Price Close BEST WORLD (BEST SP) (BEST SP) Buy - Listed Company

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Singapore Results Review28 February 2019Consumer Cyclical Health & BeautyBest World (BEST SP)Buy (Maintained)Target Price (Return)Price:Market Cap:SGD2.95 ( 15%)SGD2.56USD1,031m12.8m/9.5mAvg Daily Turnover (SGD/USD) Stay safe, stick to fundamentals. While we are confident of the near-termearnings prospects, we caveat investors to avoid chasing share price whenvaluation runs way too high. Unlike a usual retail business, Best World’sdirect selling model and franchise model operate largely by “social selling”.This business model itself innately has limited visibility in end-consumerdemand. Key risks include overstocking of inventories by franchisees andinability to track sudden drop in end-consumer demand.Forecasts and ValuationTotal turnover (SGDm)Recurring net profit (SGDm)Recurring net profit growth (%)Recurring P/E (x)P/BV (x)P/CF (x)Dividend Yield (%)EV/EBITDA (x)ROE (%)Net debt to equity (%)Interest coverage 1.613.630.81.323.343.0net cashn.a266.363.914.827.510.111.72.316.442.0net cashn.a471.197.051.818.17.921.72.811.243.6net cashn.a561.8117.521.215.06.314.23.38.841.8net cashn.a647.8139.218.512.65.011.54.07.139.7net cashn.aSource: Company data, RHBSee important disclosures at the end of this report1Share Performance tive(8.6)(6.0)6.7108.586.952-wk Price low/high (SGD)1.14 - 3.33BEST WORLD (BEST SP)Price Close3.53.02.52.01.51.00.5Source: BloombergFeb-19Oct-18Aug-18Jun-18Apr-180.0Feb-18 Going back to fundamentals. Since the share price has now retraced to amore reasonable level, we see value emerging, given the strong growthprospects in its China franchise business. We raised our TP to SGD2.95 onthe back of stronger earnings growth as well as a higher target P/E multiple of18x in our blended valuation methodology (page 2) to reflect increased clarityin the franchise business’ margins.juliana.cai@rhbgroup.comDec-17 Share price has been on a rollercoaster ride in the last month. Overexuberance in the market resulted in its share price soaring 24% in the firsttwo weeks of February over no apparent news, before collapsing on concernsraised in the Business Times article, Sales of DR's Secret in China: BestWorld's best-kept secret? (page 3). We note that Best World has issued astatement to clarify the issues raised. It is also looking to engage anindependent review to address the relevant concerns. We believe the movetowards greater transparency will build greater confidence among theinvestment community.Juliana Cai 65 6232 3871Oct-17 4Q18 results were above expectations. Sales from all markets came inabove our expectations, while the franchise business model in Chinaachieved stronger margins. During the briefing, management said it stillexpects 50% YoY growth in end-consumer demand for the China market. Assuch, we remain confident of its growth prospects in the near term. We raiseour FY19F-21F earnings by 8-14% on the back of higher revenue and marginassumptions.AnalystAug-17 Maintain BUY with higher TP of SGD2.95 from SGD2.13, 15% upside and3% FY19F yield. Best World’s 4Q18 results beat our as well as consensus’estimate. For the full year, core PATMI grew 15% YoY to SGD63.9m.Dec-18Going Back To Fundamentals; Maintain BUY

