Best World

[Retired@52]

I got to know this stock from Boon's post. Thank you Boon.

Let's do a simple reality check on Boon projection, with an assumptions. The price to final consumers, should remain the same, in the shift from export, to Direct Selling channel. In other words, Best World and the Saloon Owners/Distributors, will re-balance their shares, during the channel shift. I am skeptical, Best World can keep all the gains from the shift, on the expense of the down-line Saloon Owners/Distributors, without any damage on the relationship.

I do agree the company, is more scale-able, than the existing export channel, once the license approved.

What do you think?

(not vested, but monitoring)

Hi CityFarmer,

First we must know how Multi-Level-Marketing (MLM) or Network Marketing works.

In a Traditional Business, huge cost goes to 3 major areas:

1. Whole Sellers, their Warehouses, their staffs & their profits.
2. Retails, their Shop Spaces, their staffs & their profits.
3. Company's Sales Staffs, Salary & Commissions.

Note: All the above have a Limitation.

In MLM, the company doesn't need all the above & the savings are passed directly to every Individual Distributor.
The potential is the multiplying effect. Every individual distributor can bring in more distributors to join the business.

Every individual distributors will have to use their products in order to receive the commission if any.
(This ensure the usage of the products.)

Currently, the Saloons can only sell to their customers and that's their limit. When they become distributors,
they can bring in their customers to join them as fellow distributors, unlimited.

Note: This is very sensitive to the Communist System because it can spread like wildfire if not properly control.
Therefore, the MLM company has to abide to certain quote of Conduct.
Example, they may not be allowed to use words like "recruit". They can say, bring in customers to join as distributors.

Hope that my simple writing helps. (There are a lot more to it then what I've written).

[CityFarmer]

We have two threads of discussion here. One is the Boon's projection, on the immediate profit, after a change of "export" to "direct-selling (DS)" model on existing China biz. Another one is the prospect after the DS license.

I don't think there will be a magical jump in company PnL, just by converting the existing China biz, from "export" to "DS" model. Please refer to my previous post.

The "DS model" is like the "Online model" for retail. It is not a sure-win model. It has different cost structure. Warehouse/Retail Outlets expenses, are replaced by commission/promotional expenses. The execution is important. I am cautiously optimistic on the DS model outlook in China, with the success in Taiwan market. On top of that, it is interesting to see the impact of e-commerce.

(not vested, and have studied Amway and Nu Skin model, for a basic understanding of direct selling)

[Boon]

[Image: spepox.jpg]


[Image: 33xest3.jpg]

Export Model:
BWI sells to its China agents
BWI has no control over how much its China agents sell to their end consumers.
Assuming export price = 40
COGS = 24
Administrative Expenses (AE) = fixed overheads (employee salaries and rental) bear by BWI = 11 ( ~ 40% of 27)
ðRevenue booked by BWI = 40
ðEstimated Profit ( EBITDA)= 40 (sales) – 24 (COGS) - 11 (AE) = 5
ðMargin ~ 12.5% (=5/40)
 
DS model:
Selling Price to end consumer = 100
COGS = 24
Distribution Cost (DC) = commission to distributor = 36
Administrative Expenses (AE) = fixed overheads (employee salaries and rental) bear by BWI = 27
=> Revenue booked by BWI = 100
=> Estimated Profit (EBITDA)= 100 (Sales) -24 (COGS) – 36 (DC or commission)  – 27 (AE) = 13
=> Margin ~ 13% (=13/100)
 
By converting Export model to DS model:
ðRevenue increased by 2.5 times from 40 to 100
ðEstimated profit (EBITDA) increase by 2.6 times from 5 to 13

Note: The 2.5 multiplier is only my guess work to show the concept, I do not know the actual number and export price.  
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[CityFarmer]

We don't need to re-invent the wheel, by re-calculating with assumptions. We can take the segment info as base for discussion.

Base on the AR2015's segment info, Export model's PBT margin is 49%, while Direct-Selling (for non-China-market) PBT margin is 13%. It should be a more reliable base for discussion.

A simple scenario, converting Export-DS, wouldn't enlarge the pie over-night (assume end-user price the same), thus if company gain more, the saloon owner/distributors need to lose, a simple logic, right? I agree both will gain if the pie is enlarged eventually.

(not vested)

[Boon]

Thanks CF,

Well, selling prices to distributors (under DS model) would be significantly higher than the export prices to China.  So would margin. These were the guidance given by the management during the AGM.

