SINGAPORE (Aug 16): CIMB is reiterating its “add” call on Best World International with a target price of $1.80 given the stock underwent a price retracement after Tuesday’s negative news.
“This is an attractive entry point given its stellar forward earnings momentum, in our view,” says Jonathan Seow in a report out on the same day.
As at 11.05am, shares in Best World are trading 2 cents lower at $1.33.
The media reported that China’s State Administration for Industry & Commerce (SAIC) has announced a special three-month campaign to police pyramid schemes.
The SAIC campaign plans to crack down on pyramid selling schemes disguised as investment opportunities, job offers, job referrals and recruitment activities, especially those targeted at new graduates.
The committee also plans to investigate and deal with illegal activities and to increase the awareness on pyramid selling schemes among students.
According to Best World however, warning signs of pyramid schemes include profits which are largely derived from the act of recruitment instead of the sale of products and services; low-quality products sold at high prices and high startup and entry fees.
“In our view, Best World’s business model differs from that of a pyramid scheme as its products are of quality; it has set very low hurdles for members to sustain their memberships meaning the only have to buy a product in the past 12 months to retain membership and charges little to no joining fee to become a member,” says Seow.
Best World also assured investors that all its current preparations for conversion to direct selling are in line with the SAIC statement.
This means all service outlets for its future direct selling business in China will be subjected to verification and approval by local authorities before they can start operations, and none will be located within near school compounds to allay concerns about targeting students.
Best World also stressed that its future direct selling business in China will not accept students, civil servants, police and military personnel as members.
“While it has holds a direct selling licence, Best World’s existing China revenues are currently based on an “export” model,” says Seow, “hence we believe it is unlikely to fall under the purview of this campaign. As such, we maintain our forecasts.”
In fact, Best World is currently enjoying higher gross profit margins under its existing export model, but has opted to slowly switch to a direct-selling model to enhance control over its product sales in China.
In the worst-case scenario, CIMB envisages a delay in the conversion of its China business into a direct-selling model, initially targeted to happen by end-17/early-18.
