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See important disclosures, including any required research certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of the Taiwan Sportswear Sector
with a Positive view. Although the global sportswear brands have faced
inventory issues in recent months, we are not concerned about the impact
on the 3 stocks that we cover, which are leading players in the fast-growing
global sportswear supply chain. As we see significant earnings momentum
for the Taiwan players, we expect their shares to be rerated.
Improving inventory days for global brands. Based on our research,
Adidas’s and Under Armour’s inventory days improved in 3Q15 and Nike’s
inventory accumulation in North America, due to the US West Coast ports
shutdown in early 2015, will likely decline and revert to normal levels in
1H16. We see global sportswear being a growth sector over 2016-17E and
believe that overstocking concerns are only a short-term negative, with the
share prices of Eclat Textile and Taiwan Paiho having fallen by around 30%
and 10%, respectively, since late September 2015.
Multifunctional and new products to expand margins. Global brands
are focusing on providing “athleisure” (athletic/leisure) and multifunctional
products to meet demand across categories. As the Taiwan sportswear
players are targeting the relatively high-margin mid- to high-end
multifunctional segments and offering one-stop-shop models, we expect
them to benefit from supplier consolidation and gain market share.
Catalysts: We believe the market has yet to factor in the improving
inventory picture or the strong product pipelines of the global brands. After
2 quarters of inventory digestion for the brands, we expect visibility on
earnings growth in the Taiwan Sportswear sector to improve appreciably by
3Q16, driven by robust demand and major sports events (ie, the 2016
Olympics), which should serve as share-price driver. Further out, we look
for the stocks under coverage to reap Trans Pacific Partnership (TPP)
benefits.
Valuation: We forecast sector earnings growth of 25% YoY for 2016, vs.
20% for 2015 (vs. a CAGR of 26% for 2013-15E). The sector is trading at
21x 1-year forward PER, below the average of its one-year-forward PER of
15-28x during 2015, and translating into 0.8x PEG for 2016. We have Buy
(1) calls on Eclat Textile (1476 TT, TWD410) and Taiwan Paiho (9938 TT,
TWD82.6), as we like their ongoing product upgrades and look for their
product pipelines to underpin bottom-line growth. We rate Nike play Feng
Tey (9910 TT, TWD177) as a Hold (3), mainly on valuation grounds.
Risks: The main risk to our Positive rating would be if inventory were to
build up due to weaker-than-expected demand.
8 March 2016
Taiwan Sportswear Sector
Initiation: setting the pace with the global brands
Interest in the Taiwan Sportswear stocks likely to return soon, given their edge in operating efficiency, improving global inventory
Rising demand for athleisure and multifunctional apparel should further drive the sector’s earnings growth over 2016-17
We rate Eclat Textile and Taiwan Paiho as Buys (1); Feng Tay rated a Hold (3) on valuation grounds
Key stock calls
Source: Daiwa forecasts
Helen Chien(886) 2 8758 6254
New Prev.
Eclat Textile (1476 TT)Rating Buy
Target 500.00
Upside p 22%
Taiwan Paiho (9938 TT)Rating Buy
Target 100.00
Upside p 21.1%
Feng Tay Enterprise (9910 TT)Rating Hold
Target 176.00
Downside q 0.6%
2
Taiwan Sportswear Sector: 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Taiwan Sportswear Sector: net profit YoY growth
We expect the Taiwan sportswear stocks that we cover to
deliver an earnings CAGR of 22.4% for 2015-17E, driven
by an increase in the contribution of new or high-ASP
products, improving operating efficiency and the ongoing
vendor consolidation globally. We are upbeat on Eclat
Textile and Paiho, in particular, as we believe these
companies are offering the right products at the right time,
and that their complete product lines offer the global
brands a one-stop shopping experience. We like Feng
Tay’s record of innovation and its strong ties with sector
leader Nike, but we believe the fundamental positives are
factored into the current share.
Source: Daiwa forecasts
Valuation Taiwan Sportswear Sector: one-year forward PER
Currently, the Taiwan Sportswear ODM names are trading
at a one-year forward PER of 21x, below the average of
the trading range of 15-28x in 2015 and equating to 0.8x
PEG for 2016, which we see as undervalued. This is
because we expect the sector’s earnings to growth for
2016E to outpace 2015, at 25% vs. 20% YoY in 2015E.
Indeed, we expect the sector to be rerated back to its
recent PER high of 28x (early 3Q15) now that the inventory
build-up among the global sportswear brands has reversed
(since 3Q15), and given the Taiwan players’ strong product
line-ups and improved earnings momentum.
Source: Bloomberg
Earnings revisions Taiwan Sportswear Sector: Bloomberg-consensus earnings revisions
Bloomberg consensus earnings forecasts for the 3 stocks
under Daiwa’s coverage have come down since 4Q15, due
to generally weak sentiment toward textile stocks on
inventory concerns in North America and the relatively
warm winter there. Our 2016-17 EPS forecasts for Eclat
and Paiho are 0-10% above the Bloomberg consensus, as
we are more positive on both companies’ earnings growth
prospects and segment positioning in multifunctional and
new products. For Feng Tay, our EPS forecasts are 1.7-
3.2% higher than the consensus for 2016-17E, as we see
the company as a solid partner of Nike, and expect it to
grow in step with Nike in the next few years.
Source: Bloomberg
15%
20%
25%
30%
35%
40%
2015E 2016E 2017E
Eclat Textile Feng Tay Taiwan Paiho
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Market Cap 10x 14x
18x 22x 26x
38.0
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(TWD)
2016E EPS 2017E EPS
3
Taiwan Sportswear Sector: 8 March 2016
Sector stocks: key indicators
Source: Bloomberg, Daiwa forecasts
Regional Sportswear Sector: valuation metrics
Companies Bloomberg code
Rating Market cap (USDm)
Share price (local curr.)
PER (x) PBR (x) ROE (%) Dividend yield (%)
2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
*ECLAT TEXTILE CO 1476 TT Buy 3,374 410.00 20.9 16.7 6.7 5.7 37.9 37.1 3.4 4.2
*TAIWAN PAIHO LTD 9938 TT Buy 752 82.60 17.4 14.1 3.2 2.9 19.4 21.7 3.7 4.6
*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177.00 21.1 18.0 7.0 6.0 35.5 36.0 3.3 3.9
DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7 13.3 2.3 1.9 10.7 15.1 1.3 1.8
PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.20 13.2 NA 1.6 NA 11.8 NA NA NA
TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.10 17.7 15.2 4.1 3.7 24.3 25.0 4.6 4.8
HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.50 14.0 NA NA NA NA NA NA NA
FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53.00 19.1 13.1 1.2 1.0 6.5 8.0 4.9 6.1
Average 17.6 14.7 3.2 3.5 18.0 21.2 3.5 4.2
Regional peers
*SHENZHOU INTERNATIONAL GROUP 2313 HK Buy 6,933 38.50 16.4 13.6 3.1 2.7 21.2 22.6 3.6 4.3
*PACIFIC TEXTILES HOLDINGS 1382 HK Outperform 2,007 10.78 13.3 12.4 4.5 4.5 33.6 36.1 7.5 8.1
*BEST PACIFIC INTERNATIONAL H 2111 HK Buy 487 3.70 10.6 9.0 1.8 1.6 18.2 18.8 2.9 3.4
REGINA MIRACLE INTERNATIONAL 2199 HK Not rated 1,856 11.78 24.0 17.9 4.6 3.9 20.7 20.6 1.3 1.7
YUE YUEN INDUSTRIAL HLDG 551 HK Not rated 5,933 27.95 12.5 11.0 1.2 1.2 10.6 11.3 4.3 4.7
YOUNGONE CORP 111770 KS Not rated 1,885 51,300.00 14.0 13.0 1.8 1.6 13.2 12.5 0.4 0.4
Regional Average 15.1 12.8 2.8 2.6 19.6 20.3 3.3 3.8
Source: Bloomberg;*Daiwa forecasts Note: data is based on share prices as at 7 March 2016; NA denotes no Bloomberg-consensus forecasts
Taiwan Sportswear Sector: key assumptions
2010 2011 2012 2013 2014 2015E 2016E 2017E
Revenue (TWDm)
Eclat Textile 8,541 10,649 13,566 18,142 20,843 25,525 31,337 38,632
YoY 37.9% 24.7% 27.4% 33.7% 14.9% 22.5% 22.8% 23.3%
Taiwan Paiho 8,374 8,154 6,981 8,107 9,116 9,439 10,997 12,864
YoY 44.3% -2.6% -14.4% 16.1% 12.4% 3.5% 16.5% 17.0%
Feng Tay 29,973 35,604 36,517 38,148 47,654 55,754 64,294 72,353
YoY 12.5% 18.8% 2.6% 4.5% 24.9% 17.0% 15.3% 12.5%
Gross margin
Eclat Textile 23.8% 25.2% 27.8% 28.2% 26.2% 27.7% 28.3% 28.5%
Taiwan Paiho 26.4% 25.9% 28.6% 30.8% 33.5% 37.2% 38.0% 39.1%
Feng Tay 18.4% 16.2% 18.8% 19.5% 20.5% 20.5% 20.7% 20.9%
Operating margin
Eclat Textile 11.1% 13.6% 16.5% 18.1% 16.8% 19.1% 20.7% 21.0%
Taiwan Paiho 11.8% 10.7% 10.9% 13.8% 16.8% 20.4% 21.2% 22.4%
Feng Tay 5.4% 4.7% 6.9% 7.6% 9.4% 9.8% 10.3% 10.8%
Net profit (TWDm)
Eclat Textile 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618
YoY 102.6% 54.8% 51.5% 52.9% 9.7% 40.4% 25.3% 25.3%
Taiwan Paiho 1,178 584 454 705 980 1,133 1,415 1,746
YoY 439.5% -50.4% -22.3% 55.4% 38.9% 15.6% 24.8% 23.4%
Feng Tay 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878
YoY 2.5% -7.5% 17.3% 36.5% 34.6% 35.7% 19.6% 17.3%
Source: Company data, Daiwa forecasts
Share
Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg
Eclat Textile 1476 TT 410.00 Buy 500.00 15.676 19.637
Feng Tay Enterprise 9910 TT 177.00 Hold 176.00 7.025 8.401
Taiwan Paiho 9938 TT 82.60 Buy 100.00 3.802 4.747
Rating Target price (local curr.) FY1
EPS (local curr.)
FY2
4
Taiwan Sportswear Sector: 8 March 2016
Table of contents
Setting the pace with the global sportswear brands ............................................. 5
Taiwan sportswear ODMs riding on rising global demand ..................................................5
Valuation and recommendations ...........................................................................15
The sector merits a rerating ............................................................................................. 15
Investment risks to our sector call .................................................................................... 16
Appendix ..................................................................................................................18
Global sportswear brands: the big are getting bigger ....................................................... 18
Company Section
Eclat Textile ..................................................................................................................... 21
Taiwan Paiho ................................................................................................................... 36
Feng Tay Enterprise ........................................................................................................ 49
5
Taiwan Sportswear Sector: 8 March 2016
Setting the pace with the global sportswear brands
Taiwan sportswear ODMs riding on rising global demand
Given the rising popularity of sportswear, more fashion and retail brands have launched
their own sportswear products, leading to “sportswear” becoming a lifestyle concept rather
just something people wear in the gym. Hence, consumers are now demanding functional
apparel that offers performance, fit and fashion. We expect the arrival of even more new
innovative products (ie, even more lightweight and multifunctional) from the major brands
globally, as well as their solid new sportswear pipelines, to support the earnings growth of
the Taiwan Sportswear Sector, which accounts for a significant part of the global supply
chain. Furthermore, we are still seeing increasing consumer interest in health and wellness
matters globally, and with that more people taking part in sports — developments that
should bode well for the stocks under our coverage, in our opinion.
Inventory concerns look overdone when it comes to the Taiwan players
The share prices of the Taiwan sportswear players have declined by 20-25% since October
2015, along with the sector PER being derated to 21x, from a high of 27x in early October
2015. The main reason for this was, in our view, the impact of concerns among investors
as to the inventory adjustments in North America for the brand names, including the build-
up of inventory following the labour strike and closure of the US West Coast port in early
2015. This led to congestion at the port and delays in the launch of the brands’ product
pipelines. Also, the warmer-than-expected winter in North America has had an impact on
the sell-through of the major brands’ winter products. However, we consider this inventory
accumulation to be a short-term issue that has largely played out.
We note that the inventory build-up among the sportswear brands started to reverse in
3Q15 for some brands. This is evident from the inventory days data disclosed by Adidas
and Under Armour (see the following charts). And we expect Nike’s data to show the same
trend in 1H16 as, according to our market research of the supply chain, Nike has worked
efficiently to manage its flow of products in North America and clear its excess inventory.
Adidas: inventory days Under Armour: inventory days
Source: Company Source: Company
According to Nike’s 2Q FY16 earnings conference call, the company expects its inventory
levels in North America to normalise over the rest of FY16, while it is also bringing a strong
pipeline of new innovative products to the market over the same time horizon. While we
think the company’s excess inventory in North America stems largely from the residual
impact of the West Coast port congestion, its inventory levels in other markets remain
healthy.
0
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Under Armour Average
The sportswear sector
keeps on running
Away from the short-
term issue of inventory
build-up, long-term
growth trends appear to
be intact
6
Taiwan Sportswear Sector: 8 March 2016
Nike: inventory days
Source: Company
Besides, most of the listed Taiwan sportswear players have fairly diverse client bases and
have partnered with global leading brands. For example, Eclat Textile’s largest client is
Nike, accounting for around 10% of its 2015E revenue. For Paiho, Nike accounted for 22%
of its 2015E revenue and Adidas for 18%. And for Feng Tay, 82% of 2015E revenue is
attributable to Nike. In other words, 2 of the 3 stocks under our coverage do not appear to
be subject to client concentration risk.
Taiwan sportswear ODMs offer better earnings visibility than pure OEMs
Earnings visibility remains a top priority in our 2016 investment case. Generally speaking,
the Taiwan sportswear ODM players need 1-2 years to develop new products with
sportswear brands and enjoy a 3-month to 1-year order visibility. Thanks to their R&D
capability, these companies have the advantage of knowing the upcoming trends 6-12
months ahead of the pure OEM suppliers. The lengthy product development process
serves as a barrier to would-be market entrants, and gives these companies a time
advantage to develop their new products to meet the right trends.
From an investment perspective, we prefer companies with longer earnings visibility,
especially in a relatively volatile stock investment environment such as 2016.
Growing sportswear demand
Sales of global sports apparel to see a CAGR of 4.8% over 2014-19E from 4.1% in 2012-14
According to market data from Euromonitor, global sports apparel sales value will rise at a
CAGR of 4.8% over 2014-19E, to USD215.9bn by 2019E from USD170.4bn for 2014.
Among this, Euromonitor expects the functional sportswear’s market value to increase to
USD95.6bn by 2019E (accounting for 44.3% of sportswear sector) from USD75.3bn in
2014, translating into a 4.9% CAGR over 2014-19E. The functional sportswear segment
posted the highest YoY growth in the sportswear sector in 2014 at 7.1% YoY, compared to
4.3% for outdoor wear and 3.6% for lifestyle wear.
In 2019E, Euromonitor sees functional sportswear, in terms of value, remaining as the
major contributor to the sports apparel sector, accounting for 44.3% of the sector from
44.2% in 2014, followed by 38% for lifestyle wear (38.4% in 2014) and 17.7% for outdoor
wear (17.4% in 2014).
Global sports apparel market: growth in value
2012-14 CAGR 2014-19 CAGR
Functional sportswear 3.7% 4.9%
Outdoor wear 5.0% 5.2%
Lifestyle wear 3.6% 4.6%
Sportswear (in total) 4.1% 4.8%
Source: Euromonitor
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1Q16
Nike Average
Earnings visibility is one
of our top investment
considerations
Stronger global sports
apparel demand in 2014-
19E vs. 2012-14
7
Taiwan Sportswear Sector: 8 March 2016
Global sports footwear sales poised to rise at a CAGR of 1.6% over 2015-19E
According to market data from Statista, the value of global sports footwear sales will rise at
a CAGR of 1.6% over 2015-19E, aiming for a market value of USD85.7bn for 2019E from
USD80.5bn for 2015, and from USD74.7bn for 2011. We believe Taiwan sports footwear
companies have potential to gain global market share in light of their strong client coverage
(such as Nike and Adidas) and seasoned management who have a wealth of production
experience. We already saw this happen with Feng Tay thanks to the support of its main
client, Nike.
Global sports footwear market
Source: Statista
We prefer US proxies in 2016; favourable currency is a bonus
For 2016, we prefer US proxy companies, which we expect to be the main beneficiaries of
US economic growth continuing from 2015. As such, we think 2016 will be a good year for
the Taiwan Sportswear Sector given that these names export a large amount of goods to
the US, and/or manufacture for US brands.
Eclat Textile (2015 top-4 clients: Nike, Gap [Athleta], Under Armour and Lululemon),
Taiwan Paiho (2015 top-3 clients: Nike, Adidas and New Balance) and Feng Tay (largest
client: Nike, for 82% of 2015 revenue) supply most of their products to the US or for US
brands. Such exposure to the US bodes well for their earnings growth prospects over the
next few years, in our view, as they ride on the growth of the US economy and their clients’
stronger sportswear brand recognition.
Besides, most of the Taiwan sportswear ODM manufacturers’ accounts receivables are
priced in USD for the most part, and costs are in USD and Asian currencies. Given the
trend of the strong USD vs. weak Asian currencies, we see Taiwan sportswear players
benefiting from this favourable currency trend over 2016-17. (According to Daiwa
forecasts, the USD/TWD would be 34.7 by the end of 2016E and 35.5 by the end of
2017E.)
Taiwan Sportswear: % of sales priced in USD Taiwan Sportswear: % of 2015 sales to North America
Source: Company
Source: Company, Daiwa forecast Note: Taiwan Paiho provides accessories needed by clients for their own operations (ie footwear
manufacture) so the sales areas are not the final market.
1.3%1.4%
1.5% 1.5%1.4% 1.4%
1.3%1.2%
1.3% 1.3%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
65
70
75
80
85
90
2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
(USDbn)
Value (LHS) YoY (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Feng Tay Eclat Textile Taiwan Paiho
0%
10%
20%
30%
40%
50%
60%
70%
Feng Tay Eclat Textile Taiwan Paiho
US angle: support from
US economic growth
Taiwan sports footwear
companies likely to see
market-share gains on a
global basis
8
Taiwan Sportswear Sector: 8 March 2016
EPS sensitivity to USD vs. TWD
Every 1% USD appreciated against the TWD 2016E EPS 2017E EPS
Eclat Textile 3-4% 3-4%
Taiwan Paiho 0-1% 0-1%
Feng Tay 4-5% 4-5%
Source: Daiwa forecasts
Relatively complete Taiwan supply chain for sportswear
As the charts below show, Taiwan’s textile and footwear sectors both have complete supply
chains in Taiwan, which provide flexibility for textile players’ business models, such as
Eclat Textile’s garment outsourcing ratio of 40% for 2015 and 15% for Makalot.
We believe such a complete supply chain in Taiwan favours the suppliers, allowing them to
source the raw material at competitive prices and within a short space of time, and hence
provide a quick service for clients. Besides, Taiwan sportswear companies’ strong
synthetic fabric technology and capability in new product development stand these
companies in good stead when it comes to being the production partners of global
sportswear brands, particularly given the prevailing current multi-function and athleisure
trend.
According to our market research, Taiwan is the world’s leading functional textile products
provider (especially in nylon- and polyester-based synthetic products) and is on the
preferential list of most global sportswear brands for the Taiwanese companies’ ability to
source mid to high end functional fabric given their superior manufacturing know-how (ie,
around 40% of Nike’s functional fabric is sourced from Taiwan). With the global adoption
rate of functional textile products at less than 10% currently, we see an opportunity for the
Taiwan textile suppliers.
