Best World to resume trading after 3.5-year suspension

BEST World International will resume trading on the Singapore Exchange (SGX) on Monday (Nov 14).

Shares of the beauty products distributor were suspended in 2019, due to regulatory concerns about the company’s business model in China.

The company has been through an independent review; and after submitting several trading resumption proposals to SGX, has received approval from the frontline market regulator to resume trading.

After such a lengthy suspension, investors may wonder how the stock will trade.

Rise and fall

Best World shares had been on a tear just before their suspension. They doubled in 2018 to S$2.61, and reached a high of S$3.28 in February 2019, driven by strong growth in China for its DR’s Secret line of skincare products.

Net profit for FY2018 grew 30.9 per cent on year to S$72.9 million, on the back of stronger revenue, driven largely from contribution from franchise sales.

The bull run did not last long.

The Business Times noted in February 2019 that it was challenging to figure out the sources of the company’s China sales, and analysts said key data was difficult to verify.

In April 2019, shortseller Bonitas Research published a report questioning the company’s accounting and sales in China.

The counter fell nearly 60 per cent from its highs to end at S$1.36, before it was suspended on May 9, 2019.

PwC Advisory Services was appointed as an independent reviewer to look into the financial affairs of Best World.

The report – released in July 2020 – highlighted several concerns surrounding the company’s operations under both a new franchise model and an earlier export model. The company’s legal adviser also noted that the franchise model was potentially in breach of regulations on direct selling.

Attempts to resume trading

Best World submitted its first proposal to resume trading in December 2020. But in March 2021, it announced that the suspension would continue until the group could make progress on its transition to a different selling model in China.

Last November, Best World’s board said it might be appropriate to consider a delisting. The company conducted two off-market offers to buy back shares for S$1.36 apiece.

Both tranches were oversubscribed.

In July this year, Best World said it had received an improved audit opinion from its independent auditor for FY2021.

Best World also cited two legal opinions that the non-compliance risk of its business model in China were remote.

It submitted another trading resumption proposal in October, to which the regulator had no objections.

Financials

Best World’s revenue and net profit have continued to grow.

Revenue for FY2021 came in at S$580 million, more than double the S$266.3 million reported for FY2018. China was the group’s largest market, accounting for around half of revenue.

Net profit for FY2021 stood at S$149.8 million, also more than double the S$72.9 million reported in FY2018.

Earnings per share rose to S$0.2754 in FY2021, from S$0.1326 in FY18. If the company sticks to its previous dividend policy of no less than 40 per cent of net profit, FY2021 dividends would have been at least S$0.11.

Bloomberg data shows Best World has traded at a median price-to-earnings ratio of 16 since its listing. At this level, the share price, based on FY2021 earnings, would be S$4.41.

The company released its latest financial statements for the nine months ended Sep 30, 2022 on Nov 11, which showed revenue declining 12.5 per cent on year, while net profit for the period also slipped 13.5 per cent to S$88.6 million.

Ongoing pandemic restrictions in China contributed to weaker revenue, and the group noted that prospects of recovery in China “remains very challenging” due to Covid-19 control measures.

Despite the recent decline, revenue and net profit for nine-month FY2022 are still higher than levels posted in FY2018.

Net asset value per share stood at S$1.0179 as at Sep 30, 2022, up from S$0.9344 in December 2021. The group has no bank borrowings or debt securities.

Although Best World’s reported financial performance has clearly improved, there are still questions over investor sentiment.

Investors might feel confident to buy into the stock if valuations are low. But there could also be some shareholders who were stuck holding the stock during the suspension, and are now looking for an exit.

Response to the company’s share buyback offer earlier this year shows there are many who want to exit their positions – even at the S$1.36 level – and put this episode behind them.

These individuals might have been willing to take an illiquidity discount. As normal trading resumes on Monday, investors will have a clearer indication of how much the past three-and-a-half years have affected Best World.