Best World COO lauds new China strategy as share price surges

Best World International has begun to see the benefits of changing its business model in China, and is making positive progress in other key markets, the company's chief operating officer told The Business Times.

Those comments came as shares of the skincare maker and distributor reached a record high on Friday to extend a months-long run.

On the stock market, the counter added seven Singapore cents or 2.8 per cent to S$2.59, as more than 3.3 million shares traded hands. The stock has risen 97 per cent year-to-date, nearly doubling in value.

"I guess it's got to do with the fundamentals," Best World's Huang Ban Chin said in a phone interview.

"We don't really pay too much attention to the share price but I believe it's because we have commenced our franchise business model which is a replacement for our previous export model (in China)."

He said that the company's third-quarter net profit of S$29.9 million - a 145 per cent year-on-year increase - was an indication of early success in the company's shifting of its export business to a franchise model. The new model allows greater control over development in China, he said.

Revenue in the three months ended Sept 30 rose 97 per cent to S$92.1 million, due mainly to the full commencement of the franchise business in China since July, which also lifted profit margins. Franchise revenue accounted for S$60.5 million, or 66 per cent of third-quarter revenue.

Mr Huang added that the company has also arrested six quarters of sales declines in Taiwan in its latest quarterly results, thanks to new promotional and marketing campaigns held in the third quarter. A RHB report says that management expects the sales momentum to continue in the fourth quarter.

Sales growth in Indonesia has also been steady, and the company boasts a strong balance sheet and working capital position with about S$134.2 million in cash and cash equivalents as at end-September 2018, he said.

Mr Huang does not rule out taking on some leverage for acquisitions. The company has earlier said that it may consider acquisitions in the beauty and personal care space to add to its product range.

RHB analyst Juliana Cai on Friday suggested that the price surge could be due to investors gaining confidence in the company after its promising third-quarter results. "Perhaps people are trying to buy in before next year," she said.

On Nov 12, she assigned a "buy" rating on the stock with a 12-month target price of S$2.13, which the company has already breezed past, but when asked if she is looking to review her recommendation, she said "not anytime soon".

Her Nov 12 report says that the change in business model in China allows the group to recognise higher revenue and profit per unit product sold in China. This is because even though the retail prices for end-consumers remain unchanged, the new model allows Best World to sell its products at a higher price to franchisees versus prices charged to export agents.

"According to management, Best World is now selling products to its franchisees at a franchise wholesale price that is at least two times higher than prices charged to export agents.

" Although part of the margins will be eroded as the group incurs higher distribution and administrative costs with the new franchise model, we expect profits in absolute terms to be higher, given the surge in revenue."

Under the export business model, Best World sells its products to export agents at a discounted bulk price. This method is usually used as a way of penetrating new markets before it has obtained a direct selling licence. The export agents would in turn distribute products to beauty salons and spas. The group recognises the revenue upon selling to such agents.

Conversely, under the franchise model, franchisees such as beauty salons and spa operators convert their stores or open new premises as Best World Experience Centres to exclusively sell the group's products. Best World recognises revenue when it sells the products to its franchisees, who then sell the products to end-consumers at the retail price set by Best World.

According to Bloomberg data, the company is about 35.1 per cent owned by D2 Investment, a 50-50 vehicle owned by co-founders Dora Hoan and Doreen Tan. Ms Hoan also directly owns a 5.9 per cent stake, and Ms Tan a 5.7 per cent stake, while Mr Huang has a further 4.2 per cent interest in the company.

Lee Meixian

08 December 2018