Hence, I believe that selling price to distributors (under DS model) would likely be set at 2 to 3 times to that of export price.

CIMB uses revenue multiplier of 2 in its report dated 21 April 2016.

Margin multiplier would be harder to predict.

PBT of 49% is already pretty high.  

I am not sure how AE is being allocated between export segment and DS segment !

The implicit assumptions “of same selling price and same cost structure across all geographical markets” in my model could be flawed.
____________________________________________________________________________________________________________________

[Boon]

For FY 2015, total AE incurred = SGD 27.161m
 
The PBT (or recurring EBITDA) margin arrived at for each segment (export or DS) is dependent on how the SGD 27.161 m is being allocated or apportioned between various segments.
_____________________________________________________________________________________________________________________

[CityFarmer]

Thanks CF,

Well, selling prices to distributors (under DS model) would be significantly higher than the export prices to China.  So would margin. These were the guidance given by the management during the AGM.

Hence, I believe that selling price to distributors (under DS model) would likely be set at 2 to 3 times to that of export price.

CIMB uses revenue multiplier of 2 in its report dated 21 April 2016.

Margin multiplier would be harder to predict.

PBT of 49% is already pretty high.  

I am not sure how AE is being allocated between export segment and DS segment !

The implicit assumptions “of same selling price and same cost structure across all geographical markets” in my model could be flawed.
____________________________________________________________________________________________________________________

I agree with your assessment of DS price as 2.5x of export price, and very likely the right figure. The "adjusted" PBT margin of export/mfg/wholesale (which is mostly meant for China market) is about 33%. After China sales are converted from export price to DS price, the margin will be "adjusted" to about 13%, which is similar as existing DS margin in other regions.

One observation, the commission per member has increased about +80% during FY2013-FY2015. I reckon the key contributor is from Taiwan market. E-commerce has "improved" the efficiency of member to promote sales.

What do you think on the potential of e-commerce?

(not vested)

[BlueKelah]

this stock so much coverage on NextInsight, sure boom lah. Some more go China expand, same story as OSIM last time. Once the China story over, see what other thing they can spin. I bet it will be some IPO in HKSE or some acquisitions and asking money from shareholders to expand.

Question is how successful? I had a neighbour with a couple factory in China producing this MLM type of home sundries, which did very well for many years, but couple years back he decided to sell off. Why? Because he said in China there is too much corruption, very hard to do business, everything need to "lubricate" and that add additional costs.

[Retired@52]

this stock so much coverage on NextInsight, sure boom lah. Some more go China expand, same story as OSIM last time. Once the China story over, see what other thing they can spin. I bet it will be some IPO in HKSE or some acquisitions and asking money from shareholders to expand.

Question is how successful? I had a neighbour with a couple factory in China producing this MLM type of home sundries, which did very well for many years, but couple years back he decided to sell off. Why? Because he said in China there is too much corruption, very hard to do business, everything need to "lubricate" and that add additional costs.

Hi Blue Kelah,

You hit the nail on the head! I saw what you see & now I see what you saw!

Back in 2008 I was already retired so I decided to allocate a small portion of my funds in the shares of Life Style Products.

I looked at 2 companies: Best World Ltd (BWL) & Osim. BWL was traded at about $0.20 & Osim at about $0.05.
Between the 2, I chose BWL for 4 reasons:

1) As a retiree, I need dividend and its yield was quite reasonable.
2) I'm more familiar & comfortable with the MLM System versus the high cost of stocking & renting/owning retail shops.
3) Best World was then the only MLM company listed in SGX.
4) BWL was traded at about $1.10 in 2007

In 2014 when Osim's share price went up to $2.90 (Increase by 58 times) & BSL stay at $0.20 I told myself (I was Wrong).

If history is anything to go by, BSL is only up by 5 times now. I hope it follows the pattern of Osim as what Blue Kedah has said.

Having said all these, between $1.25 to $2.50 I'll take some chips of the table to reallocate in the Retiree's Stocks for dividends.

[CityFarmer]

For FY 2015, total AE incurred = SGD 27.161m
 
The PBT (or recurring EBITDA) margin arrived at for each segment (export or DS) is dependent on how the SGD 27.161 m is being allocated or apportioned between various segments.
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What is the AE? Advertising Expense or something else?