Best World International's 1Q2018 results will likely show a rare fall -- but it's anyone's guess as to whether the stock price will fall as a result and provide buying opportunities.

Stock price 

$1.48

52-week range

95 c – $1.90

PE (ttm)

15

Market cap

S$815 m

Shares outstanding

550 m

Dividend 
yield (ttm)

2.77%

1-year return

15%

Source: Bloomberg

Will the market, instead, look past the results and embrace Best World's assurance that its underlying business in China is strong, if not stronger than ever before? 

Where will the stock price settle in the weeks and months after? Will Best World execute a share buyback programme -- will it be aggressive? -- and will that make a difference?

The 1Q results (release date: Mon, 14 May 2018) will reflect a change in its business model, from "export" to "China wholesale" or direct selling. 

It's a
 one-off switchover, and the first in Best World's 28-year operating history, following the grant of a direct-selling licence to Best World by the Chinese authorities. 

In other words, this transition has to do with the way Best World products are imported into China and how China revenue is recognised -- rather than whether its products are selling well or not.


Best World has explained the workings of the transition on various occasions:

• On 26 Feb 2018,  its FY2017 financial results announcement said:

"As previously announced, conversion of the Export business to Direct Selling shall be implemented in phases. Management expects first phase conversion to commence during the first half of FY2018. Revenue from the Export Segment may decline during the course of conversion, as the Group will concurrently export to the Export Agent and our China subsidiary. As Export Agent had placed their orders for the next three to six months in 4Q2017, there is a possibility that 1Q2018 may be weaker than 1Q2017."

Best World's annual report, released on 12 April 2018, said:

"During the transition from Export to China Wholesale, Group revenue in 1Q2018 from Export segment is expected to be minimal as the Group will be importing into China through its wholly owned subsidiary, Best World (China) Pharmaceutical Co., Ltd. (“BWCP”). All exports under this arrangement will not be captured as “export revenue” as the inventory is still within the Group. When specific stock keeping unit (“SKU”) on the agent’s side are depleted, all China distributors’ orders for the specific SKU will then be fulfilled by BWCP. The revenue from these orders will then be captured under China Wholesale. We expect revenue from this segment to commence in 2Q2018 and will reach full conversion when the inventory on agent’s side is completely depleted. In other words, low export sales in 1Q 2018 does not reflect the true market demand."

agm4.18@ AGM (30 April 2018): Senior group financial controller Koh Hui, COO Huang Ban Chin, Co-Chairman Dora Hoan, Co-Chairman Doreen Tan, ID Chan Soo Sen, ID Adrian Chan Pengee. Photo: Company
BWagm4.18@ AGM (30 April 2018)
On 30 April 2018, at its AGM, Best World management explained the above to shareholders, several of whom asked about matters related to the conversion.

One can refer to 1Q2017 results (see table) to have some idea of the percentage contribution of the export segment (almost entirely arising from China).

If 1Q18 contribution from the "export" segment is "minimal", the impact on the top and bottomline is significant.


Business segment

1Q2017

$’000

%

Direct Selling

23,225

51.9

Export

20,657

46.2

Manufacturing
/Wholesale

862

1.9

Total

44,744

100.0

In 1Q17, the export segment accounted for 46% of total revenue. (In 2Q17, that segment contributed 46% too). 

In the event of significant stock price weakness post 1Q2018 results, Best World might buy its shares, lending support to the share price.

In the past, during various bouts of market volatility, it has done so, resulting in 4.3 million treasury shares held by Best World as at end-2017.

Best World, thanks to the massively positive cashflow nature of its business, has lots of gunpowder for a share buyback programme.

It was sitting on S$82 million of cash and cash equivalents as at end-2017.  

Looking beyond the 1Q18 results, Best World is upbeat about its China prospects. In fact, it is forecasting growth in revenue and profit for the full year 2018, despite a very weak 1Q. 

In its annual report, it said: 

"Upon full conversion, the Group is expected to record higher revenue and gross profit as a result of revenue recognition at a price higher than export price, offset by an increase in operating expenses mainly attributable to management and staff costs that support the market in China....


"The China market is not new to us. We are backed by proven results, achieved by strategies which have been refined over the years. While we are heartened with our achievements thus far, we also believe that this is only the beginning of a new growth era, with China set to be our fastest growing market for at least the next three to five years and we are confident of our execution abilities to navigate this market of immense potential."


The 2017 financial results statement said:


"As management expects growth momentum to continue from the Group’s business in China, barring unforeseen circumstances, management expects improvement in both top and bottom line for FY2018 when compared to FY2017."

 
See also investor discussion of Best World in Valuebuddies.com

dorahoan4.18Co-Chairman Dora Hoan posted the following on her Facebook page after the AGM:

"The number of participants at our AGM is getting higher, and more questions are asked, which show that the market is getting interested and concerned about our shares and development! It is our management's responsibility to answer all their questions whatever we can. Thanks for the good job done in answering the questions by Ban Chin while the meeting was chaired by me . Today, something interesting -- even got a shareholder whom I don’t know at all said to me, I cannot retire and must live longer for Best World! I felt happy to hear that -- it is a complimentary message and appreciation of my effort and hardwork for the company."


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