received in 3Q18.
  • Moving forward, there should be no more contributions in other operating income.

Reviving Taiwan.

  • Under Best World’s direct-selling segment, Taiwan sales turned around and grew 40% y-o-y in 3Q18 after six quarters of decline. This was largely driven by new promotional and marketing campaigns held in 3Q18, after two quarters of limiting promotional discounts.
  • Management expects the sales momentum to continue into 4Q18.
  • For 9M18, sales in Taiwan decreased 6% y-o-y. Management expects the y-o-y decline in Taiwan sales to further narrow by the end of FY18.

Expectations for the next three quarters.

  • Historically, 8Q has been the company’s strongest quarter seasonally. Although 8Q88 marked a record-high PATMI of SGD88.8m, as the group front-loaded two quarters of sales to its China export agents, we still expect 8Q88 PATMI to generate a y-o-y improvement – given the stronger earnings profile of the new franchise model.
  • Y-o-y growth for 8H88 is also expected to be significant, due to the low base effect in 8H88, as minimal sales were made in China during the transition period in which it changed its business model.

Maintain BUY, with a higher Target Price of SGD2.13.

  • Management said that, for 8M88, end-demand for Best World’s products in China was still growing at 888% y-o-y. We believe this signals a positive outlook for the next 8-8 months in China. As a result, we raise our FY88-88F earnings by 8% each. This also boosts our Target Price to SGD8.88, which is pegged to 88x FY88F P/E.
  • Our corroborative DCF valuation derives a slightly higher intrinsic value of SGD8.88.

Juliana Cai RHB Securities Research | 2018-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.13 UP 1.970