Strategic Stock Investment Opportunity Best World International Limited Analysts: Ai Xin, Charles Phan & Jeremy Liang

Transcription

1 Strategic Stock Investment Opportunity Best World International Limited Analysts: Ai Xin, Charles Phan & Jeremy Liang

2 Executive Summary S$3.66 Target Price BUY call 47.7% Potential Upside 1 Unique model create opportunities Highly scalable model business with limited CAPEX Shift of 3 rd -party manufacturing in-house to further drive margins 2 Investment highlights include: Obtaining Direct Selling license in China Sustainable growth in target markets 3 BWL s current trading price of S$2.48 per share is undervalued by 47.7% based on our football field analysis which includes valuation methodologies like RIM, DCF and trading comparables 2

3 Agenda Company & Business Overview Industry Analysis ` Investment Thesis Accounting Adjustments & Valuation Risks & Mitigations 3

4 Share Price in (SGD) Volume (000 ) Company Overview Best World International Business Overview Founded in 1990, Best World International is direct selling company that is mainly engaged in the development, production and direct distribution of skin care and wellness products Derives revenue from its 3 main segments: o Direct Selling: Sale of proprietary products to its members through its direct distribution network o Export: Sale of proprietary products to 3 rd party agents o Manufacturing/Wholesale: Production and wholesale distribution of Aurigen line of healthcare products in China Presence in 13 countries across Asia Pacific and the Middle East Listed on the SGX since 2004 with a market capitalization of SGD680m o Only direct selling company to listed on the mainboard of Singapore Stock Exchange (SGX) FY2016 Revenue Breakdown LTM Share Price Performance c. 600% Y-o-Y Growth c. 10% Y-o-Y Growth 0.00 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 BWL's Vol BWL STI Index (Rebased) Financial Overview 12, , , , , , By Business 2.3% By Geography 2.7% 3.5% 3.7% FYE 31 Mar (S$ 000) 2015A 2016A 2017E 2018E CAGR Revenue 101, , , , % % Y-o-Y growth 35% 97% 20% 21% 26.8% EBIT 16,999 50,917 47,182 57, % 70.9% 28.8% 61.3% % EBIT margin 17% 25% 20% 20% Net Income 8,996 34,189 31,732 38, % % NPAT margin 9% 17% 13% 13% Direct Selling Export Manufacturing/Wholesale Key Management Dr. Dora Hoan: Co-Chairman / Group CEO Dr. Doreen Tan: Co-Chairman / President Taiwan China Singapore Indonesia Others Key Shareholders Dr. Dora Hoan & Dr. Doreen Tan (1) : 47.24% Shi Jinyu: 7.04% Diluted EPS (in S$) Key Brands Source: Annual Reports, Broker Reports, Factiva, Bloomberg Note: Market data as of 14 Mar 2017 (1) Includes both direct & indirect shareholdings 4

5 Company Overview - Business Model Highly scalable business model with strong margins and minimal capital Members Price Product Conceptualization and Development 3 rd Party Manufacturing Receipt of Products, Quality Assurance & Packaging Sales through Distribution Channel Direct Selling (c.435,000 Members) Transfer Price Export (3 rd Party Agents) End Consumers In-house Manufacturing By End 2017 Direct Selling v Export Model (a) Direct Selling Products sold to members at members price Members to market and distribute to other independent distributors/end consumers Commission only paid to members on successful sales (b) Export Products sold to agents at transfer price (lower margins compared to members ) Agents to work closely with local sales representatives to market products to end consumers Highly scalable business model, with limited capital outlay Focused on brand building and marketing Lower amount of fixed cost (Rental, Staff expenses etc.) as compared to traditional retailers Outsourced manufacturing to 3 rd Party manufacturers to eliminate costly overheads In-house manufacturing to begin end 2017 and create higher margins In-house manufacturing facility in Tuas expected to be operational by end 2017 Half of BWL s skincare products to be manufactured out of Tuas by end 2017, with shift completed by 2019 Upstream expansion reduces inventory lead time and grant them greater control over procurement cost and quality Increases margins over the long run Source: Annual Reports, Broker Reports, Factiva, Bloomberg 5

