May 16, 2018

1Q18 core earnings were a big miss as it met only 9-10% of our and consensus FY18 estimates. We are not overly concerned as management already warned in 4Q17 of the possible impact of weak export sales during its business transition, and the demand for BEST’s products in China remain healthy. We expect earnings to improve from 3Q18 onwards. However, we cut FY18-20E EPS by 6-8% to reflect weaker Taiwan sales and potential risk of longer-than-expected transition. Accordingly, we cut our TP 23% to SGD1.56, pegged to a lower P/E multiple of 14x (from 17x) FY18E EPS (still based on 0.8x PEG using FY1720E EPS CAGR of 18%); We ascribed a c.20% discount to the PEG of 1.0x for regulatory risks and competition. Our target P/E fell from 17x as our 3-year forward EPS CAGR declined after our EPS cut.

In China, 1Q18 sales were weak, declining 68% YoY due to the change in its business model from export to wholesale. 1Q18 sales were low as export agents had already placed orders in advance for the next 3-6 months in 4Q17 (they have to deplete export inventories before being able to recognise revenue under the new wholesale model). However, actual demand for BEST’s products in China is still robust. Management expects this trend to continue and contribute to double-digit earnings growth for FY18E. Once the transition is completed, it will expand BEST’s geographical presence more quickly, allow it to run its own management team on the ground, and improve revenue-recognition efficiency. BEST expects 2Q18 earnings to remain weak as the transition won’t be complete and as export agents continue to work down their inventory.

In Taiwan, sales declined for the fifth straight quarter as BEST continued to reduce price promotions to prevent discounted goods from flooding into the market. Management expects its sales in Taiwan to stabilise in the rest of FY18 as it will launch more events and products in 2H18. Maintain BUY at TP SGD1.56 by Maybank Kim Eng. Share price closed at S$1.290