Best World

[Boon]

Hi Kelvesy，

Distribution Costs (which I assume include commission) is not a problem.

The problem with BWI is its HIGH overhead fixed cost in the form of Administrative Expenses (AE) in relation to its revenue.

See Charts:

Gross Profit Margin (GPM = Revenue – Cost of Goods) has been pretty stable from 74% to 79% - this is not a problem

Distribution Costs as % of Revenue have been between 34.9% to 40.3% - and is trending down slightly of late – this is not a problem.

Administrative Expenses stayed around SGD 17 plus million – This Fixed Cost as a % of revenue has been staying HIGH (revenue staying low) – this has been the PROBLEM.

Revenue at about SGD 40 million plus is roughly at breakeven point.

To propel it to the next level of profitibility, BWI just needs to grow its revenues - be able to obtain its direct selling license in China would certainly be crucial, I reckon.

(vested)

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Having analyzed its cost structure, let’s explore BWI’s profitability under such cost structure:

Profitability of BWI : Simplified Model

Assumptions:
- Ignoring depreciation, impairment, FX effects, other charges etc.
- Ignoring minor costs – consider key major costs only:
Costs of Goods Sold = COGS
Distribution Costs = DC
Distribution Costs = AE

EBIT = Revenue – (COGS + DC + AE) = Revenue {1 – (COGS/Revenue + DC/Revenue + AE/Revenue)}

For 2013 : COGS/Revenue = 23% ; DC/revenue = 35% and AE = SGD 18.0 million. And assuming BWI could control these costs at these levels.

Then,

EBIT = Revenue { 1 - (0.23 + 0.35 + AE/Revenue)}
EBIT = Revenue {0.42 - AE/Revenue}
EBIT =0.42 x Revenue – AE

At breakeven:
EBIT = 0 = 0.42 x Revenue – AE
Revenue (at breakeven) = AE/0.42 = SGD18 million/0.42 = SGD 43 million

If BWI could double its revenue to SGD 86 million with the same cost structure,

EBIT (Revenue = 86 million) = 0.42 x 86 – 18 = SGD 18 million

As always, an analysis is only as good as its underlying assumptions.

Questions: Why couldn’t BWI grow its revenue over the last 3 years under the same cost structure? What if DC/Revenue is increased from 35% to 40% (i.e. increase commission by 5%) ?

(vested)