Best World

[Boon]

BR claims that : “As reward for their fraudulent scheme, Best World’s founders Dora Hoan and Doreen Tan (the “Dora’s”) exponentially accelerated their combined annual take home pay by 20x in five years, earning less than S$ 2 million in 2013 to receiving S$ 40+ million in cash in 2018!. In the three years since implementing the scheme, the Dora’s have collectively brought home S$ 85 million in cash while Best World exited 2018 with its trade and payables balance at an all-time high of S$ 95 million and its receivables touching all-time lows at S$ 5.2 million.” (page 25)
 
The Annual Compensation Table presented by BR on page 25 of it report shows that, over the three years (2016, 2017, 2018), D2 get paid 62 m in dividend and 22 m in remuneration.
 
(2016 +2017 + 2018) : Dividend Payout (SGD million)
NPAT = 34.569 + 55,673 + 72.892 = 163.134 m
Total Dividend Payout = 12.661 + 22.553 + 40.658 = 75.872 m
Average dividend payout ratio = 46.5%
http://bestworld.listedcompany.com/newsroom/20190226_221606_CGN_SWA0S51IDKGAST4D.2.pdf     (refer to dividend payout track record table)
 
Dividend paid to D2 (as claimed by BR) = 62 m  (~81.7% of 75.872 m)
 
D2 owns less than 50% of BWI. If they indeed pay themselves 81.7% of the dividend payout over the three years at the expense of other shareholders, it would have been called “day light robbery" instead of a "fraudulent scheme”.
 
Intentionally or unintentionally, BR can’t count……………….Ha-ha !

[weijian]

 
The sum we are talking about is SGD 9.1 m.

It was Changsha Best’s China profit (hence after paying China tax), as claimed by BR.

BR didn’t mention the 9.1 m was being part of the “fake profit fabrication”. Presumably they believe it was real.
 
If it were real, it would certainly have boosted BWI’s 3Q/FY2018 top and bottom line.
 
The 9.1 m (ignoring Singapore tax), if distributed as additional dividend, D2 would get about 46% of it only, the rest would go to the remaining shareholders. 
 
The 9.1 m could NOT be paid ENTIRELY as additional bonus to D2 as I believe their bonus is capped at a certain FRACTION of net profit (NOT 100%).
 
If Changsha Best were indeed an entity secretly controlled by D2 (or the management), they would have certainly kept the entire 9.1 m in Changsha Best for themselves, I believe.
 
What kind of fraudsters would share it with shareholders whom they have set out to cheat in the first place? Ha-ha!
 

Income from subsidiaries doesn't only benefit the controlling shareholders in the form of dividends (cold hard cash) when declared upwards. Earnings from your subsidiary contribute in a 1:1 ratio (if wholly owned) to the bottom-line of the holding company, but from ownership standpoint, this earnings multiplies because the listed holding company is valued as a multiple of earnings.

So D2 may just claim 46% of 9.1mil (4.2mil) but wealth effect would be "4.2mil x earnings multiple".

[Boon]

BR claims:
 
“PRC Credit Reports disclosed that in 2016 Changsha Best’s total costs of good sold (“COGS”) amounted to S$ 52.5 million, nearly identical to the S$ 53 million Best World generated from China skin care sales to its one major customer. We think this evidence further corroborates that Changsha Best is the correct identity of Best World’s one major China customer in 2016 and 2017”. (page 10)

While Changsha Best’s 2016 COGS matched Best World reported sales to its one major customer, PRC Credit Reports disclosed that Changsha Best’s 2017 total COGS were only S$ 85 million, ~S$ 20 million less than the S$ 106 million Best World reportedly generated from its one major customer in 2017. (Page 10)
 
PRC Credit Reports disclosed that not all of the raw materials Changsha Best purchased were imported skin care products. In 2017, Changsha Best imported S$ 74.6 million worth of skin care products, suggesting that Best World overstated its 2017 China skin care sales by at least S$ 31 million. (page 11)
 
Changsha Best’s 2017 skincare product imports of S$74.6 million included inventory shipped but not yet paid for As of December 31, 2017, Changsha Best reported an inventory balance of RMB 165 million (S$33.7 million) and trade payables of RMB 167 million (S$34.2 m), suggesting Changsha Best had not yet paid for its reported inventory and that we are significantly understating Best World’s fabricated 2017 sales to Changsha Best.” (page 11)
 _________________________________________________________________________________________________________________

BR claims that COGS of CB should match BWI’s sales to CB. This is a flawed argument.
 
