Best World shares sag after CLSA flags challenges in China

Singapore

BEST World shares fell 5.91 per cent on Tuesday after CLSA wrote in a report that consumer interest for the group's flagship skincare brand in China trails its strong sales revenue.

They closed 13 cents lower at S$2.07, with 5.6 million shares changing hands.

The findings by the corporate finance and capital markets provider were based on a study of Internet mentions and keyword searches for Best World and its DR's Secret brand on China's leading social media app WeChat, and the search engine Baidu.

CLSA analyst Horng Han Low wrote on Tuesday: "We conducted a search on free-to-use Baidu Trends to assess consumer interest in Best World's products in China. The unavailability of trend results for Best World's company name and product name, in both English and Chinese characters, contrasts with that of Best World's direct-selling peers in China."

With zero trend records on Baidu, Best World's brand awareness is weak and does not match its stated market position, Mr Low said.

He also described the results of a paid premium search on Baidu.

"Three days after the paid search had been subscribed for, Best World's related keywords started showing results. However, the number of searches was extremely thin relative to the bottom three direct-selling peers."

Findings on WeChat were consistent with what he found on Baidu.

"On our WeChat search, the trend results for 'DR's Secret' were slightly better than Baidu but consistently lower than almost all the competitors (in the multi-level marketing business).

"When compared to Tiens, which has a quarter of Best World's revenue, Best World's index score is less than 40 per cent of Tiens'."

In China's "Internet-conscious" economy, the sales figures of China's top direct-selling brands ranked by revenue tend to correlate with their search frequency on Baidu and WeChat, Mr Low noted.

Best World's weak online footprint suggests "red flags", he wrote.

Best World has said that China is its key market, accounting for 54 per cent of group revenue.

CLSA is keeping its "sell" call on the stock but revised its target price to S$1.75, from S$1.29 previously.

At S$1.75, the stock would trade at a multiple of 12 times the average of forward earnings from 2019 to 2021.

CLSA had previously valued the stock at a multiple of 15 times its 12-month forward earnings. It has since adopted a lower multiple to take into account earnings volatility.

Mr Low expects Best World to deliver strong earnings for 2019, followed by a decline for 2020 and 2021 as "end demand sell-through could be challenged".

His profit forecast for 2019 is 16 per cent above the Bloomberg consensus, hence the higher blended earnings per share estimate.

Mr Low wrote: "Sales momentum could continue and surprise on the upside in 2019 as the group penetrates new cities and grows its distributorship via its franchise model. While this generates significant sales, the extent of inventory build (up) remains a concern since this is challenging to track."

Best World's stellar China growth is also "reminiscent of earlier boom-and-bust experiences", he noted.

"Despite a diversified geographical exposure, Best World's strong performance is usually anchored to a single country," he said.

"Sales in 2006 to 2007 were primarily driven by Indonesia. Subsequently, Taiwan drove the group's revenue in 2014 to 2016 before it declined unexpectedly. Revenue in both countries has failed to recover."

Mr Low attributed the slowdown in Taiwan to inventory over-build among distributors.

"Despite efforts to revive growth in Taiwan, sales are not expected to return to peak levels."

When Taiwan's strong performance did not sustain beyond 2016, China underpinned growth from 2017.

Mr Low said: "With China sales surging, momentum in 2019 is set to continue, but we are concerned if the strong growth is sustainable."