Best World International Strategy (CGN.SI)

Summary

  • Best World is not an obviously great long term investment until they get the go ahead to resume expansion of direct sales in China
  • Because the recent news hit Best World’s growth profile directly, even a large sell-off is likely to be an underreaction
  • We’re adding this to our watchlist and waiting for better new on direct selling access in China, trade plan to be posted soon
  • In the meantime because of its high operating profit margin (30%) and high guided growth rate we expect it to trade on a price to sales ratio of 2-4x ($0.72 – $1.44 per share)

Overview

A multi-year stock market darling has taken a 30% hit:

best world revenue.PNG

China’s State Administration for Industry & Commerce (SAIC) announced yesterday a new three-month campaign against recruitment by pyramid sellers.

But apparently Best World are not direct selling in China yet:

In response, BWI highlighted that although it holds a direct selling licence, it has not converted its business in China to direct selling yet.

While Herbalife and other direct sellers globally took a hit:

China crackdown on pyramid schemes hits Herbalife shares

So at first glance this seems like a potential sympathy play or overreaction to bad news.

As a starting point, is Best World a good long term investment?

  • Taiwan large portion of revenue, grew 120% in 2016 but fell 20% in 1H2017
  • China revenue grew 100% from mid 2016 to mid 2017
  • 1H2017 revenue 15% higher than 1H2016
  • Obtained licence in July 2016 to direct sell in Hangzhou and have been since expanding direct selling locations

Does Best World have brand value? This isn’t a clear yes, there’s so many of these competing beauty product brands.

Is Best World making use of new technology to disrupt the current market? Multi-level selling isn’t exactly new but this could set them apart from the competition.

Is the market valuing Best World on the success of similar stocks (e.g. Herbalife)? There’s no doubt future growth has been priced into Best World but the company has posted some crazy revenue growth figures so this isn’t obvious.

Summary: its unclear if Best World can grow revenue more than 10%/yr without adopting direct selling in China. If we see increased adoption of direct selling then it could be worth picking up. Also a concern but to be expected is the heavy reinvestment of cash flows into new inventory. If sales fall short they’ll get stuck with a backlog of old product (sales declined in TW already).

best world valuation

best world metrics.PNG

best world cash flow statement

Is the recent news a trading opportunity?

Remember our 3 trading mistakes we’re watching for.

Potential sector selling? YES, direct sales stocks globally took a hit on this news. The news does relate directly to Best World’s growth profile though so a sell-off is not unjustified.

Under/overreaction? As the company’s growth profile relies heavily on the expansion of direct selling in China, even a large share price move could still be an underreaction.

Other notes: Best World started a buyback after this buying approx $30k worth of shares per day, they’re still bullish on themselves.

best world news.PNG

One thought on “Best World International Strategy (CGN.SI)

  1. Pingback: Value-Momentum Watchlist | Know Your Alpha

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