SINGAPORE (Jan 16): CLSA is starting coverage of Best World with a target price of $2.50.

CLSA says Best World, the direct-selling company focusing on premium skin care, is well established outside of Singapore although the investment merits are not fully appreciated.

Despite its share price having rallied 480% over the past one year, the stock remains undervalued versus regional peers.

The research house also likes the fact that the stock is supported by 27% EPS CAGR over FY16-18CY and strong free cashflow and backed by about 40% net cash equity.

In a Friday report, analyst Jesalyn Wong reveals that Best World does not require members to make bulk purchase, so revenue is not inflated.

More importantly, Best World has successfully built its product positioning in the premium skincare segment, says Wong, in Taiwan and China.

In fact, Wong says Best World’s ability to succeed in Taiwan, a highly competitive market, is a litmus test of its management capabilities.

“We project sales to grow sevenfold over five years to reach $107 million in 2016. Growth looks set to continue, as we expect 20-30% y-o-y sales growth in 2017-18,” says Best World.

However, China will be the game changer. In Nov 16, Best World was awarded a direct-selling licence by the Chinese government.

This endorsement can significantly propel China sales -- which makes up 33% of sales -- and overtake Taiwan in five years, which makes up 54% of sales.

According to Wong, Best World has already built certain scale with a network of beauty salons as distributors and the licence enables the company to gain credibility and differentiate its products.

“Best World trades at a large discount to comparables despite enjoying superior earnings, dividend yield and ROE,” says Wong, “Our target at $2.50 is based on ~18x 2017CL PE is based on a 30% discount to peer group PEG.”

Shares of Best World are up 7 cents at $1.53.