As we understand it, most Taiwan textile or footwear suppliers specialise in high value
added products and tend to pursue ASP growth over shipment growth. These companies
target the mid to high end products to form relatively high entry barriers for other regional
peers (see the following reports for further details: Everest Textile (1460 TT): Focus on
knitted fabrics , dated at 11 September, 2015; Hong Yi Fiber Industry (1452 TT): Growing
with demand for high-end hybrid yarn, dated at 5 June 2015, Nan Liu Enterprise (6504 TT):
A leading nonwoven fabric supplier in Asia, 2 September 2015; Toung Loong Textile: The
largest provider of nylon 66 yarn in Asia, 15 January 2016. Benefiting from booming
demand for sportswear, 1 March 2016.)
The chart below explains the specialisation of the textile and footwear industries. Take the
textile industry for example. The manufacturing process starts with producing the fibre and
processing it into yarn (the upstream space), fabric finishing and dyeing (the midstream
space), and finally garment manufacturing (the downstream space). In the Taiwan textile
industry, the textile players focus on what they excel at by focusing on specific
manufacturing processes, and thus form a solid supply chain network to boost the
synergies as much as possible.
Taiwan sportswear:
growth potential for
synthetic segment and
complete supply chain
cluster
9
Taiwan Sportswear Sector: 8 March 2016
Textile: manufacturing process
Source: Daiwa
Taiwan textile supply chain
Source: Daiwa
Footwear: manufacturing process
Source: Daiwa
Material preparation
Shoe face
Shoe bottom
Cutting Sewing
Material preparation
Mixing/hot-pressing/ infusing/setting
Deburring Sole laying
Processing Packaging
Upstream
Midstream
Downstream
Raw material > yarn > textured yarn
Spinning > weaving > finishing
Garment manufacturing
Zig Sheng (1455 TT)/ Hong Yi Fiber (1452 TT)/ Lealea (1444 TT)/ Shinkong Synthetic
Fiber (1409 TT)/ Toung Loong Textile (4401 TT)/ Lan Fa Textile (1459 TT)
Eclat Textile(1476 TT)/ Everest Textile (1460 TT)/Far Eastern New Century (1402 TT)/Le Licacy (1464 TT)/Tex-Ray (1467 TT)
Eclat Textile (1476 TT)/Makalot Industrial (1477 TT)/Hakers (4432 TT)/Nien Hsing (1451 TT)/Tainan Enterprise (1473 TT)/Carnival Industry (1417 TT)/Tex-Ray (1467 TT)/Quang Viet (4438 TT)
Spinning mill
Textile mill
Dyeing and finishing mill
Twisted yarn
Dyeing, printing and
finishing
Vertical –integration
model: grey, dyeing, printing
and finishing
Fabric
Home and furniture
textile
Industrial goods
Natural fibre and synthetic fibre
10
Taiwan Sportswear Sector: 8 March 2016
Taiwan footwear supply chain
Source: Daiwa
Strong R&D capabilities in Taiwan’s sportswear supply chain Taiwan textile and footwear companies are good R&D partners for international brands like
Nike, Adidas, Under Armour. They specialise in each focus segment, hence forming a
competitive league against other regional peers, thus raising their bargaining power and
enhancing their preferential position in the supply chain.
Strong innovation is the key component on which the Taiwan sportswear players compete.
These companies devote themselves to: 1) providing innovative products to international
brand clients, 2) enhancing their capability to co-develop new products with clients, 3)
providing clients with a one-stop shop and solutions, and 4) shortening lead times and
dealing with rush orders to strengthen their relationships with clients and overcome the
competition.
Eclat Textile
Eclat Textile develops over 3,000 new fabric products every year and over 150 new
garment samples every day for its clients. In the past, Eclat has successfully developed
Dri-FIT UV, which is a high-performance fabric that wicks moisture away from the skin and
toward the fabric surface, where it evaporates, to help the wearer stay dry and
comfortable, while also providing the minimum UPF 30 ultraviolet protection. It has also
developed Coolmax, a performance fabric featuring a fibre-based moisture management
system designed to allow the wearer to feel cooler.
Other advanced innovations of Eclat Textile include Coldblack, a special finishing
technology for textiles which reduces heat build-up and provides reliable protection from
UV rays. Eclat X-POLE Cool Fabric is based on a cool-sensation fibre and chemically
modified fabric that features strong heat resistance. Fabrics made from cool-sensation
fibres provide coolness from heat and humidity transfer, are soft and comfortable to wear,
and have superior wicking to keep the body dry. Another of Eclat’s innovations is X – Pole
Thermo 1.0~2.0, which is a light weight fabric, with good thermal resistance, and moisture
control function. And Eclon is a nylon yarn and fabric developed by Eclat, whose name is a
combination of “Eclat” and “nylon”. It is widely adopted in sportswear, active wear trendy
fashion and sleepwear.
Upstream
Midstream
Downstream
Raw material (leather, rubber, chemical feedstock)
Leather processing, synthetic leather processing, sole
processing, shoe accessories provider
Footwear manufacturing
TSRC (2103 TT)/Pontex Polyblend (8935 TT)
Taiwan Paiho (9938 TT)/Paiho Shih (8406 TT)/Li Cheng (4426 TT)/San Fang Chemical (1307 TT)/Long John (unlisted)
Feng Tay (9910 TT)/Pou Chen (9904 TT)/Fulgent Sun (9802 TT) /Deanshoes (unlisted) /Ching Luh (unlisted)
Key to success of the
Taiwan sportswear
players: innovation
11
Taiwan Sportswear Sector: 8 March 2016
Eclat Textile: performance sportswear Eclat Textile: fashion sportswear
Source: Company Source: Company
Taiwan Paiho
Taiwan Paiho develops a number of innovative products every year (for which it secures
the patent), in order to meet the sportswear trends, as well as the requirements of its
footwear and apparel clients to reduce material and labour costs. In the table below, we
show Taiwan Paiho’s product roadmap since 1979.
Paiho: product roadmap
Year Creative products
1979 Touch fasteners
1990 Elastic
1993 Webbing
1996 Reflective material, braid fabric
2003 Moulded hooks, apparel zipper pullers, consumption products, easy tape products
2005 Injection hooks and loop products, computer cable ties, outdoor sports appliances
2007 Easy tape, changeable soles
2009 Spandex knitted elastic, anti-slip cobra shoelaces
2011 Eco-friendly dyed shoelaces
2013 Four-way stretch knitted shoe uppers, blended coloured shoelaces, spandex elastics
2015 Neon/reflective webbing, elastic shoelaces, mesh topped jacquard fabric
Source: Company
Among some of the innovative products recently developed by Taiwan Paiho are what the
company terms “new shoe-faced products”, namely, moulded hooks, one-piece shoe
uppers, 4-way stretchable elastic tape, and warp-knitted jacquard fabric, all of which it
launched between 4Q13 and 4Q15.
The advantages of these products over their traditional counterparts are numerous. For
example, the advantages of Paiho’s moulded hooks compared to traditional hooks and
loops include: 1) the more delicate moulded hook has strong shear strength and forms a
strong seal when closed, 2) quiet closure, 3) more comfortable and easy to use, and 4)
can be used repeatedly. Paiho is mainly focused on developing innovative and upgraded
products, which is also the core value of the company.
Paiho: moulded hook application (automobile, diaper and apparel, etc)
Paiho: the difference between a traditional hook and loop vs. Paiho’s patented moulded hook
Source: Company Source: Company
Ongoing product
upgrades and new
products to drive Paiho’s
profitability
Traditional
hook and loop
Paiho’s patented
moulded hook
12
Taiwan Sportswear Sector: 8 March 2016
We view these new shoe face products as having strong potential to boost the company’s
earnings together with global sportswear brands’ aggressive development of similar
products after the success of Nike’s Flyknit and Adidas’s Primeknit.
These products all have the qualities of being comfortable to wear, providing ventilation
and being light in weight. While sport shoes are usually made from many separate pieces,
these new products allow shoemakers to fine-tune the exact amount of flexibility and
support needed in every part of the shoe. This means lightweight comfort that wraps
around the foot, and fewer materials mean less waste. And above all, they reflect current
trends.
Taiwan Paiho: 1-piece shoe upper application for Camper Taiwan Paiho: 4-way stretchable elastic application for
Skechers
Source: Company
Source: Company
Taiwan Paiho: 4-way stretchable elastic tape application for Adidas
Source: Company
Feng Tay
Feng Tay has co-operated with Nike since 1977 and has developed several innovative
material and products for Nike, such as Flyknit (2011), Flyweave (2014) and basketball
shoes (Jordan series, since 1980s). It dedicates itself to R&D activities (at a cost of 2-3%
of sales per year) and is well-positioned in the global sportswear sector in light of its strong
relationship with Nike, the sportswear leader, in our view. Besides, we think Feng Tay
stands to see its earnings increase along with Nike in China and India, 2 markets with the
potential to grow in the long term.
13
Taiwan Sportswear Sector: 8 March 2016
In addition to its R&D centre in Taiwan, the company has built another R&D centre in
Vietnam which commenced operations in May 2015 to expand its development scale in its
largest production base.
FengTay: Nike Shox FengTay: Nike Flyknit Racer
Source: Company Note: a shoe midsole made of small hollow columns of special materials that help to "bounce
back" and absorb the impact from heel strikes while running and jumping.
Source: Company
Potential Trans-Pacific Partnership (TPP) benefits Most of Taiwan’s sportswear suppliers moved their production bases out of China in the
1990s and into Vietnam. We believe their 10+ years’ experience in Vietnam have
strengthened their production site management capability, and together with the potential
benefits of the TPP (due to come into effect in 2018), the earnings-growth outlook for these
companies is favourable and their bargaining power over brand clients is rising. Successful
implementation of the planned TPP would also allow the companies to capitalise on the
favourable tariff treatment for companies in Vietnam, which would mean brand customers
pay zero import tariffs, from an average Vietnam apparel tariff to the US of 17.5% currently
and an average footwear tariff of 14.5%.
Vietnam capacity as a percentage of total production
% of capacity in Vietnam as of 2015 First Vietnam plant since when
Eclat Textile 60-70% 2005
Makalot Industrial 33% 2002
Feng Tay 53% 1999
Pou Chen 42% 1994
Taiwan Paiho 28% 1999
Source: Company
Under the TPP framework, TPP members will benefit from an immediate 70.2-100.0%
reduction in tariffs on certain product items, and a 67.4-100.0% reduction on certain
volumes; and after 15 years, the tariffs will be almost completely abolished.
TPP: tariff reduction framework
Country % of tariff cancellation by product item immediately
% of tariff cancellation by volume of trade immediately
% of tariff cancellation by product item after 15 years
% of tariff cancellation by volume of trade after 15 years
Japan 95.3% 99.1% 100.0% 100.0%
United States 90.9% 67.4% 100.0% 100.0%
Canada 96.9% 68.4% 100.0% 100.0%
New Zealand 93.9% 98.0% 100.0% 100.0%
Australia 91.8% 94.2% 99.8% 99.8%
Brunei 90.6% 96.4% 100.0% 100.0%
Chile 94.7% 98.9% 100.0% 100.0%
Malaysia 78.8% 77.3% 100.0% 100.0%
Mexico 77.0% 94.6% 99.6% 99.4%
Peru 80.2% 98.2% 100.0% 100.0%
Singapore 100.0% 100.0% 100.0% 100.0%
Vietnam 70.2% 72.1% 100.0% 100.0%
Source: Chung-Hua Institution for Economic Research (CIER)
Well prepared to reap
TPP benefits
Long established
capacity in Taiwan
14
Taiwan Sportswear Sector: 8 March 2016
Taiwan Sportswear: monthly wages in 2014 by production site
Source: Company and Daiwa
Diversifying to withstand the weather impact
In our view, the weather has become less and less of an issue for most sportswear brands
as they have diversified their product lines and regions, and began operating on more of a
global basis.
Eclat Textile’s products include fabric (functional, sustainable, innovation and outdoor
series) and garments (performance sports, fashion sports, seamless) for sportswear,
casual wear, underwear, pyjamas, yoga clothes, and fashionable dress. In our view, the
effect on Eclat Textile’s earnings of the warm winter period in the US in December 2015 will
be limited on the back of its various product lines and usage. On the contrary, the warm
winter is likely to increase the sports participation rate.
Taiwan Paiho’s products also cover diversified segments, such as sportswear (apparel
and footwear, accounting for 67% of 2015E revenue), and accessories used in the
medical, diapers, autos and aircraft industries.
Feng Tay manufactures sports shoes (83% of 2015 revenue) and casual shoes (10%),
mainly for Nike (82% of 2015 revenue). Given Nike’s leading position in the global
sportswear market and the favourable revenue growth outlook for Nike, we believe Feng
Tay will grow with Nike, and as such we are less concerned about Feng Tay’s client
concentration as a risk. Our view is also supported by the Bloomberg consensus’s upward
EPS revisions of Nike’s earnings since mid-2015.
Nike: earnings revisions
Source: Bloomberg
686
319 300271.15 252
219
0
100
200
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600
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800
China Vietnam Philippines India Indonesia Cambodia
(USD)
1.5
1.7
1.9
2.1
2.3
2.5
2.7
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Dec
-12
Jan-
13
Feb
-13
Mar
-13
Apr
-13
May
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Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
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Nov
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Dec
-13
Jan-
14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
(TWD)
2016E 2017E
15
Taiwan Sportswear Sector: 8 March 2016
Valuation and recommendations
The sector merits a rerating
We initiate coverage of the Taiwan Sportswear Sector with a Positive rating. The sector is
trading currently at a 2016E PER of 21x, slightly higher than the midpoint (19x) of its past
3-year trading PER of 10-28x and equal to a 0.8x PEG for 2016. The sector was derated
from 27x in October 2015 due we believe to concerns about inventory accumulation in
North America as a result of the West Coast port issue in early 2015 and the warm spell of
winter weather in North America in December 2015.
Based our and the Bloomberg forecasts, sector earnings look set to grow by 25% YoY for
2016 compared with 20% YoY for 2015, after posting a CAGR of 26% over 2013-15.
We believe the major Taiwan sportswear players (Eclat Textile and Taiwan Paiho) deserve
a rerating, as:
1) The inventory build-up by the sportswear brands in 2Q15 is starting to reverse.
In our view, the inventory accumulation was triggered by the US West Coast port
turmoil and weather effects, not weak end demand. In addition, we see improving
inventory days for the global sportswear brands providers like Adidas and Under
Armour. We also expect Nike’s inventory in North America to return to normal levels
after 2 quarters of digestion in addition to other markets maintaining healthy inventory
levels. From a long-term investment perspective, we see the inventory concerns in late
2015 as only a short-term negative.
2) Robust revenue growth and margin expansion. For 2016 and 2017, we look for
Eclat Textile’s revenue to increase by 22.8% YoY and 23.3% YoY, respectively, along
with 0.2-0.6pp gross margin expansion due to the higher contribution from new and
high ASP products. For Taiwan Paiho, we forecast revenue growth of 16.5% YoY for
2016 and 17.0% for 2017, and 0.8-1.1pp gross margin expansion in light of product
upgrades and the contribution from the new shoe face products.
3) Rerating likely. We forecast EPS for Eclat and Paiho to rise by 23-25% per year in
2016 and 2017, due to solid revenue growth and margin expansion on the back of new
and upgraded products as well as greater operating efficiency. This rate of increase is
in line with their 2013-15 earnings CAGR but valuations have declined by 20-30% over
the past 5 months to 2016 PERs of 20.9x/17.4x on our forecasts, respectively, due to
inventory concerns for the rising sportswear brands. With this trend reversing, and
assuming the stocks stage a rerating back to recent PER highs, they look attractive to
us.
Our 2016-17 EPS forecasts for Eclat Textile are 5-7% above the consensus for 2016-
17E, as we like its niche segmentation in elastic fabric and innovative capability. For
Taiwan Paiho, we are also 10% above consensus for 2017E, as we are more positive
on its new products’ revenue contribution and gross margin expansion. For Feng Tay,
our EPS forecast is also higher than the market by about 2-3%, however, we believe
the current share price already reflects the fundamental positives, such as its proven
innovation and execution skills, high ROE and close ties with Nike.
In our view, Taiwan’s small- and mid-caps typically trade in line with the market’s view
of their earnings-growth potential. According to our forecasts, for Eclat Textile and
Taiwan Paiho, a similar earnings CAGR over 2015-17E vs. 2013-15E would support a
rerating of these stocks over 2016-17.
4) Enhancing ROE performance and margins. We see ROE and margins both
improving as a result of margin enhancement, greater operating leverage and better
economies of scale.
Stronger earnings
growth for 2016E vs.
2015 offers rerating
potential for the Taiwan
Sportswear Sector
16
Taiwan Sportswear Sector: 8 March 2016
ROE: Taiwan Sportswear Operating margins: Taiwan Sportswear
Source: Daiwa forecast Source: Daiwa forecast
Taiwan Sportswear Sector: 1-year forward PER bands Eclat Textile: 1-year forward PER bands
Source: Bloomberg
Source: Bloomberg
Taiwan Paiho: 1-year forward PER bands Feng Tay: 1-year forward PER bands
Source: Bloomberg
Source: Bloomberg
Investment risks to our sector call
Weaker-than-expected global demand
The main risk to our call on the sector would be a sharper-than-expected macro-driven
slowdown dragging down global demand for sportswear and therefore affecting the
revenue growth of Taiwan’s sportswear ODMs. As a result of the Global Financial Crisis of
2008, Eclat Textile, Taiwan Paiho and Feng Tay saw their revenues fall by 7.7%, 6.1% and
2% YoY, respectively, in 2009 (though demand returned the following year, supporting
revenue YoY growth of 37.9%, 44.3% and 12.5% YoY for 2010, respectively).
Larger-than-expected price cuts
Stronger-than-expected price competition from their peers, or pricing pressure from clients,
would be a risk to our sector view. Although the sportswear ODM players are likely to gain
greater bargaining power by virtue of having production capacity in Vietnam (potential TPP
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2012 2013 2014 2015E 2016E 2017E
Eclat Textile Taiwan Paiho Feng Tay
0%
5%
10%
15%
20%
25%
2012 2013 2014 2015E 2016E 2017E
Eclat Textile Taiwan Paiho Feng Tay
0
2
4
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ay-0
6S
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8D
ec-0
8A
pr-0
9A
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9Ja
n-10
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ay-1
4S
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(USDbn)
Market Cap 10x 14x
18x 22x 26x
0
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Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
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Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
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Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
(TWD)
22x
1
1
1
26x
14x
18x
10x
17
Taiwan Sportswear Sector: 8 March 2016
benefits for clients, innovation capability), raw-material costs and currency and weather
trends are swing factors in the ASPs of the Taiwan Sportswear ODM players.
Unforeseen labour issues
A larger-than-expected rise in basic labour costs at the companies’ production sites would
be a risk to our sector call. In the same vein, labour disputes at production sites and
weaker-than-expected yields or utilisation rates could weigh on companies’ gross margins.
We estimate that labour costs account for 5% and 16% of Eclat Textile’s cost of goods sold
for its fabric and garment business, respectively. Meanwhile, labour costs account for 12%
of Taiwan Paiho’s COGS and 16% for Feng Tay, on our estimates.
18
Taiwan Sportswear Sector: 8 March 2016
Appendix
Global sportswear brands: the big are getting bigger
International brands dominate global sportswear demand
According to Sporting Goods Intelligence, as of 2014, Nike and Adidas together accounted
for 58% of the global footwear market and 23% of the global sports apparel market.
Most of the Taiwan sportswear suppliers serve as original design manufacturers (ODMs) or
original equipment manufacturers (OEMs) for international brands such as Nike, Adidas
and Under Armour.
