Barron's on concerns over direct selling in China

For those investors interested in public companies direct selling in China, a Barron's article suggests some caution. Though Avon (ticker: AVP) recently received approval to begin direct sales testing in China, the pace of regulation and concerns over what might be a government imposed fee, make the future of direct selling in China unclear:

Delays in regulation:

• Regulations were expected at the end of 2004.
• Now expected in 2H 2005.
• Final adoption may be delayed until the end of 2005.

Corey Lindley, President of Greater China for Nu
Skin (ticker: NUS), a direct seller in China:

• "80% to 90% confident" that the regulations will be released June 10-15.
• Hopes that 3 months later, the
  Chinese will begin approving companies for direct selling.

According to David Hines of Avalon Research Group:

• Chinese government intends to collect a fee from direct sellers to
  establish a reserve to settle problems that might arise from direct
  selling.
• The current draft of the regulations imposes a fee of 20% of monthly revenue, or a $2.4 million per month minimum.
• As part of its trial, Avon deposited $2.41 million.
• Nu Skin expects $130-140 million of revenue in China this year mainly from its storefronts.
• In 2006, with an expected direct-selling license, the same level of revenue would generate a fee of $29 million, or 18% of estimated earnings.

Government Deposit or Fee?

• Nu Skin's Lindley says the government collection is a deposit, dismissed the possibility that the "deposit" is 20% of sales, and said that the government would only draw on the "deposit" if the company were found not to be paying salespeople appropriately.
• Hines says the word used in the draft regulation for fee is the same as the word "to pay," and is normally associated with paying tax. So it's not a simple deposit.

Comment: For the rest of the Barron's article see here (subscription required).

NUS chart.