Boom Or Bust? N G [email protected] E

Boom Or Bust? N G Horng.Han.Low@Clsa.Com E

Best World S$2.20 - SELL C h a

Horng Han Low Boom or bust? n g [email protected] e

China growth reminiscent of earlier boom-and-bust experiences i +65 6416 7847 n

Best World’s (BW) strong growth has typically been underpinned by a single t a r

country: Indonesia had anchored 2006-08 growth before revenue collapsed; g e

Taiwan was the focus during 2013-16 before an unexpected decline in 2017. In t

both instances, sales have failed to recover. With China sales surging, r i c

momentum in 2019 is set to continue, but we are concerned if the strong growth e is sustainable. This is underscored by results of an online search on Baidu/WeChat, where the direct-selling company’s flagship brand, Dr’s Secret, is ranked much lower than peers. Our revised numbers are below consensus. 2 April 2019 Maintain SELL to a new S$1.75 target (from S$1.29). Singapore The boom-bust experience in Indonesia Consumer Despite a diversified geographical exposure, BW’s strong performance is usually anchored to a single country. Prior to the 2008 crisis, Indonesia had been a key Reuters BEST.SI driver as BW successfully engaged the Indo community in Singapore to distribute Bloomberg BEST SP in Indonesia. Although there were regulatory issues regarding imports in 2009, Priced on 1 April 2019 BW did adapt by enhancing the product mix. However, sales have failed to STI @ 3,250.5 recover despite a recovery in Indonesia’s GDP after the crisis. 12M hi/lo S$3.30/1.20 Revisiting our May 2017 cautious view on Taiwan 12M price target S$1.75 ±% potential -20% We expressed concerns in May 2017 - despite BW delivering above-consensus estimates (thanks to China) - due to an unexpected slowdown in Taiwan. We attributed the sharp Shares in issue 554.4m Free float (est.) 45.0% slowdown to inventory overbuild among distributors. Sales in Taiwan have yet to recover from 2017-18 levels despite BW’s efforts to improve its market positioning. Market cap US$892m 3M ADV US$7.7m Red flags in China as consumer interest trails revenue outperformance Foreign s'holding 60.0% China is now BW’s key market (54% of revenue). A stronger-than-expected 4Q18 implies momentum in 2019 will continue, but we are concerned the issues faced in Major shareholders D2 Investments Pte Ltd 35.0% Indonesia and Taiwan could repeat. Our online study on the Chinese market using Baidu/WeChat Trends API, however, indicates weak consumer interest (proxy via the number of domestic searches) on BW and its product, Dr’s Secret (晳之密). China, being a relatively new market, explains its strong performance as they expand distributors during the initial phase, but the significant gap between consumer interest and revenue Blended ESG Score (%)* implies momentum could stall once the number of distributors reaches saturation. Overall 64.7 Country average 69.3 Retain SELL with new S$1.75 target GEM sector average 64.0 *Click to visit company page on clsa.com for details Our revised estimates suggest a strong 2019 (16% above Bloomberg consensus as earnings could surprise) before a decline in 2020-21 (32-44% below as end demand sell- Stock performance (%) through could be challenged). Our S$1.75 target is based on 12x PE (avg 19-21CL EPS). 1M 3M 12M Absolute (5.6) (16.3) 20.2 Financials Relative (6.5) (21.0) 26.8 Year to 31 December 17A 18A 19CL 20CL 21CL Abs (US$) (5.6) (15.8) 16.3 Revenue (S$m) 215 266 476 380 375 3.4 (S$) (%) 300 Rev forecast change (%) - - 74.4 24.7 - 250 Net profit (S$m) 56 73 105 70 64 2.8 200 NP forecast change (%) - - 70.0 (4.0) - EPS (S¢) 10.1 13.3 19.2 12.8 11.7 2.2 150 CL/consensus (3) (EPS%) - - 132 80 69 100 1.5 EPS growth (% YoY) 61.2 31.1 44.7 (33.4) (8.2) 50 PE (x) 21.7 16.6 11.5 17.2 18.7 0.9 0 Dividend yield (%) 1.9 2.8 3.0 2.3 2.3 Apr-17 Oct-17 Apr-18 Oct-18 Best World (LHS) ROE (%) 50.6 48.1 49.6 25.7 19.6 Rel to STI (RHS) Net debt/equity (%) (63.2) (115.4) (65.6) (66.5) (67.8) Source: Bloomberg Consensus numbers from Thomson Reuters. Source: www.clsa.com

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com For important disclosures please refer to page 22. Boom or bust? Best World - SELL

Financials at a glance Year to 31 December 2017A 2018A 2019CL (% YoY) 2020CL 2021CL

