CLSA's investigative report on BestWorld yesterday revealed some very telling evidence.
The way I see it, Best World's model in China isn't exactly a typical network marketing one. In a network marketing model (such as Amway, Unicity), company products are primarily distributed directly to individuals, who in turn become a node to form their own distribution network to other individuals.
But in Best World's case, company products are distributed to distributors which act more like wholesalers holding up the stocks. It is up to the distributors how they want to sell the products. It is a pseudo franchise-network marketing model.
When distributors buy products from Best World in bulk, Best World records revenues. That results in very high revenues and growth. But it doesn't mean the products will be consumed by end users. Chances are there is an increasing stockpile at the distributors. Chances are there are clauses in their contracts for distributors to return unsold goods to Best World.
As pointed out by the CLSA report, there is a risk for Best World to repeat its boom-bust cycle, previously in Indonesia and Taiwan. The initial years see very good revenues and profits growth. But the numbers soon collapse when distributors stop buying, return stocks etc.
Despite having fallen from $2.60 recently, I believe there is more downside in the short term. Interestingly, CLSA made a sell call but revised its target price sharply higher from $1.29 to $1.75. This is primarily due to expectation for good 2019 result.
My view is that it will head to $1.50 this round.