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Best World reports 16.9% drop in Q3 profits to S$24.8m

BEST World International, the mainboard-listed skincare product company that is being probed by the bourse over its sales model in China, on Friday reported a decline in third-quarter earnings, attributed to the absence of one-time “other operating income” in the year before.

Net profit for the three months to Sept 30 fell by 16.9 per cent year on year, to S$24.8 million, even as revenue grew by 41.2 per cent to S$114.3 million, the company said.

Best World said that the jump in turnover was from gains in its direct selling and franchise sales segments, but profit was eroded by a corresponding rise in cost of sales “and also as a result of China increasing custom duties on goods from the United States during the course of 2019”.

It also noted a 43.7 per cent rise in higher distribution costs, which it blamed on sales-related expenses from the franchise segment and higher direct selling commissions.

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Earnings per share shrank to 4.56 Singapore cents, against 5.44 Singapore cents before.

Best World came under scrutiny by investors and the Singapore Exchange (SGX) earlier this year, as the news emerged that its biggest customer - which had also been its primary import agent in China - was owned by the brother-in-law of chief executive Dora Hoan.

“The revelation of the relationship between Changsha Best and the company’s CEO and managing director raises serious concerns about the veracity of the China sales conducted under the export model from 2015 to 2018, and whether these were conducted on normal commercial terms,” the SGX said in a notice of compliance issued at the time.

Best World has since switched to what it dubs a “franchise” model, where the company’s China subsidiary brings products in its DR’s Secret skincare line into China, with the goods then sold to individual consumers via franchisees in a “social selling” model.

The company separately moved to sue short-seller Bonitas Research for defamation over a 28-page report published in April, which alleged that Best World was conducting direct selling in China and questioned the authenticity of Best World’s profits.

For the nine months, net profit rose by 38.2 per cent to S$61.9 million, while revenue nearly doubled, from S$138.6 million to S$266 million.

Best World said in its latest outlook statement that the ongoing independent review of its business in China - which was ordered by the regulatory arm of the SGX in the wake of the Bonitas report - “has effectively diverted a certain portion of China management’s time from focusing on market development activities” and is expected to raise legal and other expenses.

Other factors that it said might affect its performance over the next year included a hike in Chinese import duties on US-made skincare products, as well as administrative expenses for the construction of manufacturing facilities in Tuas and other facility revamps.

No dividend was recommended for the period, compared with a special dividend of 1.2 Singapore cents a share declared in the year-ago period.

Trading in Best World shares was suspended in May and will remain so until the SGX completes its investigations.