2 Big Risks Best World International Limited Is Facing and How It Is Addressing Them
Best World International Limited (SGX: CGN) 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.
Any company, big or small, faces risks that could derail its business. In Best World’s latest annual report for its fiscal year ended 31 December 2016, the company discussed the risks it has to deal with.
I thought it’d be very useful to share Best World’s discussion. Understanding Best World’s risks and how it is addressing them will help investors better evaluate the company’s future profitability. Here are two of the company’s important risks.
A disruption in supply
Best World’s head office supplies the company’s regional centres with inventory based on forecasts given by said centres.
If there is any significant mismatch between the forecasts and actual inventory requirements, there will be inventory shortages (where actual demand is higher than estimated) or obsolesces (where the estimated demand is higher than reality). Both scenarios would result in costs to the company.
Best World aims to minimize this supply-disruption risk by regularly reviewing sales forecasts, monitoring custom regulations, maintaining buffer stocks, and maintaining a good working relationship with its suppliers.
A sudden discontinuation of key products
Best World depends on a few products for a “major part of [its] revenue.” Plum Delite and some products in the DR Secret range of skin care products are examples of the company’s key revenue generators.
There is a risk that Best World’s important products are forced to discontinue because of restrictions on certain product ingredients by regulators. These restrictions can happen when regulations change, even when Best World had met the initial requirements.
To deal with this risk, Best World’s product development team keeps track of regulatory requirements in each country the company has a business presence in. But, investors should know that Best World has relatively little control over regulatory decisions. As another way to lessen its dependence on a few key products, Best World has plans to expand its product range.
A Foolish conclusion
The above are two important risks, and how they’re managed, that Best World shared in its 2016 annual report.
Given that risks and the management of risks are part and parcel of running a company successfully, it is important that investors understand them before investing in any company.