The following is taken from a Maybank Kim Eng Research report, if which I have made minor changes:
Best World prices fell following a negative Bloomberg article highlighting a government crackdown on alleged pyramid schemes in China, which prompted a SGX trading query.
Share prices for Herbalife, Nu Skin and USANA Health Sciences fell after China’s State Administration for Industry & Commerce announced a three-month campaign to police pyramid schemes, although it did not name any companies.
Given that the Chinese market is the key growth driver for the three global direct sellers, the regulatory clampdown could pose a significant risk on sales.
Best World has only recently made inroads into the Chinese direct selling market after obtaining its licence in Hangzhou city in Nov ’16
In 1H17, revenue from China contributed 48% of Best World’s overall sales of $100m, of which almost all stem from the export and manufacturing/wholesale segment.
Best World does not operate a pyramid scheme and will be introducing its direct selling operations in phases. The government crackdown is aimed at Ponzi schemes, which are illegal and is not directed against legitimate direct selling businesses.
As for now, Best World still operates the export model in China where it sells its premium skincare products primarily to beauty/hair salons, spa owners, etc. The model does not incentivise retailers to stock up on products (channel stock) as they would not receive any distribution gains, as opposed to the direct selling model.
Further, Best World has policies in place to prevent channel stocking, particularly in China, which could lead to pyramid schemes. Products sold in China are reportedly in short supply due to increased demand from consumer acceptance.
Following the selldown, Best World currently trades at 14.1x FY18 P/E, with consensus earnings growth forecast of 23%/16% in FY18/FY19.
Despite the near-term overhang on the stock, we retain Best World in the Market Insight Growth portfolio on the basis of its phenomenal earnings growth momentum as the group makes further inroads into China.
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