Profit & Loss (S$m) Revenue 215 266 476 78.8 380 375 Cogs (ex-D&A) (64) (56) (116) (101) (107) Gross Profit (ex-D&A) 151 210 360 71.5 278 268 SG&A and other expenses (75) (115) (219) (182) (178) Op Ebitda 76 95 141 48.3 97 90 Depreciation/amortisation (5) (3) (3) (5) (6) Op Ebit 71 93 138 48.9 92 84 Net interest inc/(exp) 0 1 0 (76.3) 0 0 Other non-Op items (4) 0 (1) (1) 0 Profit before tax 68 93 137 47.6 92 84 Taxation (13) (21) (31) (21) (19) Profit after tax 55 73 107 46.8 71 65 Minority interest 1 0 (1) (1) (1) Net profit 56 73 105 44.7 70 64 Adjusted profit 59 73 106 45 71 65 Cashflow (S$m) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL Operating profit 71 93 138 48.9 92 84 Depreciation/amortisation 5 3 3 24.4 5 6 Working capital changes (3) 71 (111) (9) (7) Other items (16) (15) (32) (21) (20) Net operating cashflow 57 150 (1) 67 64 Capital expenditure - - - - - Free cashflow 57 150 (1) 67 64 M&A/Others (11) (1) (7) (6) (6) Net investing cashflow (11) (1) (7) (6) (6) Increase in loans 0 (5) 0 0 0 Dividends (17) (27) (36) (27) (27) Net equity raised/other (4) (1) 1 (4) (1) Net financing cashflow (20) (34) (35) (32) (29) Incr/(decr) in net cash 25 115 (43) 29 29 Exch rate movements 8 8 8 0 8 8 Balance sheet (S$m) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL Cash & equivalents 82 197 154 (21.8) 183 212 Accounts receivable 47 5 26 399.8 26 31 Other current assets 43 63 80 28.2 86 89 Fixed assets 8 8 16 90.6 20 22 Investments 0 0 0 0 0 Intangible assets 13 12 10 (18.8) 9 8 Other non-current assets 3 3 4 35.3 4 4 Total assets 196 288 290 0.6 327 367 Short-term debt - - - - - Accounts payable 46 95 33 (65.7) 29 31 Other current liabs 17 21 21 0 21 21 Long-term debt/CBs 2 - - - - Provisions/other LT liabs 4 2 2 0 2 2 Shareholder funds 130 174 252 44.9 296 361 Minorities/other equity (3) (3) (17) (20) (48) Total liabs & equity 196 288 290 0.6 327 367 Ratio analysis 2017A 2018A 2019CL (% YoY) 2020CL 2021CL Revenue growth (% YoY) 7.0 24.0 78.8 (20.2) (1.4) Ebitda margin (%) 35.3 35.7 29.6 25.5 24.1 Ebit margin (%) 33.1 34.7 28.9 24.2 22.5 Net profit growth (%) 61.0 30.9 44.7 (33.4) (8.2) Op cashflow growth (% YoY) 183.2 162.7 (100.8) nm (4.3) Capex/sales (%) - - - - - Net debt/equity (%) (63.2) (115.4) (65.6) (66.5) (67.8) Net debt/Ebitda (x) - - - - - ROE (%) 50.6 48.1 49.6 25.7 19.6 ROIC (%) 126.2 556.8 369.1 80.7 66.6 Source: www.clsa.com

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Boom or bust? Best World - SELL

Boom or bust? Figure 1 Best World’s growth is Best World - Revenue by country over 2005 to 2018 historically anchored to 300 growth in one country. (S$'mil) Indonesia Taiwan China Others Sales in 2006-2007 were primarily driven by 250 Indonesia Similar growth trajectory 200 Strong growth generated during in Taiwan, before an Subsequently, Taiwan drove 2006-07 in Indonesia. Recovery unexpected decline in group’s revenue in 2014- 150 efforts fail to ignite sales growth FY17 2016 before it declined despite GDP recovering unexpectedly 100 Revenue in both countries has failed to recover 50

0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: CLSA

Figure 2 The boom-bust experienced Best World - Indonesia sales have failed to recover post financial crisis despite GDP recovering in Indonesia reveals the 50 (S$'mil) 50% challenges to sustaining Indonesia revenue (LHS) Indonesia % of total revenue (RHS) revenue momentum. Despite 45 45% a strong distributorship and 40 40% GDP recovering, sales have 35 35% failed to recover 30 30% Attempts to strengthen the 25 25% product mix, by adhering to 20 20% the regulatory changes in 15 15% 2009, did not deliver results 10 10% 5 5% 0 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: CLSA

Figure 3 We observe a similar pattern Best World - Taiwan sales growth decline in 2017 with Taiwan. Revenue growth between 2014-16 140 (S$'mil) Taiwan revenue (LHS) Taiwan % of total revenue (RHS) 70% was due to successful recruitment of distributors 120 60%

Decline in 2017 (sales fell 100 50% 29% YoY) was unexpected and started in 1Q17. We 80 40% attribute this to inventory over-build among 60 30% distributors. Despite efforts to revive growth in Taiwan, 40 20% sales are not expected to return back to peak levels 20 10%

0 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: CLSA

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Boom or bust? Best World - SELL

Figure 4 Observing quarterly data Best World - Taiwan strong performance did not sustain beyond 2016 reveals contraction in 45 (S$'mil) 400% Taiwan’s revenue from Taiwan Revenue (LHS) YoY (RHS) (%) 1Q17 till 2Q18, as opposed 40 350% to growth expectations 35 300% 250% 30 200% 25 150% 20 100% 15 50% 10 0% 5 -50% 0 -100%

Source: CLSA

Figure 5 BW delivered exceptionally Best World – China underpinned growth from 2017 strong growth in China 160 (S$'mil) China Revenue (LHS) YoY (RHS) (%) 250%

140 200% 120

100 150% 80

60 100%

40 50% 20

0 0% FY14 FY15 FY16 FY17 FY18 Source: CLSA

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Best World’s market position in China BW’s flagship product in China is its premium skincare brand, Dr’s Secret (晳之密). According to Euromonitor’s recent data on top direct-sellers in China, BW is not on the list, although BW mentioned it should be ranked #13 in China. Based on The Straits Times, Euromonitor indicated it is uncertain how the ranking from BW arose as the research methodology suggests BW is ‘not significant enough to be tracked’.

