China Tier Two Cities Spur World's Top Direct-Selling Stock

(Bloomberg) -- The world’s best-performing publicly traded direct seller isn’t so direct in its approach to the behemoth that’s the Chinese market.

Instead of going after China’s biggest cities with their more affluent professionals, Singapore’s Best World International Ltd. is targeting small business owners in second-tier cities to sell its 3,988 yuan ($587) DR’s Secret skincare sets. Rather than immediately applying for a license to enter the world’s No. 2 direct-selling market four years ago, the company opted to first distribute its products through a network of nail spas, beauty and hair salons in cities like Hangzhou.

"Our focus has always been on second-tier cities," co-founder and Group CEO Dora Hoan said in an interview at Best World’s Singapore headquarters this week. "They have fewer white-collar professionals but they have more entrepreneurs, owners of small- and medium-sized enterprises,” she said, speaking in Mandarin.

The strategy is paying off. China became Best World’s biggest revenue contributor in the first quarter this year, growing 103 percent from a year earlier to account for almost half of the company’s sales. Analysts forecast an average 35 percent gain in Best World’s revenue this year to S$270 million ($196 million) and the stock has climbed more than 220 percent in the past 12 months. It’s the top gainer in a group of 28 publicly traded direct selling companies tracked by Bloomberg that includes better known names such as Nu Skin Enterprises Inc. and Avon Products Inc.

China should help drive more growth for the skincare and health supplements direct seller, according to Jonathan Seow, a Singapore-based analyst at CIMB, who has a "Add" rating on Best World with a target price of S$1.52. The shares rose 0.7 percent to S$1.475 as of 10:58 a.m. on Friday.

Having obtained its first Chinese direct-selling license in Hangzhou last year after an 18-month wait, Best World is next expecting approvals in Changsha and several other so-called second-tier cities in Hunan province, according to Chief Operating Officer Ban Chin Huang. Over the next 18 months, it plans to convert its initial customers in China – the owners of nail spas and beauty salons – into distributors, and their customers into direct sellers.

“They’re looking to grow, and they’ve not yet converted their business model in China into a direct selling one,” Seow said. “They’ll do this conversion in phases, so there’s still more upside.”

Direct selling in China reached 136 billion yuan in 2016, a more-than 13 percent increase from the previous year, according to researcher Euromonitor International. Direct sellers offer products to consumers without physical retail networks, using individuals as agents or distributors.

China Risks

While bigger cities like Beijing and Shanghai have plenty of professionals who can afford the company’s bestselling DR’s Secret line, they can only be consumers, according to Hoan. Small business owners in the second-tier cities, however, have customer databases that number in the thousands, she said in the June 12 interview.

“So we target these businessmen, and they can help us reach out to the broader masses," Hoan said.

Access remains a key challenge and risk for companies such as Best World in China, which is the second-largest direct selling market after the U.S., according to the World Federation of Direct Selling Associations. Approval is needed to operate in each city, and China has banned direct selling in the past.

"It is very hard to predict whether the government might do that again, although it’s quite unlikely," said John Cheong, Singapore-based analyst at Maybank Kim Eng. "But that’s a risk."

Japan Opportunity

The company also has its sights on other countries in Asia, even as China overtook Taiwan as its No. 1 market last quarter with S$21.4 million in revenue from the mainland. It is preparing a Singapore factory, which will produce Halal-certified products that will help bolster sales in Indonesia.

Elsewhere, Best World is in talks with several companies for possible merger and acquisition opportunities in Japan, according to Huang, who declined to name the targets. The company said these talks are still in preliminary stages, and it hasn’t entered into any binding agreements.

“Japan presents a very interesting opportunity because it’s the fifth-largest market in the world,” he said. “But it’s a very nationalistic market. So instead of us going into that market and building everything from scratch, it would actually make more sense of us to acquire a company over there.”

While Huang was confident that moving to a direct selling model in China would boost sales, he declined to provide a forecast for Best World’s 2017 revenue. The company is “quite comfortable” it can meet the average revenue estimates of analysts who cover the stock, he said.

Revenue forecasts from DBS Group, Maybank Kim Eng and CIMB for 2017 averaged S$270.3 million. The company’s net income more than tripled to S$34.6 million last year.

To contact the reporter on this story: Sterling Wong in Singapore at swong470@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Stephanie Phang, Sebastian Tong