Excerpts from Maybank Kim Eng's report
Analyst: John Cheong, CFA
|China Continues to Deliver
Strong China sales more than offset Taiwan slowdown
9M17 earnings were in line at 77-78% of ours and consensus FY17E.
3Q17 earnings grew 36% YoY and 2% QoQ, from 33% YoY revenue growth in China, offsetting the continued weakness in Taiwan (-46% YoY).
On the other hand, Taiwan should start to recover in 2018 as BEST seeks to improve earnings quality.
Maintain BUY and TP of SGD1.88, based on 19x FY18E EPS (PEG of 0.7x using FY16-19E EPS CAGR of 27%);
We ascribed a c.30% discount to the PEG of 1.0x for regulatory risks and competition.
Expect China to power growth; no sign of crackdown
China is expected to deliver healthy future growth as BEST seeks to expand geographically to other key cities. Also, we estimate the earnings contribution from China is now far larger than from Taiwan, at c.80% in 3Q17 as revenue is still being recognised based on the export price instead of retail price.
The application for direct selling license beyond Hangzhou City has already started and should include at least 7 provinces by end-2018. Cities in Hunan province are expected to be approved first, followed by other provinces.
|Taiwan weakness requires time to heal
"Sales weakness in Taiwan, which started in 1Q17 continued as BEST halted promotions to prevent subsequent discounted sales by distributors and improve earnings quality. Net margin for Taiwan has improved, despite weaker sales. Management expects a gradual recovery from 2018 onwards, due to the low base and after weeding out discounted goods."
-- John Cheong, CFA (photo),
Analyst, Maybank Kim Eng
In addition, China operations have not been impacted by any pyramid scheme crackdown; growth was supported by steady China revenue in 3Q17 (-1% QoQ). 4Q17 should record a better QoQ growth as distributors attempt to meet their full year sales target.
Eyeing Indonesia for the next growth market
Indonesia recorded healthy double-digit YoY and QoQ sales growth in 3Q17.
This resulted from a switch in strategy from weight management to skin care products, which could transform into a key growth market as BEST taps into the Halal market in 2019, after the opening of its factory.