Strategic Stock Investment Opportunity – Best World International Limited

Analysts: Ai Xin, Charles Phan & Jeremy Liang

Executive Summary

“BUY”
call

S$3.66 47.7%
Target Potential
Price Upside

1 Unique model create opportunities

• Highly scalable model business with limited CAPEX
• Shift of 3rd-party manufacturing in-house to further drive margins

2 Investment highlights include:

• Obtaining Direct Selling license in China
• Sustainable growth in target markets

3 BWL’s current trading price of S$2.48 per share is undervalued by 47.7% based on
our football field analysis which includes valuation methodologies like RIM, DCF and
trading comparables

2
Agenda

Company & Business Overview

Industry Analysis

` Investment Thesis

Accounting Adjustments & Valuation

Risks & Mitigations

3
Company Overview – Best World International
Business Overview LTM Share Price Performance

▪ Founded in 1990, Best World International is direct selling company that 3.00 12,000.0
is mainly engaged in the development, production and direct distribution

Share Price in (SGD)

of skin care and wellness products 2.50 10,000.0
▪ Derives revenue from its 3 main segments:

Volume (000‘)
2.00 c. 600% Y-o-Y Growth 8,000.0
o Direct Selling: Sale of proprietary products to its members through
its direct distribution network 1.50 6,000.0
o Export: Sale of proprietary products to 3rd party agents
1.00 4,000.0
o Manufacturing/Wholesale: Production and wholesale distribution of
“Aurigen” line of healthcare products in China c. 10% Y-o-Y Growth
0.50 2,000.0
▪ Presence in 13 countries across Asia Pacific and the Middle East
▪ Listed on the SGX since 2004 with a market capitalization of SGD680m 0.00 0.0
Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
o Only direct selling company to listed on the mainboard of Singapore
Stock Exchange (SGX) BWL's Vol BWL STI Index
(Rebased)
FY2016 Revenue Breakdown Financial Overview

By Business By Geography FYE 31 Mar (S$’000) 2015A 2016A 2017E 2018E CAGR
2.3% 3.7%
2.7% Revenue 101,672 200,764 240,364 291,595 42.1%
3.5%
% Y-o-Y growth 35% 97% 20% 21%
26.8% EBIT 16,999 50,917 47,182 57,327 50.0%

28.8% % EBIT margin 17% 25% 20% 20%

61.3%
70.9% Net Income 8,996 34,189 31,732 38,733 62.7%

% NPAT margin 9% 17% 13% 13%

Taiwan China Singapore Diluted EPS (in S$) 0.03 0.12 0.12 0.14
Direct Selling Export Manufacturing/Wholesale Indonesia Others

Key Management Key Shareholders Key Brands

▪ Dr. Dora Hoan: Co-Chairman / ▪ Dr. Dora Hoan & Dr. Doreen
Group CEO Tan(1): 47.24%
▪ Dr. Doreen Tan: Co-Chairman / ▪ Shi Jinyu: 7.04%
President
Source: Annual Reports, Broker Reports, Factiva, Bloomberg
Note: Market data as of 14 Mar 2017 4
(1) Includes both direct & indirect shareholdings
Company Overview - Business Model

Highly scalable business model with strong margins and minimal capital

Members’ Price
Direct Selling
(c.435,000 Members)
Receipt of
Product
Products, Sales through End
Conceptualization 3rd Party
Quality Distribution Transfer Price Consumers
and Manufacturing
Development Assurance & Channel
Packaging Export
(3rd Party Agents)

