3 things a direct selling license will allow Best World to do in China: CIMB


3 things a direct selling license will allow Best World to do in China: CIMB

Michelle Zhu
04/07/16, 12:18 pm

SINGAPORE (July 4): CIMB Research is maintaining its "add" recommendation on Best World with a higher target price of $1.61 from its previous $1.12 price target.

(See: Best World kept at ‘add’ by CIMB on strong 1Q showing)

This comes after the skincare manufacturer and distributor announced last Thursday that its subsidiary, Best World (ZheJiang) Pharmaceutical Co. (BWZ), has been granted a direct selling license by China’s Ministry of Commerce.

The license permits BWZ to conduct direct selling in areas within China for certain categories of products, provided that the company has set up requisite service centres in Hangzhou by Dec 16.

(See: Best World International’s subsidiary granted direct selling licence in China)

In a Friday report, analysts Jonathan Seow and Roy Chen say the higher target price is “still somewhat conservative”, as the stock traded at a peak forward P/E range of 15-18 times when it was last delivering on earnings.

“We therefore see room for further multiple expansion if the company continues to earnings,” they add.

The granting of the license came earlier than their expectations as well as the management’s initial guidance of 4Q16-1H17. This development “was always going to be a major catalyst for the stock”, say the analysts, provided that a sudden drop in sales in the key market of Taiwan does not occur.  

According to Seow and Chen, here is what is to come for the group:

Best World will be conducting full direct selling in 1H17 as it gradually transitions away from its current export model. This is expected after the company passes its next milestone of setting up requisite service centres in Hangzhou before the given deadline of Dec 16, such that it may commence direct selling.

Execution will now be the company’s focus with the granting of the license. The analysts say they are “comforted” that the company has already registered all of its products, with an established network of Taiwanese distributors and export agents. With minimal capex to be expected and supply chain management support from the group’s new factory facility in Singapore, they do not expect a long gestation period.

Sales in China could double after Best World converts exports to sales under a direct selling model. This is because selling prices to distributors are significantly higher than export prices. China formed a substantial 30% of the group’s 1Q16 revenue, and 91% of its sales to China are made up of exports.

CIMB expects the net impact on earnings from a much higher selling price to be accretive, and are confident that demand will not “suddenly taper off” from an immediate price increase as the company currently exports to an agent who is already selling to end-consumers at a higher price.

As at 12.04pm, shares of Best World are trading 12.41% higher at $1.50.

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