The formula for COGS is: 
 
COGS during a period = Beginning Inventory (BI) + Inventory Purchase (IP)  – Ending Inventory (EI)

BR assumes that Inventory Purchased (IP) by CB = Sales by BWI to CB, (a more reasonable assumption IMO.)
 
Strictly speaking, Inventory Purchase by CB should be the Landed Cost = Sales by BWI to CB   + freight & insurance costs + import tariff, which should be slightly higher than the reported sales value by BWI.
 
We also know that BI (of one period) = EI (of PREVIOUS period.)
i.e.
BI(2017) = EI(2016)
BI(2016) = EI(2015)
 
For 2016:
 
COGS(2016) = BI(2016) + IP(2016) – EI(2016)
 
COGS (2016) = 52.5 m, according to BR.
 
IP(2016) = 53 m, (BWI sold 53m of goods to Changsha Best (CB) in 2016.)
 
52.5 = BI(2016) + 53 – EI(2016)
 
Implies BI(2016) = EI(2016), since 52.5 ~ 53
 
For 2017:
 
COGS(2017) = BI(2017) + IP(2017) – EI (2017)
 
COGS(2017) = 85 m, according to BR

EI (2017) = 33.7 m, according to BR

IP(2017) = ?
 
According to BR, IP(2017) = 74.6 m, and NOT 106 m as reported by BWI. Based on this, BR argues that BWI has overstated its export sales to CB by at least 31 m.
 
COGS(2017) = BI(2017) + IP(2017) – EI (2017)
 
85 = BI(2017) + IP(2017)– 33.7
 
=> BI(2017) = 118.7 – IP(2017)
 
For 2015:

EI (2015) = BI (2016)
= EI(2016), since BI(2016) = EI (2016) 
= BI(2017), since BI(2017) = EI (2016) 
 
=> EI(2015) = BI(2017) = 118.7 – IP(2017)
=> EI (2015) = 118.7 – 74.6 = 44.1m, if IP(2017) = 74.6 m
=> EI (2015) = 118.7 – 106 = 12.7 m, if IP(2017) = 106 m
 
BWI started exporting to its import agent in 2014.
BWI’s Export sales to China = SGD 5.9 m and 13.0 m in 2014 and 2015 respectively, or 18.9 m in the two years.
 
Could CB’s inventory = 44.1m at the end of 2015 ( > 2 x 18.9 ) ? Impossible
 
Could CB’s inventory = 12.7 m at the end of 2015 ( < 18.9 ) ? Possible and looks more realistic as well, IMO.
 
To me, it looks more like CB has understating its PURCHASE rather than BWI has overstating its sales in 2017, if the numbers provided by BR were reliable……..Ha-ha!

[dreamybear]

There is a post written which tries to draw lessons from “Avoiding Potholes in Listed Companies" report* and the eg used is BW. Details : https://medium.com/@ClassifiedInvestment...6733b5443e

For learning info.

*Download links to the pdf report is found in the post itself.
*Corporate governance thread : https://www.valuebuddies.com/thread-8295.html

[Temperament]

Like I said, day one our group of investors know it is as speculative as it can get.

but one of us who suppose to have insider info dares to speculate and makes a lot of money from the very beginning lol.

The lesson is for speculators, insider connections definitely help a lot.

I think I can make money some other "safer" way in the market.

Typical 4Ks me

[Temperament]

Why we think it is a very speculative counter in the beginning is because of BW's historical price chart from 10 cents in 2016 suddenly shot up a few hundred %.