In-house
Manufacturing
By End 2017

Direct Selling v Export Model
(a) Direct Selling
• Products sold to members at members’
price
• Members to market and distribute to other
independent distributors/end consumers
• Commission only paid to members on
successful sales
(b) Export
• Products sold to agents at transfer price
(lower margins compared to members’)
• Agents to work closely with local sales
representatives to market products to end
consumers
Highly scalable business model, with limited
capital outlay
• Focused on brand building and marketing
• Lower amount of fixed cost (Rental, Staff
expenses etc.) as compared to traditional
retailers
• Outsourced manufacturing to 3rd Party
manufacturers to eliminate costly
overheads
In-house manufacturing to begin end 2017
and create higher margins
• In-house manufacturing facility in Tuas
expected to be operational by end 2017
• Half of BWL’s skincare products to be
manufactured out of Tuas by end 2017,
with shift completed by 2019
• Upstream expansion reduces inventory
lead time and grant them greater control
over procurement cost and quality
• Increases margins over the long run

Source: Annual Reports, Broker Reports, Factiva, Bloomberg

5
Company Overview - Geographical Footprint
Presence in over 13 countries across Asia Pacific and the Middle East. Impending entry into the Chinese direct selling
market creates a potential game changer.

Issued license to operate

in China’s Direct Selling Legend
market in end 2016
10x Direct Selling
Destinations

2x Export Countries

Japan 1x Manufacturing &

Wholesale
China South Korea

Taiwan
Myanmar
Laos

Thailand Vietnam Philippines

Cambodia

Brunei
Malaysia
Singapore

Indonesia

Source: Annual Reports, Broker Reports, Factiva, Bloomberg

6
 Industry Analysis

Favorable climate in both cosmetic and direct selling industry bodes well for BWL

Asia key to growth in the Global Direct Selling Despite the rapid growth, it is still poised to grow at Key Commentary
Industry 9.5% CAGR into 2019

Value of China’s Cosmetic Industry Expected Value Growth in China’s • Chinese cosmetic market estimated to be
(In USDbn) Cosmetic Industry (%)
worth north of USD30bn
− Despite rapid growth, it is expected to
grow at a 9.5% CAGR into the next 5
years
32
30 • Direct selling key to driving cosmetic
26
24 9.9% sales growth in China, with 9% of total
19 9.7%
9.6% cosmetic retail sales generated from
16 9.3%
direct selling
9.0%
• Higher quality foreign products deemed
to be more reliable and thus more
2015 2016 2017 2018 2019 appealing for discerning consumers
2011 2012 2013 2014 2015 2016
Asia key to growth in the Global Direct Selling China’s Direct Selling Market dominated by Beauty, Key Commentary
Industry Health and Personal Care Products

3 Year CAGR of Direct

Breakdown of China Direct • Global direct selling market is believed to
Selling Sales By Region (%) be worth USD183bn, with over 100m
Selling Market(%)
8.4% direct sellers by the end of 2014
7.8%
6.5%
• China key catalyst to rapid growth in
6.4%
industry
33%
4.4% − China poised to overtake US as the
3.4%
Total Value: world’s direct selling market by 2017
USD19.7Bn
• Beauty, health and personal care
67%
products account for the majority of
0.1%
China’s direct selling market sales in
Asia South Global Africa North Europe Middle 2015
America America East Beauty, Health and Personal Care Others

Source: Brokers’ Report, Euromonitor, WFDSA

7
Investment Thesis
Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results

The China Growth Story

• Industry fragmenting, with incumbents losing market share and consumers favouring
mid market premier brands
• Product quality and distribution channel validated and ready to go

Sustainable Earnings as the Key Differentiator

• Strong operational support to sustain future growth
• Increasing members’ quality despite slowing growth in overall membership
• Stronghold in Taiwan yet to fully mature

Fast-improving Financial Performance

• Superior growth already starting to materialize in BWL’s financials
• Track record of replicating growth into profits key signal of BWL’s prospects

9
 Investment Thesis 1: The China Growth Story
New growth engine in China validated and ready to take off

Market share by brands indicate fragmenting industry Skincare distribution share favors internet and direct selling

100% 100% 8.1% 8.0%

0.9% 1.0%
80% 80% 0.5% 0.5%
1.4% 1.5%
60% 60%
8.6% 8.5%
40% 40%
0.5% 0.5%
20% 20%