6 Company Overview - Geographical Footprint Presence in over 13 countries across Asia Pacific and the Middle East. Impending entry into the Chinese direct selling market creates a potential game changer. Issued license to operate in China s Direct Selling market in end 2016 Legend 10x Direct Selling Destinations 2x Export Countries China South Korea Japan 1x Manufacturing & Wholesale Myanmar Laos Thailand Vietnam Taiwan Philippines Cambodia Brunei Malaysia Singapore Indonesia Source: Annual Reports, Broker Reports, Factiva, Bloomberg 6

7 Industry Analysis Favorable climate in both cosmetic and direct selling industry bodes well for BWL Asia key to growth in the Global Direct Selling Industry 16 Value of China s Cosmetic Industry (In USDbn) Asia key to growth in the Global Direct Selling Industry Despite the rapid growth, it is still poised to grow at 9.5% CAGR into % Expected Value Growth in China s Cosmetic Industry (%) 9.9% 9.7% 9.3% 9.0% China s Direct Selling Market dominated by Beauty, Health and Personal Care Products Key Commentary Chinese cosmetic market estimated to be worth north of USD30bn Key Commentary Despite rapid growth, it is expected to grow at a 9.5% CAGR into the next 5 years Direct selling key to driving cosmetic sales growth in China, with 9% of total cosmetic retail sales generated from direct selling Higher quality foreign products deemed to be more reliable and thus more appealing for discerning consumers 8.4% 7.8% 3 Year CAGR of Direct Selling Sales By Region (%) Breakdown of China Direct Selling Market(%) Global direct selling market is believed to be worth USD183bn, with over 100m direct sellers by the end of 2014 Asia South America 6.5% 6.4% 4.4% Global Africa North America 3.4% Europe 0.1% Middle East 33% Total Value: USD19.7Bn 67% Beauty, Health and Personal Care Others China key catalyst to rapid growth in industry China poised to overtake US as the world s direct selling market by 2017 Beauty, health and personal care products account for the majority of China s direct selling market sales in 2015 Source: Brokers Report, Euromonitor, WFDSA 7

8 Investment Thesis Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results The China Growth Story Industry fragmenting, with incumbents losing market share and consumers favouring mid market premier brands Product quality and distribution channel validated and ready to go Sustainable Earnings as the Key Differentiator Strong operational support to sustain future growth Increasing members quality despite slowing growth in overall membership Stronghold in Taiwan yet to fully mature Fast-improving Financial Performance Superior growth already starting to materialize in BWL s financials Track record of replicating growth into profits key signal of BWL s prospects 9

9 SGDm Investment Thesis 1: The China Growth Story New growth engine in China validated and ready to take off Market share by brands indicate fragmenting industry Skincare distribution share favors internet and direct selling 100% 80% 60% 0.9% 1.4% 1.0% 1.5% 100% 80% 60% 8.1% 0.5% 8.6% 8.0% 0.5% 8.5% 40% 20% 0.5% 0.5% 40% 20% 0% % Rest of market 6-50 Top 5 Store-based Retailer Direct Selling Internet Retailing Others China export performance validates demand for product Growth of direct sellers in China shows effectiveness of channel % 200% % 250% 200% 150% 100% 50% 150% 100% 50% 0% % -50% Sales Sales growth Herbalife Mary Kay NuSkin Source: Annual Reports, Euromonitor, Bloomberg 10

10 Investment Thesis Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results The China Growth Story Industry fragmenting, with incumbents losing market share and consumers favouring mid market premier brands Product quality and distribution channel validated and ready to go Sustainable Earnings as the Key Differentiator Strong operational support to sustain future growth Increasing members quality despite slowing growth in overall membership Stronghold in Taiwan yet to fully mature Fast-improving Financial Performance Superior growth already starting to materialize in BWL s financials Track record of replicating growth into profits key signal of BWL s prospects 11