Quote from Euromonitor Nonetheless, using BW China’s revenue in 2018, we understand BW could obtain leads us to benchmark a ranking of the 13th position in China (See Fig 6). The quotes from Euromonitor Euromonitor ranking vs lead us to conduct further analysis of the market trend and we decide to Baidu/WeChat search trend benchmark Euromonitor’s ranking versus Baidu and WeChat’s search trend.

Figure 6 Top direct-selling brands in China (based on revenue) by Euromonitor Rank Brand name Company name 2018 Sales (Rmbm) Comments 1 Infinitus Infinitus (China) Co Ltd 26,520 Brand name in Chinese: 无限极/ Best seller: 享优乐

2 Amway Amway Corp 18,483 Brand name in Chinese: 安利 / Proxy product: Nutrilite 3 Perfect Perfect Resources (M) Sdn Bhd 16,439 Brand name in Chinese: 完美/ Key product: Marie-Anne (玛丽艳) 4 Mary Kay Mary Kay Inc 9,491 玫琳凯 5 Guozhen New Era Health Industry (Group) Co Ltd 8,211 国珍 6 Sun Hope Tianjin Sun Hope Co Ltd 7,341 尚赫 7 Herbalife Herbalife Nutrition Ltd 6,199 康宝莱 Nutrition 8 Nu Skin Nu Skin Enterprises Inc 5,574 如新集团

9 Longliqi Jiangsu Longliqi Group Co Ltd 4,564 隆力奇 10 USANA USANA Health Sciences Inc 4,019 Owns Babycare Ltd in China 11 Oriflame Oriflame Cosmetics SA 2,751 欧瑞莲 12 Pro-health Pro-Health (China) Co Ltd 2,435 宝健 Best World Best World Ltd 1,316 晳之密 13 Kasly Tasly Group 560 天士力 14 Yofoto HK Yofoto Pharm Group Co Ltd 395 三生 15 Vorwerk Vorwerk & Co KG 328 福维克 16 Tiens Tiens Group Co Ltd 308 天狮 17 For You For You Health Tech Co Ltd 179 18 Avon Avon Products Inc - 雅芳 19 Others Others 31,103 Total Total 146,214 Source: CLSA, Euromonitor (Note: BW is not included in the original list from Euromonitor. For comparative purposes, we included BW in the list by ranking its revenue in China in 2018)

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Boom or bust? Best World - SELL

Online search reveals weak brand awareness China is known to be an internet-driven economy and boasts of more than a billion monthly active users on WeChat. Such an internet-conscious economy would undoubtedly translate hot topics into internet searches and social media discussions.

We are able to reconcile We believe that the number of internet mention/searches is a good proxy to Euromonitor ranking of the gauge consumer interest in a product. We undertake our research based on the brands with our search list of top direct-selling brands from Euromonitor, and arrive at the following results for i) Baidu and ii) observations: Wechat

We notice higher sales 1. Baidu/WeChat index, a tool to measure keyword searches on these brands consistently platforms is able to replicate Euromonitor’s ranking (based on revenue) generate more search accurately (See Fig. 7). The outcome of the search for both Baidu/Wechat results than lower ranked is uncanningly consistent with the ranking by Euromonitor. peers 2. Search for BW flagship product/brand “晳之密”, “全美世界”, and “Dr’s Search index for BW Secret”) on Baidu Trends reveals zero results for several days (Fig 10-13). flagship product is almost This contrasts with BW’s strong revenue sales. zero and contrasts with its strong revenue position. a. Finally, we extended our analysis to a premium paid search on Baidu Trends. The results address the reason behind the initial (zero) above findings. Its shows significantly weaker results than expected, as compared to lower ranked peers (Fig 14-15).

3. On our WeChat search, the trend results for “晳之密” was slightly better than Baidu but is consistently lower than almost all the competitors (from the Euromonitor list).

a. To illustrate, significantly smaller competitors such as Tiens (天狮; Rmb308m) and Tasly (天士力 Rmb560m) has higher WeChat Index (64k and 58k) than BW’s 晳之密(24.5k; Rmb 1.3bn).

Euromonitor ranking is consistent with Baidu and WeChat search Search results is a proxy for Based on Baidu’s average index (over 30 days) and WeChat’s Index for each of consumer awareness and the relevant keywords, we are able to quantify and attribute a ranking for the interest in respective brands based on the respective index. brands We discover the indexes, which are a proxy for consumer awareness/interest in China, largely rank the brands in a similar consistency as Euromonitor (which utilised the brand’s revenue as the key measure for sorting).

After stripping out the brands which are difficult to track due to generic terms, we derive the table below:

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Boom or bust? Best World - SELL

Figure 7 Euromonitor ranking compared against WeChat and Baidu’s Index rank Euromonitor WeChat Baidu Brand Company Name 2018 Sales WeChat Index Baidu Index Comments rank Rank Rank Name (Rmbm) (As of 26/3/19) Avg (30 days) 1 2 2 Infinitus Infinitus (China) Co 26,520 1,357,632 3,260 Brand name in Chinese: Ltd 无限极/ Best seller: 享优乐