0% 0%
2010 2013 2015 2010 2013 2015

Rest of market 6 - 50 Top 5 Store-based Retailer Direct Selling Internet Retailing Others

China export performance validates demand for product Growth of direct sellers in China shows effectiveness of channel

60 350% 200%

50 300%
150%
250%
40
100%
SGDm

200%
30
150% 50%
20
100%
10 0%
50%
0 0% -50%
2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sales Sales growth Herbalife Mary Kay NuSkin

Source: Annual Reports, Euromonitor, Bloomberg

10
Investment Thesis
Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results

The China Growth Story

• Industry fragmenting, with incumbents losing market share and consumers favouring
mid market premier brands
• Product quality and distribution channel validated and ready to go

Sustainable Earnings as the Key Differentiator

• Strong operational support to sustain future growth
• Increasing members’ quality despite slowing growth in overall membership
• Stronghold in Taiwan yet to fully mature

Fast-improving Financial Performance

• Superior growth already starting to materialize in BWL’s financials
• Track record of replicating growth into profits key signal of BWL’s prospects

11
 Investment Thesis 2: Sustainable Earnings as a Differentiator
Room for sustainable growth in the long run

New venture upstream provides quality control and cost savings Membership base streamlining with a stronger foundation

▪ Skincare manufacturing facility in Tuas,

operational by end of 2017 Membership Base Sales per member
27% 63%
▪ State-of-the-art fully automated supply
chain using integrated communication
28% 25%

In SGD
In 000’
▪ Production will support growth in
Taiwan and China -23%

▪ Lead time expected to reduce 15 – 20% 7% 7%

8%

▪ Future growth supported by strong 2012 2013 2014 2015 2016

2012 2013 2014 2015 2016
operations in supply chain ensures
sustainability Number of members Growth Sales per member Growth

High population density into areas unpenetrated by Best World Growth of direct selling sales in Taiwan slowing down

12,000
9,770
10,000 120%
Population per sqkm

8,000
70%
6,000

4,000 20%
1,794
2,000 1,233 840 941
-4% -2% -3% -2%
-7%
0 -30%
Taipei City Taoyuan Taichung City Tainan City Kaohsiung 2011 2012 2013 2014 2015
County City
BWL Peer Average

Source: Annual Reports, Euromonitor, Bloomberg

12
Investment Thesis
Entering the next stage of growth: Entering the Chinese Market, Propelling growth in Taiwan, Replicating growth into results

The China Growth Story

• Industry fragmenting, with incumbents losing market share and consumers favouring
mid market premier brands
• Product quality and distribution channel validated and ready to go

Sustainable Earnings as the Key Differentiator

• Strong operational support to sustain future growth
• Increasing members’ quality despite slowing growth in overall membership
• Stronghold in Taiwan yet to fully mature

Fast-improving Financial Performance

• Superior growth already starting to materialize in BWL’s financials
• Track record of replicating growth into profits key signal of BWL’s prospects

13
 Investment Thesis 3: Fast-improving Financial Performance
Superior growth is already materializing in BWL’s financials

Profit growth capitalizes on high operating leverage… which results in higher Net Margin despite relatively higher COGS

BWL Profitability Analysis Profitability Comparison

30% 50% 100%
87.4%
40% 73.2%

% of total revenue
80%
Profit margin

20%
30% 60%

20% 40%
10% 25.4% 24.5%
17.0% 14.1%
10% 20%

0% 0% 0%
2012 2013 2014 2015 2016 Gross Margin EBIT Margin Net Margin
EBIT Margin Net Margin Distrbution Cost / Revenue Admin Expense / Revenue Best World Peers Average Peers Highest Peers Lowest

Consistently growing return for investors as margin improves Outshining peers even under the same asset-light business model

