What’s New

• China to remain key growth driver as Taiwan pauses for breath

• Untapped opportunities for Best World outside of China include halal skincare market in Indonesia and M&A in Japan

• FY17F/18F earnings raised by 7%/10% to reflect strong momentum and margins in China, but partly mitigated by temporary weakness in Taiwan

• Reiterate BUY with higher TP of S$1.82

Direct seller riding on highly scalable model to deliver 27% PATMI CAGR over FY16-FY18F. Compared to traditional retailers, Best World’s advantage lies in its highly scalable model (with lower fixed costs). Supported by greater scale economies, we project PATMI to rise quickly from S$34.6m in FY16 to S$55.7m by FY18F as the group further extends its reach.

Where we differ: Given higher geographical concentration risk on the group’s fast-growing exposure to the China market, we have assumed a slightly higher discount to global peers’ c. 21x FY18F PE for Best World, compared to consensus.

Potential catalysts: Earnings delivery, successful expansion into new markets, and M&A. Attainment of a direct selling licence in China, a market over 50x larger than Taiwan, should underpin years of firm growth. Having amassed a pretty decent scale in Taiwan over a fairly short period of time, and coming off an extended period of high growth, momentum in Best World’s second-largest market has thus started to ease. However, we look beyond the weaker Taiwan headline sales in 1H17 to focus on China instead, which we estimate contributes 60-65% of the group’s current earnings and still holds immense long-term potential.

China’s cosmetics sector is forecast to grow at 12.9% CAGR into 2019. With much of the groundwork already laid in China, the Ministry of Commerce of the People’s Republic of China (MOFCOM)’s indirect endorsement through the recent award of a rare direct selling licence provides Best World with the credibility and platform needed to gain scale in the world’s most populous nation and second-largest direct selling market. Stronger participation rates at Best World’s post-licence recruitment events also confirm this.

Valuation

Reiterate BUY with higher TP of S$1.82, based on 18x FY18F PE. As Best World enters a period of strong growth, we opine that the stock should trade at 18x FY18F earnings (based on historical average discount to global peers’ 21x). At current price, the stock also offers a prospective 2% yield.

Key Risks to Our View

Key risks include lack of control over individual distributor’s selling process, discretionary spending levels, and impact of unanticipated changes in local regulations and restrictions.

Source: DBS Research - 10 Aug 2017