SINGAPORE (Apr 24): Best World International, the distributor of skincare, nutritional and wellness products, has been hit by damning reports by two separate short sellers on Wednesday morning: Bonitas Research and Valiant Varriors.

As at 1pm, shares in Best World are down 16 cents to $1.62 with 8.8 million shares traded.

See also: SGX RegCo queries Best World; expects full independent review

Bonitas says Best World is a “fraud” and alleges its sales in China are a fraction of what was reported to its shareholders.

According to its website, Bonitas is founded by Matthew Wiechert, who also started Glaucus Resesarch who in 2013 issued a short seller report attacking vegetable processor China Minzhong which was later take private by its largest shareholder, Indonesian tycoon Anthoni Salim's Indofood Sukses Makmur.

“We are short Best World stock and believe its stock price will go lower,” says Bonitas in a Wednesday report.

In its report, Bonitas also questioned the motive of Best World’s management to appoint auditors PricewaterhouseCoopers (PwC) to conduct a limited, one-year independent review of its 2018 China franchise operations.

The move came after The Business Times in February raised concerns over the challenges in tracking sales Best World’s DR's Secret line of premium skincare products in China.

“We think Best World management purposely focused PwC’s investigation solely on 2018 in an attempt to both divert attention from, and ultimately further conceal, previously reported fake sales and profits from its China operations,” says Bonitas.

Bonitas also alleges filings in China suggest that Best World fabricated at least $31 million of its reported 2017 sales to its “one major customer” called Changsha Best.

According to Bonitas, Changsha Best is an “entity Best World management secretly controlled and exclusively created to be Best World’s off-books China counterparty”.

“Excluding fabricated sales to Changsha Best, we calculate that Best World overstated its 2017 net profits by at least 130%,” says Bonitas.

Bonitas also said it had, since January, communicated with 24 separate Best World China member representatives and have conducted field visits to 12 BWL Lifestyle Centers or 36% of Best World’s listed franchisee locations to better understand Best World’s sales model.

"Our findings suggest there exists very little end user consumer demand for DR’s Secret skin care products in China,” says Bonitas.

In addition, Bonitas says evidence suggests that since the publication of the BT article on Feb 18, online vendors on both JD.com and Taobao.com appear to have artificially inflated their online review counts and transaction history to give a false appearance of online sales activity.

“We found that 8 of the 12 BWL Lifestyle Centers we visited did not sell individual products to non-members,” says Bonitas.

Investigators working for Bonitas also said employees at BWL Lifestyle Centers disclosed and acted as though they were not accustomed to interacting with walk-in customers.

“We were told by on-site employees at one BWL Lifestyle Center that we were their very first walk-in customer despite their lifestyle center being open since October 2017,” says Bonitas.

Bonitas also alleges Best World’s founders exponentially accelerated their combined annual take home pay by 20 times in five years, from less than $2 million in 2013 to $40+ million in cash in 2018!

In the three years since implementing the scheme, Bonitas says Best World’s co-chairmen and presidents Doreen Tan and Dora Hoan collectively took home $85 million in cash, while Best World exited 2018 with its trade and payables balance at an all-time high of $95 million and its receivables touching all-time lows at $5.2 million.

Separately, Valiant Varriors, in its short sell research blog, has published the first instalment of a two-part report that alleges Best World continues to engage in multi-level marketing (MLM) in China, which is illegal.

In May last year, Valiant Varriors took a shot at Venture Corp, claiming the manufacturer derived a whopping 30% of revenue from Philip Morris in 2017, putting itself at risk by depending on one single large e-cigarette buyer.

“So how is Best World operating in China? Just one way: Best World has been and continues to operate an MLM scheme. We know this because of a simple reason: it continues to engage sales staff through a commissions-based model,” says Valiant in a blog called “Best World: The Worst Investment” which was available online at 10am.

According to Valiant, under China laws, parties who introduce, lure or force others to join in MLM could have its relevant assets and illegal income confiscated. Those found guilty could also face a fine of up to RMB500,000 ($101,095) while serious violators could also face jail sentences of up to five years.

Among other infractions, Valiant says Best World operates a total of four bonus mechanisms as well as more than seven tiers of selling in its China operations when the law only allows for three tiers of direct selling.

And although Best World says it has a direct selling licence, Valiant says the licence only applies in Hangzhou. But even on this front, Best World has been selective with the truth.

“In China, the direct selling scheme cannot exceed three layers as stipulated clearly by law. In BWI’s model, there are eight,” says Valiant, adding that all 33 franchisees listed on the Best World website are essentially owned and operated by salespeople who have attained the highest tier/level of Platinum Director.

And while Best World claims that it no longer operates a direct selling model and that its franchises now sell their products through a retail presence, Valiant alleges the physical stores are just a front for its MLM business.

“The so-called ‘lifestyle centres’ are actually training centres for their lower-tiered sales people,” says Valiant, “Many of these centres are completely new, situated in residential apartment units. These spaces are used to recruit and train fresh blood and new sales people.”

The short seller cites the example of former MLM company Quanjian which tried to skirt around China’s MLM rules by setting up 7,000 shops nationwide.

“But it was busted and today the 3 billion-dollar business no longer exists,” says Valiant.