60%
60%
ROIC ROIC & WACC
49.65% 49.65%
50% 43.53%

40% 36.63% 40% 36.11%

28.34%
30%

20% 20%
14.11% 12.18%
10%
7.57% 6.12%
3.80%
0% 0%
2012 2013 2014 2015 2016 ROIC WACC ROIC - WACC Spread
Best World Peers Average Peers Highest Peers Lowest

Source: Annual Reports, Broker Reports, Factiva, Bloomberg, Euromonitor

14
 Accounting Adjustments
Financials are clean and free from significant distortions

Operating Lease to Financial Lease Contingent Liabilities

Adjustments Impact Adjustments Impact

Lease expense Operating Income Non-current Liabilities Liabilities

Interest Expense Operating Income Shareholders’ Equity Equity

Depreciation Operating Income Trade Receivables

Lease Assets Assets Trade Receivables Assets

Lease Liabilities Liabilities Expenses Operating Income

Effect on adjustments on Returns on Equity Effect on adjustments on Leverage

Return on Equity (ROE) Leverage (x)

50% (%) 43.6% 2.5x
38.8% 2.1x 2.1x
40% 2.0x 1.8x 1.8x
1.5x 1.5x
30% 1.5x
20% 15.0%16.6% 1.0x
7.3% 9.8%
10% 0.5x
0% 0.0x
2014 2015 2016 2014 2015 2016

Pre-adjustment Post-adjustment Pre-adjustment Post-adjustment

16
Model Assumptions
Comprehensive modelling assumptions to capture multiple upside and downside scenarios
Case Model Assumptions
• Membership Growth: 8 – 20%
• Sale Growth / Member: 3 – 15%
Bull
• Growth in Export Sales: 5% -20%
• Long-term COGS: 23%
• Membership Growth: 5 – 15%
• Sale Growth / Member: 3 – 10%
Base
• Growth in Export Sales: 5% -18%
• Long-term COGS: 27%
• Membership Growth: 5% -10%
• Sale Growth / Member: 3 – 5%
Bear
• Growth in Export Sales: 5% -15%
• Long-term COGS: 27%
Key Commentary
• Entry to Chinese growth lives up to expectations
• Export segment continues to grow at a sustainable
rate
• New manufacturing facility increases margin of
BWL’s products
• Stable membership growth in China
• Export segment continues to grow at a sustainable
rate
• Increased time required to integrate Singapore’s
manufacturing facility before increasing margins
• China growth below expectations
• Economic slowdown which will adversely impact
sales by members
• Export sales affected by growth in Direct Selling
segment
• Increased time required to integrate Singapore’s
manufacturing facility before increasing margin
17
Trading Comparables
BWL is trading at 9.6x EV/EBITDA and 16.4x P/E, a discount to its peers who are trading at a median of 10.5x and 17.0x
respectively

25.00x
19.56x 19.49x
20.00x 17.92x 16.40x Median: 16.96x
15.99x
13.30x
FWD P/E

15.00x 12.53x
10.00x
5.00x
0.00x
Hai-O Amway Grape King Best World Nu Skin Tupperware Herbalife

15.00x
11.78x
FWD EV/EBITDA

10.48x 9.62x Median: 10.48x

10.00x 7.92x

5.00x
N.A. N.A. N.A.
0.00x
Hai-O Amway Grape King Best World Nu Skin Tupperware Herbalife

Equity Value
285.9 397.3 1184.2 680.0 3746.0 4315.8 7062.4
(SGDm)

EV
268.0 333.5 1213.2 648.1 3812.8 5187.3 7923.1
(SGDm)

Note: Market data as of 14 Mar 2017

Source: Bloomberg 18
Football Field Analysis
Based on our valuation methodologies, we estimate BWL’ share price to be SGD3.66, a 48% premium to last close price
of SGD2.46

Category Equity Value per Share (SGD) Comments

Last Close 4.5 6.8

Bull
Price:
SGD2.46
Discounted 3.1 4.7 • Applied WACC: 5.50% - 6.50%
Base
Cash Flow • Applied Terminal Growth: 1.0% - 2.0%
Target
1.9 2.8 Price:
Bear
SGD3.66