2 3 3 Amway Amway Corp 18,483 1,291,767 2,821 Brand name in Chinese: 安利 / Proxy product: Nutrilite 3 6 5 Mary Kay Mary Kay Inc 9,491 205,176 1,571 玫琳凯 4 4 10 Guozhen New Era Health 8,211 854,074 827 国珍 Industry (Group) Co Ltd 5 7 6 Sun Hope Tianjin Sun Hope Co 7,341 155,022 1,187 尚赫 Ltd 6 5 4 Herbalife Herbalife Nutrition 6,199 213,770 2,209 康宝莱 Nutrition Ltd * 7 1 1 Nu Skin* Nu Skin Enterprises 5,574 2,087,048 3,491 如新集团 Inc 8 9 12 Longliqi Jiangsu Longliqi Group 4,564 100,648 746 隆力奇 Co Ltd 9 8 9 USANA USANA Health 4,019 103,488 1,054 Owns Babycare Ltd in China Sciences Inc 10 11 8 Oriflame Oriflame Cosmetics 2,751 62,576 1,094 欧瑞莲 SA 11 13 14 Best Best World Ltd 1,316 24,510 65 晳之密 World 12 12 7 Kasly Tasly Group 560 58,372 1,175 天士力 13 14 11 Vorwerk Vorwerk & Co KG 328 8,532 826 福维克 14 10 13 Tiens Tiens Group Co Ltd 308 64,010 542 天狮 Source: CLSA, Best World 晳之密 brand ranking. Note: Best World is manually ranked into Euromonitor’s list

Nuskin and Herbalife are two With the exception of NuSkin and Herbalife which are ranked significantly above outliers the Euromonitor ranking if we use WeChat/Baidu Index as the benchmark, the other brand’s brand awareness generally matches their revenue ranking. This is reasonable, as NuSkin and Herbalife have been high-profile brands worldwide, and hence a higher-than-expected Index ranking as compared to ranking based on revenue. Both are also listed for a long period.

Figure 8 Each of the points on the Regression analysis of Baidu’s Index against corresponding brand sales chart represents a particular 4,000 brand, and its position is (Baidu Index) based on its sales (x-axis) 3,500 Correlation=0.6894 and its corresponding Baidu 3,000 Index (y-axis) 2,500 2,000 1,500 1,000 500 (Sales in RMB'mil) 0 - 5,000 10,000 15,000 20,000 25,000 30,000

Source: CLSA

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Boom or bust? Best World - SELL

Figure 9 Regression analysis of WeChat Index against corresponding brand sales

2,500 (WeChat Index '000) Correlation=0.5967 2,000

1,500

1,000

500

(Sales in RMB'mil) 0 - 5,000 10,000 15,000 20,000 25,000 30,000

Source: CLSA

Baidu Trends results reveal zero searches Figure 10

We conducted a search on Baidu Trends – Unable to obtain results when searching for “晳之密” (24 Mar 2019) free-to-use Baidu Trends to assess consumer interest in BW’s products in China. The unavailability of trend results for BW’s company name and product name, in both English and Chinese characters contrasts with that of BW’s direct-selling peers in China

Source: CLSA, Baidu

Figure 11 Baidu Trends – Unable to obtain results when searching for “Dr’s Secret” (25 Mar 2019)

Source: CLSA, Baidu

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Boom or bust? Best World - SELL

Figure 12 Baidu Trends – Best World’s name in Chinese characters produced no results (26 March 2019)

Source: CLSA, Baidu

Figure 13 The lack of consumer Baidu Trends - Premium paid search yielded no results initially interest is the underlying reason for the absence of trend records on Baidu

Hence, we paid for Baidu service for a detailed search, but were shown the search is constantly in progress for a long time - could this be a hint that the search numbers for BW related keywords were so thin that there was difficulty retrieving relevant records Source: CLSA, Baidu

Figure 14 BW related keywords Premium paid search in Baidu finally yielded results after a prolong search efforts search data is finally available, index spiked to the range of 50-100, still significantly than the closest peer, Tiens at 542 Baidu search results are only This underscores our view - available after paying for the unavailability of trend premium service. It is currently results for these keywords trending near zero. previously is due to the low number of searches as there is weak consumer awareness. Due to the low search volumes, search trends are typically not captured by Baidu; this is made available only upon deliberate request. Source: CLSA

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Boom or bust? Best World - SELL

Figure 15 3 days after the paid search Premium paid search in Baidu finally yielded results after a prolong search efforts (Comparison) has been subscribed for, BW’s related keywords started showing results. However, the number of searches is extremely thin relative to the bottom 3 direct-selling peers

Source: CLSA

Figure 16 Baidu Trends produces Baidu Trends - Trend result of top five direct-selling peers is consistent with Euromonitor ranking index averages for these keywords (bottom right box). We find that the index averages (30 day average) in the bottom right box is a good indication of consumer interest in China.

The results are rather consistent with Euromonitor revenue ranking

Source: CLSA, Baidu; Note: We exclude Perfect resources as ‘完美’ is a generic term

Figure 17 Baidu Trends – Trend result of peers ranked 6-10 Baidu search results for Euromonitor top 6-10 brands have lower score than Euromonitor top five brands

Source: CLSA, Baidu

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Figure 18 Baidu Trends – Trend result of the bottom five direct-selling peers Search trends for the bottom brands yield much lower score than the 6-10 ranked names, using Euromonitor ranking

Source: CLSA, Baidu; Note: We exclude Pro-Health and Yofoto as ‘宝健’ and ‘三生’ are generic terms.

Figure 19 Baidu Trends – Data available on ‘全美’, but lags peers with low revenue Earlier search for “全美世界” yielded no results thus we attempt a shorter version “全美”.

