Excerpts from analyst's report

Maybank Kim Eng analyst: Clement Ho

DR's Secret productsDR's Secret skincare products are among the best-selling in Best World's stable of products.
Photo: Company
Earnings surge on operational leverage

Best World is a multi-channel distributor which sells premium skincare, personal-care, nutritional and wellness products.

It is also the only direct-selling company listed on SGX, and has a presence in 10 countries across the region, supported by a sales force of 388,138 members. 9M15 earnings soared 219% YoY to SGD6.4m, exceeding FY14’s record SGD4.1m (+84% YoY).

This was achieved mainly from operational leverage on revenue growth of 21% to SGD60.7m, attributed to strong contribution from Taiwan and China, due primarily to greater product demand from increased customer acceptance.

Awaiting licence from China
Best World is awaiting its direct selling licence in China, and according to management, is expected sometime between Mar 2016 and Mar 2017. It has already gained entry into this market since 2014 via two distribution channels, export and wholesale.

Approval of direct selling licence in China. Products are currently sold to China under its export retail price scheme, with lower profitability and scale than direct selling. With any licence approval, Best World foresees a rise in its profitability, from a shift in its sales mix and operational leverage.

"Best World guides that it has advanced to the stage just before obtaining approval from the Chinese central government. It had taken the group just nine months from Mar 2014 to Dec 2014 to get its application to this stage. This is compared to ~2.5 years for other companies that have gone through similar processes.

"Positioning for potential licence approval, Best World has put together a team of proven sales agents, mainly comprising its top sellers in Taiwan. It wants to direct their expertise to the China market to expedite its gestation period." -- Clement Ho

Management guides that products in China grew at a steady pace and saw a tipping point in 4Q14 on customer acceptance.

During the same period, the company reached the final stage of its licence application process, which led to some agents stocking up on inventory to anticipate the approval. If it succeeds, management foresees a rise in profitability, stemming from a shift in sales mix and further operational leverage.

Respectable yield backed by net cash pile; trading at 36% discount to peers
As at end-3Q15, Best World had net cash of SGD39.9m or SGD0.181/share. This represents 52% of its current market cap, underpinned by free cash flow generation of SGD8.7m in FY14.

Based on FY14’s payout ratio of 43.5% and trailing 12M profit, dividend yield is at a respectable 4.8% at SGD0.35/share.

The stock is currently priced at 9.1x trailing P/E and 4.4x on an ex-cash basis, compared to larger peers’ average of 14.2x.

Full report here.

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