Best World International (CGN.SI)

Investment Opportunity?

Brand value? Not obvious. Likely many competing products.

Use of new technology to disrupt? MLM or direct selling is their competitive advantage.

Sympathy/spillover effect on valuation? All MLM companies selling in China took a hit after the crackdown. Potentially some sympathy.

Trading Opportunity?

Potential sector or index selling? YES, direct selling 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/over-reaction to news?

  • Super-normal growth profile relies on expansion into China via direct selling
  • If anything market likely under-reacts to the potential negative tail risk

Revenue

  • 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

best world revenue.PNG

Strategy

  • Obtained licence in July 2016 to direct sell in Hangzhou and have been since expanding direct selling locations in China

Approximate Valuation

  • Unclear if Best World can grow revenue more than 10%/yr without adopting direct selling in China
  • Cash flow not increasing with revenue, suggests possible inventory stockpiling
  • 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)

Watching

  • Direct sales growth in China
  • Cash flow to increase with revenues

best world valuation

best world metrics.PNG

best world cash flow statement