Global sports footwear brands: market share by retail price (2014)
Global sports apparel brands: market share by retail price (2014)
Source: Sporting Goods Intelligence
Note: Nike brand includes Converse; Adidas includes Reebok
Source: Sporting Goods Intelligence
Athleisure products
Lifestyle consumers are driving demand
Arguably the biggest trend in sportswear right now is athleisure, which is best described as
fashion meets function. This trend has seen established sportswear brands such as Nike,
Adidas, Under Armour, Reebok and Puma competing with outdoor brands such as the
North Face, Arc'teryx and Patagonia and fast-fashion players such as H&M and Zara. In
our view, getting ahead of the pack in athleisure is likely to be key to various brands’
growth prospects in the coming years.
Echoing the athleisure trend, Nike has indicated that short-term fitness trends are being
superseded by a sustained interest in healthy living, with female consumers spearheading
the change. Highlighting the change in buying habits, Nike noted in its 2015 investor
meeting that global athletic apparel sales have grown at a faster rate than overall apparel
sales over the past 4 years.
Rising awareness of health and wellness globally
As part of this healthy living push, global consumers are increasingly turning to sports and
outdoor/adventure activities, and their buying habits are changing as a result. Products
such as sports shoes, apparel and accessories, along with a variety of sports gear and
equipment, have become must-have items. And we expect the trend to continue as
consumers’ disposable incomes increase globally, which should benefit the Taiwan
sportswear sector as a whole.
For example, growing numbers of people in China are exercising regularly as rising
affluence is accompanied by increased awareness of health matters. According to one
national survey, the number of Chinese citizens paying to exercise rose to 164m in 2014,
from 98m in 2007, backed by the central government’s efforts to encourage mass
participation in sports by building more sports facilities. Also, the number of marathons held
in the country rose to 56 in 2015, from 33 in 2012. China’s General Administration of
40.00%
17.90%
7.50%
5.30%
5.10%
4.50%
3.20%
2.30%
1.30%
1.10%
11.80%Nike
Adidas
VF Corporation
New Balance
Asics
Sketcher
Puma
Crocs
Anta
Mizuno
Others
11.70%
11.00%
5.70%
3.30%
3.10%
2.20%
63.00%
Nike
Adidas
VF Corporation
Under Armour
Gildan
Columbia
Others
Nike and Adidas are the
No.1 and No.2 players in
sports footwear and
apparel
The rise of “athleisure”
Sportswear demand is
rising on the back of
growing incomes and
awareness of health
issues
19
Taiwan Sportswear Sector: 8 March 2016
Sports is targeting for sports to contribute 1% of China’s GDP by 2020E, which is just half
the equivalent figure for the EU in 2014.
Consumers looking for multi-function sportswear
With consumers’ tastes becoming ever more sophisticated, we are seeing more multi-
function sportswear products hitting the market. We consider these multi-function products
to make up a new category, ie, one separate and distinct from sportswear and mass-
market products, as such products tend to feature performance fabrics (ie, lightweight,
breathable, water-proof, UV-cutting and thermal control) that consumers seem prepared to
pay a premium for.
Supporting our view of the rise in multi-function sportswear demand, we note that
Alibaba.com recently added a new “functional sportswear” category to its sportswear
section. Besides, sportswear brands such as Nike, Adidas, and Puma are offering more
multifunctional sportswear to meet consumers’ growing demand, backed by innovations in
raw materials (so-called functional fabrics).
Growth potential for international brands in developing geographies
Value for money is key, but foreign brands are on the rise
According to Euromonitor, the leading international brands, such as Nike and Adidas,
together claimed 28% of China’s sportswear market as of 2014, up from 23% in 2013. We
think these companies’ market-share gains reflect the willingness of Chinese consumers to
pay a price premium for international brands. Indeed, in mid-October 2015, Nike stated
that it expects a mid-teen-percentage annual growth rate in its footwear revenue from
Greater China over the next 5 years; for the sake of comparison, it is looking for low-
double-digit annual growth in emerging markets and high single-digit growth rates for
developed geographies over the same timeframe.
Sportswear is a growing pie
Euromonitor estimates that China’s sportswear market was worth USD22bn for 2015, and
forecasts it to grow to USD28.4bn by 2018. The implied 8.9% CAGR for China’s
sportswear market over 2015-18E is above Euromonitor’s forecast CAGR of 6.1% for
global sports apparel and 1.6% CAGR for global sports footwear over the same horizon.
Quality and value for money continue to be the top considerations among Chinese
consumers when purchasing sportswear, according to our research in the market.
However, with consumers’ disposable income rising, we believe their purchasing
preferences will shift from value-for-money choices to more expensive brands. While
international brands already command consumers’ attention in China, they do not yet
dominate the market, which we think underlines the growth prospects for international
brands that have yet to establish a presence in China.
Based on data from Euromonitor, Nike and Adidas were the largest international players in
China’s sportswear market in 2015, with respective market shares of 14.3% (up from
11.2% in 2011) and 13.8% (up from 8.5% in 2011). Their market-share gains have likely
come at the expense of small domestic brands in the face of ongoing industry
consolidation.
Multi-function =
sportswear + casual
wear + fashion wear
Scope for leading global
sportswear players to
grow in developing
markets
20
Taiwan Sportswear Sector: 8 March 2016
China: Nike and Adidas’ sportswear market share
Source: Euromonitor
Fuelled by increasing sports participation and government support
Sports participation in China continues to rise, backed by a combination of consumers’
growing affluence and a concerted push from the government. In October 2014, China’s
State Council formally announced plans to promote the sports industry in the country’s 12th
Five-Year Plan with the longer-term goal of making the industry a CNY5trn sector by 2025.
The table below shows the size of major apparel markets in 2012 and 2025E, according to
Statista. On Statista’s forecasts, the US apparel market will expand from USD225bn in
2012 to USD285bn in 2025, implying a CAGR of 2%. By contrast, Statista forecasts a 10%
CAGR for the China apparel market (USD540bn in 2025E, from USD150bn in 2012E) and
a 12% CAGR for India’s apparel market (USD200bn in 2025E, from USD45bn in 2012).
Size of major apparel markets
Region (USDbn) 2012 2025E CAGR
China 150 540 10%
EU-27 350 440 2%
United States 225 285 2%
India 45 200 12%
Japan 110 150 2%
Russia 40 105 8%
Brazil 55 100 5%
Canada 30 50 4%
Australia 25 45 5%
Rest of the World 75 195 8%
Global 1105 2110 5%
Source: Statista
11.20%
14.30%
8.50%
13.80%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 2015
Nike Adidas
See important disclosures, including any required research certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of Eclat Textile, a leading global
manufacturer of functional elastic knitted fabrics and garments, with a Buy
(1) call. We foresee the sportswear trend continuing over the next 2 years
and believe Eclat’s capability in product development and its strategic
position with global-brand customers will support revenue growth across
the functional sportswear, outdoor wear and lifestyle wear segments.
Inventory days reversing since 3Q15. Eclat’s share price is down by 20-
25% since October 2015 due to inventory concerns in North America
resulting from the US West Coast port congestion and the warm winter in
North America in late 4Q15. However, inventory levels at the company’s
major clients, such as Under Amour (since 3Q15), Gap (4Q15) and JC
Penny (4Q15), look to be improving. Nike and Lululemon have been trying
to lower their inventories to a healthy level, and we believe new innovative
products will stimulate demand within the space.
More multi-function and athleisure demand, more demand for
synthetic products. We expect the sales proportion of synthetic fabric to
hit over 25% of total fabric sales in 2016, from 18% in 2015 and 8% in
2014, thanks to Eclat specialising in the manufacture of nylon and
polyester-based synthetic fabric (vs. regional peers’ synthetic cotton-based
products) and its preferential position that allows global brands to source
mid- to high-end functional fabric based on Eclat’s manufacturing know-
how. In 2016-17, we expect its fabric ASP to rise by 12-13% and its
garment ASP to rise by 3-5%, due mainly to the change in the company’s
product mix (rising revenue from synthetic fabric and fabric for use in its
own garment products rather than for sale to clients).
Catalysts: We believe the market has yet to factor in the improving
inventory situation since 3Q15 or the new product pipeline from global
sportswear players. Also, we see now as a good time to accumulate the
stock in light of robust sportswear demand, in addition to the company’s
new product pipeline and its clients’ improving inventory situation.
Valuation: We initiate coverage with a Buy (1) rating and 12-month target
price of TWD500, based on a 2016E PER of 25x, which translates into a
2015-17E PEG of 1x. We see this target multiple as fair based on our
2015-17 earnings CAGR forecast of 25.3%, below the midpoint of Eclat’s
2013-15E PER of 17-43x and close to its earnings CAGR of 24.1%.
Risks: Main risks to our call: 1) weaker-than-expected global demand, and
2) disappointing gross margin expansion on slower-than-expected new
product launches or weaker ASP expansion and utilisation rate.
8 March 2016
Eclat Textile
Initiation: leading the pack
Inventory days at Eclat’s clients have been improving since 3Q15
Synthetic fabric demand set to drive ASP growth in 2016-17
Initiating with a Buy (1) rating and 12-month TP of TWD500
Source: FactSet, Daiwa forecasts
Eclat Textile (1476 TT)
Target price: TWD500.00
Share price (7 Mar): TWD410.00 | Up/downside: +22.0%
Helen Chien(886) 2 8758 6254
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550
Mar-15 Jun-15 Sep-15 Dec-15
Share price performance
Eclat Text (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 369.43-529.04
Market cap (USDbn) 3.37
3m avg daily turnover (USDm) 17.67
Shares outstanding (m) 269
Major shareholder Zhen-Hai Hong (Chairman) (3.3%)
Financial summary (TWD)
Year to 31 Dec 15E 16E 17E
Revenue (m) 25,525 31,337 38,632
Operating profit (m) 4,888 6,477 8,113
Net profit (m) 4,217 5,282 6,618
Core EPS (fully-diluted) 15.676 19.637 24.604
EPS change (%) 40.4 25.3 25.3
Daiwa vs Cons. EPS (%) 0.9 5.1 7.0
PER (x) 26.2 20.9 16.7
Dividend yield (%) 2.8 3.4 4.2
DPS 11.3 13.7 17.2
PBR (x) 9.3 6.7 5.7
EV/EBITDA (x) 19.9 14.9 12.0
ROE (%) 40.3 37.9 37.1
22
Eclat Textile (1476 TT): 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Eclat: earnings outlook
For 2015-17, we forecast Eclat’s revenue to see a CAGR
of 23% and its gross margin to improve by 0.2-0.6pp. As
such, we forecast a stronger earnings CAGR of 25.3% in
2015-17 vs. 24.1% in 2013-15E, based on its new product
pipeline, ongoing vendor consolidation and rising demand
for multi-functional products, after a slight slowdown in YoY
revenue growth in 2014 as the company ramped up new
garment capacity in Vietnam.
Source: Company, Daiwa forecasts
Valuation Eclat: 1-year forward PER bands
Our target price of TWD500 is based on a 2016E PER of
25x, which translates into a 2015-17E PEG of 1x, which we
believe is in line with the stock’s earnings growth outlook.
During 2013-15, the stock traded at an average PER of
30x, and we believe it has potential to rerate to the
midpoint of its trading PER of 17-43x over 2013-15, based
on what we see as stronger earnings growth prospects
over 2015-17.
Source: Bloomberg, Daiwa forecasts
Earnings revisions Eclat: Bloomberg-consensus earnings revisions
The Bloomberg consensus 2017E EPS had been rising
since April 2015, due we believe to the company’s better-
than-expected gross margin trajectory and stronger-than-
expected high-end product launches.
However, the market’s forecasts have come down since
4Q15, due to generally weak sentiment toward textile
stocks on inventory concerns in North America and the
warm winter there.
Source: Bloomberg
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Net Profit (LHS) Net Margin (RHS)
CAGR of 25.3%
CAGR of 24.1%
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23
Eclat Textile (1476 TT): 8 March 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Garment revenue growth (YoY %) 55.7 32.7 45.8 35.4 10.6 21.4 18.7 20.5
Fabric revenue growth (YoY %) 22.2 15.5 2.6 30.7 23.6 24.3 30.0 27.7
Gross margin (%) 23.8 25.2 27.8 28.2 26.2 27.7 28.3 28.5
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Garment revenue 4,603 6,110 8,907 12,059 13,333 16,191 19,211 23,151
Fabric revenue 3,919 4,525 4,643 6,069 7,503 9,326 12,119 15,474
Other Revenue 20 14 17 14 7 7 7 7
Total Revenue 8,541 10,649 13,566 18,142 20,843 25,525 31,337 38,632
Other income 0 0 0 0 0 0 0 0
COGS (6,508) (7,967) (9,792) (13,022) (15,372) (18,442) (22,453) (27,603)
SG&A (1,053) (1,181) (1,484) (1,727) (1,857) (2,067) (2,259) (2,743)
Other op.expenses (29) (53) (57) (102) (107) (128) (147) (174)
Operating profit 950 1,448 2,233 3,291 3,507 4,888 6,477 8,113
Net-interest inc./(exp.) (18) (27) (24) (17) (25) (30) (25) (21)
Assoc/forex/extraord./others (8) 36 (13) 45 256 284 29 29
Pre-tax profit 924 1,457 2,197 3,319 3,738 5,142 6,481 8,121
Tax (158) (274) (405) (579) (734) (926) (1,199) (1,502)
Min. int./pref. div./others (2) 0 (1) (1) (1) 0 0 0
Net profit (reported) 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618
Net profit (adjusted) 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618
EPS (reported)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157 19.638 24.604
EPS (adjusted)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157 19.638 24.604
EPS (adjusted fully-diluted)(TWD) 3.684 5.394 7.493 10.575 11.166 15.676 19.637 24.604
DPS (TWD) 2.000 3.000 5.324 7.000 8.000 11.310 13.746 17.223
EBIT 950 1,448 2,233 3,291 3,507 4,888 6,477 8,113
EBITDA 1,240 1,757 2,572 3,709 4,059 5,535 7,243 8,939
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 924 1,457 2,197 3,319 3,738 5,142 6,481 8,121
Depreciation and amortisation 290 310 338 418 552 647 765 826
Tax paid (158) (274) (405) (509) (657) (926) (1,199) (1,502)
Change in working capital (707) (311) (462) (744) (489) (794) (997) (1,257)
Other operational CF items (33) 62 63 50 (0) 30 25 21
Cash flow from operations 316 1,243 1,732 2,534 3,144 4,099 5,076 6,209
Capex (300) (692) (865) (1,641) (1,651) (1,221) (2,500) (2,000)
Net (acquisitions)/disposals 6 (20) (78) (53) 10 0 0 0
Other investing CF items (36) (60) (33) 0 (12) 0 0 0
Cash flow from investing (330) (772) (976) (1,693) (1,652) (1,221) (2,500) (2,000)
Change in debt 128 112 (100) 168 969 0 0 0
Net share issues/(repurchases) 0 0 1,000 0 0 0 2,560 0
Dividends paid (193) (399) (634) (1,230) (1,757) (2,088) (2,952) (3,698)
Other financing CF items 0 0 0 0 (11) 0 0 0
Cash flow from financing (65) (286) 266 (1,062) (798) (2,088) (392) (3,698)
Forex effect/others 43 (22) 37 (5) (52) 0 0 0
Change in cash (36) 164 1,059 (226) 642 790 2,184 511
Free cash flow 15 551 867 893 1,493 2,878 2,576 4,209
24
Eclat Textile (1476 TT): 8 March 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 244 384 1,462 1,212 1,850 2,640 4,824 5,335
Inventory 1,588 1,919 2,461 3,233 3,099 3,718 4,527 5,565
Accounts receivable 1,086 1,221 1,741 2,295 2,788 3,415 4,192 5,168
Other current assets 169 203 249 239 328 300 300 300
Total current assets 3,087 3,727 5,913 6,979 8,065 10,073 13,843 16,368
Fixed assets 2,798 3,262 3,915 4,985 6,563 7,860 9,595 10,768
Goodwill & intangibles 116 115 134 24 23 23 23 23
Other non-current assets 142 214 115 558 274 261 261 261
Total assets 6,143 7,318 10,077 12,546 14,925 18,216 23,721 27,420
Short-term debt 933 1,174 1,116 1,330 2,229 2,229 2,229 2,229
Accounts payable 703 680 1,149 2,223 2,259 2,710 3,299 4,056
Other current liabilities 494 754 930 614 585 1,429 1,454 1,476
Total current liabilities 2,129 2,608 3,195 4,167 5,073 6,368 6,982 7,760
Long-term debt 189 63 24 0 74 74 74 74
Other non-current liabilities 178 181 204 262 300 300 300 300
Total liabilities 2,497 2,852 3,423 4,429 5,447 6,742 7,356 8,134
Share capital 1,993 2,112 2,460 2,509 2,610 2,610 2,690 2,690
Reserves/R.E./others 1,645 2,346 4,184 5,598 6,868 8,864 13,675 16,596
Shareholders' equity 3,638 4,458 6,645 8,107 9,478 11,474 16,365 19,286
Minority interests 8 8 9 10 0 0 0 0
Total equity & liabilities 6,143 7,318 10,077 12,546 14,925 18,216 23,721 27,420
EV 111,171 111,146 109,972 110,413 110,738 109,948 107,764 107,253
Net debt/(cash) 878 853 (322) 118 453 (337) (2,521) (3,032)
BVPS (TWD) 18.255 21.106 27.008 32.306 36.315 43.965 60.839 71.697
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) 37.9 24.7 27.4 33.7 14.9 22.5 22.8 23.3
EBITDA (YoY) 34.4 41.7 46.4 44.2 9.4 36.3 30.9 23.4
Operating profit (YoY) 41.5 52.4 54.3 47.3 6.6 39.4 32.5 25.2
Net profit (YoY) 102.6 54.8 51.5 52.9 9.7 40.4 25.3 25.3
Core EPS (fully-diluted) (YoY) 97.0 46.4 38.9 41.1 5.6 40.4 25.3 25.3
Gross-profit margin 23.8 25.2 27.8 28.2 26.2 27.7 28.3 28.5
EBITDA margin 14.5 16.5 19.0 20.4 19.5 21.7 23.1 23.1
Operating-profit margin 11.1 13.6 16.5 18.1 16.8 19.1 20.7 21.0
Net profit margin 8.9 11.1 13.2 15.1 14.4 16.5 16.9 17.1
ROAE 22.8 29.2 32.3 37.1 34.2 40.3 37.9 37.1
ROAA 13.5 17.6 20.6 24.2 21.9 25.4 25.2 25.9
ROCE 21.5 27.6 33.1 38.2 33.0 38.2 39.9 40.3
ROIC 19.0 23.9 31.3 37.3 31.0 38.0 42.3 43.9
Net debt to equity 24.1 19.1 n.a. 1.5 4.8 n.a. n.a. n.a.
Effective tax rate 17.1 18.8 18.4 17.5 19.6 18.0 18.5 18.5
Accounts receivable (days) 41.5 39.5 39.8 40.6 44.5 44.3 44.3 44.2
Current ratio (x) 1.4 1.4 1.9 1.7 1.6 1.6 2.0 2.1
Net interest cover (x) 51.4 54.4 93.6 191.3 140.9 164.1 255.9 381.3
Net dividend payout 52.2 53.6 68.7 64.1 69.5 70.0 70.0 70.0
Free cash flow yield 0.0 0.5 0.8 0.8 1.4 2.6 2.3 3.8
Company profile
Eclat Textile (Eclat) is a technology-based Taiwanese textiles company that supplies functional and
flexible knitwear fabrics, as well as sports apparel products, to a diversified client base. Its major
clients include Nike, Gap (Athleta), Under Amour and Lululemon.
