The Straits Times / The Business Times News on Best World

Best World looks good

The sole SGX-listed direct marketer has put up a good show. Can it be sustained?

MENTION direct marketing, and many people will give you the brush-off. 'But it's direct marketing!' they'd scream at you. This reaction could stem from a number of reasons.

One, the fallacious association with pyramid schemes, which are prohibited in Singapore. Two, stories by friends or relatives who have tried their hands in direct marketing but have given up since. And three, the impression is there are just too many direct marketing companies out there.

But the only direct marketing company listed on the Singapore Exchange - Best World International - has turned out to be a mini celebrity among the SGX stocks. In the last six months, its share price has tripled - from about 20 cents to 60 cents now.

What's driving its explosive growth, and can it be sustained, and for how long?

In the six months to June 30, 2005, Best World's revenues doubled to $25.2 million while its net earnings grew by about the same quantum to $4.4 million.

I had a chat with the company's executive director Huang Ban Chin this week and I asked him if he thinks that his company's share price reflects its fundamentals.

'The share price reflects that some people are looking at us. But it has not reflected the full impact of retail investors' participation. In terms of fundamentals, it has some way to go,' he said. 'Whatever optimism the market has for the second half, it is based on our existing markets. It has not taken into account China - a market with huge potential but we don't know when it will open up.'

The super-normal growth of Best World and the confidence of the management intrigue me and I've decided to take a closer look at the company's numbers. First off, obviously the market shouldn't be valuing something that has not occurred yet, and whose timing is still highly uncertain.

Before we go any further, here's a brief description of what Best World is all about. It is principally a marketing and distribution company. It sources products from contract manufacturers, sometimes providing inputs on the formulation of the products, brand them under their proprietary names, and then distribute them to consumers.

The products that Best World has now can be categorised into skin care, nutritional supplements, personal care, healthcare equipment and the recently launched weight-control products.

The distribution is done by members, who will sell and market to their friends and family. Members earn commissions from selling the products. They also recruit others to sell the products so as to get a cut from the commissions earned by those they have recruited.

The members they recruit will go on to recruit others. Being the early bird has its advantages, because the first tier members can earn a fraction of the commissions of all the members lower down the line, hence the term multi-level marketing.

Just under 50 per cent of Best World's gross profits are paid out as commissions to its members. The sum is classified as distribution expenses in its accounts. The actual cost of its products is about 22 per cent of its sales. So the growth drivers for the business are new products and new members.

As at end of June, Malaysia has overtaken Singapore as Best World's biggest market, contributing 41.4 per cent to group revenues of $25.2 million. Singapore, at 30.5 per cent, is second. Indonesia's revenues, negligible a year ago, surged to $6.3 million in the six months to June this year. By next year, Mr Huang thinks Best World's biggest markets will be in the order of Malaysia, Indonesia, Singapore and Thailand.

New markets that Best World will enter include the Philippines, Hong Kong, Taiwan and the wild card China. As part of its preparation for the entry into China, Best World has agreed to acquire 20 product licences, inventories and all the trademarks of the range of nutritional supplements sold and marketed in China for the last five years under the 'Vigor' brand.

The transaction, valued at 20 million yuan (S$4.1 million), will be completed in this quarter.

From its relatively low base, any new markets added will provide a major boost to the company's performance. Budding entrepreneurs around the region, tempted by the promise of being their own boss with relatively low capital outlay, may be willing to buy the products at first. Whether they will come back for more will be the true test.

Mr Huang said the Optrimax range - Best World's recently launched weight control products - are selling well.

So at least for this year and next, Best World should continue to show decent growth. Assuming it did as well in the second half, its earnings per share for this year would come to 5.8 cents. Its last traded price of 60.5 cents works out to 10.4 times its annualised earnings.

In comparison, its peers like Amway (Malaysia) Holdings is trading at 20 times its estimated earnings. Nu Skin in the US is trading at about 18 times. Admittedly both are bigger and more established players.

Threats to growth

But perhaps Best World makes up with its promised growth. There is, however, no lack of threats to that promised growth. For one thing, many of the direct market companies sell similar products - health supplements, skin care products, and so on.

'It is the efficacy of our products that sets us apart from other direct marketing companies. We are a consumer product company, we are product-oriented and brand-oriented. The proposition of the others are very much business-oriented, people join as members for the business, not because they believe in the products,' said Mr Huang.

But the fact is, any company can produce and sell the same products as those sold under Best World's brands Avance, bwl or Dr's Secret. The formulation and ingredients of the products, if any company bothered to find out, can be replicated.

So Best World's success will depend, besides the products' quality, on how it manages to position them. They have to be of such quality and efficacy, and of the appropriate pricing that users will want to keep replenishing their stock.

But perhaps the most valuable assets of the group is its distribution network, the management's ability to identify new products to be launched and their ability to execute their strategy. As at end-June, the company has 50,000 members primarily in Singapore, Malaysia, Indonesia and Thailand. That's an increase of 5,000 from December 2004.

Good figures

On the whole, the network it seems has yet to reach a point of diminishing returns. Last year, Best World raked in revenues of $31 million from 45,000 members - that's $689 per member. At half time this year, the 50,000 members brought in $25.2 million, or $504 per member for just six months.

As mentioned, there are many direct market companies already operating in the region. How well penetrated are the various markets that Best World is targeting?

As you can see from the table, Malaysia has the highest penetration of direct marketers. Every one in four urban dwellers is a direct marketer! In Singapore, it's about one in ten. In Thailand it's one in five. Relative to the rest, it appears Indonesia has the greatest growth potential.

However, the sales per person is also highly correlated with the wealth of the nation. The two million direct marketers in Japan generated sales of US$27 billion in 2003. That's a whopping US$13,500 per person.

In Singapore, the 400,000 or so direct marketers raked in US$318 million last year or US$799 per person. Incidentally, Best World members' sales per person in Singapore was US$500 last year.

So in a country like Indonesia, more members would be needed to generate, say, a similar sales level as that of Singapore. Thus this region is not quite a virgin territory when it comes to direct marketing.

So can Best World sustain its growth? Well, from the experiences of most other direct marketers, it appears that growth is good for the first three years after listing. After that, it tapers off and earnings stay rather flat before the next rejuvenation, likely to be a new market or a new product range.

I wondered if a company with well-trusted, proprietary products, and employing the personalised selling of direct marketers, might make for a market-beating combination. Would you consider buying Eu Yan Sang products from your aunty? Why not, at least it will be home delivered . . .

The writer is a CFA charterholder. Her e-mail: hooiling@sph.com.sg