The Motley Fool

Best World International Limited Responds to Short-Seller’s Thesis

Best World International Limited (SGX: CGN) has been in the limelight for all the wrong reasons this year. First, in February, a Business Times article cast doubts over the authenticity of the company’s sales figures in China.

And a few weeks ago, activist short seller Bonitas Research released a damning report on the company, suggesting that Best World had overstated its 2017 profits. Other accusations leveled at the company included it conducting a multi-level marketing business in China without a license and pushing sales to distributors, rather than end users. Best World quickly halted trading of its shares to give the company time to respond to the allegations.

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Here are some updates on what has happened since.

Best World’s response

Best World provided a 24-page response to Bonitas Research allegations and attached a ledger of all the invoices of its main export clients in China. Here are the salient points from Best World’s response:

  1. In response to the allegation of the inflation of sales figures:
  • Bonitas Research claimed that the difference between its China primary agent costs of goods sold and Best World’s own stated sales to its primary agent in 2017 differed by S$31 million. Best World in its response said that the difference is because the primary agent did not sell all the products it purchased in the same financial year that they had purchased from Best World.
  • It also highlighted that the primary import agent reported an inventory balance of S$33.7 million at the end of 2017.
  1. In response to allegations that the group is conducting direct selling in China:
  • Best World said that its franchise model is in compliance with applicable laws and that it is continuing to review and fine-tune its model according to changes in laws and regulations.
  • Best World also said that the commission structure provided by Bonitas Research’s report was for its direct selling markets such as Taiwan and Singapore. The commission structure did not apply to China.
  1. In response to allegations that most of its sales are made mostly to distributors and not end-users:
  • Best World said that it did not pay bonuses to Member Reps for recruitment of other Member Reps in China or any market in which it operates in.

What Best World will do now

Best World has also announced that the company and its co-founders have commenced defamation proceedings against Bonitas and its founder in the High Court of Singapore. It will also take advantage of its share price’s steep drop by utilising its cash holdings to repurchase shares of the company.

Best World’s recent earnings report

On 8 May 2019, Best World reported its earnings for the first quarter of 2019. Revenue for the period more than doubled to 117.4% and net profit increased by 79%, driven by the full-year contribution from the franchise segment. The group’s gross profit and gross profit margin improved by 139.3% and 6.9 percentage points, respectively.

The group reported operating cash flow before working capital of S$15.3 million. However, working capital commitments of higher inventories and settlement of commissions resulted in net cash outflow from operations of S$21.5 million.

The Foolish conclusion

It certainly has been a hectic few weeks for Best World International Limited. The allegations made by Bonitas Research are worrying. However, Best World has tried its best to explain some of the discrepancies found by Bonitas Research analysts. As investors, the best thing to do now is to wait for the independent review of the company before making an investment decision.


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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 Jeremy Chia doesn’t own shares in any companies mentioned.