Search results are extremely thin although better than ”全美世界”

Source: CLSA, Baidu

Figure 20 While there is trend data on Baidu Search on ‘全美’ showed 4/7 results unrelated to BWL ‘全美’, we believe that the term could be too generic

A check via searching ‘全美’ on Baidu gives us 4/7 results that are unrelated to Best World

Source: CLSA, Baidu

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Boom or bust? Best World - SELL

WeChat Trends results

Figure 21 While trend results are WeChat Trends – Trend results available for ‘晳之密’ available for”晳之密 “ keyword, its index score significantly lag behind peers

When compared to Tiens which has a quarter of BW’s revenue, BW’s index score is less than 40% of Tiens’

Source: CLSA, WeChat

Figure 22 BW flagship “晳之密” is WeChat Trends – Overall results for direct-selling brands (Euromonitor list) ranked much lower than peer group based on WeChat trend

Source: CLSA, WeChat

Note: We exclude Perfect Resources, Pro-health and Yofoto from the Euromonitor list as their Chinese characters are generic phrases. We also exclude ‘For You Health Tech’ as we are unable to find reasonable characters to search up, and ‘Avon Products’ as it is included in Euromonitor’s list while no data is provided for its 2018 sales in China.

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Boom or bust? Best World - SELL

Figure 23 Results for WeChat search WeChat Trends – Trend results of top four direct-selling peers are consistent with Baidu. Top Euromonitor ranked brands have higher search numbers

Source: CLSA, WeChat; Note: We exclude Perfect resources as ‘完美’ is a generic term

Figure 24 Mid-ranked brands per WeChat Trends - Trend results of peers ranked 6-9 Euromonitor list generally have lower index results as compared to top ranked peers

Source: CLSA, WeChat

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Boom or bust? Best World - SELL

Figure 25 Lowest ranked brands per WeChat Trends – Trend results of peers ranked 10-16 Euromonitor list have the lowest search numbers

Source: CLSA, WeChat; Note: We exclude Pro-Health and Yofoto as ‘宝健’ and ‘三生’ are generic terms

Figure 26 Tiens scored better than WeChat Trends – Trend results of peers ranked 11-17 some of the higher ranked peers, due to the spike earlier in Jan. Spike in Jan were due to public comments over potential regulatory actions against Tiens

Source: CLSA, WeChat; Note: We exclude Pro-Health and Yofoto as ‘宝健’ and ‘三生’ are generic terms.

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Boom or bust? Best World - SELL

Google Trends result Figure 27 While we understand China Google Trends – Search on Best World in varied keyword combination produces no results does not have access to Google, these searches may come from users who use VPN. The trend search is focused on keyword searches arising from China only.

Varied combinations of Best World’s company and product name in English and Chinese characters produces the same result. Google accrues this to insufficient data on this Source: CLSA, Google keyword search. Figure 28 As Best World’s peers Google Trends – Search on direct-selling peers produces results on search frequency produces trend results of keyword searches that are made in China, we believe that this supports our findings on Baidu Trends – there is a lack of consumer interest in BW’s products, a mismatch to its market position

Source: CLSA, Google

Reiterate concern on sustainability of China sales momentum Sales momentum could BW delivered an exceptional set of 4Q18 results. Profit grew 30% YoY to S$28m. continue in 2019 as BW 4Q18 accounted for 39% of full-year profit. This is underpinned by China grows distributorship, performance where sales accounted for 63% of the group during the quarter. penetrates new cities but worries of inventory build since this is challenging to Sales momentum could continue and surprise on the upside in 2019 as the group track penetrate new cities and grow its distributorship via its franchise model. While this generates significant sales, the extent of inventory build remains a concern since this is challenging to track.

These concerns are underscored by our various online Baidu/WeChat findings, and are reminiscent of the BW operating experience in Indonesia and Taiwan.

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Boom or bust? Best World - SELL

Figure 29 Best World – Direct-selling peer valuation multiple Company Ticker Mkt cap PE (x) EPS growth (%) EV/Ebitda (x) ROE PB (x) Div (%) (US$m) 19F 20F 19F 20F 19F 20F 19F 20F 19F 19F 20F HK/China BAIYUNSHAN PH-H 874 HK 9,084 14.7 12.6 -5.8 17.1 14.7 11.2 13.9 13.9 2.0 1.9 2.3 ------Taiwan GRAPE KING BIO 1707 TT 879 18.3 16.6 13.4 10.4 9.4 8.5 24.0 24.3 4.2 3.6 4.1 CHLITINA HOLDING 4137 TT 759 16.6 14.3 15.2 16.4 10.2 9.1 31.9 32.3 5.1 4.8 5.6 ------Malaysia HAI-O ENTERPRISE HAIO MK 181 14.7 13.8 -30.5 6.9 8.6 7.6 17.3 17.3 2.2 4.5 4.7 AMWAY MALAYSIA H AMW MK 238 17.0 16.2 4.9 4.9 13.3 12.5 19.2 25.4 3.9 4.9 5.0 ------United States NU SKIN ENTERP-A NUS US 2,652 12.2 11.0 78.2 10.8 6.1 5.8 27.5 27.9 3.6 na na HERBALIFE LTD HLF US 8,096 16.6 14.3 50.8 16.1 11.8 10.9 n.a n.a n.a - - USANA HEALTH SCI USNA US 1,943 14.7 12.8 7.8 14.9 7.3 6.6 25.7 27.0 n.a n.a n.a ------Singapore BEST WORLD INTL BEST SP 892 11.5 17.2 44.7 -33.4 7.4 10.4 49.6 25.7 1.3 3.0 2.3 Source: CLSA, Bloomberg

Figure 30 Best World long-term historical PE multiples

(X) 40.0

35.0

30.0

25.0

20.0 +1sd 19.3x

15.0

avg 11.09x 10.0

5.0 -1sd 2.89x 0.0 May 11 May 12 May 13 May 14 May 15 May 16 May 17 May 18

Source: CLSA

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Boom or bust? Best World - SELL

Valuation details In deriving our fair value, we have lowered our valuation multiples from 15x to 12x PE in order to reflect the lower growth assumptions. We no longer use a 12- month forward multiple to derive our fair value but apply an average of three- year earnings. We believe this accommodate BW EPS volatility. In our EPS forecasts, we are above consensus in 2019 by about 16% but below consensus by 32-44% over 2020-2021. During 2020-2021, we project earnings to decline for two consecutive years. This reflects our view earnings could surprise in 2019 as the group expand its distributor base but end demand sell-through could be challenged and result in a YoY decline in 2020. As a result, our multiple is the lower end of the range among peers. Based on our target price, we expect the stock to derate from the current multiple.

