"Outter" contributed this article to NextInsight


My CNY Wish List for BEST WORLD

Best World's (BWL) stock price has been consolidating in recent months, touching its low post the 3Q17 results at around $1.20.

The stock is a laggard compared with the Straits Times index which is up roughly 10% in the last 6 months.   


In my view, the weak share performance suggests a lack of confidence in the company’s earnings outlook. 

As we enter the year of Earth Dog, I believe the stock could regain its upward trajectory.  Here is my wish list for BWL.

outlet zhongshanBest World outlet in Zhongshan, one of several cities in China where Best World aims to grow aggressively. Photo: Internet



1. Good 4Q Results

Investors are concerned about BWL's earnings outlook following the lackluster results in 3Q17.  

Whilst 3Q17 net income was up 35% YoY to $12mn, analysts covering the stock did not raise their earnings forecast. 

Two broking houses downgraded the stock to “HOLD” with a lower price target. 

 

The implied 4Q17 earnings from the Street's forecast suggest a weak 4Q results with net income of just $7 to 10mn, down 18 to 43% YoY.  

Additionally, the low 4Q estimates are also contrary to the company's reply to the SGX on 8 Sept 2017, that its results for second half of year is stronger than the first half

 

Net income ($mn)

       

Brokers

2017 est

Implied 4Q

YoY chg %

Implied 2H17

HoH chg %

DBSV

40.9

7.0

-43%

19.2

-12%

CIMB

44.0

10.1

-18%

22.3

3%

MBKE

44.0

10.1

-18%

22.3

3%

My forecast

50.0

16.1

31%

28.3

30%

 

The market seems to be more worried for the sales drag in Taiwan.

 

Revenue from Taiwan fell YoY for three consecutive quarters in 2017 and was down 36% for 9M17.

 

Unfortunately, during the 3Q17 results, management was unable to say how long or deep would the weakness be.  Therefore, it was not a surprise that investors chose to sell, while analysts downgraded the stock.

But I expect BWL to deliver net income of $50mn for 2017, implying a 4Q17 net income of $16mn, +30% YoY, consistent with the growth trend for most of 2017.

 

I believe that a strong set of results for 4Q17 should alleviate investors’ concerns about BWL's growth momentum.  

It is important for BWL to demonstrate that its growth momentum remains intact despite the problems with Taiwan, as China is now the growth engine of the company. 

 

Additionally, management could allay investors’ concern about Taiwan by giving some updates on the situation. 

 

The key is to improve the communication on challenges in the Taiwan market, the actions taken to contain the deterioration and, most important, the outlook.

Attractive Valuations  

Streets Forecast

My Forecast

2017

2018

2017

2018

Net income-$mn

44

55

50

65

EPS-$

0.08

0.10

0.09

0.12

PE @ $1.20

15.0

12.0

13.2

10.2

Target PE (x)

20

20

20

20

Fair Value-$

1.60

2.00

1.82

2.36

 

2. Positive Guidance for 2018

I'd like BWL to provide some guidance on its earnings outlook for 2018.  While BWL has provided some guidance on its second half earnings, management can be more explicit with its guidance.

Some companies, such as Hi-P, provide detailed guidance to investors like “higher revenue and profit for 2018 compared to 2017”.  This is useful assurance and could reduce stock price volatility.

BWL aims be a top 15 direct selling company in China in the next five years. According to BWL, the top 15 direct selling company in China achieved a revenue of RMB2.6bn in 2016. 

 

If BWL were to achieve similar sales by 2021, it would represent a CAGR of more than 50% for the next five years. 

While this long term goal is admirable, it is too long dated and uncertain for most investors. 

 

In my view, it would be more helpful to investors if BWL were to provide an annual target which could serve a road map to its long term vision.

 

3. Updates on Direct Selling License

The Direct Selling License is a key part of the BWL growth strategy in China and for the company as a whole.  

 

BWL's next stage of growth depends on the its ability to roll out the direct selling model to other cities in China. 

Management has indicated “The expansion application has already commenced and shall include key cities of at least 7 provinces to be approved by the end of FY2018”. 

Whilst much of the approval process is dependent on the authorities in China, the management could shed some light on the status of its application, as well as its
strategy post the approval of the license, such as how the company plans to move from the export model to the direct selling model.


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