BEST WORLD: "No impact from SAIC statement on our China business"

Note from Maybank KE Retail Research

Best World obtained its direct selling licence in China in Nov 2016 but has yet to begin direct selling.
Photo: CompanyBest World hit a low of $1.40 (-9.1%) in early trading following a negative Bloomberg article highlighting a government crackdown on alleged pyramid schemes in China, which prompted a SGX trading query.

Share prices for Herbalife (-7.8%), Nu Skin (-9.6%) and USANA Health Sciences (-10%) fell overnight after China's State Administration for Industry & Commerce announced a three-month campaign to police pyramid schemes, although it did not name any companies.

Given that the Chinese market is the key growth driver for the three global direct sellers, the regulatory clampdown could pose a significant risk on sales.

Despite the near-term overhang on the stock, we retain Best World in the Market Insight Growth portfolio on the basis of its phenomenal earnings growth momentum as the group makes further inroads into China.

-- Maybank KE

Best World has only recently made inroads into the Chinese direct selling market after obtaining its licence in Hangzhou city in Nov '16.

In 1H17, revenue from China contributed 48% of Best World's overall sales of $100m, of which almost all stem from the export and manufacturing/wholesale segment.

Best World does not operate a pyramid scheme and will be introducing its direct selling operations in phases. The government crackdown is aimed at Ponzi schemes, which are illegal and is not directed against legitimate direct selling businesses.

For now, Best World still operates the export model in China where it sells its premium skincare products primarily to beauty/hair salons, spa owners, etc.

The model does not incentivise retailers to stock up on products (channel stock) as they would not receive any distribution gains, as opposed to the direct selling model.

Further, Best World has policies in place to prevent channel stocking, particularly in China, which could lead to pyramid schemes. Products sold in China are reportedly in short supply due to increased demand from consumer acceptance.

Following the selldown, Best World currently trades at 14.1x FY18 P/E, with consensus earnings growth forecast of 23%/16% in FY18/FY19.

Best World says....

Although we hold a direct selling licence, we have not converted our business in China to direct selling yet. Presently all DRs’ Secret, Avance and Optrimax products are available for purchase by customers through DRs’ Secret outlets and workshops. As such, the above SAIC statement has little or no impact to our China business."

....the Company would like to highlight that although we hold a direct selling licence, we have not converted our business in China to direct selling yet.

Presently all DRs’ Secret, Avance and Optrimax products are available for purchase by customers through DRs’ Secret outlets and workshops. As such, the above SAIC statement has little or no impact to our China business.

The Company also wishes to highlight that all current preparations for conversion to direct selling are in line with the above SAIC statement. All service outlets set up are subject to verification by local authorities beforehand and are not within or near any school compound.

Our membership criteria, upon conversion to direct selling, shall also not accept students, civil servants, police and military personnel etc.

The Company would like to reiterate that it adheres to strong principles of legal business, transparency and corporate governance and is fully compliant with the rules and regulations of business operations under China’s laws.

For Best World's full statement, click here.

BEST WORLD: "No impact from SAIC statement on our China business"

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