Insider news trader told us only after 2nd or #rd round of magical price increase to about $1 + +, was quite sure it was going further up in future. Which was quite "true" until now?

So the lesson is still if U must punt, insider's info helps a lot.

The only problem is don't know when insider's news is too late already or not accurately anymore.

NB:

i think most veteran investors looking at only historical price chart of BW will be alarmed and dare not invest.

Maybe a few will speculate a bit with insider news?

Even Apple or Microsoft took time to incubate.

[Squirrel]

Best World has issued both the refute to Bonitas Report and the quarterly results

https://links.sgx.com/FileOpen/2019%2005...eID=558496

https://links.sgx.com/FileOpen/BWG%20Q12...eID=558491

[Squirrel]

Its very interesting how the company phrases the clarification on distribution and commission structure

"The Company confirms that:
(i) the Group did not pay any bonuses to “Member Reps” (as described in the
Report) for recruitment of other Member Reps in China or any market in which
the Group operates; and
(ii) the commission structure presented on pages 21 and 23 of the Report is the
commission structure applied in the Company’s direct selling markets, such as
Taiwan and Singapore (amongst others). This commission structure is not
applied by the Group in China."

All are in relation to the group, but does not vouch for the Franchisees. Should the Franchisees practices be part of the review?

[Squirrel]

Another update by Valiant. Interesting developments.

https://valiantvarriors.wixsite.com/home...ted-to-bwl

[Squirrel]

What does Interested Person Transaction mean?

According to SGX rulebook

http://rulebook.sgx.com/en/display/displ...48&print=1

901

The objective of this Chapter is to guard against the risk that interested persons could influence the issuer, its subsidiaries or associated companies, to enter into transactions with interested persons that may adversely affect the interests of the issuer or its shareholders.

(4)
(a) In the case of a company, "interested person" means:—
(i) a director, chief executive officer, or controlling shareholder of the issuer; or
(ii) an associate of any such director, chief executive officer, or controlling shareholder.

(6) "transaction" includes:—
(a) the provision or receipt of financial assistance;
(b) the acquisition, disposal or leasing of assets;
© the provision or receipt of services;
(d) the issuance or subscription of securities;
(e) the granting of or being granted options; and
(f) the establishment of joint ventures or joint investments;
whether or not in the ordinary course of business, and whether or not entered into directly or indirectly (for example, through one or more interposed entities).

Part III General Requirements

   905

   (1) An issuer must make an immediate announcement of any interested person transaction of a value equal to, or more than, 3% of the group's latest audited net tangible assets.
   (2) If the aggregate value of all transactions entered into with the same interested person during the same financial year amounts to 3% or more of the group's latest audited net tangible assets, the issuer must make an immediate announcement of the latest transaction and all future transactions entered into with that same interested person during that financial year.
   (3) Rule 905(1) and (2) does not apply to any transaction below $100,000.

   906

   (1) An issuer must obtain shareholder approval for any interested person transaction of a value equal to, or more than:—
   (a) 5% of the group's latest audited net tangible assets; or
   (b) 5% of the group's latest audited net tangible assets, when aggregated with other transactions entered into with the same interested person during the same financial year. However, a transaction which has been approved by shareholders, or is the subject of aggregation with another transaction that has been approved by shareholders, need not be included in any subsequent aggregation.
   (2) Rule 906(1) does not apply to any transaction below $100,000.

Part V Exceptions

   915

   The following transactions are not required to comply with Rules 905, 906 and 907:—.

(5) A transaction between an entity at risk and an interested person for the provision of goods or services if:—
(a) the goods or services are sold or rendered based on a fixed or graduated scale, which is publicly quoted; and
(b) the sale prices are applied consistently to all customers or class of customers.
Such transactions include telecommunication and postal services, public utility services, and sale of fixed price goods at retail outlets.

====================================================

From the above, what's your interpretation for Interest Persons Transaction? Does BWL need to declare Koh Kim Chuan as such? Not familiar with this area of disclosure. Can buddies here help explain?