25
Eclat Textile (1476 TT): 8 March 2016
Why buy Eclat?
Major clients’ inventory days are reversing
Even though Eclat has quite a diverse client base (over 150 garment customers and 300-
400 fabric customers, for brand and retail brands as well as department stores for the
North America, Europe and Asia markets), its share price has corrected by 20-25% since
October 2015. We attribute the decline to inventory concerns in North America resulting
from US West Coast port congestion and the warmer-than-expected winter in North
America.
However, some of its major clients’ inventory days have improved since 3Q15 (as shown in
the charts below), such as Under Amour (around 6% of 2015 revenue), Gap (6%) and JC
Penny (3%).
Some of Eclat’s clients, such as Nike and Lululemon, are clearing their inventories. Nike
(Eclat’s largest client in 2015, accounting for around 10% of revenue last year) expects its
inventory levels in North America to normalise over the course of 1H16, while bringing a
strong pipeline of new innovative products to the market over the same period. While its
excess inventory in North America stems from the residual impact of the West Coast port
congestion earlier in 2015, its other markets’ inventory levels remain healthy. Hence, we
expect Nike’s inventory days to return to a normal level in the next 2 quarters.
Meanwhile, Lululemon (around 6% of 2015 revenue) indicated that there was some
improvement in its inventory levels in 4Q15, but that levels were still elevated; however,
during its annual conference in January 2016, the company stated that in 1Q16 its
inventory growth should be in line with sales growth.
Under Amour: inventory days GAP: inventory days
Source: Company Source: Company
JC Penny: inventory days Nike: inventory days
Source: Company Source: Company
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Nike Average
Trends in inventory days
for global sportswear
brands have reversed
since 3Q15
26
Eclat Textile (1476 TT): 8 March 2016
Lululemon: inventory days
Source: Company
We saw a reversal of the inventory days trend in 3Q15 for some global sportswear and
retail brands, and expect a number of them soon to see a return of inventory days to
normal levels after a 2-quarter adjustment. Indeed, inventory concerns in 4Q15 were not
about end-demand per se, but rather the lingering impact of the West Coast port
congestion in early 2015 (delays in product pipelines), as well as the warmer-than-
expected winter (affecting sell-through of winter products). Hence, we look for progress on
this front to assuage investor concerns.
Rising demand for synthetic fabric thanks to the multi-function and athlesiure trend
Eclat specialises in manufacturing nylon- and polyester-based synthetic fabric (vs. regional
peers’ focus on synthetic cotton-based products) and is on the preferential list of a number
of global sportswear brands for mid- to high-end functional fabric based on its better
production know-how for synthetics.
Eclat focuses on developing mid- to high-end products which combine function, fashion
and casual themes, in an effort to pursue ASP improvements rather than volume growth.
We forecast its synthetic fabric sales to account for over 25% of its fabric sales in 2016,
from 18% in 2015 and 8% in 2014, driving revenue momentum for the next 5 years.
According to our research in the market, plans are underway in the industry to launch a
number of new synthetic products, though we do not yet know the details. In our view,
Eclat, leveraging its R&D capability for new products, stands to benefit from these
developments by winning new orders from global sportswear brands’ aggressive approach
to bringing strong pipelines of innovative products to the market (eg, Nike), in addition to
clearing their excess inventories in North America.
ASP and gross margin set to expand in 2016-17
We expect the ASP for Eclat’s fabric business to grow by 12-13% in 2016-17 on an
enlarged revenue contribution from: 1) synthetic fabric, with an ASP at least 10-15% higher
than non-synthetic fabric, and we forecast the sales proportion to hit over 25% of fabric
sales in 2016, from 18% in 2015 and 8% in 2014, 2) new and customised products, and 3)
the upgrading of ongoing products.
In addition, thanks to the rising proportion of internal-use fabric in the garment business,
we look for a 3-5% YoY increase in Eclat’s garment business ASP for 2016-17, and expect
its fabric for internal use as a proportion of total fabric to expand to 38% in 2016 from 35%
in 2015 and 32% for 2014.
Given a limited number of suppliers in the synthetic fabric space (ie, complex hybrid
products [nylon plus wool, nylon plus cashmere, etc]) compared with other mass-market
products, we see Eclat facing less pricing pressure than other mass-market players.
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Lululemon Average
Rising synthetic demand
bodes well for Eclat’s
earnings growth
ASP and margin drivers:
new products and
upgrading of existing
ones
27
Eclat Textile (1476 TT): 8 March 2016
Indeed, Eclat has more bargaining power with its clients in terms of pricing thanks to its
know-how in processing elastic yarn and synthetic fabric, better sourcing opportunities
from the Taiwan supply chain, as well as the capability and flexibility to develop new and
customised items for clients (vs. regional peers that target large-scale orders). Besides, we
expect to see a rising revenue contribution from global brands, such as for Nike, Under
Armour and Adidas (vs. department stores and retailers) in 2016, of up to 40% in 2016
from 30% in 2015, leading to an uptick in Eclat’s ASPs in 2016-17.
On the margin front, Eclat’s gross margin in 2014 declined to 26.2% from 28.2% in 2013,
after a c.40% expansion in garment capacity at its plants in Vietnam in 2014. With new
employees in Vietnam coming up the learning curve, the gross margin rose to 27.6% in
9M15 and we forecast a further increase to 27.7% in 2015 and 28.3% in 2016. For 2017,
Eclat plans to expand its total garment capacity globally to 7.7m pieces per month by
1Q17, from current 6.4m currently, translating into 20% capacity growth. Hence, we only
assume a 0.2pp gross-margin expansion in 2017 after considering its new Vietnam
capacity expansion and the company’s experience in training new employees in garment
manufacturing capability and efficiency.
In our view, the changing product mix for the both fabric and garment business toward
higher-margin items will be the main driver of Eclat’s ASP growth over our forecast horizon.
Eclat: garment ASP trend Eclat: fabric ASP trend
Source: Company, Daiwa forecasts Note: The ASP drop in 2013 and 2014 due to its capacity expansion in Vietnam and take more
low ASP order to train new employees
Source: : Company, Daiwa forecasts
Eclat: garment shipment trend Eclat: fabric shipment trend
Source: : Company, Daiwa forecasts Source: : Company, Daiwa forecasts
Eclat: sensitivity of 2016E EPS to changes in revenue growth for garment and fabric business
Change to 2016E EPS Garment revenue YoY growth
17.7% 18.2% 18.7% 19.2% 19.7%
Fabric revenue YoY
growth
31.0% 25.0% 25.3% 25.6% 26.0% 26.3%
30.5% 24.8% 25.1% 25.5% 25.8% 26.1%
30.0% 24.6% 24.9% 25.3% 25.6% 25.9%
29.5% 24.4% 24.8% 25.1% 25.4% 25.7%
29.0% 24.2% 24.6% 24.9% 25.2% 25.5%
Source: Daiwa estimates; Note: Columns and rows in blue represent our base-case assumptions
(8%)
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2011 2012 2013 2014 2015E 2016E 2017E
(TWD)
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28
Eclat Textile (1476 TT): 8 March 2016
Eclat: sensitivity of 2017E EPS to changes in revenue growth for garment and fabric business
Change to 2017E EPS Garment revenue YoY growth
19.5% 20.0% 20.5% 21.0% 21.5%
Fabric revenue YoY
growth
28.7% 25.1% 25.4% 25.7% 26.0% 26.3%
28.2% 24.9% 25.2% 25.5% 25.8% 26.1%
27.7% 24.7% 25.0% 25.3% 25.6% 25.9%
27.2% 24.5% 24.8% 25.1% 25.4% 25.7%
26.7% 24.3% 24.6% 24.9% 25.2% 25.5%
Source: Daiwa estimates; Note: Columns and rows in blue represent our base-case assumptions
Potential market-share gains in Europe, as well as with existing clients
We see a high possibility of Eclat gaining more share of the European market, as it is
aggressively pitching to customers based in Europe, where orders have relatively high
ASPs and gross margins. Pricing in Europe is also more stable and there is a high
acceptance of the service Eclat can provide, especially among SME clients, according to
our research in the market. Currently, most of Eclat’s revenue is derived from North
America (55% of 2015 total revenue, from 63% from 2012), Europe 15-20%, Japan 5%,
Australia 5%, and Asia accounts (the remainder).
For the next 3-5 years, we expect Eclat to increase its revenue proportion from Europe to
25% (vs. 8% for 2014 and a target of 18-20% for 2016). Also, we expect the revenue
contribution from Japan and Australia to increase as the company aims to diversify its
revenue sources and ease the swings in its quarterly revenue (resulting from different
weather patterns and hence peak selling seasons in the northern and southern
hemispheres). Besides, assuming incremental gains revenue from its non-US clients, we
see it making likely market-share gains at existing clients, such as Nike and Under Amour,
over 2016-17, driven by their new product pipelines. We expect the revenue contribution
from these 2 clients to grow faster than the company’s top line in 2016-17 and remain
among Eclat’s top-4 clients over the same horizon.
We know Eclat has 6 SME customers on the books in Europe, the US and Canada, all of
which have the potential to place an increasing number of orders with Eclat, as was the
case in the early stages of Eclat’s business relationships with Lululemon and Under Amour.
Well prepared to reap potential TPP benefits
The company has 15 garment production bases globally, in Vietnam, China and Cambodia,
as well as having strategic outsourcing partners in South Africa, Vietnam, Cambodia,
Taiwan and China. In terms of garment capacity distribution, Vietnam is the company’s
largest production site, accounting for 60-70% of its total capacity as at end-2015, followed
by South Africa (10-20%), Cambodia, Taiwan and China. The company has over 10 years’
production experience in Vietnam and targets to assign more production orders to its 4
plants there in 2016-17, eyeing potential benefits from the Trans Pacific Partnership (TPP),
which should increase its bargaining power over its clients.
As we highlight in the accompanying sector report, the textile supply chain in Taiwan
favours Eclat, given the company’s ability to source raw materials that are of better quality
and more price competitive than those of its regional peers, as well as its quicker, more
competitive service for clients, regardless of whether the clients assigning the orders to the
company’s major production bases of Taiwan or Vietnam. Moreover, as a result of the
company’s coverage of the complete Taiwan textile supply chain, we think Eclat should be
able to maintain its garment outsourcing ratio at 40% in 2016-17, in line with the figure for
2015 and up from 20-30% in 2014. Outsourcing allows Eclat to more easily allocate
capacity between its peak and off-peak seasons, and maintain its operating flexibility.
The company specialises in producing functional elastic circular knitting fabrics (ie,
Nylon66 and Nylon6 based vs. cotton-based) and garments for performance as well as
fashion sports. On the expansion of its internal garment capacity, we expect its internal-use
Eclat stands to gain
market share from
European clients, as well
as existing clients, such
as Nike and Under
Amour
Eclat can compete on
Vietnam capacity and
R&D
29
Eclat Textile (1476 TT): 8 March 2016
fabric ratio to rise in the coming years to 38% by 2016, from 35% in 2015 and 32% in
2014, which should provide scope for gross-margin expansion and underpin Eclat’s
earnings growth prospects.
Eclat continues to develop innovative, professional, flexible and functional knit fabric and
apparel through its 170-member R&D team, which works in collaboration with global
leading brands in order to keep its product line in step with fashion trends. The company
has thus established a preferential position in the textile supply chain, in our view. On
average, it takes 1.5-2 years for Eclat and its client brands to work together in developing
new product items, on which Eclat then has order visibility for 6-9 months.
Eclat develops over 3,000 new fabric products every year and more than 150 new garment
samples every day for its clients. Over the past 10 years, Eclat has successfully developed
Dri-FIT UV, a high-performance fabric that wicks moisture away from the skin and towards
the fabric surface where it evaporates, to help the wearer stay dry and comfortable, and
also provides a minimum UPF 30 ultraviolet protection. More recently, it developed
Coolmax, a performance fabric featuring a fibre-based moisture management system
designed to allow the wearer to feel cooler.
In addition, Eclat has developed eco-friendly and functional fabric products, such as those
allowing for moisture management, high elasticity and UV protection, and are water-proof,
wind-proof water-repellent, dirt-repellent, and lightweight – all of which we believe are in
step with emerging sportswear trends.
30
Eclat Textile (1476 TT): 8 March 2016
Financial analysis
Strong revenue growth expected to resume in 2016-17
Eclat’s total revenue rose by 33.7% YoY in 2013 and 14.9% YoY in 2014, and is expected
to rise to 22.5% YoY in 2015. We attribute the slowdown in momentum in 2014 to the
slower-than-expected revenue growth for its garment business as a result of new
employees in Vietnam coming up the learning curve as the company expanded capacity
there. Looking to 2016-17, we expect revenue momentum to resume and forecast revenue
growth of 22.8% YoY in 2016 and 23.3% YoY in 2017 on both ASP and shipment growth.
Besides, Eclat plans to expand its Vietnam garment manufacturing capacity by 20% by
1Q17, and we expect Eclat to raise its internal-use fabric ratio (ie, fabric used for garment
manufacturing vs. fabric sold to clients), which we think should boost profitability.
On our forecasts, Eclat’s garment revenue would rise by 18.7% YoY in 2016 (on 5% YoY
ASP growth and 13% YoY shipment growth) and 20.5% YoY in 2017 (on 3% YoY ASP
growth and 17% YoY shipment growth). Besides, in light of Eclat’s strong R&D capability
and its leading position in the elastic fabric market, we forecast its fabric revenue to grow
by 30% YoY in 2016 and 27.7% YoY in 2017.
Eclat: total revenue growth trend and forecasts for 2010-17
Source: Company, Daiwa forecasts
Eclat: garment revenue growth trend and forecasts over 2010-17 Eclat: fabric revenue growth and forecasts for 2010-17
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Improving gross and operating margins in 2016-17 In 2016 and 2017, we look for Eclat’s gross profit margin and operating margin to climb to
28.3% and 28.5% (from 27.7% in 2015E) and 20.7% and 21.0% (from 19.1% in 2015E),
respectively. Eclat’s gross margin improved to 28.2% in 2013, from 18.8% in 2008.
However, its gross margin fell to 26.2% in 2014 (26.8% in 1Q14, 25% in 2Q14, 25.7% in
3Q14 and 27.5% in 4Q15) as the company expanded its garment capacity in Vietnam and
new employees there came up the learning curve. Eclat targets a 20% increase in new
capacity at 2 of its 4 plants in Vietnam by 1Q17, and as such we expect gross-margin
10%
15%
20%
25%
30%
35%
40%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2010 2011 2012 2013 2014 2015 2016E 2017E
(TWDm)
Total revenue (LHS) YoY (RHS)
CAGR of 23.0%
0%
10%
20%
30%
40%
50%
60%
0
5,000
10,000
15,000
20,000
25,000
2010 2011 2012 2013 2014 2015 2016E 2017E
(TWDm)
Garment revenue (LHS) YoY (RHS)
CAGR of 19.6%
0%
5%
10%
15%
20%
25%
30%
35%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2010 2011 2012 2013 2014 2015 2016E 2017E
(TWDm)
Fabric revenue (LHS) YoY (RHS)
CAGR of 28.8%
We forecast a 2015-17
revenue CAGR of 23%
A margin expansion
story in 2016-17
31
Eclat Textile (1476 TT): 8 March 2016
expansion to slow YoY in 2017 (we forecast gross-margin expansion of 0.6pp in 2016 and
0.2pp in 2017).
Eclat: gross profit and gross margin outlook Eclat: operating profit and operating margin outlook
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Favourable currency trends Over 90% of Eclat’s sales are priced in USD. Thus, its currency risk is naturally partly
hedged by having USD accounts payable. Its major cost comprises CNY, TWD, USD and
some other Asian currencies for labour costs. In sum, the strong USD vs. Asian currencies
is favourable for Eclat. We believe the likely trend of an appreciating USD against Asian
currencies would be favourable for Eclat (ie, Daiwa forecasts call for the TWD/USD to
reach 34.7 by the end of 2016 and 35.5 by the end of 2017). We estimate that for every
1% rise in the USD against the TWD, Eclat’s earnings would see a positive impact of 3-4%.
Eclat: cost structure for fabric manufacturing Eclat: cost structure for garment manufacturing
Source: Company Source: Company
Sustainable net margin; set to rise in 2016-17 We forecast Eclat to book net income of TWD5.3bn in 2016 and TWD6.6bn in 2017.
Further, we forecast its net-profit margin to improve to 16.9% in 2016 and 17.1% in 2017,
from 16.5% in 2015E and 14.4% in 2014. Its pre-tax profit margin for the fabric and
garment segments rose to 13.9% and 16.5% in 9M15, from troughs of 8% and 11.7% in
2Q14, respectively, likely due to the increased contribution from its high-ASP products and
improving production efficiency. Note that Eclat is due to release its 4Q15 results during
the week of 21 March.
21%
22%
23%
24%
25%
26%
27%
28%
29%
0
2,000
4,000
6,000
8,000
10,000
12,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Gross Profit (RHS) Gross Margin (LHS)
CAGR of 24.8%
0%
5%
10%
15%
20%
25%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Operating Profit (LHS) Operating Margin (RHS)
CAGR of 28.8%
Raw material52%
Labor cost5%
Overhead43% Raw material
50%
Labor cost16%
Overhead34%
We forecast a net
income CAGR of 25.3%
in 2015-17
32
Eclat Textile (1476 TT): 8 March 2016
Eclat: pre-tax margin by product
Source: Company
Eclat: net income trend
Source: Company, Daiwa forecasts
Strong ROE and solid balance sheet Eclat’s ROE has strengthened since 2008, reaching 40.3% in 2015E (our forecast) from
34.2% in 2014. Taking into account its fund-raising exercise at end-2015 and receipt of the
proceeds in February 2016 (total proceeds of TWD2.56bn from 8m shares offered at
TWD320/share), we forecast Eclat’s ROE to decline to 37.9% in 2016 and 37.1% in 2017.
We forecast Eclat’s cash balance to be TWD4.8bn (20.3% of total assets) in 2016 and
TWD5.3bn (19.5% of total assets) in 2017, after considering the incremental USD2.56bn
capital-raising (with a 3.1% share dilution effect) in December 2015. We expect its net cash
position to increase to TWD3.0bn in 2017 from TWD337m in 2015. This improved net cash
position should allow the company to maintain a dividend payout ratio of around 70%, for a
dividend yield of 3.4-4.2% over 2016-17E.
We forecast Eclat to generate free cash flow (FCF) of TWD2.6bn in 2016 and TWD4.2bn in
2017, after incorporating our respective TWD2.5bn and TWD2.0bn capex forecasts for
these years. This capex is mostly for its Vietnam garment capacity expansion.
0%
5%
10%
15%
20%
25%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
Fabric Garment
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net Profit (LHS) Net Margin (RHS)
We expect the company
to be in stronger net
cash and free cash flow
positions in 2016-17
33
Eclat Textile (1476 TT): 8 March 2016
Valuation and risks
Valuations undemanding
Our 12-month target price of TWD500 is set at a 2016E PER of 25x, based on a 1x PEG
over 2015-17E, which we believe is fair given the company’s strong earnings growth
outlook.
We forecast an earnings CAGR of 24.1% in 2013-15, during which time the stock traded at
an average PER of 30x. For 2015-17, we forecast Eclat to deliver a stronger earnings
CAGR of 25.3%, and we see the potential for a rerating back to the average of its trading
PER of 30x (17-43x over 2013-15E).
Compared with regional fabric and garment makers, such as Shenzhou (2313
HK,HKD38.5, Buy [1]) and Youngone (1117770 KS, KRW51,300, Not rated), our target
2016E PER of 25x for Eclat looks fair, due to: 1) our forecast for the company’s earnings to
rise by 25.3% over 2015-17 vs. Shenzhou’s 20.6% over the same period, based on Daiwa
forecasts, and Youngone’s 14.1% over the same period, based on the Bloomberg
consensus forecasts; and 2) the tendency for investors in Taiwan to ascribe higher
multiples to textile- and apparel-related companies than investors in other markets.
