JasonWee2.19Jason Wee, CFA (photo), who has been a Best World International shareholder for several years, was Head of Asian Small Caps Research at CLSA, until he retired. He contributed this article to NextInsight. 


On Feb 18, 2019, Business Times published an article titled “Sales of DR's Secret in China: Best World's best-kept secret?”. This caustic article, which was but one or two steps short of calling the company a fraud, can probably take full credit for causing a 32% collapse in the share price of Best World (BW) over the ensuing two trading days.


Perhaps the share price had outrun its fundamentals, after more than doubling over the last three months, and a healthy pullback was called for.

Still, the article was decidedly one-sided.

As it turned out, the journalist was missing something, as can be seen in BW’s 15-page response published on the SGX website on Feb 23.


For example, the journalist started off the article by quoting an analyst’s inability to "reconcile upfront sales figures and underlying consumer demand”, hence suspending coverage. Given that BW collects cash upon delivery of the goods, with limited recourse for returns, then sales would be more or less the actual demand.

As for the difficulty of projecting future sales, and hence forecasting BW’s future revenue, then that’s a different question. Forecasting sales is one of the most difficult tasks that every investment analyst faces.

No amount of understanding of China’s consumer outlook will be able to help you get a better forecast for BW’s China sales anyway.

Just as the IT sector outlook might give you a guide to specific EMS (Electronics Manufacturing Sector) companies' revenue outlook, it is at best a directional guide, and the analyst just has to do his or her best at “guesstimating”.

The article goes on to detail bits of information which raised questions on whether BW’s China business was as robust as claimed. The journalist should be lauded for calling BW’s facility in Hangzhou to check on facts. Unfortunately, she made the rookie mistake of calling someone at a factory to check on the facts for another part of the business. A direct check with management should have cleared this up, but it is doubtful she did this.

The quotation from the Euromonitor spokesperson which cast further doubt on BW’s China business could also have been directly checked with management and clarified on the spot. I wonder if this too, was ever done.

While I laud the journalist for trying to dig deeper into business stories, this article should have been checked, and probably held back a week later, when BW’s results would have been released and management would be free to clarify everything raised.

Writing a gutsy piece challenging a listed company is even more challenging. In my 13 years as an analyst, which culminated with a top ranking for my pan-Asian small caps coverage, I too have come across dozens of companies with questionable business models. Yet, I have only publicly challenged one. The reason is simple - getting it wrong can result in a lingering negative stain on an otherwise healthy and promising business.”

-- Jason Wee, CFA

The journalist has a challenging beat, covering the small and mid-caps in Singapore. Writing a gutsy piece challenging a listed company is even more challenging.

In my 13 years as an analyst, which culminated with a top ranking for my pan-Asian small caps coverage, I too have come across dozens of companies with questionable business models.

Yet, I have only publicly challenged one. The reason is simple - getting it wrong can result in a lingering negative stain on an otherwise healthy and promising business.

In this specific case of BW, the journalist could have joined as a direct seller herself and befriended any number of senior direct salespersons. Most of them would have immediately verified for her the strength of BW’s China business.

In addition, BW runs a largely cash-based business. This means that the revenues are directly related to the cash coming into the company’s accounts. Any attempt at faking this should be easily picked up by any conscientious auditor through simple sample testing against the sales reports of top distributors.

dorahoan FB.8.16Dora Hoan, Co-Chairman of Best World International, was recently appointed secretary to the World Federation of Direct Selling Association. Indeed, while this journalist was wondering if BW was really a significant business, the global direct selling community had already decided it was.

After all, BW’s Chairperson was recently appointed secretary to the World Federation of Direct Selling Association, the first Asian CEO to ever hold this position.

This said, BW does have areas which can be improved. On the transparency side, investor communications can be clearer. For example, in the surprisingly strong 4Q2017 result, BW should have reiterated that a big chunk of China’s sales was front-loaded due to the changing business model planned for 2018. Because many did not pay attention to the notes made in their 4Q2017 results, the 1Q2018 results announcement came as a negative shock.

In addition, it is likely that a small number of top sales people have very frequent updates on a very significant portion of the sales situation for BW.

This gives them an unfair informational advantage over the public, who only sees a delayed snapshot every three months. Perhaps BW can remedy this by giving monthly figures on the top line operating stats instead.

All said, the BT article managed to shave $571m off the market cap of a home-grown business, that is expanding aggressively into the Asian market. What are its internal protocols that prevent this highly destructive power from being abused?

At a minimum, given its failure to countercheck damning statements, and failure to allow management the right to clarify its findings before publishing, it certainly owes BW and shareholders some semblance of an apology.

Alas, the damage has been done. Hopefully, BT can improve its internal protocols and ensure that future journalistic articles are more balanced in content.  

Please give our small-mid caps in Singapore some benefit of the doubt, and please give managements the right to respond before hugely damning articles are published.


Comments  

0 #6 Nana 2019-03-17 21:51
BT article said: “The person who answered a telephone call in Best World's subsidiary's office in Hangzhou city said she was not sure how to locate the franchisees, and reckoned they were based in Hunan province.”

BW responded: "The Company has undertaken an internal investigation of this matter and would like to clarify that the employee contacted is employed at the Group’s manufacturing facility in Hangzhou, China, which manufactures the “Aurigen” (全金) line of health supplements. The relevant employee was therefore unable to provide information on the location of the Franchisees, as the employee was involved in a different part of the Group’s business and was not privy to the information requested."


(I checked out BW announcement on SGX. So, this is what Jason Wee meant by "rookie mistake" of the reporter. Bad, fail!).
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0 #5 xlandjy 2019-03-07 19:55
I will stay away from this stock. Good luck to the shareholders.
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0 #4 Marissa Owned BW 2019-03-06 19:49
Yay! Marissa and friends can get BW at cheap price!
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0 #3 Shiyi 2019-03-06 18:26
The jury is still out on Best World, or for that matter, BT's article.
We may draw lessons from the Noble saga with Iceberg. It took three years for Iceberg to be vindicated.
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0 #2 Chong ling ling 2019-03-06 14:19
That journalist must make a public apology and BT should issue her a letter for her wrongful reporting. She has to be responsible for such a wrongful article.
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0 #1 Ava 2019-03-06 13:14
Iceberg is possibly the Invisible Hand behind the BT article? If so, why?
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