Excerpts from analysts' report

CIMB analysts: Jonathan Seow & Roy Chen

DrsSecret5.16DR's Secret -- a popular range of skincare products from Best World.■ 1Q16 was way above our expectations on a very strong showing in Taiwan. 1Q net profit formed 37% of our FY16F, even as 1Q is seasonally weaker. 
■ Taiwan and China both continued to do well. Promising signs of recovery in Indo. 
■ Other ASEAN markets remain dull as expected, but are small markets for the group. 
■ Positive sales led to higher operating leverage and drove margins higher. 
■ We raise our FY16-18F EPS by 16-21% to account for higher sales, which lifts our TP to S$1.12 (still based on 10.6x CY17 P/E, +0.5 s.d.). 


Best World
Share price:
93 c

Earnings beat mostly from Taiwan
1Q16 revenue (+161% yoy) reflected the strong sales momentum in Taiwan (+353%) and China (+242%). Positive operating leverage from increased sales further propelled 1Q net profit to S$6m (US$4.4m; 4Q15: S$3.7m; 1Q15: S$0.2m). Given that 1Q is seasonally weaker, this was a huge earnings beat. 1Q16 formed 37% of our full-year.

Strong momentum in Taiwan likely to continue into 2H16
We think the stellar showing in Taiwan reflects the company having reached a tipping point in terms members. A new product launch (face mask), the opening of a new regional centre in Kaohsiung and a new online store also contributed positively. 1Q16 was seasonally weaker qoq (-27%) due to Chinese New Year festivities but up 353% yoy. Taiwan now makes up 57% of the group’s revenue.

Only scratching the tip of the iceberg in China
The group’s second biggest market is China (30% of group revenue). China is still predominantly export driven, and export sales rose 447% yoy as Best World continued to see increased demand for its skin care line of products. We understand that even at these growth levels, the group has yet to aggressively market and engage new customers. The promise is therefore for sales in China to implode once the group obtains a direct selling licence.

"Our TP rises as we raise our estimates; Reiterate Add.  The stock has surged over 40% following our initiation, but we still see room for another leg up.

"In addition to continued momentum in Taiwan, a major re-rating catalyst will be obtaining a direct selling licence in China which we have yet to include in our estimates.

“Trading at 10.5x CY16 P/E, BWL is still below its larger peers’ average of 18x.

-- Jonathan Seow (photo) & Roy Chen 

Margins surprised on the upside on operating leverage
1Q gross margins were 75.5%, up 0.7% pt qoq and 0.6% pt yoy on better sales mix. But the bigger improvement in margins came from operating leverage and lower commissions associated with the new product launch in Taiwan. 1Q16 PBT margins came in at 21.6% (1Q15: 3.3%).

Acquiring a manufacturing facility in Singapore
The group also announced the proposed purchase of a factory facility in Singapore for S$10m (expected completion in 3Q16). The rationale is to manage the upstream and achieve better control over production and quality.

We are not worried about funding; the group is in a healthy net cash position of S$47m. Overall, we are neutral on the acquisition as we like an asset-light strategy but understand this could improve margins.

Full report here.

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