Eclat: 1-year forward PER bands Makalot: 1-year forward PER bands
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
Shenzhou international: 1-year forward PER bands Youngone: 1-year forward PER bands
Source: Bloomberg, Daiwa forecasts Source: Bloomberg
0
100
200
300
400
500
600
700
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
25x
1
1
1
30x
15x
20x
10x
0
50
100
150
200
250
300
350
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
20x
1
1
1
24x
12x
16x
8x
0
10
20
30
40
50
60
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
(HKD)
19x
1
1
1
22x
13x
16x
10x
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
(KSD)
18x
11
1
22x
10x
14x
6x
12-month target price of
TWD500 based on 2016E
PER of 25x
34
Eclat Textile (1476 TT): 8 March 2016
Valuation: Eclat and its peers
Companies Bloomberg code Rating
Market cap (USDm)
Share price (local curr.)
PER (x) PBR (x) ROE (%) Dividend yield (%)
2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
*ECLAT TEXTILE CO 1476 TT Buy 3,374 410 20.9 16.7 6.7 5.7 37.9 37.1 3.4 4.2
*TAIWAN PAIHO LTD 9938 TT Buy 752 82.6 17.4 14.1 3.2 2.9 19.4 21.7 3.7 4.6
*MAKALOT INDUSTRIAL 1477 TT Buy 1,192 196 15.6 12.9 4.1 3.7 27.9 31.1 5.6 6.8
TAINAN ENTERPRISES CO LTD 1473 TT Not rated 167 37.35 13.6 9.2 1.3 NA 9.4 12.1 5.4 8
DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7 13.3 2.3 1.9 10.7 15.1 1.3 1.8
PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.2 13.2 NA 1.6 NA 11.8 NA NA NA
TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.1 17.7 15.2 4.1 3.7 24.3 25 4.6 4.8
HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.5 14 NA NA NA NA NA NA NA
Average 16.0 12.9 2.8 3.6 17.3 21.0 4.0 5.0
Regional peers
*SHENZHOU INTERNATIONAL GROUP 2313 HK Buy 6,933 38.5 16.4 13.6 3.1 2.7 21.2 22.6 3.6 4.3
*PACIFIC TEXTILES HOLDINGS 1382 HK Outperform 2,007 10.78 13.3 12.4 4.5 4.5 33.6 36.1 7.5 8.1
*BEST PACIFIC INTERNATIONAL H 2111 HK Buy 487 3.7 10.6 9 1.8 1.6 18.2 18.8 2.9 3.4
REGINA MIRACLE INTERNATIONAL 2199 HK Not rated 1,856 11.78 24.0 17.9 4.6 3.9 20.7 20.6 1.3 1.7
YOUNGONE CORP 111770 KS Not rated 1,885 51,300.00 14.0 13.0 1.8 1.6 13.2 12.5 0.4 0.4
Regional Average 15.7 13.2 3.2 2.9 21.4 22.1 3.1 3.6
Source: Bloomberg;*Daiwa forecasts Note: data is based on share prices as at 7 March 2016; NA denotes no Bloomberg-consensus forecasts
Risks to our call
Weaker-than-expected global demand. A sharper-than-expected macro-driven
slowdown could drag down global sportswear demand, leading to weaker-than-expected
shipments by Eclat. We saw this scenario play out during the GFC in 2008, with Eclat’s
revenue declining by 7.7% YoY in 2009. This is the major risk to our call.
Weaker-than-expected gross margin expansion. Should Eclat’s gross margins expand
more slowly and weakly than we expect as a result of: 1) slower-than-expected new
product launches, 2) stronger price competition from peers or pricing pressure from clients,
3) lower-than-expected production yields and utilisation rates at its production bases, this
would have a negative impact on its earnings. For example, we estimate that every 0.5pp
decline in its gross margin would lead to Eclat’s EPS falling by 3-4% over 2016-17.
Worse-the-expected new product demand. We view Eclat’s R&D capability in synthetic
fabric and ongoing product upgrades as the most important drivers of its ASP growth.
Should such demand fall away, we estimate that every 1% decline in the ASPs for both the
fabric and garment businesses would affect Eclat’s EPS by 1-2% in 2016-17.
Labour issues. Another secondary risk involves labour costs and disputes. Our earnings
forecasts could be at risk if basic labour costs at production sites increase by more than we
expect and labour disputes start to occur, or if the learning curve for new employees in
Vietnam proves to be steeper than we expect. Labour costs account for around 5% of
Eclat’s COGS for fabric (raw material: 52%, overhead: 43%), and 16% of COGS for the
garment business (raw materials: 50%, overhead: 34%), and we estimate that every 10%
higher-than-expected increase in labour costs would have a 4-5% negative impact on EPS
in 2016-17.
35
Eclat Textile (1476 TT): 8 March 2016
Appendix
Company background
Eclat was founded in 1977 in Taiwan by Zhen-Hai Hong, Hsien-Chin, Tsai, Li-Chen, Wang
and Wan-Shun, Hsu, as a textile trading company to offer fabric and garment buying and
selling services, as well as a fabric outsourcing manufacturing business. The company
started its own flexible knit fabric production in 1983, and during the 1990s, it launched a
garment business, completing the vertical integration model.
In 1985, Mr Zhen-Hai Hong was appointed chairman from predecessor, Mr Hsien-Chin
Tsai. In 1993, the company launched its R&D and inspection centre; it also was qualified
by Dupont with a Q Mark quality certification, becoming the first Dupont-certified vendor in
Pan Pacific Asia, effectively endorsing Eclat's quality and development capability for
producing flexible Lycra fabric.
In 1996, Eclat set up sales offices in Hong Kong and New York to expand its business in
these markets, and 1 year later it launched its own fabric brand, ”Eclon”.
In the 1990 and 2000s, in order to avoid labour costs and develop overseas production
bases, Eclat established its WuXi (China) plant, Cambodia plant and Vietnam plant. In
2007, Eclat completed the vertical integration of its Vietnam plant (dyeing, finishing and
garment-making) in an attempt to lower production costs, raising its competitiveness and
providing total service solutions.
Eclat was listed on the Taiwan Stock Exchange in April 2001. Its management team has an
average of 40 years’ experience in the industry.
Eclat: management team (February 2016)
Management Position Background and experience
Zhen-Hai Hong Chairman Mr. Hong has operated Eclat for over 30 years and is also responsible for the R&D division.
Ren-Chieh Lo Vice-president / CFO Mr Lo joined Eclat in 2001. He is responsible for finance and accounting. He also focuses on investment and overseas production sites.
Chun-Chin Tsai Division General Manager Mr. Tsai is responsible for the group’s fabric business.
Kun-Tang Chen Division General Manager Mr. Chen is responsible for the group’s garment business.
Source: Company
Eclat: major shareholders (as of 3 March 2016)
Holder Share (%)
Yi-Yuan Investment Co. Ltd 9.29
Hsien-Chin Tsai
Ching-Fang Chen
Zhen-Hai Hung
Chin-Chih Cheng Wang
Li-Chen Wang
7.78
3.48
3.26
3.05
2.86
Source: Bloomberg
The chairman is also
responsible for R&D
development
See important disclosures, including any required research certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of niche sportswear accessory ODM
company Taiwan Paiho (Paiho) with a Buy (1) rating. Over 2016-17, we see an
increasing revenue contribution from Paiho’s higher gross margin products,
and believe the company is well positioned to benefit from rising order
allocations from the world’s leading sportswear brands (ie, Nike and Adidas).
Profitable products bode well for margin expansion and bottom-line
growth. We forecast Paiho’s gross margin to expand to 38.0% for 2016
and 39.1% for 2017, from 37.2% in 2015 and 33.5% in 2014, due to its
more favourable product mix, better economies of scale and greater
contribution from high value-added products. We see ongoing product
upgrades and its solid relationships with the global leading sportswear
brands as the main drivers of its earnings growth over our forecast period.
Paiho’s shoe-face products likely to benefit from success of Nike’s
Flyknit. Some of Paiho’s new shoe-face products started to contribute to
revenue in 2015, and we forecast these products to account for a combined
3.6% of total revenue for 2016, and 4.3% for 2017. Although this
contribution is minor, we think the future bodes well for Paiho, as we are
seeing more global sportswear brands developing products similar to
Nike’s Flyknit (and Paiho is one of a few sportswear accessory ODMs in
Taiwan to have developed a similar shoe-face to the one used in Flyknit).
These new products are more functional and offer consumers greater
flexibility. They are also cheaper and quicker to manufacture, which means
we see less pressure (vs. peers) on Paiho to cut its prices going forward.
Catalysts: We view Paiho’s new shoe-face products as potential share-price
and rerating catalysts, driven by more sportswear brands developing products
similar to Nike’s Flyknit. The catalysts would come from higher revenue
guidance being issued for 2016 and/or new orders from Adidas in 2Q16.
Valuation: We initiate coverage with a 12-month target price of TWD100,
based on a 2016E PER of 21x, which is the mid-point of its 2015E PER
trading range, and translates into a 2015-17E PEG of 0.9x. Based on the
strong net profit growth of 24.8% and 23.4% that we expect for 2016 and
2017 (vs. 15.6% for 2015E), we believe the stock deserves to be rerated
back to at least the mid-point of its 2015E PER trading range of 15-29x.
Risks: The main risks to our 2016-17 earnings forecasts are: 1) weaker-
than-expected global demand, 2) slower-than-expected adoption of new
products, and 3) lower-than-expected gross margin expansion if its product
mix were to turn out to be less favourable than we expect, or if it were to
cut its ASP.
8 March 2016
Tai wan Pai ho
Initiation: flying high
Ongoing product upgrades driving gross margin expansion
New shoe-face products benefiting from success of Nike’s Flyknit
Initiating with a Buy (1) rating and 12-month TP of TWD100
Source: FactSet, Daiwa forecasts
Taiwan Paiho (9938 TT)
Target price: TWD100.00
Share price (7 Mar): TWD82.60 | Up/downside: +21.1%
Helen Chien(886) 2 8758 6254
90
109
128
146
165
55
66
78
89
100
Mar-15 Jun-15 Sep-15 Dec-15
Share price performance
Taiwan Pai (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 60.00-99.30
Market cap (USDbn) 0.75
3m avg daily turnover (USDm) 5.61
Shares outstanding (m) 298
Major shareholder Cheng family (35.0%)
Financial summary (TWD)
Year to 31 Dec 15E 16E 17E
Revenue (m) 9,439 10,997 12,864
Operating profit (m) 1,929 2,330 2,879
Net profit (m) 1,133 1,415 1,746
Core EPS (fully-diluted) 3.802 4.747 5.859
EPS change (%) 15.8 24.8 23.4
Daiwa vs Cons. EPS (%) 0.1 0.1 9.9
PER (x) 21.7 17.4 14.1
Dividend yield (%) 3.0 3.7 4.6
DPS 2.5 3.1 3.8
PBR (x) 3.5 3.2 2.9
EV/EBITDA (x) 10.2 8.6 7.1
ROE (%) 16.5 19.4 21.7
37
Taiwan Paiho (9938 TT): 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Paiho: net profit and growth
Given that Paiho’s product mix has improved and its
increasing revenue contribution from higher gross margin
products (including new shoe-face products), we are
upbeat on the company’s earnings outlook for 2015-17.
We forecast revenue and earnings CAGRs of 16.7% and
24.1%, respectively, over 2015-17, with the gross margin
improving by 0.8-1.1pp over the same period.
Source: Company, Daiwa forecasts Note: the net profit declined YoY for 2012, due to weak sales of 3C (computer, communication
and consumer electronics) products
Valuation Paiho: one-year forward PER bands
Our target price of TWD100 is based on a fully diluted
2016E PER of 21x, which is the average of its PER trading
multiple for 2015. We forecast stronger bottom-line growth
of 24.8% YoY for 2016 and 23.4% for 2017 (vs. 15.6% for
2015E), and believe the stock has the potential to be
rerated to at least the mid-point of the 2015E trading range
of 15-29x.
Our target PER of 21x translates into a 2015-17E PEG of
0.9x, which we see as undemanding.
Source: Bloomberg, Daiwa forecasts
Earnings revisions Paiho: Bloomberg-consensus earnings forecast revisions
The Bloomberg consensus has been raising its EPS
forecasts for 2017 for Paiho since December 2015. But
there was a slight cut made to the 2016E EPS (in
December 2015), which we think was probably due to the
delay in the company’s new shoe-face products being
adopted by some of its global sportswear brand clients, to
2017 from 2016.
Source: Bloomberg
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
60%
0
500
1,000
1,500
2,000
2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net income (LHS) YoY (RHS)
CAGR of 24.1%
0
20
40
60
80
100
120
140
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
20x 1
1
1
24x
12x
16x
8x
4.5
4.7
4.9
5.1
5.3
5.5
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
(TWD)
2016E EPS 2017E EPS
38
Taiwan Paiho (9938 TT): 8 March 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Webbings/shoe lace revenue YoY
growth (%)27.7 10.1 8.7 23.5 24.0 23.3 25.0 20.0
Elastics revenue YoY growth (%) 20.3 16.9 (0.1) 27.7 11.0 33.5 25.0 20.0
Molded Hook revenue YoY growth (%) 20.3 (2.6) 2.7 14.2 35.3 22.5 25.0 20.0
New shoe face products (TWDm) 0 0 0 0 0 49 400 550
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Webbings/shoe lace 1,926 2,120 2,304 2,846 3,528 4,351 5,439 6,527
Touch Fasteners 2,261 2,039 1,885 2,148 2,197 2,077 2,077 2,077
Other Revenue 4,187 3,996 2,792 3,113 3,391 3,011 3,481 4,261
Total Revenue 8,374 8,154 6,981 8,107 9,116 9,439 10,997 12,864
Other income 0 0 0 0 0 0 0 0
COGS (6,162) (6,045) (4,981) (5,611) (6,061) (5,928) (6,816) (7,832)
SG&A (1,083) (1,099) (1,054) (1,190) (1,295) (1,333) (1,562) (1,814)
Other op.expenses (139) (138) (185) (188) (226) (249) (290) (340)
Operating profit 989 873 761 1,117 1,533 1,929 2,330 2,879
Net-interest inc./(exp.) (85) (62) 17 2 21 40 43 51
Assoc/forex/extraord./others 650 37 (53) 5 12 (3) 9 9
Pre-tax profit 1,554 847 726 1,124 1,566 1,966 2,381 2,938
Tax (308) (173) (204) (334) (417) (593) (667) (823)
Min. int./pref. div./others (67) (90) (67) (85) (170) (240) (300) (370)
Net profit (reported) 1,178 584 454 705 980 1,133 1,415 1,746
Net profit (adjusted) 1,178 584 454 705 980 1,133 1,415 1,746
EPS (reported)(TWD) 4.015 1.862 1.521 2.368 3.288 3.802 4.747 5.859
EPS (adjusted)(TWD) 4.015 1.862 1.521 2.368 3.288 3.802 4.747 5.859
EPS (adjusted fully-diluted)(TWD) 4.010 1.858 1.517 2.364 3.282 3.802 4.747 5.859
DPS (TWD) 3.000 0.280 0.998 1.500 2.000 2.472 3.086 3.809
EBIT 989 873 761 1,117 1,533 1,929 2,330 2,879
EBITDA 1,539 1,454 1,290 1,660 2,090 2,569 3,050 3,670
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 1,554 847 726 1,124 1,566 1,966 2,381 2,938
Depreciation and amortisation 550 581 529 543 557 639 721 791
Tax paid (308) (173) (204) (190) (211) (593) (667) (823)
Change in working capital (829) (59) 181 (98) 45 (119) (504) (513)
Other operational CF items (470) 123 66 84 46 (41) (43) (51)
Cash flow from operations 497 1,320 1,299 1,463 2,003 1,852 1,888 2,344
Capex (432) (500) (773) (826) (617) (1,100) (1,100) (800)
Net (acquisitions)/disposals 1,204 108 55 54 12 0 0 0
Other investing CF items (400) 63 66 (917) 37 0 0 0
Cash flow from investing 371 (328) (652) (1,688) (568) (1,100) (1,100) (800)
Change in debt 159 182 (342) 312 (134) 0 0 0
Net share issues/(repurchases) 0 (84) (276) 0 0 0 0 0
Dividends paid (140) (880) (84) (298) (447) (596) (736) (919)
Other financing CF items (26) 625 (32) (47) 592 0 0 0
Cash flow from financing (7) (157) (733) (33) 10 (596) (736) (919)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 860 834 (86) (258) 1,446 156 52 624
Free cash flow 64 821 525 638 1,386 752 788 1,544
39
Taiwan Paiho (9938 TT): 8 March 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 1,742 2,556 2,394 2,064 3,561 3,718 3,770 4,394
Inventory 1,938 1,798 1,662 1,789 1,731 1,794 2,017 2,268
Accounts receivable 1,886 1,646 1,581 1,685 1,860 1,926 2,309 2,702
Other current assets 417 230 194 138 120 1,462 1,589 1,723
Total current assets 5,984 6,231 5,831 5,677 7,272 8,900 9,685 11,086
Fixed assets 4,072 4,249 4,322 4,588 4,399 5,114 5,493 5,502
Goodwill & intangibles 661 796 758 313 309 0 0 0
Other non-current assets 203 127 110 1,839 2,378 0 0 0
Total assets 10,919 11,403 11,021 12,417 14,359 14,014 15,178 16,588
Short-term debt 1,623 1,500 1,169 1,502 1,699 1,699 1,699 1,699
Accounts payable 1,303 812 894 1,016 1,152 1,245 1,431 1,645
Other current liabilities 220 160 190 266 428 352 352 352
Total current liabilities 3,146 2,472 2,253 2,784 3,279 3,296 3,482 3,696
Long-term debt 1,191 1,554 1,496 1,497 1,242 1,242 1,242 1,242
Other non-current liabilities 519 660 705 921 1,047 241 241 241
Total liabilities 4,855 4,686 4,454 5,203 5,567 4,778 4,965 5,178
Share capital 2,935 2,935 2,980 2,980 2,980 2,980 2,980 2,980
Reserves/R.E./others 2,325 2,440 2,301 2,866 3,766 3,971 4,649 5,475
Shareholders' equity 5,260 5,375 5,281 5,846 6,746 6,950 7,628 8,455
Minority interests 805 1,342 1,286 1,369 2,046 2,286 2,586 2,955
Total equity & liabilities 10,919 11,403 11,021 12,417 14,359 14,014 15,178 16,588
EV 26,488 26,451 26,169 26,916 26,037 26,120 26,368 26,114
Net debt/(cash) 1,072 498 271 935 (620) (778) (829) (1,453)
BVPS (TWD) 17.922 18.316 17.723 19.618 22.639 23.325 25.601 28.375
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) 44.3 (2.6) (14.4) 16.1 12.4 3.5 16.5 17.0
EBITDA (YoY) 49.0 (5.6) (11.2) 28.6 25.9 22.9 18.8 20.3
Operating profit (YoY) 97.2 (11.8) (12.8) 46.8 37.3 25.8 20.7 23.6
Net profit (YoY) 439.5 (50.4) (22.3) 55.4 38.9 15.6 24.8 23.4
Core EPS (fully-diluted) (YoY) 439.4 (53.7) (18.4) 55.8 38.9 15.8 24.8 23.4
Gross-profit margin 26.4 25.9 28.6 30.8 33.5 37.2 38.0 39.1
EBITDA margin 18.4 17.8 18.5 20.5 22.9 27.2 27.7 28.5
Operating-profit margin 11.8 10.7 10.9 13.8 16.8 20.4 21.2 22.4
Net profit margin 14.1 7.2 6.5 8.7 10.7 12.0 12.9 13.6
ROAE 23.7 11.0 8.5 12.7 15.6 16.5 19.4 21.7
ROAA 11.9 5.2 4.1 6.0 7.3 8.0 9.7 11.0
ROCE 11.9 9.4 8.0 11.5 14.0 16.1 18.4 20.9
ROIC 11.4 9.7 7.8 10.5 13.8 16.2 18.8 21.4
Net debt to equity 20.4 9.3 5.1 16.0 n.a. n.a. n.a. n.a.
