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.
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
- 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 in China
- 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)
- Direct sales growth in China
- Cash flow to increase with revenues