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Best World's independent reviewer to report only to SGX RegCo from now

SGX's regulatory arm digs deeper into Best World's business dealings after company admits to familial ties with owner of its major customer

Early on Monday, Best World apologised to investors for failing to provide a fuller picture of the ownership of Changsha Best, but said that it still believes that the customer is an independent party.


BEST World's former business partners are now being asked to hand over documents to the Singapore Exchange (SGX), after the company on Monday confirmed allegations that its biggest customer was owned by the brother-in-law of its chief executive Dora Hoan; it also revealed more links between the two firms.

The customer, Changsha Best, was Best World's primary import agent in China until the middle of last year.

On Monday, the SGX hit Best World with a notice of compliance: "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."

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It has ordered Best World to procure Changsha Best and other import agents to hand over copies of their financial information, accounting and corporate records to SGX Regco, its regulatory arm.

It also wants Best World to put SGX RegCo in contact with the import agents' customers, warehouses and delivery service providers.

The notice came swiftly after Best World admitted early on Monday that Koh Kim Chuan, the brother-in-law of its CEO Ms Hoan, is the sole shareholder and legal representative of Changsha Best.

The admission was made in reply to queries from the SGX last Thursday, after an anonymous short-sell report drew the links between Ms Hoan and Changsha Best.

Early on Monday, Best World apologised to investors for failing to provide a fuller picture of the ownership of Changsha Best, but said that it still believes that the customer is an independent party.

It argued that neither Mr Koh nor his wife Mary Huan - sister of Ms Hoan - are involved in the management and operations of Changsha Best.

Best World described Mr Koh as a "passive investor" in Changsha Best, and that he had provided US$100,000 in seed funding to Changsha Best as a "personal investment" when the company was incorporated.

Referring to the SGX rule book, the company said that Changsha Best was not an interested person, as far as the rules that govern interested person transactions (IPTs) went.

Corporate governance advocate Mak Yuen Teen told The Business Times that he is not satisfied by Best World's logic: "Unfortunately, our IPT rules are porous (and) Best World could have used a very technical interpretation of the rules as an excuse."

The SGX rulebook states that a CEO's associates would include her immediate family members; in-laws are not included.

Prof Mak said: "We have already seen companies like Datapulse Technology drive a truck through these rules. The SGX needs to review the IPT rules and drive home the message that it will enforce the spirit of the rules, not just the letter. Saying that companies must follow the spirit, which the rules say, but not enforcing accordingly, would be pointless."

For now, the SGX is digging deeper into Best World's business dealings.

Best World, which sells premium skincare products, is already the subject of an independent review that the SGX ordered in April, after the first short-seller report questioned the accounting behind its profits and its sales practices in China.

The SGX has now ordered the independent reviewer, PwC, to report "solely to SGX RegCo" on the scope and all findings of its review. PwC had at first been told to report directly to both SGX RegCo and Best World's audit committee.

The SGX also wants the scope of the PwC review expanded, to determine the veracity of the group's sales in China under the export model from 2015 to 2018, and whether these were conducted on normal commercial terms, it said on Monday.

Trading in shares of Best World will remain suspended until the SGX completes its investigations.

The company also revealed its other connections to its former customer on Monday.

Changsha Best was incorporated by Chinese citizen Yan Weijun and his team of executives in July 2014. Mr Yan was introduced to Mr Koh by Jansen Tang, the nephew of Dora Hoan and Mary Huan.

The nephew is also Best World's senior country manager for China and Hong Kong. Mr Koh is described by Best World as a "self-made businessman" who owns and manages two companies in Singapore.

Mr Yan became the general manager of Changsha Best, which commenced dealings with Best World in August 2015, on terms governed by a distribution agreement struck, which were agreed on a willing-seller / willing-buyer basis after discussions conducted at an arm's length basis.

These discussions were conducted by Huang Ban Chin, director and chief operating officer of Best World.

The distribution agreement allowed Best World to advise on the overall marketing strategy for the products in China, provide product and sales-management training to Changsha Best employees and distributors, and provide promotional materials regarding the products.

Last year, Best World switched from an "export" to a "franchise" model; the distribution agreement was terminated on Sept 30, 2018.

Under the franchise model, Best World's China subsidiary is the one bringing the goods into China, instead of the import agents. The goods are then sold to individual consumers via 33 franchisees under a "social selling" model.

Mr Yan and his team of executives have joined BWL China to allow for a "seamless transition from the export model to the franchise model", given their familiarity with the group's operations.

Best World told BT that Mr Yan and his team have no further dealings with Changsha Best or its owner, following the termination of the distribution agreement.

"Mr Yan and his team no longer have any access to any information regarding any matter in Changsha Best after they left the company," it said.

Mr Yan is now a marketing director of BWL China. His spouse owns a franchisee under Best World's standard franchise arrangement.

Unlike typical franchise agreements where the franchisor takes a cut of the franchisees' sales, Best World's agreement with its Chinese franchisees allows it to recognise revenue upfront, because franchisees must make cash payments before delivery, though the group may offer credit terms on a case-by-case basis.

Best World reiterated on Monday that its franchise model was developed with the help of professional advisers and blessed by one of the largest law firms in China.

Still, the SGX wants it to obtain an independent legal opinion on the legality of its sales and distribution business under the franchise model.

The SGX has also required that Best World cooperate fully with SGX RegCo's requests for interviews or visits, if any, to facilitate the independent review.

Meanwhile, Brokerage CLSA is keeping its "sell" call on Best World.

Analyst Low Horng Han slashed his 12-month target price for the stock from S$1.75 to S$0.47 on Monday, based on a lower multiple of five times forward earnings, instead of 12 times.

In a report on Monday titled Best World's Zero Moment of Truth, he wrote that Best World reported a weak set of first-quarter results last week, reaffirming his view that consumer interest in the group's flagship skincare brand in China trails its strong sales revenue.

"We are below consensus and project earnings to decline for two consecutive years," Mr Low wrote.

Best World shares last traded at S$1.36 before trading was suspended.