Effective tax rate 19.8 20.5 28.1 29.7 26.6 30.2 28.0 28.0
Accounts receivable (days) 66.8 79.1 84.4 73.5 71.0 73.2 70.3 71.1
Current ratio (x) 1.9 2.5 2.6 2.0 2.2 2.7 2.8 3.0
Net interest cover (x) 11.6 14.0 n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 74.7 15.1 65.6 63.4 60.8 65.0 65.0 65.0
Free cash flow yield 0.3 3.3 2.1 2.6 5.6 3.1 3.2 6.3
Company profile
Founded in 1985 in Taiwan, Taiwan Paiho (Paiho) is one of the world’s leading accessory ODM
manufacturers (webbing and shoe laces, touch fasteners, elastic and molded hooks, etc), mainly
for the leading sports apparel and shoe brands, such as Nike, Adidas and New Balance.
40
Taiwan Paiho (9938 TT): 8 March 2016
Doing the right thing at the right time
New shoe-face products: a new chapter for the company
These are likely to be share-price catalysts given the success of Nike’s Flyknit
Paiho’s new shoe-face products (has been making one-piece shoe uppers since 4Q13,
four-way stretchable elastic tape since 4Q13, and warp-knitted jacquard fabric since 4Q15)
have been contributing to its revenue since 2015, and for 2016-17, we forecast this
contribution to reach 3.6-4.3% of revenue, and 4.8-5.5% of earnings.
Despite the minor revenue contribution currently, we think these new shoe-face products
have the potential to become significant earnings drivers (they offer a gross margin that is
higher than the company’s average) as more global sportswear brands are developing
sports footwear products that follow on the heels of Nike’s Flyknit (launched in February
2012; Adidas launched its Primeknit in July 2012). Since then, these 2 brands have
promoted various models in various categories, such as running, football and basketball.
Since 2014, Paiho has been successfully selling its products to the global sportswear
brands, such as Camper, Puma, Under Armour, Reebok, Skechers and Adidas. While sport
shoes are usually made from many separate pieces, these new products allow
shoemakers to fine-tune the exact amount of flexibility and support needed in every part of
the shoe. This means lightweight comfort that wraps around foot, and fewer materials
mean less waste.
Although the party has not started properly yet for Paiho’s shoe-face products, we foresee
a rising revenue contribution from these products over 2016-20, given the still low adoption
rate of such products among existing clients and categories, and the likely addition of new
clients as more of them adopt these aspects into their own designs.
Paiho’s warp-knitted jacquard fabric was launched in November 2015, and is now being
tested by 2 of the global leading sportswear brands, reaffirming our view that its products
are now on trend.
Paiho: its 4-way stretchable elastic tape Paiho: warp-knitted jacquard fabric
Source: Company
Source: Company
Paiho is now providing
shoe-face materials. It
was previously a pure
accessory components
provider
41
Taiwan Paiho (9938 TT): 8 March 2016
Paiho: one-piece shoe upper used by Puma Paiho: 4-way stretchable elastic tape used by Adidas (the majority of upper is made of elastic tape)
Source: Company Source: Company
Accessory products, a cash-cow business
Favourable product mix to boost Paiho’s gross margin expansion
In a bid to expand its gross margin, Paiho has expanded into more products with higher margins, and has also been continually upgrading existing products over the past 5 years. This has led to its gross margin hitting 37.2% in 2015E, from 25.9% in 2011. Furthermore, we see less ASP or margin pressure for Paiho compared to its sportswear OEM manufacturer peers, given its continuous innovation and R&D capability. We forecast its gross margin for 2016 and 2017 to expand by 0.8pp and 1.1pp, respectively.
Among its accessory products, we expect its webbing/shoelaces, elastic and molded
hooks (together accounting for 69% and 71% of 2016E and 2017E revenue, respectively,
and 77% of its net profit for 2016E and 78% for 2017E) to remain the major revenue
drivers for 2016-17, versus its other products (ie, touch fasteners and powder coating). We
also see gross margin expansion potential for these products (higher than the company’s
average gross margin).
In light of its improving function and economies of scale, Paiho has seen the gross margin
of its webbing/shoe-lace products improve to 40.5% in 2015E, from 38.7% in 2014, and we
forecast this to rise to 41.5% for 2016 and 41.8% for 2017. The gross margin of its elastics
products has expanded to 39.1% in 2015E, from 36.1% in 2014, and we estimate 40% for
2016 and 40.5% for 2017.
Meanwhile, for its molded hooks, we expect the gross margin to rise to 52.5% for 2017,
from 52% in 2016, 51.1% in 2015, and 40.4% in 2014, as the company is 1 of only 6
fastener providers globally that are able to provide molded hooks and is the only company
with a production base in Asia, benefitting from low manufacturing costs and its close
proximity to footwear OEM production sites. Its global peers are 3M, Aplix, Binder, Velcro
and YKK.
Paiho: product mix by end-2015E Paiho: major products
Source: Daiwa forecasts Note:3C refers to computer, communication and consumer electronics-related products
Source Company
46.1%
22.0%
0.8%
9.8%
8.4%
4.6%7.8%
0.1%
Webbing/shoelaces
Touch fasteners
3C accessories
Elastic
Molded hooks
Powder coating
Others
New shoe face products
Ongoing product
upgrades should drive
gross margin expansion
over our current forecast
horizon
42
Taiwan Paiho (9938 TT): 8 March 2016
Paiho: each product as a % of total revenue Paiho: gross margin trends for its main products
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Paiho’s products used mainly in sports apparel and footwear segments
Based on Euromonitor data, the sizes of the global sports apparel and footwear markets
are expected to grow at CAGRs of 4.2% and 1.6% over 2015-19, respectively. Sportswear
brand clients today want products that are lightweight, provide ventilation and are
multifunctional (as we highlight in the main section of our report). They also want to cut
material waste and labour costs. Paiho can offer all of this, and we expect it to not only
benefit from the growth of the sportswear industry globally but also gain market share on
its competitive product categories and one-stop shopping service.
Its rising sportswear-related sales proportion (apparel and footwear, vs. 3C) over 2012-15E
was up to 67% for 2015E, from 52% for 2012 (combined percentages in the following
chart), and indicates to us that Paiho has won market share and that the adoption rate of
its products has increased. We believe this trend will continue in light of its more functional
and innovative products vs. peers.
Paiho: product applications Paiho: % of its applications used in sports footwear/apparel
Source: Company Source: Company, Daiwa forecasts
Favourable client coverage should boost earnings growth and product penetration
Paiho supplies products to the global leading sportswear brands such as Nike (22% of
Paiho’s 2015E revenue), Adidas (18%), New Balance (3.8%), Reebok (3.1%), Under
Armour (3%) and Skechers (1.5%), all of which should account for 51.4% of the company’s
total revenue for 2015E. The diversified client base gives the company more revenue
growth potential going forward, in our view.
0%
10%
20%
30%
40%
50%
60%
Web
bing
/sho
elac
es
Tou
ch fa
sten
ers
3C a
cces
sorie
s
Ela
stic
Mol
ded
hook
s
Pow
der
coat
ing
Oth
ers
2013 2014 2015E 2016E 2017E
0%
10%
20%
30%
40%
50%
60%
2013 2014 2015E 2016E 2017E
Webbing/shoelaces Elastic Molded Hooks
25%
29%31%
38%
27% 26%28% 29%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2012 2013 2014 2015 E
Footwear Apparel
Riding the sportswear
trend
Strong client profile
includes Nike, Adidas,
New Balance, Reebok,
and Under Armour
43
Taiwan Paiho (9938 TT): 8 March 2016
Global sports footwear brand market share for 2014 by retail price
Paiho: brand coverage
Source: Sporting Goods Intelligence Note: Nike’s brands include Converse and Adidas’s include Reebok,
denotes Paiho’s end-clients
Source: Company
40.0%
17.9%
7.5%5.3%
5.1%
4.5%
3.2%
2.3%
1.3%
1.1%11.8%
Nike
Adidas
VF Corporation
New Balance
Asics
Sketcher
Puma
Crocs
Anta
Mizuno
Others Apparel Footwear
44
Taiwan Paiho (9938 TT): 8 March 2016
Financial analysis
2016-17 revenue prospects: regaining momentum
We forecast Paiho’s revenue to rise by 3.5% YoY for 2015 (vs. 12.4% YoY for 2014), due to
its slower revenue momentum for 2015 on product-mix adjustments. In other words, it cut
the revenue contribution from its 3C accessories (computer, communication and consumer
electronics related), which are its lowest gross margin products, in order to improve
profitability. Looking at 2016 and 2017, we expect its higher gross margin products, such as
webbing/shoelaces, elastic and molded hooks, to be its main revenue drivers, in addition to
the incremental revenue contribution that we see from its new shoe-face products over this
period. Thus, we forecast 16.5% YoY revenue growth for 2016 and 17.0% for 2017.
Paiho: total revenue growth forecasts
Source: Company, Daiwa forecasts Note: 3C revenue decreased YoY over 2010-15E
Paiho has been able to continuously enhance its gross margin since 2013 by optimising its
product mix and increasing the gross margin of the majority of its product lines.
Paiho: gross margin trend by product line-up
Source: Company, Daiwa forecasts
Paiho: product mix changes
Source: Company, Daiwa forecasts Note: New products include one-piece shoe-uppers, four-way stretchable elastic tape and warp-knitted jacquard fabric
(20%)
(10%)
0%
10%
20%
30%
40%
50%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Total revenue (LHS) YoY (RHS)
CAGR of 16.7%
0%
10%
20%
30%
40%
50%
60%
2013 2014 2015E 2016E 2017E
Others 3C accessories Powder coating Molded Hooks Touch Fasteners Elastic Webbing/shoelaces
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014 2015E 2016E 2017E
Webbing/shoelaces Touch Fasteners 3C accessories Elastic Molded Hooks Powder coating New products Others
2015-17E: revenue
CAGR of 16.7%
45
Taiwan Paiho (9938 TT): 8 March 2016
Gross and operating margin expansion under way
For 2016-17, we forecast Paiho’s gross and operating margins to reach respective 38.0%
and 39.1% (from 37.2% in 2015E), and 21.2% and 22.4% (from 20.4% in 2015E). The
margin expansion should be driven mainly by the gross margin on Paiho’s ability to
upgrade existing products, as well as the growing contribution from its new products and
better economies of scale.
Paiho: gross profit and gross margin outlook Paiho: operating profit and operating margin outlook
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Net margins set to rise over 2016-17
We expect Paiho to record net income of TWD1.41bn for 2016 and TWD1.75bn for 2017,
from TWD1.1bn for 2015, and for its net margin to improve to 12.9% for 2016 and 13.6% for
2017, from 12.0% for 2015 and 10.7% for 2014. We see greater net profit growth than
operating profit growth, as we expect a lower effective tax rate for 2016 and 2017, vs. 2015,
for Vietnam and China, on tax benefits from local governments.
Paiho: net income
Source: Company, Daiwa forecasts Note: for 2012, Paiho had a one-time gain of about TWD682m from an investment disposal
Balance sheet and cash flow
We forecast Paiho’s cash position to reach TWD4.4bn (26% of its total assets) in 2017,
from TWD3.7bn (27% of total asset) in 2015, and TWD3.8bn for 2016 (25% of its total
assets), and for its net cash position to increase to TWD1.5bn in 2017, from TWD778m in
2015 , and TWD829m for 2016. The high cash position should allow Paiho to maintain its
cash dividend pay-out policy at 60-70% for 2016-17 (likely to be close to the high end, on
our forecasts).
We forecast Paiho to generate free cash flow of TWD788m and TWD1.5bn for 2016 and
2017, respectively, after incorporating our respective TWD1.1bn and TWD0.8bn capex
forecasts for those years. The capex would be mostly used for the expansion of its
Indonesia, Vietnam and Taiwan plants and to procure new equipment. In our view, Paiho’s
strong FCF will allow the company to maintain a dividend payout ratio of around 65%, with
a dividend yield of 3.0-4.6% over 2015-17E.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
1,000
2,000
3,000
4,000
5,000
6,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Gross profit (RHS) Gross margin (LHS)
CAGR of 19.7%
0%
5%
10%
15%
20%
25%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Operating profit (LHS) Operating margin (RHS)
CAGR of 22.2%
(100%)
0%
100%
200%
300%
400%
500%
0
500
1,000
1,500
2,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net income (LHS) YoY (RHS)
CAGR of 24.1%
2015-17E: gross profit
CAGR of 19.7% vs.
operating profit CAGR
of 22.2%
2015-17E: net profit
CAGR of 24.1%
Stronger net cash and
free cash flow positions
for 2015-17
46
Taiwan Paiho (9938 TT): 8 March 2016
Valuation, rating and risks
Valuation looks attractive
We initiate coverage with a Buy (1) rating and 12-month target price of TWD100, based on
a fully diluted 2016E PER of 21x, the average of its 2015 trading PER (equal to a PEG of
0.9x over 2015-17E). Based on the stronger earnings growth that we see, at 24.8% for
2016 and 23.4% for 2017 vs. 15.6% in 2015, we believe the stock deserves to rerated, at
least at least the mid-point of its 2015 trading range of 15-29x. The stock is trading
currently at 2016E PER of 17.4x.
Taiwan-based peer Li Cheng (4426TT, not rated) also provides shoe and apparel material
to the global leading sports brands, and its PER has been rerated to an average of 31x
since 2015, from an average PER of 15x over 2012-14. Li Cheng manufactures shoe
material products for Nike that are similar to Paiho’s new shoe-face products (ie, its warp-
knitted jacquard fabric). Paiho’s Taiwan textile and footwear peers are trading at an
average 2016E PER of 16.4x, on our and the Bloomberg consensus forecasts. Our target
PER for Paiho of 21x is a 25% premium to the sector average PER, supported by our
strong EPS growth forecast of 24.8% YoY for 2016 vs. the 20% EPS growth for its peers
over the same period.
Paiho: one-year forward PER bands Li Cheng: historical PER
Source: Bloomberg, Daiwa forecast Source: TEJ; Note: No Bloomberg consensus
Valuation: Paiho and its peers
Companies
Bloomberg
Rating
Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%)
code (USDm) (local curr.) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
*TAIWAN PAIHO LTD 9938 TT Buy 752 82.6 17.4 14.1 3.2 2.9 19.4 21.7 3.7 4.6
*ECLAT TEXTILE CO 1476 TT Buy 3,374 410 20.9 16.7 6.7 5.7 37.9 37.1 3.4 4.2
*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177 21.1 18 7 6 35.5 36 3.3 3.9
TAINAN ENTERPRISES CO LTD 1473 TT Not rated 167 37.35 13.6 9.2 1.3 NA 9.4 12.1 5.4 8
DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7 13.3 2.3 1.9 10.7 15.1 1.3 1.8
PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.2 13.2 NA 1.6 NA 11.8 NA NA NA
TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.1 17.7 15.2 4.1 3.7 24.3 25 4.6 4.8
HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.5 14 NA NA NA NA NA NA NA
FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53 19.1 13.1 1.2 1 6.5 8 4.9 6.1
POU CHEN 9904 TT Not rated 3,772 41.9 10.4 9.1 1.4 1.2 11.1 13.4 4.3 4.7
Average
16.4 13.8 3.0 3.5 16.8 19.7 3.9 4.8
Source: Bloomberg;*Daiwa forecasts; Note: data is based on share prices as at 7 March 2016; NA denotes no Bloomberg-consensus forecasts
Risks to our call
Weaker-than-expected global demand. A sharper-than-expected macro-driven
slowdown globally could drag down global sportswear demand. During the global financial
crisis in 2008, Paiho’s revenue was down 6.1% YoY (although for 2009, demand bounced
back, lifting revenue growth by 44.3% YoY). This is the major risk to our call.
A secondary risk would be slower-than-expected gross margin expansion, which
could be due to: 1) Paiho’s product mix turning out to be a weaker than expected. We
expect Paiho’s more favourable product mix to be the main earnings driver over 2016-17,
0
20
40
60
80
100
120
140
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
20x 1
1
1
24x
12x
16x
8x
0
10
20
30
40
50
60
25-F
eb-1
4
25-A
pr-1
4
25-J
un-1
4
25-A
ug-1
4
25-O
ct-1
4
25-D
ec-1
4
25-F
eb-1
5
25-A
pr-1
5
25-J
un-1
5
25-A
ug-1
5
25-O
ct-1
5
25-D
ec-1
5
25-F
eb-1
6
(x)
Stronger earnings
growth for 2016-17E
underpins rerating
potential, in our view
47
Taiwan Paiho (9938 TT): 8 March 2016
2) stronger-than-expected price competition from its peers or pricing pressure from clients.
We estimate that every 0.5pp decline in the gross margin decline would lower Paiho’s EPS
by 2-3% for 2016-17.
Slower-than-expected adoption rate of its new products. As we view Paiho’s new
shoe-face products as potential revenue drivers for the next 5 years, any downtrends in
demand for such products would impact our earnings forecasts.
Labour issues. If the company’s basic labour costs at its production sites were to increase
by more than we expect or if it were disrupted by labour disputes at these production sites,
then this would impact our forecasts. Labour costs account for around 12% of Paiho’s
COGS (raw materials: 60% and overheads: 28%), and we estimate that for every 10% rise
in its labour costs, its EPS would decline by 3-4% for 2016-17.
48
Taiwan Paiho (9938 TT): 8 March 2016
Appendix
Company background
San Ho Shin Limited (Paiho’s predecessor) was set up by Mr Sen-Mei Cheng and his 2
brothers, Kuo-Sen Cheng and Kuo-Yen Cheng in 1979 to supply hook and loop products
for apparel, footwear, medical use. In 1985, San Ho Shin entered into a joint venture with
Velcro Industries USA and the company was renamed Taiwan Paiho Limited. In 1990, the
Cheng family bought back all of its 49% stake in Velcro Industries. Following that, Paiho
started to set up its global production distribution network: Dongguan Paiho in 1992,
Vietnam Paiho in 1999, Wuxi Paiho in 2001, Europe Paiho and North America Paiho in
2004, and Indonesia Paiho in 2010. Paiho was listed on the Taiwan Stock Exchange in
January 2001.
Paiho: company structure
Source: Company
Paiho: management team (February 2016)
Management Position Background and experience
Sen-Mei Cheng Chairman/General Manager Founder of Taiwan Paiho. Mr. Cheng has more than 35 years’ experience in the textiles industry
Guei-Zhu Ye Vice-president Mrs Ye joined Paiho in 1992. She is responsible for procurement, new-plants expansion and production. She has over 20 years’ industry experience.
Cheng-Tsung Cheng Vice-president Mr. Cheng is responsible for brand and market development. He is the son of chairman.
Huan-Dung Tseng Director Mr. Tseng focuses on R&D and has over 30 years’ industry experience.
Yao-Da Huang Director Mr. Huang focuses on finance affairs and has been with Paiho for at least 5 years.
Source: Company
Paiho: major milestones
Year Milestones
2012 Awarded by Adidas: “Best Supplier (Speed/Agility)”
2013 Awarded by Adidas: “FACT division 1 supplier”
2014 Paiho became one of the 11 members in Adidas’s A-Team and was the only supplier of accessories used in sportswear (ed, shoe laces). It was named a “pioneer supplier” for garments by Nike, as well as one of its strategic partners.