Investment risks 1) Weaker-than-expected sales momentum in China; 2) tightening of government regulations that impede growth for direct-selling firms in key markets, such as Taiwan and China; and 3) inventory build-up due to weak demand.

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Boom or bust? Best World - SELL

Detailed financials Profit & Loss (S$m) Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Revenue 102 201 215 266 476 380 375 Cogs (ex-D&A) (22) (51) (64) (56) (116) (101) (107) Gross Profit (ex-D&A) 80 150 151 210 360 278 268 Research & development costs ------Selling & marketing expenses (36) (66) (42) (80) (152) (133) (131) Other SG&A (27) (36) (39) (51) (86) (68) (67) Other Op Expenses ex-D&A 3 4 6 16 19 20 21 Op Ebitda 19 51 76 95 141 97 90 Depreciation/amortisation (3) (3) (5) (3) (3) (5) (6) Op Ebit 16 48 71 93 138 92 84 Interest income 0 0 0 1 0 0 0 Interest expense 0 0 0 0 0 0 0 Net interest inc/(exp) 0 0 0 1 0 0 0 Associates/investments ------Forex/other income ------Asset sales/other cash items ------Provisions/other non-cash items ------Asset revaluation/Exceptional items 0 2 (4) 0 (1) (1) (1) Profit before tax 17 51 68 93 137 92 84 Taxation (8) (17) (13) (21) (31) (21) (19) Profit after tax 9 34 55 73 107 71 65 Preference dividends ------Profit for period 9 34 55 73 107 71 65 Minority interest (1) 0 1 0 (1) (1) (1) Net profit 8 35 56 73 105 70 64 Extraordinaries/others 0 0 0 0 0 0 0 Profit avail to ordinary shares 8 35 56 73 105 70 64 Dividends ------Retained profit 8 35 56 73 105 70 64 Adjusted profit 8 33 59 73 106 71 65 EPS (S¢) 1.9 6.3 10.1 13.3 19.2 12.8 11.7 Adj EPS [pre excep] (S¢) 1.9 6.0 10.7 13.3 19.3 12.9 11.8 Core EPS (S¢) 1.9 6.3 10.1 13.3 19.2 12.8 11.7 DPS (S¢) 0.5 1.3 4.1 6.2 6.5 5.0 5.0

Profit & loss ratios Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Growth (%) Revenue growth (% YoY) 35.1 97.5 7.0 24.0 78.8 (20.2) (1.4) Ebitda growth (% YoY) 89.7 168.1 48.0 25.5 48.3 (31.3) (6.8) Ebit growth (% YoY) 118.1 197.0 47.0 30.0 48.9 (33.3) (8.2) Net profit growth (%) 108.1 306.8 61.0 30.9 44.7 (33.4) (8.2) EPS growth (% YoY) 105.7 225.4 61.2 31.1 44.7 (33.4) (8.2) Adj EPS growth (% YoY) 49.7 220.2 77.6 24.5 45.0 (33.3) (8.1) DPS growth (% YoY) - 150.0 228.0 51.2 4.8 (23.1) 0.0 Core EPS growth (% YoY) 105.7 225.4 61.2 31.1 44.7 (33.4) (8.2) Margins (%) Ebitda margin (%) 18.8 25.5 35.3 35.7 29.6 25.5 24.1 Ebit margin (%) 16.0 24.1 33.1 34.7 28.9 24.2 22.5 Net profit margin (%) 8.4 17.2 25.9 27.4 22.2 18.5 17.2 Core profit margin 8.4 17.2 25.9 27.4 22.2 18.5 17.2 Op cashflow margin 16.8 10.1 26.6 56.4 (0.2) 17.6 17.1 Returns (%) ROE (%) 14.2 44.8 50.6 48.1 49.6 25.7 19.6 ROA (%) 10.0 25.7 32.6 29.8 36.9 23.1 18.9 ROIC (%) 45.7 112.2 126.2 556.8 369.1 80.7 66.6 ROCE (%) 93.0 182.1 167.4 913.4 506.6 106.2 87.4 Other key ratios (%) Effective tax rate (%) 45.3 32.4 18.6 22.1 22.5 22.5 22.5 Ebitda/net int exp (x) ------Exceptional or extraord. inc/PBT (%) ------Dividend payout (%) 25.9 19.9 40.5 46.7 33.9 39.1 42.6 Source: www.clsa.com

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Boom or bust? Best World - SELL