11 Population per sqkm In 000 In SGD Investment Thesis 2: Sustainable Earnings as a Differentiator Room for sustainable growth in the long run New venture upstream provides quality control and cost savings Membership base streamlining with a stronger foundation Skincare manufacturing facility in Tuas, operational by end of 2017 State-of-the-art fully automated supply chain using integrated communication Membership Base 27% Sales per member 28% 25% 63% Production will support growth in Taiwan and China -23% Lead time expected to reduce 15 20% 7% 7% 8% Future growth supported by strong operations in supply chain ensures sustainability Number of members Growth Sales per member Growth High population density into areas unpenetrated by Best World Growth of direct selling sales in Taiwan slowing down 12,000 10,000 9, % 8,000 6,000 70% 4,000 2,000 0 Taipei City 1,794 Taoyuan County 1, Taichung City Tainan City Kaohsiung City 20% -30% -7% -4% -2% -3% -2% BWL Peer Average Source: Annual Reports, Euromonitor, Bloomberg 12

12 Investment Thesis Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results The China Growth Story Industry fragmenting, with incumbents losing market share and consumers favouring mid market premier brands Product quality and distribution channel validated and ready to go Sustainable Earnings as the Key Differentiator Strong operational support to sustain future growth Increasing members quality despite slowing growth in overall membership Stronghold in Taiwan yet to fully mature Fast-improving Financial Performance Superior growth already starting to materialize in BWL s financials Track record of replicating growth into profits key signal of BWL s prospects 13

13 Profit margin % of total revenue Investment Thesis 3: Fast-improving Financial Performance Superior growth is already materializing in BWL s financials Profit growth capitalizes on high operating leverage which results in higher Net Margin despite relatively higher COGS BWL Profitability Analysis Profitability Comparison 30% 50% 40% 100% 80% 73.2% 87.4% 20% 30% 60% 10% 20% 10% 40% 20% 25.4% 24.5% 17.0% 14.1% 0% % 0% Gross Margin EBIT Margin Net Margin EBIT Margin Net Margin Distrbution Cost / Revenue Admin Expense / Revenue Best World Peers Average Peers Highest Peers Lowest Consistently growing return for investors as margin improves Outshining peers even under the same asset-light business model 60% 50% ROIC 49.65% 60% 49.65% ROIC & WACC 43.53% 40% 36.63% 40% 36.11% 30% 28.34% 20% 10% 7.57% 3.80% 14.11% 20% 6.12% 12.18% 0% % ROIC WACC ROIC - WACC Spread Best World Peers Average Peers Highest Peers Lowest Source: Annual Reports, Broker Reports, Factiva, Bloomberg, Euromonitor 14

14 Accounting Adjustments Financials are clean and free from significant distortions Operating Lease to Financial Lease Contingent Liabilities Adjustments Impact Adjustments Impact Lease expense Operating Income Non-current Liabilities Liabilities Interest Expense Operating Income Shareholders Equity Equity Depreciation Operating Income Trade Receivables Lease Assets Assets Trade Receivables Assets Lease Liabilities Liabilities Expenses Operating Income Effect on adjustments on Returns on Equity Effect on adjustments on Leverage 50% 40% 30% 20% 10% 7.3% 9.8% Return on Equity (ROE) (%) 15.0% 16.6% 43.6% 38.8% 2.5x 2.0x 1.5x 1.0x 0.5x 2.1x 1.5x 1.5x Leverage (x) 1.8x 1.8x 2.1x 0% x Pre-adjustment Post-adjustment Pre-adjustment Post-adjustment 16

15 Model Assumptions Comprehensive modelling assumptions to capture multiple upside and downside scenarios Case Model Assumptions Key Commentary Bull Membership Growth: 8 20% Sale Growth / Member: 3 15% Growth in Export Sales: 5% -20% Long-term COGS: 23% Entry to Chinese growth lives up to expectations Export segment continues to grow at a sustainable rate New manufacturing facility increases margin of BWL s products Base Membership Growth: 5 15% Sale Growth / Member: 3 10% Growth in Export Sales: 5% -18% Long-term COGS: 27% Stable membership growth in China Export segment continues to grow at a sustainable rate Increased time required to integrate Singapore s manufacturing facility before increasing margins Bear Membership Growth: 5% -10% Sale Growth / Member: 3 5% Growth in Export Sales: 5% -15% Long-term COGS: 27% China growth below expectations Economic slowdown which will adversely impact sales by members Export sales affected by growth in Direct Selling segment Increased time required to integrate Singapore s manufacturing facility before increasing margin 17

