Best World International Limited (SGX: CGN) has been one of the best-performing stocks over the last five years. Even after a recent sell-down, its shares are still up around 24-fold in five years. The stock’s meteoric rise was driven by a greater than fivefold increase in revenue and a 50-fold increase in net profit.
Source: Best World International Limited 2017 Annual Report
While Best World’s rapid growth could endure, there are inevitably business risks that shareholders and potential investors should be aware of.
Risks involving direct selling
Best World sells its skincare, personal care, nutritional, and wellness products mostly through a direct selling model or a franchise model.
However, there are certain risks associated with the direct selling model. In Best World’s case, direct selling involves a multilayered commission structure that incentivises the distributors to sell its products. One of the key risks of such a structure is that often, a single distributor can contribute a large percentage of sales for the company. If there is a fallout and the distributor decides to take his network of customers and distributors to another company, it could have a material impact on Best World’s sales. The risk stems from the fact that end consumers or distributors tend to be loyal to a sales leader rather than the underlying product.
There are also regulatory risks involved in direct selling. Regulations can change in a flash and could affect Best World’s distribution network.
Risks involving its franchise model
As mentioned earlier, most of Best World’s sales are through its direct selling or franchise model. In its franchise model, Best World distributes its products through third-party franchisees who, in turn, sell the products to end consumers.
The sale of products to its franchisees are on a cash basis and are not refundable. However, there are still concerns over the frequency of reorders. Best World only made its transition to the franchise model in China this year, so investors have little information to go on.
If its franchisees take longer than expected to move their products, there may be a slowdown in reorders. In fact, one of the reasons for the recent sell down of Best World shares was concerns that consumer interest in China for Best World’s flagship skincare brand, DR Secrets, is trailing its strong sales revenue.
Although management is confident of the revenue growth in China, investors should continue to keep an eye on quarterly sales figures and reports by independent market researchers.
The Foolish bottom line
Best World has certainly done a great job of expanding its network of distributors, which, in turn, has helped grow the company’s sales and profit multiple-fold over the last five years. 2018 was another great year for the company as it extended its remarkable growing run, with net profit up 30%.
However, no company is free from business risks. Investors should therefore be aware of the risks each of their investments face.
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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 writer Jeremy Chia doesn’t own shares in any companies mentioned.