Balance sheet (S$m) Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Cash & equivalents 47 55 82 197 154 183 212 Accounts receivable 11 23 47 5 26 26 31 Inventories 12 43 28 31 59 64 68 Other current assets 7 12 14 31 22 22 22 Current assets 77 133 172 265 261 295 333 Fixed assets 7 17 8 8 16 20 22 Investments 0 0 0 0 0 0 0 Goodwill 0 0 0 0 0 0 0 Other intangible assets 7 6 13 12 10 9 8 Other non-current assets 4 4 3 3 4 4 4 Total assets 94 160 196 288 290 327 367 Short term loans/OD ------Accounts payable 25 44 46 95 33 29 31 Accrued expenses ------Taxes payable 5 16 11 18 18 18 18 Other current liabs 1 4 6 3 3 3 3 Current liabilities 30 64 63 116 53 50 52 Long-term debt/leases/other 0 5 2 - - - - Convertible bonds ------Provisions/other LT liabs 2 3 4 2 2 2 2 Total liabilities 32 72 69 118 55 52 53 Share capital 20 20 20 19 19 19 19 Retained earnings 42 69 110 149 227 271 337 Reserves/others 2 2 0 6 6 6 6 Shareholder funds 64 91 130 174 252 296 361 Minorities/other equity (2) (2) (3) (3) (17) (20) (48) Total equity 62 89 127 171 235 275 313 Total liabs & equity 94 160 196 288 290 327 367 Total debt 0 5 2 0 0 0 0 Net debt (47) (50) (80) (197) (154) (183) (212) Adjusted EV 920 1,159 1,127 1,009 1,038 1,005 948 BVPS (S¢) 14.5 16.5 23.5 31.6 45.8 53.8 65.7

Balance sheet ratios Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Key ratios Current ratio (x) 2.5 2.1 2.7 2.3 4.9 5.9 6.4 Growth in total assets (% YoY) 12.2 69.7 22.2 47.3 0.6 12.8 12.1 Growth in capital employed (% YoY) (27.4) 160.7 21.2 (156.5) nm 14.3 9.2 Net debt to operating cashflow (x) ------Gross debt to operating cashflow (x) 0.0 0.2 0.0 - - - - Gross debt to Ebitda (x) 0.0 0.1 0.0 - - - - Net debt/Ebitda (x) ------Gearing Net debt/equity (%) (76.2) (56.6) (63.2) (115.4) (65.6) (66.5) (67.8) Gross debt/equity (%) 0.0 5.3 1.6 0.0 0.0 0.0 0.0 Interest cover (x) 307.7 826.7 459.1 1,026.0 3,091.5 2,063.1 1,895.1 Debt Cover (x) 1,554.3 4.3 28.1 0.0 0.0 0.0 0.0 Working capital analysis Inventory days 159.7 194.7 203.7 193.4 141.9 220.9 225.7 Debtor days 35.8 30.9 59.9 35.9 12.0 25.0 27.7 Creditor days 360.5 244.5 257.2 457.2 201.1 111.1 102.6 Working capital/Sales (%) (0.7) 7.2 12.4 (18.0) 11.2 16.3 18.3 Capital employed analysis Sales/Capital employed (%) 689.3 522.1 461.0 (1,011.0) 589.7 411.7 371.8 EV/Capital employed (%) 6,236.8 3,013.7 2,419.1 (3,829.1) 1,285.2 1,089.6 941.3 Working capital/Capital employed (%) (5.1) 37.7 57.3 181.8 65.8 67.1 68.1 Fixed capital/Capital employed (%) 46.4 43.6 16.2 (31.3) 19.5 21.1 22.1 Other ratios (%) EV/OCF (x) 53.8 57.4 19.7 6.7 (892.5) 15.1 14.8 EV/FCF (x) 53.8 57.4 19.7 6.7 (892.5) 15.1 14.8 EV/Sales (x) 9.0 5.8 5.2 3.8 2.2 2.6 2.5 Capex/depreciation (%) ------Source: www.clsa.com

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Boom or bust? Best World - SELL

Cashflow (S$m) Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Operating profit 16 48 71 93 138 92 84 Operating adjustments 1 2 (3) 1 0 0 0 Depreciation/amortisation 3 3 5 3 3 5 6 Working capital changes 0 (27) (3) 71 (111) (9) (7) Interest paid / other financial expenses 0 0 0 (1) 0 0 0 Tax paid (1) (4) (17) (15) (31) (21) (19) Other non-cash operating items (1) (2) 5 0 0 0 0 Net operating cashflow 17 20 57 150 (1) 67 64 Capital expenditure ------Free cashflow 17 20 57 150 (1) 67 64 Acq/inv/disposals (3) (12) (12) (2) (7) (6) (6) Int, invt & associate div 0 0 0 1 0 0 0 Net investing cashflow (3) (12) (11) (1) (7) (6) (6) Increase in loans (6) 7 0 (5) 0 0 0 Dividends (2) (8) (17) (27) (36) (27) (27) Net equity raised/(buybacks) 0 0 0 (1) (1) (1) (1) Net financing cashflow (13) 0 (20) (34) (35) (32) (29) Incr/(decr) in net cash 2 8 25 115 (43) 29 29 Exch rate movements 6 6 8 8 8 8 8 Opening cash 39 41 49 74 189 146 175 Closing cash 47 55 82 197 154 183 212 OCF PS (S¢) 3.9 3.7 10.4 27.4 (0.2) 12.2 11.6 FCF PS (S¢) 3.9 3.7 10.4 27.4 (0.2) 12.2 11.6

Cashflow ratio analysis Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Growth (%) Op cashflow growth (% YoY) 53.8 18.2 183.2 162.7 (100.8) nm (4.3) FCF growth (% YoY) 53.8 18.2 183.2 162.7 (100.8) - (4.3) Capex growth (%) ------Other key ratios (%) Capex/sales (%) ------Capex/op cashflow (%) ------Operating cashflow payout ratio (%) 12.9 34.1 39.4 22.7 - 41.1 43.0 Cashflow payout ratio (%) ------Free cashflow payout ratio (%) ------