16 FWD EV/EBITDA FWD P/E Trading Comparables BWL is trading at 9.6x EV/EBITDA and 16.4x P/E, a discount to its peers who are trading at a median of 10.5x and 17.0x respectively 25.00x 20.00x 15.00x 10.00x 5.00x 0.00x 19.56x 19.49x 17.92x 16.40x 15.99x Median: 16.96x 13.30x 12.53x Hai-O Amway Grape King Best World Nu Skin Tupperware Herbalife 15.00x 10.00x 10.48x 11.78x 9.62x 7.92x Median: 10.48x 5.00x 0.00x N.A. N.A. N.A. Hai-O Amway Grape King Best World Nu Skin Tupperware Herbalife Equity Value (SGDm) EV (SGDm) Note: Market data as of 14 Mar 2017 Source: Bloomberg 18

17 Football Field Analysis Based on our valuation methodologies, we estimate BWL share price to be SGD3.66, a 48% premium to last close price of SGD2.46 Category Equity Value per Share (SGD) Comments Discounted Cash Flow Bull Base Bear Last Close Price: SGD Target Price: SGD Applied WACC: 5.50% % Applied Terminal Growth: 1.0% - 2.0% Bull Residual Income Model Base Applied WACC: 5.50% % Applied Terminal Growth: 1.0% - 2.0% Bear FWD P/E Based on peers NTM P/E Multiple Applied on NTM NPAT of SGD34.0m Trading Comparatives FWD EV/EBITDA Based on peers NTM EV/EBITDA Multiple Applied on NTM EBITDA of SGD55.2m LTM P/B Based on peers LTM P/B Multiple Applied on NAV of SGD77.2m Source: Annual Reports, Bloomberg

18 Probability Low Moderate High Risks and Mitigations Concerns over BWL s rapid growth, especially their business model and faithfulness behind their financials Intensified competition driven by existing and new players Legend Government regulations against directing selling companies like BWL Inflated Sales and earnings growth due to manipulation Market Firm Political Insignificant Moderate Severe Impact 20

19 Risks and Mitigations However, we believed that these risks are well under control Risks Mitigations Risk 1: Government Regulation BWL is aiming to expand its direct-selling business in China Direct selling model s strong association with fraudulent pyramid scheme and multi-level marketing Multi-level marketing has been strictly banned in China Any possible illegitimate scandal can jeopardize BWL s entire business Mitigation Only direct selling Mainboard listed company on SGX Higher transparency and stringent reporting requirements from SGX This results in greater credibility and more supervision Its proven track record thus far also help to fend off any skepticism over their business model in the long run Risk 2: Intensified Competition Intense competition already seen in major markets like China and Taiwan The recent reduction of import tariff from 5% to 2% in late 2015 in China for skin care products incensed another round of competition The competition will be more intensified, especially in China, as local brands begin to mature Risk 3: Earnings Manipulation Mitigation Moderate impact on BWL s business is expected due to their unique business model which can quickly scale up with relatively lower cost compared to traditional skin care companies Growth in BWL s export business indicates that growing consumer acceptance in BWL s products Mitigation Revenue / Cash ratio has grown rapidly during the past three years CFO / Earning ratio has constantly gone down over the same period These all signal potential earnings management which can severely impede the progress made by BWL thus far 4.0x 3.0x 2.0x 1.0x 0.0x BWL Income Statement Manipulation Analysis Revenue / Cash CFO / Earnings Rising Revenue / Cash ratio could be attributed to its unique direct selling model as it might be a norm among its directselling peers Low CFO / Earning ratio is mainly affected by their changes in working capital which is necessary during expansion Peer Comparison 23.7x 5.7x 5.0x 3.7x 0.6x 1.2x 2.2x 0.9x Revenue / Cash CFO / Earnings Best World Peers Median Peers Highest Peers Lowest Source: Annual Reports 21

20 Conclusion S$3.66 Target Price BUY call 47.7% Potential Upside 1 Unique model create opportunities Highly scalable model business with limited CAPEX Shift of 3 rd -party manufacturing in-house to further drive margins 2 Investment highlights include: Obtaining Direct Selling license in China Sustainable growth in target markets 3 BWL s current trading price of S$2.48 per share is undervalued by 47.7% based on our football field analysis which includes valuation methodologies like RIM, DCF and trading comparables 22