Bull 4.3 6.6

Residual • Applied WACC: 5.50% - 6.50%

Base 2.8 4.2
Income Model • Applied Terminal Growth: 1.0% - 2.0%

Bear 1.5 2.3

• Based on peers NTM P/E Multiple

FWD P/E 1.6 2.4
• Applied on NTM NPAT of SGD34.0m

Trading FWD • Based on peers NTM EV/EBITDA Multiple

1.8 2.6
Comparatives EV/EBITDA • Applied on NTM EBITDA of SGD55.2m

• Based on peers LTM P/B Multiple

LTM P/B 0.9 3.8
• Applied on NAV of SGD77.2m

0.0 2.0 4.0 6.0 8.0

Source: Annual Reports, Bloomberg
19
Risks and Mitigations
Concerns over BWL’s rapid growth, especially their business model and faithfulness behind their financials

Intensified competition
High

driven by existing and

new players
Legend
Market
Moderate

Government
Probability

Inflated Sales and

regulations against Firm
earnings growth due
directing selling
to manipulation Political
companies like BWL
Low

Insignificant Moderate Severe

Impact

20
 Risks and Mitigations
However, we believed that these risks are well under control

Risks Mitigations

Risk 1: Government Regulation Mitigation

▪ BWL is aiming to expand its direct-selling business in China
▪ Direct selling model’s strong association with fraudulent pyramid scheme
and multi-level marketing
▪ Multi-level marketing has been strictly banned in China
▪ Any possible illegitimate scandal can jeopardize BWL’s entire business
▪ Only direct selling Mainboard listed company on SGX
▪ Higher transparency and stringent reporting requirements from SGX
▪ This results in greater credibility and more supervision
▪ Its proven track record thus far also help to fend off any skepticism over
their business model in the long run

Risk 2: Intensified Competition Mitigation

▪ Intense competition already seen in major markets like China and Taiwan
▪ The recent reduction of import tariff from 5% to 2% in late 2015 in China
for skin care products incensed another round of competition
▪ The competition will be more intensified, especially in China, as local
brands begin to mature
▪ Moderate impact on BWL’s business is expected due to their unique
business model which can quickly scale up with relatively lower cost
compared to traditional skin care companies
▪ Growth in BWL’s export business indicates that growing consumer
acceptance in BWL’s products

Risk 3: Earnings Manipulation Mitigation

BWL Income Statement Manipulation ▪ Rising Revenue / Cash

▪ Revenue / Cash ratio has grown Analysis Peer Comparison
rapidly during the past three years ratio could be attributed to 23.7x
4.0x its unique direct selling
▪ CFO / Earning ratio has
model as it might be a
constantly gone down over the 3.0x
norm among its direct-
same period
2.0x selling peers
▪ These all signal potential earnings
▪ Low CFO / Earning ratio 3.7x
5.7x 5.0x
management which can severely 1.0x 2.2x
is mainly affected by their 0.6x 1.2x 0.9x
impede the progress made by
changes in working
BWL thus far 0.0x Revenue / Cash CFO / Earnings
2012 2013 2014 2015 2016 capital which is necessary
during expansion Best World Peers Median Peers Highest Peers Lowest
Revenue / Cash CFO / Earnings

Source: Annual Reports

21
Conclusion

“BUY”
call

S$3.66 47.7%
Target Potential
Price Upside

1 Unique model create opportunities

• Highly scalable model business with limited CAPEX
• Shift of 3rd-party manufacturing in-house to further drive margins

2 Investment highlights include:

• Obtaining Direct Selling license in China
• Sustainable growth in target markets

3 BWL’s current trading price of S$2.48 per share is undervalued by 47.7% based on
our football field analysis which includes valuation methodologies like RIM, DCF and
trading comparables

22