DuPont analysis Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Ebit margin (%) 16.0 24.1 33.1 34.7 28.9 24.2 22.5 Asset turnover (x) 1.1 1.6 1.2 1.1 1.6 1.2 1.1 Interest burden (x) 1.0 1.1 1.0 1.0 1.0 1.0 1.0 Tax burden (x) 0.5 0.7 0.8 0.8 0.8 0.8 0.8 Return on assets (%) 10.0 25.7 32.6 29.8 36.9 23.1 18.9 Leverage (x) 1.5 1.7 1.7 1.6 1.4 1.2 1.2 ROE (%) 15.8 45.7 51.2 48.8 52.5 27.8 22.1

EVA® analysis Year to 31 December 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL Ebit adj for tax 9 33 58 72 107 71 65 Average invested capital 20 29 46 13 29 88 98 ROIC (%) 45.7 112.2 126.2 556.8 369.1 80.7 66.6 Cost of equity (%) 12.0 12.0 12.0 12.0 12.0 12.0 12.0 Cost of debt (adj for tax) 2.7 3.4 4.1 3.9 3.9 3.9 3.9 Weighted average cost of capital (%) 12.0 12.0 12.0 12.0 12.0 12.0 12.0 EVA/IC (%) 33.7 100.2 114.3 544.8 357.1 68.7 54.6 EVA (S$m) 7 29 52 71 103 61 54 Source: www.clsa.com

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Important disclosures Best World - SELL

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Companies mentioned Best World (BEST SP - S$2.20 - SELL) Amway (N-R) Avon Products (N-R) Babycare (N-R) Baidu (BIDU US - US$170.40 - BUY) BAIYUNSHAN PH-H (N-R) chltina holding (N-R) D2 Investments (N-R) For You Health Tech (N-R) grape king (N-R) hai-o enterprise (N-R) Herbalife Nutrition (N-R) HK Yofoto Pharm Group (N-R) Infinitus (N-R) Jiangsu Longliqi Group (N-R) Mary Kay (N-R) New Era Health Industry (N-R) Nu Skin (N-R) Oriflame Cosmetics (N-R) Perfect Resources (N-R) Pro-Health (China) (N-R) Tasly Group (N-R) Tianjin Sun Hope (N-R) Tiens Group (N-R) USANA Health Sciences (N-R) Vorwerk & Co (N-R) Vorwerk and Co (N-R) WeChat (N-R)

Analyst certification The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report.

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Important disclosures Best World - SELL

Important disclosures Recommendation history of Best World International Ltd BEST SP Horng Han Low BUY O-PF )

$ Other analysts U-PF SELL S

( No coverage N-R e c i

r 3 p k c o t S

May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18 Jan 19

Date Rec Target Date Rec Target LATEST SELL 1.75 10 May 2017 SELL 1.27* 15 May 2018 SELL 1.29* 13 Jan 2017 BUY 1.25* 27 Feb 2018 BUY 1.84* Source: CLSA; * Adjusted for corporate action

Recommendation history of Baidu Inc BIDU US Elinor Leung, CFA BUY O-PF )

$ Other analysts U-PF SELL S No coverage N-R U ( e c i

r 300 p k c o t S 250

200

May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18 Jan 19

Date Rec Target Date Rec Target 19 Feb 2019 BUY 230.00 28 Jul 2017 BUY 250.00 31 Oct 2018 BUY 270.00 28 Oct 2016 BUY 220.00 27 Apr 2018 BUY 315.00 26 Jul 2016 BUY 222.00 27 Oct 2017 BUY 305.00 14 Jun 2016 BUY 232.00 20 Oct 2017 BUY 323.00 13 May 2016 BUY 245.00 05 Sep 2017 BUY 275.00 Source: CLSA

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Important disclosures Best World - SELL

affiliates, did not receive investment banking/non-investment a registered trademark of Stern, Stewart & Co. "CL" in charts and banking income from, and did not manage/co-manage a public tables stands for CLSA estimates, “CT” stands for CLST estimates, offering for, the listed company during the past 12 months, and it "CRR" stands for CRR Research estimates and “CS” for Citic does not expect to receive investment banking compensation from Securities estimates unless otherwise noted in the source. the listed company within the coming three months. Unless This publication/communication is subject to and incorporates mentioned otherwise, CLSA/CLST does not own 1% or more of any the terms and conditions of use set out on the www.clsa.com class of securities of the subject company, and does not make a website (https://www.clsa.com/disclaimer.html). 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In part of the information, opinions or estimates contained herein addition, the analysts included herein attest that they were not in reflects the views and opinions of a sales person or a non-analyst, possession of any material, nonpublic information regarding the such views and opinions may not correspond to the published view subject company at the time of publication of the report. The of CLSA and/or CLST. Any price target given in the report may be analysts further confirm that none of the information used in this projected from one or more valuation models and hence any price report was received from CLSA's Corporate Finance department or target may be subject to the inherent risk of the selected model as CLSA's Sales and Trading business. Save from the disclosure below well as other external risk factors. 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The list for each and investors should exercise prudence and their own judgment in market is monitored weekly. making their investment decisions. The value of any investment or Overall rating distribution for CLSA (exclude CLST) only income my go down as well as up, and investors may not get back Universe: Overall rating distribution: BUY / Outperform - CLSA: the full (or any) amount invested. Past performance is not 69.96%, Underperform / SELL - CLSA: 36.42%, Restricted - CLSA: necessarily a guide to future performance. CLSA and/or CLST 0.09%; Data as of 31 December 2018. Investment banking clients as do/does not accept any responsibility and cannot be held liable for a % of rating category: BUY / Outperform - CLSA: 0.999%, any person’s use of or reliance on the information and opinions Underperform / SELL - CLSA: 0.52%; Restricted - CLSA: 0.00%. Data contained herein. 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Important disclosures Best World - SELL

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