Source: Company
Paiho: major shareholders (as of 3 March 2016)
Holder Share (%)
Chih-Yu Cheng 4.95
Kuo-Yen Cheng 3.08
Sen-Mei Cheng 2.80
A-Wei Chen Cheng 2.24
Hsin-Lung Cheng 1.68
Cheng-Tsung Cheng 1.60
Cheng-I Cheng 1.60
Source: Bloomberg
Paiho (9938 TT)
China Star International Limited
Wuxi Paisen Chemical Fibre Co Ltd
PT. Paiho Indonesia
Vietnam Paiho Limited
Paiho Shih Holdings Corporation (8404 TT)
Dougguan Paiho Powder Coating Co., Ltd
Wuxi Paiho Textile Co., Ltd
Dongguan Paihong Industry Co., Ltd
Management team has
over 30 years’ textile
industry experience
See important disclosures, including any required research certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of Feng Tay Enterprise, a leading
ODM sports and casual footwear maker based in Taiwan, with a Hold (3)
rating on valuation grounds. We like Feng Tay’s proven innovation and
execution skill, high ROE and close ties with Nike, the world’s largest
sports footwear brand. But, while we forecast solid earnings growth over
2016-17, driven mainly by the growth prospects of Nike, we believe the
current share price already reflects the fundamental positives.
Pure Nike play. We estimate that Feng Tay supplied about 17% of Nike’s
global footwear shipment demand in 2015 (up from 16.7% in 2014), and we
expect this order allocation ratio to be stable in the coming few years, on
Feng Tay’s co-development capabilities, preferential supply chain position,
and 40-plus-year relationship with Nike. On a stable ASP in USD terms, we
forecast Feng Tay to see 10% shipment YoY growth over 2016-17, in line
with Nike’s mid-October 2015 target for a revenue CAGR of 10.3% over
2016-20. Given Nike’s 40% share of the global sports footwear segment,
we believe Feng Tay will remain a top-line expansion story through 2020.
Besides, in light of the favourable raw-material environment (low oil price),
increasing production efficiency, and improving operating leverage, we
forecast Feng Tay’s operating margin to expand by 0.5pp for both 2016 and
2017. Hence, we forecast a revenue CAGR of 13.9% and earnings CAGR
of 18.4% for 2015-17.
Positives look priced in. The share price has almost doubled since 2015,
and we believe the above-mentioned positives are priced into the current
share price, given its peers’ trading PER of 16x.
Catalysts: We would see stronger-than-expected order allocation from
Nike as a near-term catalyst for the shares, and market-share gains by
Nike as a longer-term catalyst.
Valuation: We initiate coverage with a 12-month TP of TWD176, based on
a 2016E PER of 21x, which is 30% higher than regional peers’ Yue Yuen
(551 HK) and Fulgent Sun’s (9802 TT) average PER trading multiple of
16x, based on Feng Tay’s stronger earnings CAGR of 18.4% over 2015-
17E vs. regional peers’ 14.8% (Bloomberg consensus forecasts), and our
expectation of an improving ROE trend over 2015-17.
Risks: The key risks to our call are: 1) stronger- or weaker-than-expected
global demand, 2) better- or worse-than-expected operating efficiency, and
3) stronger- or weaker-than expected YoY growth in its ASP.
8 March 2016
Feng Tay Enterprise
Initiation: valuation running in line with fundamentals
Pure Nike play based in Taiwan with proven R&D capabilities
Current premium valuation looks to factor in fundamental positives
Initiating with a Hold (3) rating and 12-month TP of TWD176
Source: FactSet, Daiwa forecasts
Feng Tay Enterprise (9910 TT)
Target price: TWD176.00
Share price (7 Mar): TWD177.00 | Up/downside: -0.6%
Helen Chien(886) 2 8758 6254
100
123
145
168
190
130
150
170
190
210
Mar-15 Jun-15 Sep-15 Dec-15
Share price performance
Feng Tay (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 135.43-206.50
Market cap (USDbn) 3.22
3m avg daily turnover (USDm) 6.87
Shares outstanding (m) 596
Major shareholder Wang family (60.0%)
Financial summary (TWD)
Year to 31 Dec 15E 16E 17E
Revenue (m) 55,754 64,294 72,353
Operating profit (m) 5,475 6,635 7,793
Net profit (m) 4,189 5,010 5,878
Core EPS (fully-diluted) 7.025 8.401 9.856
EPS change (%) 35.7 19.6 17.3
Daiwa vs Cons. EPS (%) 0.1 3.2 1.7
PER (x) 25.2 21.1 18.0
Dividend yield (%) 2.8 3.3 3.9
DPS 4.9 5.9 6.9
PBR (x) 8.1 7.0 6.0
EV/EBITDA (x) 15.6 13.1 11.3
ROE (%) 35.0 35.5 36.0
50
Feng Tay Enterprise (9910 TT): 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Feng Tay: earnings
Being a pure Nike player, Feng Tay looks positioned to
grow in step with Nike’s footwear business. We forecast
revenue and earnings CAGRS of 13.9% and 18.4%,
respectively, for 2015-17.
We forecast 10% shipment YoY growth for 2016-17
alongside a flat ASP (around USD16-17 per pair).
However, we see some ASP upside potential from the
likely trend of the TWD depreciating against the USD over
2016-17 (Daiwa’s house view).
Also, we forecast a 0.5pp improvement in Feng Tay’s
operating margin for both 2016 and 2017.
Source: Company, Daiwa forecasts
Valuation Feng Tay: one-year forward PER bands
Our target price of TWD176 is based on a 2016E PER of
21x, which is 30% higher than its peers’ PER trading
multiple of 16x. We believe our target multiple is
reasonable considering Feng Tay’s stronger earnings
CAGR of 18.4% over 2015-17E vs. peers’ 14.8%, as well
as our expectation of a solid ROE performance (35.5% for
2016 vs. peers’ 8.5%) and 36.0% for 2017 vs. peers’ 9.6%)
(note: Bloomberg consensus data for its peers).
Feng Tay’s share price has almost doubled since 2015 and
the stock is currently trading at 21.1x 2016E PER.
Source: Bloomberg, Daiwa forecasts
Earnings revisions Feng Tay: Bloomberg-consensus earnings revisions
The Bloomberg consensus 2016 and 2017 EPS forecasts
for Feng Tay have come down since early 3Q15, likely due
to slower-than-expected operating-margin expansion and
delayed orders for casual shoes at end-2015 (Converse
and Bauer brands), which were shipped in January 2016.
Source: Bloomberg forecasts
(10%)
0%
10%
20%
30%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net profit (RHS) YoY (LHS)
CAGR of 18.4%
0
50
100
150
200
250
300
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
(TWD)
22x
1
1
1
26x
14x
18x
10x
8
9
9
10
10
11
May-15 Aug-15 Nov-15 Feb-16
(TWD)
2016E EPS 2017E EPS
51
Feng Tay Enterprise (9910 TT): 8 March 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Shipment growth (YoY %) 18.9 13.1 (6.3) 6.2 15.9 12.5 10.0 10.0
Shipment (m pair) 60.7 68.6 64.3 68.3 79.2 89.0 97.9 107.7
ASP growth (YoY %) (5.4) 5.0 9.5 (1.6) 7.8 4.0 4.8 2.3
ASP 493.8 518.7 567.7 558.5 602.1 626.4 656.7 671.8
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
North America 15,852 18,531 19,387 22,390 27,810 32,895 38,166 38,802
Asia 3,761 3,368 6,017 7,594 8,506 10,036 12,086 14,205
Other Revenue 10,360 13,705 11,113 8,165 11,338 12,823 14,041 19,346
Total Revenue 29,973 35,604 36,517 38,148 47,654 55,754 64,294 72,353
Other income 0 0 0 0 0 0 0 0
COGS (24,468) (29,838) (29,644) (30,708) (37,885) (44,313) (50,972) (57,217)
SG&A (2,936) (3,087) (3,316) (3,445) (3,990) (4,516) (5,079) (5,571)
Other op.expenses (937) (1,020) (1,030) (1,090) (1,278) (1,450) (1,607) (1,773)
Operating profit 1,632 1,659 2,528 2,905 4,501 5,475 6,635 7,793
Net-interest inc./(exp.) (47) (67) (70) (51) (40) (40) (38) (35)
Assoc/forex/extraord./others 497 469 262 538 594 759 664 669
Pre-tax profit 2,082 2,061 2,721 3,393 5,055 6,194 7,261 8,427
Tax (331) (438) (671) (769) (1,613) (1,588) (1,815) (2,107)
Min. int./pref. div./others (203) (191) (369) (330) (355) (417) (436) (442)
Net profit (reported) 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878
Net profit (adjusted) 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878
EPS (reported)(TWD) 2.979 2.675 3.018 3.962 5.332 7.025 8.401 9.856
EPS (adjusted)(TWD) 2.979 2.675 3.018 3.962 5.332 7.025 8.401 9.856
EPS (adjusted fully-diluted)(TWD) 2.979 2.675 3.018 3.962 5.177 7.025 8.401 9.856
DPS (TWD) 1.800 1.800 2.200 3.300 3.700 4.917 5.881 6.899
EBIT 1,632 1,659 2,528 2,905 4,501 5,475 6,635 7,793
EBITDA 2,793 2,871 3,843 4,138 5,820 6,907 8,218 9,541
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 2,082 2,061 2,721 3,393 5,055 6,194 7,261 8,427
Depreciation and amortisation 1,162 1,213 1,315 1,233 1,319 1,432 1,583 1,749
Tax paid (331) (438) (554) (586) (1,500) (1,588) (1,815) (2,107)
Change in working capital (361) (175) 431 (140) (302) (580) (1,042) (981)
Other operational CF items (234) 6 4 (8) 81 (14) (22) (30)
Cash flow from operations 2,318 2,667 3,916 3,891 4,653 5,444 5,965 7,057
Capex (1,816) (1,562) (1,342) (1,016) (2,054) (2,500) (3,000) (3,000)
Net (acquisitions)/disposals 204 21 229 371 82 0 0 0
Other investing CF items (77) (121) (77) 9 47 0 0 0
Cash flow from investing (1,688) (1,662) (1,189) (635) (1,925) (2,500) (3,000) (3,000)
Change in debt 1,083 488 (896) (1,189) 484 0 0 0
Net share issues/(repurchases) (100) (135) 0 0 0 0 0 0
Dividends paid (883) (936) (936) (1,178) (1,837) (2,142) (2,933) (3,507)
Other financing CF items (905) (147) (261) (1,079) (967) (162) 0 0
Cash flow from financing (804) (730) (2,093) (3,445) (2,320) (2,304) (2,933) (3,507)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (175) 275 634 (190) 408 639 32 550
Free cash flow 502 1,105 2,575 2,875 2,599 2,944 2,965 4,057
52
Feng Tay Enterprise (9910 TT): 8 March 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 1,222 1,303 1,808 1,583 1,891 2,531 2,563 3,113
Inventory 3,113 3,903 3,735 4,045 5,233 6,120 7,040 7,903
Accounts receivable 3,048 3,014 2,518 3,139 4,138 4,357 5,024 5,654
Other current assets 733 1,065 925 666 844 696 696 696
Total current assets 8,117 9,285 8,986 9,432 12,106 13,704 15,323 17,365
Fixed assets 10,069 10,947 10,529 10,254 11,480 12,575 14,021 15,304
Goodwill & intangibles 595 665 634 354 361 361 361 361
Other non-current assets 797 873 782 1,457 1,449 986 986 986
Total assets 19,578 21,769 20,931 21,497 25,397 27,626 30,691 34,016
Short-term debt 2,335 2,534 2,023 2,652 1,978 1,978 1,978 1,978
Accounts payable 2,232 2,353 2,100 2,302 3,101 3,627 4,172 4,683
Other current liabilities 1,681 2,152 1,939 2,490 3,144 2,626 3,069 3,512
Total current liabilities 6,248 7,040 6,062 7,445 8,223 8,231 9,219 10,174
Long-term debt 1,950 2,330 1,854 89 1,360 1,360 1,360 1,360
Other non-current liabilities 1,255 1,560 1,799 2,692 3,391 3,391 3,391 3,391
Total liabilities 9,453 10,930 9,715 10,226 12,973 12,981 13,969 14,924
Share capital 5,197 5,197 5,353 5,567 5,790 5,964 5,964 5,964
Reserves/R.E./others 2,828 3,511 3,674 4,178 5,063 7,110 9,188 11,558
Shareholders' equity 8,025 8,708 9,028 9,745 10,853 13,074 15,151 17,522
Minority interests 2,101 2,131 2,189 1,526 1,571 1,571 1,571 1,571
Total equity & liabilities 19,578 21,769 20,931 21,497 25,397 27,626 30,691 34,016
EV 110,722 111,251 109,816 108,242 108,575 107,936 107,904 107,354
Net debt/(cash) 3,063 3,561 2,069 1,158 1,446 807 775 225
BVPS (TWD) 15.441 16.267 16.215 16.831 18.744 21.922 25.406 29.381
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) 12.5 18.8 2.6 4.5 24.9 17.0 15.3 12.5
EBITDA (YoY) (19.6) 2.8 33.8 7.7 40.6 18.7 19.0 16.1
Operating profit (YoY) (30.7) 1.7 52.4 14.9 54.9 21.6 21.2 17.4
Net profit (YoY) 2.5 (7.5) 17.3 36.5 34.6 35.7 19.6 17.3
Core EPS (fully-diluted) (YoY) 2.5 (10.2) 12.8 31.3 30.7 35.7 19.6 17.3
Gross-profit margin 18.4 16.2 18.8 19.5 20.5 20.5 20.7 20.9
EBITDA margin 9.3 8.1 10.5 10.8 12.2 12.4 12.8 13.2
Operating-profit margin 5.4 4.7 6.9 7.6 9.4 9.8 10.3 10.8
Net profit margin 5.2 4.0 4.6 6.0 6.5 7.5 7.8 8.1
ROAE 19.1 17.1 18.9 24.4 30.0 35.0 35.5 36.0
ROAA 8.0 6.9 7.9 10.8 13.2 15.8 17.2 18.2
ROCE 11.3 11.0 16.4 20.0 30.2 32.5 34.9 36.7
ROIC 10.5 9.5 13.8 17.5 23.3 27.8 30.2 31.8
Net debt to equity 38.2 40.9 22.9 11.9 13.3 6.2 5.1 1.3
Effective tax rate 15.9 21.3 24.7 22.7 31.9 25.6 25.0 25.0
Accounts receivable (days) 31.9 31.1 27.6 27.1 27.9 27.8 26.6 26.9
Current ratio (x) 1.3 1.3 1.5 1.3 1.5 1.7 1.7 1.7
Net interest cover (x) 34.6 24.9 36.3 57.4 113.3 136.5 175.1 224.7
Net dividend payout 60.4 67.3 72.9 83.3 69.4 70.0 70.0 70.0
Free cash flow yield 0.5 1.0 2.4 2.7 2.5 2.8 2.8 3.8
Company profile
Founded in 1971, Feng Tay manufactures sports shoes, casual shoes, and sports balls (particularly
golf and soccer). Its major clients include Nike (82% of 2015 sales), Bauer (3.5%), Converse (3%),
Salomon (2.5%) and others (9%).
53
Feng Tay Enterprise (9910 TT): 8 March 2016
Valuation running in line with fundamentals
Pure Nike play
Feng Tay engages in the manufacture of sports shoes (83% of 2015 sales), casual shoes
(10%), sports balls (particularly golf and soccer) (2%), as well as generating other retail
revenue (5%). In terms of client coverage, Nike is the main revenue contributor (82% of
revenue for 2015E), followed by Bauer, Converse and Salomon.
Feng Tay: client mix
Source: Company, Daiwa forecasts
The company is a long-term production partner of Nike, and on our estimates supplied
around 17% of Nike’s global shipment demand in 2015 (from 16.7% in 2014). We believe
Feng Tay’s order allocation from Nike will be sustained at around the current level in the
coming years, as we think the companies’ long-established relationship is based on Feng
Tay’s proven R&D capabilities and flexible production strategy.
Over the past 10 years, Nike’s footwear revenue has recorded a CAGR of 9.7%, outpacing
the US company’s revenue from the apparel business (8.4% CAGR) as a result of its
dominant 40% share of the global sports footwear market.
Nike: footwear and apparel revenue YoY growth Feng Tay: share price performance vs. Nike
Source: Bloomberg Source: Bloomberg
In mid-October 2015, Nike announced it was targeting annual revenue of USD50bn by
end-2020, from USD30.6bn in 2015, translating into a revenue CAGR of 10.3% over 2016-
20E. For its more-developed geographic markets (North America, Western Europe and
Japan), Nike expects high-single-digit revenue growth per annum over the next 5 years; for
its developing geographic markets (Emerging Markets, Greater China, and Central and
Eastern Europe), the US company expects low-double-digit annual revenue growth over
the same horizon. Within the latter segment, the company expects its Emerging Markets
geography to deliver low-double-digit average annual revenue growth and Greater China
mid-teen growth over the next 5 years. For Greater China we see total annual revenue of
76% 76% 70% 73%82% 84% 82.1% 82% 82% 82%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Nike Bauer Converse Salomon Others
(10%)
(5%)
0%
5%
10%
15%
20%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Footwear Apparel
0
10
20
30
40
50
60
70
80
0
50
100
150
200
250
Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16
(USD)(TWD)
Feng Tay (LHS) Nike (RHS)
Global production
partner of Nike, with
which it has a 40-year-
plus relationship
The company’s share of
Nike orders looks
sustainable
Nike’s footwear business
has outpaced its apparel
business in recent years
The US company is
targeting a revenue
CAGR of 10.3% over
2016-20
54
Feng Tay Enterprise (9910 TT): 8 March 2016
USD6.5bn by 2020, vs.USD3.1bn for 2015, an implied revenue CAGR of 16%. We believe
this development will bode well for Feng Tay’s top-line growth through to 2020.
Global sports footwear brands: market share as of 2014 by retail price
Global sports apparel brands: market share as of 2014 by retail price
Source: Sporting Goods Intelligence; Note: Nike brand include Converse and Adidas include Reebok
Source: Sporting Goods Intelligence
On the favourable raw material environment, alongside the company’s improving
production efficiency across its different production sites and expanding sales scale and
operating leverage, we forecast Feng Tay’s gross margin to expand by 0.2pp in each of
2016 and 2017 and its operating margin to expand by 0.5pp in each of 2016 and 2017.
Vietnam is the company’s largest production base
As of 2015, Vietnam accounted for 53% of Feng Tay’s shipment capacity, followed by India
(20%), China (15%) and Indonesia (12%). We believe this skew in capacity towards
Vietnam should allow the company to capitalise on the favourable tariff treatment planned
for companies in Vietnam under the TPP, whereby brand customers will effectively pay
zero import tariffs (they will no longer have to pay the average Vietnam footwear tariff of
14.5%).
Feng Tay: capacity allocation
Source: Company, Daiwa forecasts
Besides, in order to bring down its labour costs, Feng Tay plans to increase its production
capacity in Indonesia (it had added 2 buildings as of end-2015 and plans to establish
another new plant to boost its production capacity by 2017-18) and India (targets to set up
a second production site, with manufacturing planned to commence by mid-2017). We
expect this capacity expansion effort to have a limited negative impact on its net profit
performance in the early stages, since the company can draw on its management
experience of the past 10 years and emulate previous successes on this front.
