BEST World International shares have soared 171 per cent over the past 12 months, driven by strong growth in China, where the group derives 66 per cent of total revenue from sales of the DR's Secret line of premium skincare products.
However, it is challenging to figure out just how and where those sales are taking place, according to new findings by The Business Times.
Analysts who engage in fundamental analysis to evaluate the stock's intrinsic value have found key data hard to find or verify.
At least one research house has given up tracking the stock.
In August 2018, DBS Group Research analyst Carmen Tay wrote: "Given challenges in reconciling between upfront sales figures and underlying consumer demand in China, which have yet to be addressed under the new franchise model, we will suspend coverage for now."
Let's leave aside the upfront sales issue for now and back up a moment.
Best World has direct selling operations in most markets it operates. While China is the world's second largest direct selling market after the US, Best World is not licensed to conduct direct-selling of DR's Secret products there.
Direct selling, in which companies recruit sales promoters to sell products directly to end consumers outside the companies' fixed outlets, is a regulated activity in China, as part of a broader crackdown on illegal pyramid schemes.
Best World, however, does have a limited direct selling licence in China.
If this sound confusing, this is because its China business model has evolved very quickly over the years. In November 2016, Best World announced that China's Ministry of Commerce had awarded the group a direct-selling licence, authorising it to conduct direct-selling in Hangzhou city.
The market cheered the development.
But a check by BT showed that the licence covers only six health supplements under the Aurigen brand, and no skincare products - something Best World did not clarify when analyst reports stated otherwise.
Aurigen is distributed to drugstores (not through direct selling) in China and sales make up just 1.1 per cent of group revenue.
As recently as last year, Best World was bullish on kicking off direct selling of its skincare line in China.
In February 2018, its management said: "Conversion of the export business to direct selling shall be implemented in phases.The group's effort to widen the coverage of our direct selling licence beyond Hangzhou to include other cities generating substantial sales is proceeding as planned. The expansion application has already commenced since 3Q 2016 and shall cover key cities of at least seven provinces to be approved by the end of 2018."
But approval hasn't come. So what's the holdup?
"I didn't say there's a holdup," chief operating officer Huang Ban Chin replied when contacted by BT last week.
"By 3Q17, I already mentioned that it would be a 'franchise wholesale' model. Then I changed it to 'franchise'... The problem is that in China we already have another segment called 'manufacturing/wholesale' (for health supplements), so analysts and people we met at our non-deal roadshows confused the two."
Franchising is a business model where the owner of a business, or franchisor, licenses to a third party, or franchisee, the right to distribute goods using the franchisor's business name.
Mr Huang said: "The franchise business allows seamless integration from export to direct selling. That's why I don't want to talk about direct selling. I haven't talked about direct selling for China for a long time."
He said the franchisees operate as "social selling". Online sharing often results in an offline purchase, as people can place orders with any salesperson they follow on Wechat, he said.
Best World says it has 28 franchisees spread across 10 provinces and one municipality in China. However, not a single one is listed on the company website.
The person who answered a telephone call in Best World's subsidiary's office in Hangzhou city said she was not sure how to locate the franchisees, and reckoned they were based in Hunan province.
Changsha city in Hunan is said to be a Best World stronghold. The city hosted Best World's annual international convention last June.
But a search for "Best World" on Dazhong Dianping, China's most popular review and ratings app, listed only one beauty parlour in Changsha. It had 18 reviews, two of which were negative. Its phone was powered off.
An online search for "DR's Secret" listed a handful of skin management centres with only one review between them.
By any yardstick, Best World's retail locations in China are exceptionally hard for consumers to track down.
Mr Huang declined to disclose the names of the 28 franchisees and their exact store locations: "We don't share that. Now is not the right time. I'm in the blackout period. After results maybe we can talk more. "
There is no online store for DR's Secret in China even though Best World's franchisees use a "social selling" model.
In its latest corporate presentation, Best World said it is the 13th largest company in China's premium skincare market, with a market share of 1.6 per cent in 2017 based on retail value of 940 million yuan (S$188 million).
The league table was attributed to Euromonitor, based on the market research firm's estimates and trade interviews.
When BT showed Best World's league table to Euromonitor, a Euromonitor spokesman expressed surprise.
"We are not sure about how they rank themselves by the reference of Euromonitor's source. Indeed, according to our research methodology in 2017 they were not significant enough to be tracked," she said.
"So we are lacking solid source to recognise its market share in the context of premium skincare in China."
According to Euromonitor, the top brand was L'Oreal, followed by Estee Lauder, Infinitus and Amway. Clarins ranked 13th with a 1.5 per cent market share based on 2017 retail value of 877 million yuan. Fancl ranked 14th, Chanel 15th, and Laboratoires Bioderma 16th.
A search on Taobao that sorts skincare products by sales volume reflected a slower sales record for DR's Secret over the last 30 days, relative to its apparently smaller rivals like Clarins and Chanel.
Best World said it has strong user engagement on Wechat, where people can make purchases from promoters directly. But it's not possible to track sales on Wechat.
It could well be that Taobao is not one of Best World's main sales channels, but as China's biggest e-commerce app, it may be the best gauge an outsider can have of customer demand.
Investors trying to independently verify the popularity of DR's Secret in China are therefore left trying to make sense of data points that suggest an unimpressive online and offline footprint for what is supposedly a fast-growing skincare brand.
Change of model
When Best World completed the switch from an "export" to a "franchise" model in China in July last year, it was able to charge franchisees a huge mark-up to the wholesale price that export agents had paid. This was reflected in the group's improved gross profit margin of 83.9 per cent in the third quarter last year, up from 67.2 per cent in the same period a year earlier, Best World said.
Group revenue surged 96.8 per cent to S$92.1 million in the same quarter.
Mr Huang said that operationally, the main difference is: Best World's China subsidiary is the one bringing the products into China, instead of the export agents.
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 they must make payment before any inventory is shipped. (Recognising revenue upfront was an issue flagged by DBS' Ms Tay as she had problems reconciling it with underlying consumer demand.)
Asked if Best World makes a point of tracking end-user demand, Mr Huang replied: "We are not worried about them (franchisees) loading on inventory because they have to make cash payments, and there is (a) no-return policy. They will not pay cash for inventories they can't sell. So we have a good feel of the pulse of the market."
When Best World shifted to the franchise model, it also stopped reporting the number of "consumer members" it had in China since revenue is booked when the franchisees take inventory, which renders consumer member numbers irrelevant. Mr Huang declined to comment on the size of the franchise salesforce, stating only that each franchisee has its own page and followers.
After the numbers from China were stripped out, Best World's total direct selling membership shrank from 500,259 members at the end of March last year to 97,892 at the end of June.
Separately, Best World said last Friday that independent director Chan Soo Sen has resigned to focus on work commitments and responsibilities outside of the company. He joined the board in 2016. The board has appointed Hong Kong-based Chester Fong Po Wai as his replacement.