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Best World International Limited - How does it plan to deal with the crisis in Korea?

17/5/2013 – Best World International Limited is cautiously optimistic of its business, and plans to set up a new 'RC' in Taipei by Q3.

We assume the company is talking about opening a Regional Centre in Taipei, as the announcement didn't elaborate the abbreviation 'RC'.

The company, which uses a network of sales agents to market various skin care products and nutritional supplements to consumers, just announced earnings for Q1 FY13:

Revenue: -3.2% to S$9.03mln
Profit: S$0.96mlnvs (S$0.7 mln)
One-off gains/losses: S$1.83 mln vs Nil
Cash flow from operations: (S$0.24mln) vs (S$1.9mln)
Dividend: Nil
Order book: Not Disclosed

Revenue was lower due to seasonal weak first quarter and the Chinese New Year holidays.

If it hadn't been for a one-time gain from the sale of two warehouses, it would have made another loss.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

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Question

1. How does it plan to deal with the crisis in Korea?

Best World International's revenue from Korea almost halved in Q1.

The company says the drop was due to a longer and colder than usual winter, which curtailed its marketing activities in January and February.

But the biggest challenge for the company would be to continue its Korean operations.

After North Korea closed down the Kaesong Industrial Region, there has been a shortage of supply of packaging materials for the company's products which are made in Korea.

The earnings report didn't disclose the alternatives being adopted.

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Question

2. How will an 'Education Centre' transform its Korean business model?

The Q1 earnings report (page 15) also talks of the 'first Education Centre in Korea', which is expected to open during Q2.

What will the Education Centre be educating about? And who?

While the company sees it to be 'marking a new milestone in the Group’s business model in Korea', we have too little information to get our heads around it.

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Question

3. Why did it sell two warehouses?

On January 25, Best World International sold two of its freehold properties, used as warehouses, for S$2.96 mln to Rapid Effect Pte Ltd.

The company bought these properties in 1994 and was carrying them on its books at a value ofS$1.1 mln as at December 31, 2012.

So, it made aS$1.86 mln paper gain from the sale of properties.

In its rationale, the company said:

"The Board is of the view that the selling price of the properties is attractive in view of current uncertainties in the global economy which further dampens the possibility of finding a lessee for the properties".

Let's consider that for a moment.

Both, globally and locally the worst of the economic woes might already be behind us.

And the recent deals in the commercial properties market of Singapore demonstrate the resilience, instead of weakness.

On January 11, the government imposed 15% stamp duty on sellers of properties such as warehouses and logistics buildings, to curb speculation.

Prices had doubled in the past three years and outpaced the increase in rents.

Best World International sold the properties on December 20, 2012, before the government measures were announced, and commercial property prices were raging higher then.

Subsequently, Q1 2013 industrial sales data shows 'prices remained relatively stable' despite a drop in the number of deals after the cooling measures.

Best World International can justify the decision to sell the properties just-in-time, before the cooling measures were announced.

Then, why would a company sell its warehouses just because it fears economic downturn?

Moreover, why should it be worried about leasing the warehouses?

Does it not need them for its own business?

Now that the company has sold the warehouses, where will it store its inventory of skin care and nutritional products, among others?

Why did it not sell its two-storey investment property at Block 726 Ang Mo Kio Avenue 6 #01-4150, instead of selling a core-asset of the business?

We really look forward to management's clarification.

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Question

4. Did it pull the shutters on two of its Lifestyle Centres?

Lifestyle Centres are one of the three pillars of Best World International's business.

It had 49 Lifestyle Centres in operation as on March 31, 2013 (refer page 13 of Q1 earnings report).

This is two short of the number of Lifestyle Centres operating just three months earlier(refer page 15 of FY2012 earnings report).

Therefore that makes us wonder if it pulled shutters on two of its Lifestyle Centres during the quarter.

If so, where and why?

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Question

5. Why don't its membership numbers add up?

According to the 2012 earnings report (page 15), the company had 278,789 direct sales people, which it calls members, as at December 31.

In its Q1 earnings report (page 13), the company said "total membership rose 1.7% to 282,427 members, when compared to 31 December 2012".

But this turns out to be an increase of 1.3%, not 1.7%.

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Question

6. Are the distributors struggling to sell its products?

Despite a 3.2% drop in revenue, Best World International's distribution costs increased 1.2% YoY.

The increase in cost was due to higher commission paid to the distributors, and increased promotion and advertising spending.

Therefore that makes us wonder why it had to pay higher commissions to the distributors.

Are the distributors struggling to sell its products, which might have contributed to the drop in Q1 revenue?

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

However, our emails to the company have bounced back.

A separate email to Independent Director, Mr Robson Lee, was not replied to at the time of publication.



©2013 Investor Central® - a service of Hong Bao Media