Nike40.0%
Adidas17.9%
VF Corporation7.5%
New Balance5.3%
Asics5.1%
Sketcher4.5%
Puma3.2%
Crocs2.3%
Anta1.3%
Mizuno1.1%
Others11.8%
Nike11.7%
Adidas11.0%
VF Corporation5.7%
Under Armour3.3%
Gildan3.1%
Columbia2.2%
Others63.0%
21% 21% 17% 15% 13% 11%
50% 50%51% 53% 52% 51%
16% 15%13% 12% 13% 14%
13% 14% 19% 20% 22% 24%
0%
20%
40%
60%
80%
100%
2012 2013 2014 2015 E 2016 E 2017 E
China Vietnam Indonesia India
Feng Tay’s Vietnam
focus should be positive
in terms of TPP benefits
Planning to expand
production capacity in
India and Indonesia
55
Feng Tay Enterprise (9910 TT): 8 March 2016
Competitive landscape: strong R&D
Feng Tay has been co-operating with Nike since 1977 and together the companies have
developed several innovative materials and products, including Flyknit and Flyweave
footwear and basketball shoes (Jordan series). Flyknit and Flyweave are made from
synthetic yarn that is woven together by a knitting machine, thus reducing the weight of the
shoe and the number of stages needed in the production process. Through its focus on
R&D (2-3% of revenue pa) and co-developing products with Nike, we believe Feng Tay is
well positioned for future developments in the global sportswear sector.
Nike: Flyknit Nike: Flyweave
Source: Nike
Source: Nike Note: Flyweave technology has been implemented on the Air Jordan 29 (basketball), Nike TW ’15
(golf), Nike CJ Elite TD Cleat (football), and Nike CJ3 Flyweave Trainer (training) lines.
In addition to its established R&D centre in Taiwan, which commenced operations in 2008,
Feng Tay built another R&D centre in Vietnam, which started up in May 2015, to expand its
development efforts alongside its largest production base.
Nike: Flyknit vs. Flyweave
Material name Launch time Light weight Precision fit Reduce waste Flexible More stability and support
Flyknit 2012 V V V V
Flyweave 2015 V V V V V
Source: Daiwa
Feng Tay: R&D development for Nike
Year Creative products
1977 Began producing high-end canvas and leather athletic shoes for Nike
1979 Began producing Nike tennis shoes with two-coloured outsole
1985 Began producing Nike Air shoes - Air Condition
1987 Began developing signature shoe models (Air Jordan) for Michael Jordan, a Nike-contracted NBA athlete
1992 Nike’s first Research and Development Centre based in Asia is established in Douliu City, Taiwan.
1993 Collaborated with Nike on the SOTAP (State of the Art Production) project
1997 Began producing Bauer ice and inline skates
2000 Began producing the first generation Nike Shox
2003 Began developing signature shoe models for LeBron James, a Nike-contracted NBA athlete
2006 Began producing air bags and golf balls for Nike
2009 Produced ice hockey helmets for Bauer
2010 Began producing vulcanized shoes for Converse; began producing ice hockey goalkeeper helmets for Bauer
2011 Established knit technology in Taiwan; began producing soccer balls for Nike
2012 Developed and produced Nike Flyknit Racer, selected by Time magazine as one of the "Best Inventions of the Year 2012"
2013 Began producing male casual shoes for Cole Haan and ice hockey sticks and gloves for Bauer; successfully developed and began producing non-hand-sewn elite footballs for Nike
2015 First generation of Flyweave for Nike; upgraded Flyknit technology and developed first generation Flyknit soccer boots as wel l as Air Jordan Future
Source: Company
1.85
1.90
1.95
2.00
2.05
2.10
2.15
2.20
5.0
6.0
7.0
8.0
9.0
10.0
Nov
-14
Feb
-15
May
-15
Aug
-15
Nov
-15
(USD) (TWD)
Feng Tay (LHS) Nike (RHS)
2.20
2.25
2.30
2.35
2.40
2.45
2.50
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
May
-15
Aug
-15
Nov
-15
(USD) (TWD)
Feng Tay (LHS) Nike (RHS)
Record of innovation:
Flyknit, Flyweave and
Jordan series
Now has R&D centres in
Taiwan and Vietnam
56
Feng Tay Enterprise (9910 TT): 8 March 2016
Financial analysis
2016-17E: solid revenue and earnings growth trajectory
We forecast Feng Tay to deliver an earnings CAGR of 18.4% for 2015-17, on a 13.9%
sales CAGR and an expanding operating-profit margin of 0.5pp for both 2016 and 2017.
We believe the company’s revenue growth for 2016-17 will be driven mainly by shipment
growth, with a flat ASP of USD16-17 per pair (up in TWD terms).
Daiwa’s house forecasts call for the TWD/USD rate to reach 34.7 by the end of 2016 and
35.5 by the end of 2017, and these figures are factored into our ASP assumptions for Feng
Tay over 2016-17.
Feng Tay: sensitivity of 2016E EPS to changes in shipment and ASP growth
Change to 2016E EPS Shipment YoY growth
6.0% 8.0% 10.0% 12.0% 14.0%
ASP YoY growth (TWD)
8.8% 19.6% 21.8% 24.1% 26.3% 28.6%
6.8% 17.4% 19.6% 21.8% 24.0% 26.2%
4.8% 15.2% 17.4% 19.6% 21.7% 23.9%
2.8% 13.1% 15.2% 17.3% 19.4% 21.5%
0.8% 10.9% 12.9% 15.0% 17.1% 19.2%
Source: Daiwa estimates
Note: columns and rows in blue represent our base-case assumptions
Feng Tay: sensitivity of 2017E EPS to changes in in shipment and ASP growth
Change to 2017E EPS Shipment YoY growth
6.0% 8.0% 10.0% 12.0% 14.0%
ASP YoY growth (TWD)
6.3% 17.5% 19.7% 21.9% 24.1% 26.3%
4.3% 15.3% 17.5% 19.6% 21.8% 24.0%
2.3% 13.1% 15.2% 17.3% 19.5% 21.6%
0.3% 10.9% 13.0% 15.1% 17.1% 19.2%
-2.3% 8.0% 10.1% 12.1% 14.1% 16.2%
Source: Daiwa estimates
Note: columns and rows in blue represent our base-case assumptions
On 11 January 2016, the company guided for its production volume to grow by 10% YoY
and delivery volume to grow by 8% YoY for 1Q16. Its 4Q15 production volume and delivery
volume fell short of the company’s guidance by 1.3% and 3.2%, respectively, which we
attribute to inventory digestion of casual shoes from Converse and Bauer.
Feng Tay: difference between reported and guided production volume and delivery volume
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
Actual production volume 18,319 18,992 20,576 22,224 20,705 22,010 21,873 23,877
Production volume guidance 17,520 18,920 20,100 21,640 21,000 21,800 21,800 24,200 22,700
Difference 4.6% 0.4% 2.4% 2.7% -1.4% 1.0% 0.3% -1.3%
Actual delivery volume 17,823 20,984 19,435 21,118 20,616 23,951 21,791 22,642
Delivery volume guidance 17,510 20,440 18,810 20,420 20,000 23,100 21,700 23,400 22,200
Difference 1.8% 2.7% 3.3% 3.4% 3.1% 3.7% 0.4% -3.2%
Source: Company
Feng Tay: revenue trend Feng Tay: net income trend
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
0%
5%
10%
15%
20%
25%
30%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Revenue (RHS) YoY (LHS)
CAGR of 13.9%
(10%)
0%
10%
20%
30%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net profit (RHS) YoY (LHS)
CAGR of 18.4%
We forecast a net
earnings CAGR of 18.4%
and revenue CAGR of
13.9% over 2015-17
57
Feng Tay Enterprise (9910 TT): 8 March 2016
Improving gross and operating margins
Feng Tay had delivered an improving gross margin to 20.5% in 2015 from 19.5% in 2013;
and operating margin of 9.8% in 2015 from 7.6% in 2013, we attribute this to the improving
production effectiveness across its diversified manufacturing sites, favourable raw material
environment and enhancing sales scale, which allow it to improve its operating leverage
and offset the rising labour costs. For 2016, we forecast a gross margin of 20.7% and
operating margin of 10.3%; and for 2017, we forecast a gross margin of 20.9% and
operating margin of 10.8%.
Feng Tay: gross and operating profit margin trends
Source: Company, Daiwa forecast
As shown below, in 9M15, Feng Tay recorded the highest operating-profit margin among
other regional ODM footwear makers, such as Fulgent Sun (9802 TT) and Yue Yuen (551
HK).
Feng Tay: gross margin performance compared with peers
% 2011 2012 2013 2014 9M15
Feng Tay 16.2 18.8 19.5 20.5 20.5
Fulgent Sun 17.7 15.6 15.1 16.0 12.1
Yue Yuen 22.1 22.8 21.7 22.1 22.7
Source: Company, Bloomberg
Feng Tay: operating margin performance compared with peers
% 2011 2012 2013 2014 9M15
Feng Tay 4.7 6.9 7.6 9.4 9.5
Fulgent Sun 8.3 3.8 3.7 5.6 1.6
Yue Yuen 6.2 6.3 5.4 3.5 5.0
Source: Company, Bloomberg
Feng Tay: ROE compared with peers
% 2011 2012 2013 2014 9M15
Feng Tay 17.1 18.9 24.4 30.0 26.0
Fulgent Sun 13.0 6.5 5.2 7.6 1.6
Yue Yuen 12.8 16.3 10.4 7.6 10.1
Source: Company, Bloomberg Note:* 1H15 data
Balance sheet and cash flow
We forecast Feng Tay’s cash position to reach TWD3.1bn (9% of total assets) in 2017,
from TWD2.5bn (9% of total assets) in 2015, while its net debt position should narrow to
TWD225m in 2017, from TWD807m in 2015. Incorporating our capex forecasts of
TWD3.0bn for both years, we look for the company to generate free cash flow (FCF) of
TWD3.0bn for 2016 and TWD4.1bn for 2017. We assume most of the capex will be put
towards the company’s new plants in Indonesia and India, as well as new equipment
procurement. In our view, Feng Tay’s strong FCF would allow the company to maintain a
cash dividend payout ratio of around 70%, for dividend yields of 2.8-3.9% over 2015-17E.
18.4% 16.2%18.8%
19.5% 20.5% 20.5%20.7% 20.9%
5.4% 4.7%6.9%
7.6%9.4% 9.8%
10.3% 10.8%
0%
5%
10%
15%
20%
25%
2010 2011 2012 2013 2014 2015E 2016E 2017E
Gross margin Operating margin
We expect the
company’s operating
efficiency to continue
improving
Feng Tay has been
outperforming its peers
on operating margin and
ROE
We forecast Feng Tay’s
net cash position and
FCF to improve over
2016-17
58
Feng Tay Enterprise (9910 TT): 8 March 2016
Valuation and risks
Strong fundamentals appear to be priced in
Our 12-month target price of TWD176 is based on a fully diluted 2016E target PER of 21x,
which is 30% higher than the 16x average multiple of regional peers Yue Yuen and Fulgent
Sun. In our view, Feng Tay merits a higher PER multiple than its peers because of its
stronger net earnings growth of 18.4% vs. peers’ 14.8% over 2015-17E and superior ROEs
of 35.5% (vs. peers’ 8.5%) for 2016E and 36.0% (vs. peers’ 9.6%) for 2017E, according to
Daiwa and Bloomberg forecasts.
On valuation grounds, we initiate coverage with a Hold (3) rating.
Feng Tay: one-year forward PER bands Fulgent Sun: one-year forward PER bands
Source: Bloomberg, Daiwa forecast Source: Bloomberg
Yue Yuen: one-year forward PER bands Pou Chen: one-year forward PER bands
Source: Bloomberg Source: Bloomberg
Valuation: Feng Tay and its peers
Companies Bloomberg code Rating
Market cap (USDm)
Share price (local curr.)
PER (x) PBR (x) ROE (%) Dividend yield (%)
2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177 21.1 18 7 6 35.5 36 3.3 3.9
YUE YUEN INDUSTRIAL HLDG 551 HK Not rated 5,933 27.95 12.5 11 1.2 1.2 10.6 11.3 4.3 4.7
FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53 19.1 13.1 1.2 1 6.5 8 4.9 6.1
POU CHEN 9904 TT Not rated 3,772 41.9 10.4 9.1 1.4 1.2 11.1 13.4 4.3 4.7
Average
15.8 14.0 3.1 2.7 17.5 18.4 4.2 4.9
Source: Bloomberg;*Daiwa forecasts Note: data is based on share prices as at 7 March 2016
Risks to our call
The main risk to our Hold (3) rating on Feng Tay would be weaker- or stronger-than-
expected global sports footwear demand driving up or dragging down the company’s YoY
shipment growth.
Upside risks to our Hold call include: 1) stronger-than-expected global sports footwear
demand, 2) faster-than-expected market-share gains by Feng Tay in terms of its share of
0
50
100
150
200
250
300
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
(TWD)
22x
1
1
1
26x
14x
18x
10x
0
10
20
30
40
50
60
70
80
90
100
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
25x
1
1
1
30x
15x
20x
10x
0
5
10
15
20
25
30
35
40
45
50
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
(HKD)
14x1
1
1
16x
10x
12x
8x
0
10
20
30
40
50
60
70
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
(TWD)
12x1
1
1
14x
8x
10x
6x
We see limited upside
from current premium
valuation
59
Feng Tay Enterprise (9910 TT): 8 March 2016
Nike’s business or by Nike at the expense of other global sports footwear providers, 3)
stronger-than-expected gross- and operating-margin expansion on favourable raw-material
prices, better scale economies, and operating efficiency, 4) higher-than-expected
depreciation in Asian currencies relative to the USD, and 5) smaller-than-expected rises in
basic labour costs at production sites or higher-than-expected utilisation rates.
Downside risks to our Hold call include: 1) softer-than-expected global sports footwear
demand, 2) loss of market share by Feng Tay in terms of its share of Nike’s business or by
Nike to other global sports footwear providers, 3) weaker-than-expected gross- and
operating erosion due to unfavourable raw-material prices and higher-than-expected
operating expenses, 4) Lower-than-expected depreciation in Asian currencies relative to
the USD, and 5) higher-than-expected rises in basic labour costs at production sites or
lower-than-expected utilisation rates.
60
Feng Tay Enterprise (9910 TT): 8 March 2016
Appendix
Company background
Feng Tay was established by Mr Chiu-Hsiung Wang in July 1971 as a trading company
specialising in rubber canvas shoes. It started producing sports shoes in 1973 and began
cooperating with Nike 4 years later. Since the late 1980s, Feng Tay has expanded its
global production network to China (1988), Indonesia (1992), Vietnam (1999) and India
(2007), with the goal of lowering its labour costs and diversifying its country risk.
In 1999, the company began to produce casual shoes, outdoor shoes and snowshoes. It
further broadened its product portfolio in the mid-2000s by starting to make golf and soccer
balls, ice hockey helmets and other sports equipment.
Feng Tay was listed on the Taiwan Stock Exchange in February 1992. Its management
team has an average of 30 years’ experience in the industry.
Feng Tay: management team (January 2016)
Management Position Background and experience
Chiu-Hsiung Wang Chairman Founder of Feng Tay. Mr Wang has more than 45 years’ experience in the industry.
Chien-Hung Wang Group president Mr Wang joined Feng Tay as the manager of moulding department. He has over 20 years’ industry experience.
Chia-Chi Hsu General manager in R&D department
Mr. Hsu has worked for Nike (R&D manager), K-Swiss (Country manager). After that, Mr. Hsu joined Feng Tay as manager of production, technology and R&D department and accumulated over 30 years’ experience in the industry.
Chao-Chi Chen General manager in the first department
Mr. Chen is responsible for sports shoe business (Nike) and has over 20 years’ industry experience.
Chien-Jung Wang General manager in the second department
Mr. Wang is responsible for casual shoe, balls and sport equipment businesses and has over 15 years’ industry experience. .
Li-Chin Chen CFO/spokeswoman Mrs. Chen is responsible for finance and accounting departments and she has over 20 years’ experience in the industry.
Source: Company
Feng Tay : major shareholders (as of 3 March 2016)
Holder Share (%)
Chiu-Hsiung Wang 11.11
Mei-Huei Liu Wang
Hui-Ling Chen
Shih-Jung Chen
Tsai-Yun Wang Chen
Chien-Hung Wang
Chien-Jung Wang
Li-Chuan Wang
10.87
6.47
5.42
5.15
2.80
2.80
2.68
Source: Bloomberg
61
Taiwan Sportswear Sector: 8 March 2016
Daiwa’s Asia Pacific Research Directory
HONG KONG
Takashi FUJIKURA (852) 2848 4051 [email protected]
Regional Research Head
Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273
Regional Research Co-head
John HETHERINGTON (852) 2773 8787 [email protected]
Regional Deputy Head of Asia Pacific Research
Rohan DALZIELL (852) 2848 4938 [email protected]
Regional Head of Product Management
Kevin LAI (852) 2848 4926 [email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Junjie TANG (852) 2773 8736 [email protected]
Macro Economics (China)
Jonas KAN (852) 2848 4439 [email protected]
Head of Hong Kong and China Property
Cynthia CHAN (852) 2773 8243 [email protected]
Property (China)
Leon QI (852) 2532 4381 [email protected]
Banking (Hong Kong/China); Broker (China); Insurance (China)
Anson CHAN (852) 2532 4350 [email protected]
Consumer (Hong Kong/China)
Jamie SOO (852) 2773 8529 [email protected]
Gaming and Leisure (Hong Kong/China)
Dennis IP (852) 2848 4068 [email protected]
Power; Utilities; Renewables and Environment (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Kelvin LAU (852) 2848 4467 [email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Brian LAM (852) 2532 4341 [email protected]
Transportation – Railway; Construction and Engineering (China)
Jibo MA (852) 2848 4489 [email protected]
Head of Custom Products Group
Thomas HO (852) 2773 8716 [email protected]
Custom Products Group
PHILIPPINES
Bianca SOLEMA (63) 2 737 3023 [email protected]
Utilities and Energy
SOUTH KOREA
Sung Yop CHUNG (82) 2 787 9157 [email protected]
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Mike OH (82) 2 787 9179 [email protected]
Banking; Capital Goods (Construction and Machinery)
Iris PARK (82) 2 787 9165 [email protected]
Consumer/Retail
SK KIM (82) 2 787 9173 [email protected]
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Thomas Y KWON (82) 2 787 9181 [email protected]
Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game
Kevin JIN (82) 2 787 9168 [email protected]
Small/Mid Cap
TAIWAN
Rick HSU (886) 2 8758 6261 [email protected]
Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)
Christie CHIEN (886) 2 8758 6257 [email protected]
Banking; Insurance (Taiwan); Macro Economics (Regional)
Steven TSENG (886) 2 8758 6252 [email protected]
IT/Technology Hardware (PC Hardware)
Christine WANG (886) 2 8758 6249 [email protected]
IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer
Kylie HUANG (886) 2 8758 6248 [email protected]
IT/Technology Hardware (Handsets and Components)
Helen CHIEN (886) 2 8758 6254 [email protected]
Small/Mid Cap
INDIA
Punit SRIVASTAVA (91) 22 6622 1013 [email protected]
Head of India Research; Strategy; Banking/Finance
Saurabh MEHTA (91) 22 6622 1009 [email protected]
Capital Goods; Utilities
SINGAPORE
Ramakrishna MARUVADA (65) 6499 6543 [email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
Royston TAN (65) 6321 3086 [email protected]
Oil and Gas; Capital Goods
David LUM (65) 6329 2102 [email protected]
Banking; Property and REITs
Shane GOH (65) 64996546 [email protected]
Small/Mid Cap (Singapore)
Jame OSMAN (65) 6321 3092 [email protected]
Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)
62
Taiwan Sportswear Sector: 8 March 2016
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Taiwan Sportswear Sector: 8 March 2016
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Thailand
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The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
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Taiwan Sportswear Sector: 8 March 2016
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Germany
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United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
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Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 63.9%
Hold** 21.3%
Sell*** 14.8%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
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