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Why Are Best World International Limited’s Shares Down by Over 20% In the Past Month?

Best World International Limited (SGX: 5ER) is a direct-selling company that deals with a wide range of healthcare products. It currently has operations in 12 markets in Asia. In the middle of 2016, the company was awarded a direct-selling license in China.

Over the past month, Best World’s stock price has fallen by 22%. What may have caused this?

Reasons for a decline

There can be many reasons behind a stock’s price decline.

But, the reasons can generally be classified as business-performance-related, or investor-sentiment-related. The former deals with how a stock’s business has performed or is expected to perform. And in terms of business performance, one of the really important numbers would be the stock’s profits.

Meanwhile, the latter is about the overall mood of market participants – are investors more greedy than fearful, more pessimistic than optimistic et cetera? In general, negative emotions (fear and pessimism) tend to drag down the prices of stocks while positive emotions (greed and optimism) tend to push up stock prices.

The case with Best World

In Best World’s case, I believe it’s the latter that better explains the recent stock price decline.

On 14 August, China’s State Administration for Industry & Commerce (SAIC) announced that it was going to crack down on pyramid schemes.

According to a statement by Best World on 15 August, the SAIC’s action was “widely anticipated in light of the recent news reports on the drowning of a university student, who allegedly fell victim to a certain pyramid selling scheme’s advertisement posted on a popular recruitment website.”

Best World also said that it has yet to convert its business in China into a direct selling model, although it already holds a direct selling license. In other words, the statement by SAIC has no direct impact on Best World’s existing business in China, although it could limit future growth opportunities.

So, I think that investors may have over-reacted to the news of the Chinese government becoming stricter toward pyramid schemes.

After all, this is not the first time that the Chinese government has publicly voiced its concern on potential pyramid schemes operated by direct selling companies. Nevertheless, investors may want to pay close attention to this development’s possible impact on Best World’s future growth. China is after all, a big growth market for the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.