SINGAPORE (Aug 23): Maybank Kim Eng is maintaining its “buy” call on Best World International with an unchanged price target of $1.88, which is pegged to 19 times FY18E earnings per share (EPS) estimate of 9.9 cents.

The research house is forecasting total sales of $303 million for FY18E, which translates to a core P/E of 12.1 times and P/BV of 3.9 times.

In a Monday report, analyst John Cheong echoes the direct selling company’s management belief that China’s marketing practices crackdown will have minimal impact on the company’s earnings performance.

He therefore recommends that investors continue to buy the stock on its current share price weakness, and says he trusts the group’s management based on its consistent track record.

This comes in response to Bloomberg’s Aug 15 article published last week, detailing how certain direct selling companies including Herbalife and Nu Skin have seen their share prices fall since China’s State Administration for Industry & Commerce (SAIC) announced its intention to crack down on pyramid selling practices.

With Best World’s share price having fallen about 20% in response, this has sparked investor concerns regarding the group’s China operations even after the company issued a clarification that the event will have no or minimal impact on its business, as it is not a pyramid scheme.

See: Best World says pyramid scheme crackdown has little to no impact on China business

Additionally, Cheong notes that Best World’s 19% share price decline as at Monday was significantly higher than those of the three US-listed direct selling companies mentioned in the Bloomberg article, namely Herbalife, Nu Skin and Usana, whose share prices fell 6%, 8% and 4% respectively.

The analyst believes this could be due to a higher dependence of Best World on China, from which receives about 50% of its sales revenue.

Maybank has conducted scenario analysis which indicates that a China sales decline of 10-50% could reduce its FY18E EPS forecasts by 4-21%, and hence its target price by 14-38% to result in a price target estimate between $1.17-$1.61.

“We find that the worst-case scenario assuming a 50% decline in China sales from our FY18 forecast will reduce our earnings by 21% and our TP by 38% to $1.17. The steeper decline in target price is from pegging to a lower valuation multiple of 15x from 19x FY18E EPS to account for a potentially lower growth profile,” elaborates Cheong.

As such, this means Maybank’s worst-case scenario target price of $1.17 indicates only a 3% downside from the group’s last closing price of $1.20 as of Monday.

“Best World currently operates under the export business model in China and aims to convert into a direct selling model starting at end-2017. We note that any delay in conversion will not impact the operations as it is only a change in accounting policy with limited earnings impact,” says the analyst.

In Maybank’s Q&A with Best World’s management, the latter has indicated that securing the China direct selling license would benefit the group through a better profile to attract more customers, as well as prevent issues with the local authorities.

After its founders and directors bought back shares in the open market since the share price correction, the group says it also intends to write to the World Federation of Direct Selling Association to request it to issue a clarification that China’s crackdown is specifically aimed at pyramid schemes, and not licensed direct sellers such as itself. 

See: Best World bounces back after company, CEO and president scooped up shares

As at 10.18am, shares in Best World are trading 2 cents lower at $1.16.