Best WorldSingapore Results Review28 February 2019Consumer Cyclical Health & BeautyFigure 1: 4Q18 results summaryFYE Dec (SGDm)4Q183Q184Q17Revenue127.792.1Gross profit99.877.3Gross margin istribution cost increased YoY due to the change in business model.Driven by higher management fee for its China franchise )% of .658.6EBIT39.135.620.110.095.1EBIT Margin (%)30.738.628.1Pretax profit39.435.820.110.395.8Net Profit28.029.821.7(5.8)29.5Recurring PATMI28.120.921.834.628.9Net margin (%)22.022.730.5CommentsRevenue growth was largely driven by the commencement of franchisemodel in China in end 2Q18. On top of volume growth, ASP was higher perunit product under the new franchise model.The higher ASP per unit product brought about higher gross margins in3Q18 and 4Q18. We expect gross margins to be in the range of 75-80%going forward.Included in 3Q18 was SGD9m of one-off fees.Source: Company, RHBValuationWe raised our TP to SGD2.95 based on our blended valuation methodology. Ashighlighted in our initiation report Best World : Put Your Skin In The Best Game; InitiateBUY (23 Oct 2018), we think its share price is likely to re-rate upon more clarity about itsearnings prowess in China following 3Q18 and 4Q18 results. Our TP is now based on theaverage of 18x target P/E and DCF valuation. Our 18x target P/E is based on peeraverage and is also in line with Best World’s 5-year average P/E. Our WACC assumptionfor DCF valuation also includes additional country risk premium to account for its exposureto the China market. Our new TP implies 15% upside from current levels.Figure 2: TP derivationDCF valuation(SGD m)FY19FFY20FFY21FNet Income97.0117.5139.2 Non-Cash Charges7.410.010.9 Fixed Capital Investment-20.5-10.5-5.5 Change in net working capital-21.8-2.55.1 Change in debt-2.00.00.0FCFE60.0114.5149.660.0103.1Terminal ValuePVTotal discounted FCFEValue/Share (SGD)1501.21501.42.73Cost of equity11.1%Risk free rate2.8%Beta1.1Market return9.5%Country risk premium for China exposure0.8%Terminal growth1.0%Relative valuationTarget P/E18xFY19F PATMI (SGD m)97.0EPS (SGD)0.18Value/share (SGD)3.18RHB TP (average of DCF and relative valuation)2.95Source: RHBSee important disclosures at the end of this report21338.2

Best WorldSingapore Results Review28 February 2019Consumer Cyclical Health & BeautyUnderstand The Business Before InvestingUncovering the secret. Best World’s share price took a plunge on 18 Feb on concernshighlighted by the Business Times article, Sales of DR's Secret in China: Best World'sbest-kept secret?. Some of the key contentions raised include:i. The business model in China;ii. Best World’s limited direct selling licence in China;iii. Ability to track sales;iv. Reconciliation of sales figures to underlying consumer demand.Greater confidence instilled after Business Times article. We believe managementhas adequately addressed the confusion with regards to change in its business model inChina in its clarification announcement dated 23 Feb. We would also like to reiterate thatwhile the company has limited direct selling licence in China, it was selling into the Chinamarket via import agents prior to 2Q18 and is selling into China through its franchisee after2Q18. Its franchise licence applies to the whole of China and encompasses the sale ofskincare products.We came out more confident of the group’s corporate governance after this saga. In orderto assure the investment community, the group is willing to incur additional professionalcosts to engage an independent reviewer to address concerns raised with regards to itsbusiness validity. With regards to the inability to locate franchisees in China mentioned inthe article, the group now maintains an updated list of its franchisees on its website.During the analysts’ briefing, management also mentioned that the group is working withits franchisees to collate its end-consumer numbers in China. Once compiled and verified,the group would publish these figures quarterly, similar to the direct selling membershipnumbers it provides. We believe this increase in transparency would bode well for investorconfidence in the long run.However, some innate risks are unavoidable. Nonetheless, we agree with theBusiness Times article that tracking sales and the underlying consumer demand for thiscompany remain challenging. However, this is the innate risk of the business model. Aspreviously highlighted in our initiation report, unlike traditional retailers, Best World’sdistributors and franchisees sell largely through the sharing of product usage experiences.There is therefore limited visibility on sales growth and the inventory floating on trade.Best World also has limited control over sales efforts and purchases made by itsdistributors and franchisees. Inventory build-up by distributors or franchisees could occurwithout the group or investment community being aware of it, posing risks to suddenearnings decline. but relatively lower risk in the new franchise model. The change from export modelto franchise model in China, however, would mitigate this risk to a certain extent. Asopposed to the export model where import agents get credit terms from the group, thegroup operates on cash-before-delivery terms with its franchisees. There is therefore alower risk of inventory build-up by the franchisees as they have to pay cash up front beforepurchasing and there is no return policy for unsold goods. As such, moving forward, webelieve there would be better correlation between sales figures recorded by the group andthe underlying demand of end-consumers.See important disclosures at the end of this report3

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4 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of /- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels