Taiwan Consumer Discretionary 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 Helen Chien (886) 2 8758 6254 Hold (3) on valuation grounds [email protected]
Investment case: We initiate coverage of the Taiwan Sportswear Sector Key stock calls with a Positive view. Although the global sportswear brands have faced New Prev. inventory issues in recent months, we are not concerned about the impact Eclat Textile (1476 TT) Rating Buy on the 3 stocks that we cover, which are leading players in the fast-growing Target 500.00 global sportswear supply chain. As we see significant earnings momentum Upside p 22% for the Taiwan players, we expect their shares to be rerated. Taiwan Paiho (9938 TT) Rating Buy Improving inventory days for global brands. Based on our research, Target 100.00 Adidas’s and Under Armour’s inventory days improved in 3Q15 and Nike’s Upside p 21.1% inventory accumulation in North America, due to the US West Coast ports Feng Tay Enterprise (9910 TT) Rating Hold shutdown in early 2015, will likely decline and revert to normal levels in Target 176.00 1H16. We see global sportswear being a growth sector over 2016-17E and Downside q 0.6%
believe that overstocking concerns are only a short-term negative, with the Source: Daiwa forecasts 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.
See important disclosures, including any required research certifications, beginning on page 63
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 40% deliver an earnings CAGR of 22.4% for 2015-17E, driven by an increase in the contribution of new or high-ASP 35% products, improving operating efficiency and the ongoing 30% vendor consolidation globally. We are upbeat on Eclat Textile and Paiho, in particular, as we believe these 25% companies are offering the right products at the right time, and that their complete product lines offer the global 20% brands a one-stop shopping experience. We like Feng 15% Tay’s record of innovation and its strong ties with sector 2015E 2016E 2017E leader Nike, but we believe the fundamental positives are Eclat Textile Feng Tay Taiwan Paiho factored into the current share. Source: Daiwa forecasts
Valuation Taiwan Sportswear Sector: one-year forward PER
Currently, the Taiwan Sportswear ODM names are trading (USDbn) at a one-year forward PER of 21x, below the average of 12 the trading range of 15-28x in 2015 and equating to 0.8x 10 PEG for 2016, which we see as undervalued. This is 8 because we expect the sector’s earnings to growth for 6 2016E to outpace 2015, at 25% vs. 20% YoY in 2015E. 4 2 Indeed, we expect the sector to be rerated back to its 0
recent PER high of 28x (early 3Q15) now that the inventory
Jul-07 Jul-10 Jul-13
Oct-06 Apr-08 Oct-09 Apr-11 Oct-12 Apr-14 Oct-15
Jan-06 Jan-09 Jan-12 Jun-12 Jan-15 Jun-15
Feb-07 Feb-10 Mar-13
Nov-07 Aug-08 Dec-10 Sep-11 Dec-13 Sep-14 May-09 build-up among the global sportswear brands has reversed May-06 (since 3Q15), and given the Taiwan players’ strong product Market Cap 10x 14x 18x 22x 26x line-ups and improved earnings momentum. Source: Bloomberg
Taiwan Sportswear Sector: Bloomberg-consensus earnings Earnings revisions revisions
Bloomberg consensus earnings forecasts for the 3 stocks (TWD) under Daiwa’s coverage have come down since 4Q15, due 52.0 to generally weak sentiment toward textile stocks on 50.0 inventory concerns in North America and the relatively 48.0 warm winter there. Our 2016-17 EPS forecasts for Eclat 46.0 and Paiho are 0-10% above the Bloomberg consensus, as 44.0 we are more positive on both companies’ earnings growth 42.0 prospects and segment positioning in multifunctional and 40.0 new products. For Feng Tay, our EPS forecasts are 1.7- 38.0
3.2% higher than the consensus for 2016-17E, as we see
Oct-15 Oct-15 Oct-15
Jan-16 Jan-16 Jan-16 Jan-16
Feb-16 Feb-16 Feb-16 Feb-16 Mar-16
Nov-15 Nov-15 Nov-15 Dec-15 Dec-15 Dec-15 Dec-15 Dec-15 the company as a solid partner of Nike, and expect it to Nov-15 2016E EPS 2017E EPS grow in step with Nike in the next few years. Source: Bloomberg
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Taiwan Sportswear Sector: 8 March 2016
Sector stocks: key indicators
EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 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 Source: Bloomberg, Daiwa forecasts
Regional Sportswear Sector: valuation metrics 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 *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
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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
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Taiwan Sportswear Sector: 8 March 2016
Setting the pace with the global sportswear brands Taiwan sportswear ODMs riding on rising global demand The sportswear sector Given the rising popularity of sportswear, more fashion and retail brands have launched keeps on running 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 Away from the short- The share prices of the Taiwan sportswear players have declined by 20-25% since October term issue of inventory 2015, along with the sector PER being derated to 21x, from a high of 27x in early October build-up, long-term 2015. The main reason for this was, in our view, the impact of concerns among investors growth trends appear to as to the inventory adjustments in North America for the brand names, including the build- be intact 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 160 200 140 120 150 100 80 100 60
40 50 20
0 0
4Q09 3Q12 2Q13 2Q09 3Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
2Q09 3Q10 4Q12 1Q15 3Q09 4Q09 1Q10 2Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15 Adidas Average Under Armour Average
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.
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Taiwan Sportswear Sector: 8 March 2016
Nike: inventory days 120
100
80
60
40
20
0
2Q12 3Q12 4Q12 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
Nike Average
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 is one Earnings visibility remains a top priority in our 2016 investment case. Generally speaking, of our top investment the Taiwan sportswear ODM players need 1-2 years to develop new products with considerations 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 Stronger global sports According to market data from Euromonitor, global sports apparel sales value will rise at a apparel demand in 2014- CAGR of 4.8% over 2014-19E, to USD215.9bn by 2019E from USD170.4bn for 2014. 19E vs. 2012-14 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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Taiwan Sportswear Sector: 8 March 2016
Global sports footwear sales poised to rise at a CAGR of 1.6% over 2015-19E Taiwan sports footwear According to market data from Statista, the value of global sports footwear sales will rise at companies likely to see a CAGR of 1.6% over 2015-19E, aiming for a market value of USD85.7bn for 2019E from market-share gains on a USD80.5bn for 2015, and from USD74.7bn for 2011. We believe Taiwan sports footwear global basis 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
(USDbn) 1.5% 1.5% 90 1.4% 1.4% 1.4% 1.6% 1.3% 1.3% 1.3% 1.3% 1.2% 1.4% 85 1.2%
80 1.0% 0.8% 75 0.6% 0.4% 70 0.2% 65 0.0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Value (LHS) YoY (RHS)
Source: Statista
We prefer US proxies in 2016; favourable currency is a bonus US angle: support from For 2016, we prefer US proxy companies, which we expect to be the main beneficiaries of US economic growth 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
100% 70%
90% 60% 80% 70% 50% 60% 40% 50% 30% 40% 30% 20% 20% 10% 10% 0% 0% Feng Tay Eclat Textile Taiwan Paiho Feng Tay Eclat Textile Taiwan Paiho 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.
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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.
Taiwan sportswear: We believe such a complete supply chain in Taiwan favours the suppliers, allowing them to growth potential for source the raw material at competitive prices and within a short space of time, and hence synthetic segment and provide a quick service for clients. Besides, Taiwan sportswear companies’ strong complete supply chain synthetic fabric technology and capability in new product development stand these cluster 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.
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Taiwan Sportswear Sector: 8 March 2016
Textile: manufacturing process
Natural fibre and synthetic fibre
Spinning mill Twisted yarn
Vertical – integration Textile mill model: grey, Dyeing, dyeing, printing and finishing printing and finishing Dyeing and finishing mill
Fabric
Home and Industrial furniture goods textile
Source: Daiwa
Taiwan textile supply chain
Raw material > yarn > textured Upstream Zig Sheng (1455 TT)/ Hong Yi Fiber (1452 TT)/ Lealea (1444 TT)/ Shinkong Synthetic yarn 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 Midstream Spinning > weaving > finishing (1402 TT)/Le Licacy (1464 TT)/Tex-Ray (1467 TT)
Eclat Textile (1476 TT)/Makalot Industrial (1477 TT)/Hakers (4432 TT)/Nien Downstream Garment manufacturing Hsing (1451 TT)/Tainan Enterprise (1473 TT)/Carnival Industry (1417 TT)/Tex- Ray (1467 TT)/Quang Viet (4438 TT)
Source: Daiwa
Footwear: manufacturing process
Shoe Material Cutting Sewing face preparation
Processing Packaging
Shoe Material Mixing/hot-pressing/ Deburring Sole laying bottom preparation infusing/setting
Source: Daiwa
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Taiwan Sportswear Sector: 8 March 2016
Taiwan footwear supply chain Raw material (leather, rubber, Upstream TSRC (2103 TT)/Pontex Polyblend (8935 TT) chemical feedstock)
Leather processing, synthetic Taiwan Paiho (9938 TT)/Paiho Shih (8406 TT)/Li Cheng (4426 TT)/San Fang Midstream leather processing, sole Chemical (1307 TT)/Long John (unlisted) processing, shoe accessories provider Feng Tay (9910 TT)/Pou Chen (9904 TT)/Fulgent Sun (9802 TT) /Deanshoes Downstream Footwear manufacturing (unlisted) /Ching Luh (unlisted)
Source: Daiwa
Strong R&D capabilities in Taiwan’s sportswear supply chain Key to success of the Taiwan textile and footwear companies are good R&D partners for international brands like Taiwan sportswear Nike, Adidas, Under Armour. They specialise in each focus segment, hence forming a players: innovation 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.
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Taiwan Sportswear Sector: 8 March 2016
Eclat Textile: performance sportswear Eclat Textile: fashion sportswear
Source: Company Source: Company
Taiwan Paiho Ongoing product Taiwan Paiho develops a number of innovative products every year (for which it secures upgrades and new the patent), in order to meet the sportswear trends, as well as the requirements of its products to drive Paiho’s footwear and apparel clients to reduce material and labour costs. In the table below, we profitability 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 Paiho: the difference between a traditional hook and loop vs. apparel, etc) Paiho’s patented moulded hook
Traditional Paiho’s patented hook and loop moulded hook
Source: Company Source: Company
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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.
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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 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.
Potential Trans-Pacific Partnership (TPP) benefits Long established Most of Taiwan’s sportswear suppliers moved their production bases out of China in the capacity in Taiwan 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
Well prepared to reap Under the TPP framework, TPP members will benefit from an immediate 70.2-100.0% TPP benefits 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 % of tariff cancellation by % of tariff cancellation by % of tariff cancellation by % of tariff cancellation by Country product item immediately volume of trade immediately product item after 15 years 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)
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Taiwan Sportswear Sector: 8 March 2016
Taiwan Sportswear: monthly wages in 2014 by production site (USD) 800 686 700 600 500 400 319 300 271.15 252 300 219 200 100 0 China Vietnam Philippines India Indonesia Cambodia
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 (TWD) 2.7 2.5 2.3 2.1 1.9 1.7
1.5
Jul-12 Jul-13 Jul-14 Jul-15
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Jun-12 Jan-13 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Jan-16
Mar-13 Feb-15 Feb-13 Feb-14 Mar-14 Mar-15
Dec-13 Nov-15 Dec-12 Nov-13 Nov-14 Dec-14 Dec-15
Aug-12 Sep-12 Aug-13 Sep-13 Aug-14 Sep-14 Aug-15 Sep-15
May-13 May-14 May-15 2016E 2017E
Source: Bloomberg
14
Taiwan Sportswear Sector: 8 March 2016
Valuation and recommendations The sector merits a rerating Stronger earnings We initiate coverage of the Taiwan Sportswear Sector with a Positive rating. The sector is growth for 2016E vs. trading currently at a 2016E PER of 21x, slightly higher than the midpoint (19x) of its past 2015 offers rerating 3-year trading PER of 10-28x and equal to a 0.8x PEG for 2016. The sector was derated potential for the Taiwan from 27x in October 2015 due we believe to concerns about inventory accumulation in Sportswear Sector 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.
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Taiwan Sportswear Sector: 8 March 2016
ROE: Taiwan Sportswear Operating margins: Taiwan Sportswear
45% 25% 40% 35% 20% 30% 25% 15% 20% 15% 10% 10% 5% 5% 0% 0% 2012 2013 2014 2015E 2016E 2017E 2012 2013 2014 2015E 2016E 2017E Eclat Textile Taiwan Paiho Feng Tay Eclat Textile Taiwan Paiho Feng Tay
Source: Daiwa forecast Source: Daiwa forecast
Taiwan Sportswear Sector: 1-year forward PER bands Eclat Textile: 1-year forward PER bands
(USDbn) (TWD) 12 600 30x 10 500 25x 8 400 6 20x1
4 300 15x1 2 200 10x1 0
100
Jul-08 Jul-12
Oct-11 Oct-07 Apr-09 Apr-13
Jan-14 Jan-06 Jun-07 Jan-10 Jun-11 Jun-15
Feb-15 Feb-07 Mar-08 Feb-11 Mar-12
Dec-12 Dec-08 Nov-15
Sep-06 Aug-09 Sep-10 Aug-13 Sep-14
May-06 May-10 May-14 Market Cap 10x 14x 0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 18x 22x 26x Source: Bloomberg Source: Bloomberg
Taiwan Paiho: 1-year forward PER bands Feng Tay: 1-year forward PER bands
(TWD) (TWD) 140 300 120 26x 24x 250 100 22x 20x 200 1 18x1 80 16x 1 150 1 60 12x 14x 1 1 40 100 10x 8x 20 50
0 0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
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
16
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.
17
Taiwan Sportswear Sector: 8 March 2016
Appendix Global sportswear brands: the big are getting bigger International brands dominate global sportswear demand Nike and Adidas are the According to Sporting Goods Intelligence, as of 2014, Nike and Adidas together accounted No.1 and No.2 players in for 58% of the global footwear market and 23% of the global sports apparel market. sports footwear and apparel 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 Global sports apparel brands: market share by retail price (2014) (2014)
1.30% Nike 11.80% 11.70% 1.10% 40.00% Adidas Nike VF Corporation 2.30% 11.00% Adidas 3.20% New Balance VF Corporation 4.50% Asics Under Armour Sketcher 5.70% 5.10% Puma Gildan 63.00% 3.30% 5.30% Crocs Columbia Anta 3.10% Others 7.50% Mizuno 2.20% 17.90% Others
Source: Sporting Goods Intelligence Source: Sporting Goods Intelligence Note: Nike brand includes Converse; Adidas includes Reebok
Athleisure products Lifestyle consumers are driving demand The rise of “athleisure” 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 Sportswear demand is As part of this healthy living push, global consumers are increasingly turning to sports and rising on the back of outdoor/adventure activities, and their buying habits are changing as a result. Products growing incomes and such as sports shoes, apparel and accessories, along with a variety of sports gear and awareness of health equipment, have become must-have items. And we expect the trend to continue as issues 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
18
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 Multi-function = With consumers’ tastes becoming ever more sophisticated, we are seeing more multi- sportswear + casual function sportswear products hitting the market. We consider these multi-function products wear + fashion wear 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 Scope for leading global According to Euromonitor, the leading international brands, such as Nike and Adidas, sportswear players to together claimed 28% of China’s sportswear market as of 2014, up from 23% in 2013. We grow in developing think these companies’ market-share gains reflect the willingness of Chinese consumers to markets 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.
19
Taiwan Sportswear Sector: 8 March 2016
China: Nike and Adidas’ sportswear market share 16% 14.30% 14% 11.20% 12% 13.80% 10% 8% 8.50% 6% 4% 2% 0% 2011 2012 2013 2014 2015 Nike Adidas
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
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Taiwan Consumer Discretionary 8 March 2016
Eclat Textile (1476 TT) Eclat T extile
Target price: TWD500.00
Share price (7 Mar): TWD410.00 | Up/downside: +22.0%
Initiation: leading the pack
Inventory days at Eclat’s clients have been improving since 3Q15 Helen Chien (886) 2 8758 6254 Synthetic fabric demand set to drive ASP growth in 2016-17 [email protected] Initiating with a Buy (1) rating and 12-month TP of TWD500
Investment case: We initiate coverage of Eclat Textile, a leading global Share price performance manufacturer of functional elastic knitted fabrics and garments, with a Buy (TWD) (%) (1) call. We foresee the sportswear trend continuing over the next 2 years 550 165 and believe Eclat’s capability in product development and its strategic 503 146 position with global-brand customers will support revenue growth across 455 128 408 109 the functional sportswear, outdoor wear and lifestyle wear segments. 360 90 Mar-15 Jun-15 Sep-15 Dec-15 Inventory days reversing since 3Q15. Eclat’s share price is down by 20- Eclat Text (LHS) Relative to TWSE Index (RHS) 25% since October 2015 due to inventory concerns in North America resulting from the US West Coast port congestion and the warm winter in 12-month range 369.43-529.04 North America in late 4Q15. However, inventory levels at the company’s Market cap (USDbn) 3.37 major clients, such as Under Amour (since 3Q15), Gap (4Q15) and JC 3m avg daily turnover (USDm) 17.67 Shares outstanding (m) 269 Penny (4Q15), look to be improving. Nike and Lululemon have been trying Major shareholder Zhen-Hai Hong (Chairman) (3.3%) to lower their inventories to a healthy level, and we believe new innovative products will stimulate demand within the space. Financial summary (TWD) Year to 31 Dec 15E 16E 17E More multi-function and athleisure demand, more demand for Revenue (m) 25,525 31,337 38,632 Operating profit (m) 4,888 6,477 8,113 synthetic products. We expect the sales proportion of synthetic fabric to Net profit (m) 4,217 5,282 6,618 hit over 25% of total fabric sales in 2016, from 18% in 2015 and 8% in Core EPS (fully-diluted) 15.676 19.637 24.604 2014, thanks to Eclat specialising in the manufacture of nylon and EPS change (%) 40.4 25.3 25.3 Daiwa vs Cons. EPS (%) 0.9 5.1 7.0 polyester-based synthetic fabric (vs. regional peers’ synthetic cotton-based PER (x) 26.2 20.9 16.7 products) and its preferential position that allows global brands to source Dividend yield (%) 2.8 3.4 4.2 mid- to high-end functional fabric based on Eclat’s manufacturing know- DPS 11.3 13.7 17.2 PBR (x) 9.3 6.7 5.7 how. In 2016-17, we expect its fabric ASP to rise by 12-13% and its EV/EBITDA (x) 19.9 14.9 12.0 garment ASP to rise by 3-5%, due mainly to the change in the company’s ROE (%) 40.3 37.9 37.1 product mix (rising revenue from synthetic fabric and fabric for use in its Source: FactSet, Daiwa forecasts 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.
See important disclosures, including any required research certifications, beginning on page 63
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 (TWDm) of 23% and its gross margin to improve by 0.2-0.6pp. As 7,000 CAGR of 25.3% 18% such, we forecast a stronger earnings CAGR of 25.3% in 6,000 16% 14% 2015-17 vs. 24.1% in 2013-15E, based on its new product 5,000 CAGR of 24.1% 12% pipeline, ongoing vendor consolidation and rising demand 4,000 10% for multi-functional products, after a slight slowdown in YoY 3,000 8% revenue growth in 2014 as the company ramped up new 6% 2,000 garment capacity in Vietnam. 4% 1,000 2% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Net Profit (LHS) Net Margin (RHS)
Source: Company, Daiwa forecasts
Valuation Eclat: 1-year forward PER bands Our target price of TWD500 is based on a 2016E PER of (TWD) 25x, which translates into a 2015-17E PEG of 1x, which we 700 believe is in line with the stock’s earnings growth outlook. 600 30x
500 25x During 2013-15, the stock traded at an average PER of 1 400 20x 30x, and we believe it has potential to rerate to the 1 midpoint of its trading PER of 17-43x over 2013-15, based 300 15x 1 on what we see as stronger earnings growth prospects 200 10x over 2015-17. 100
0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Source: Bloomberg, Daiwa forecasts
Earnings revisions Eclat: Bloomberg-consensus earnings revisions The Bloomberg consensus 2017E EPS had been rising (TWD) since April 2015, due we believe to the company’s better- 27 than-expected gross margin trajectory and stronger-than- 25 expected high-end product launches. 23 21 However, the market’s forecasts have come down since 19 4Q15, due to generally weak sentiment toward textile stocks on inventory concerns in North America and the 17
warm winter there. 15
Jul-15
Apr-15 Oct-15 Oct-15
Jun-15 Jun-15 Jan-16
Mar-15 Feb-16 Mar-16
Dec-15 Nov-15 Dec-15
Aug-15 Aug-15 Sep-15 May-15 2016E EPS 2017E EPS
Source: Bloomberg
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Eclat Textile (1476 TT): 8 March 2016
Financial summary Key assumptions 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
Profit and loss (TWDm) 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
Cash flow (TWDm) 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 Source: FactSet, Daiwa forecasts
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Eclat Textile (1476 TT): 8 March 2016
Financial summary continued … Balance sheet (TWDm) 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
Key ratios (%) 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 Source: FactSet, Daiwa forecasts
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.
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Eclat Textile (1476 TT): 8 March 2016
Why buy Eclat? Major clients’ inventory days are reversing Trends in inventory days Even though Eclat has quite a diverse client base (over 150 garment customers and 300- for global sportswear 400 fabric customers, for brand and retail brands as well as department stores for the brands have reversed North America, Europe and Asia markets), its share price has corrected by 20-25% since since 3Q15 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
200 100
80 150 60 100 40
50 20
0 0
4Q09 3Q11 2Q13 1Q15 2Q09 3Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15
4Q12 3Q14 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Under Armour Average GAP Average
Source: Company Source: Company
JC Penny: inventory days Nike: inventory days
180 120 160 100 140 120 80 100 60 80 60 40 40 20 20
0 0
1Q10 4Q10 2Q13 1Q14 3Q09 4Q09 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
2Q09 3Q11 4Q13 4Q14 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1Q14 2Q14 3Q14 1Q15 2Q15 3Q15 4Q15 JC Penny Average Nike Average
Source: Company Source: Company
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Eclat Textile (1476 TT): 8 March 2016
Lululemon: inventory days 120
100
80
60
40
20
0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Lululemon Average
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 Rising synthetic demand Eclat specialises in manufacturing nylon- and polyester-based synthetic fabric (vs. regional bodes well for Eclat’s peers’ focus on synthetic cotton-based products) and is on the preferential list of a number earnings growth 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 ASP and margin drivers: We expect the ASP for Eclat’s fabric business to grow by 12-13% in 2016-17 on an new products and enlarged revenue contribution from: 1) synthetic fabric, with an ASP at least 10-15% higher upgrading of existing than non-synthetic fabric, and we forecast the sales proportion to hit over 25% of fabric ones 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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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 (TWD) (TWD) 2,600 8% 700,000 20% 6% 2,500 600,000 4% 15% 2,400 500,000 2% 400,000 10% 2,300 0% (2%) 300,000 5% 2,200 (4%) 200,000 2,100 0% (6%) 100,000 2,000 (8%) 0 (5%) 2011 2012 2013 2014 2015E 2016E 2017E 2011 2012 2013 2014 2015E 2016E 2017E Garment's ASP in TWD per dozen (LHS) YoY (RHS) Fabric's ASP in TWD per ton (LHS) YoY (RHS)
Source: Company, Daiwa forecasts 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
Eclat: garment shipment trend Eclat: fabric shipment trend (m dozen) (tons) 10 50% 25,000 30% 25% 8 40% 20,000 20% 15% 6 30% 15,000 10% 5% 4 20% 10,000 0% 2 10% 5,000 (5%) (10%) 0 0% 0 (15%) 2011 2012 2013 2014 2015E 2016E 2017E 2011 2012 2013 2014 2015E 2016E 2017E Garment shipment (LHS) YoY (RHS) Fabric shipment YoY (LHS)
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% 31.0% 25.0% 25.3% 25.6% 26.0% 26.3% Fabric 30.5% 24.8% 25.1% 25.5% 25.8% 26.1% revenue YoY 30.0% 24.6% 24.9% 25.3% 25.6% 25.9% growth 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
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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% 28.7% 25.1% 25.4% 25.7% 26.0% 26.3% Fabric 28.2% 24.9% 25.2% 25.5% 25.8% 26.1% revenue YoY 27.7% 24.7% 25.0% 25.3% 25.6% 25.9% growth 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 Eclat stands to gain We see a high possibility of Eclat gaining more share of the European market, as it is market share from aggressively pitching to customers based in Europe, where orders have relatively high European clients, as well ASPs and gross margins. Pricing in Europe is also more stable and there is a high as existing clients, such acceptance of the service Eclat can provide, especially among SME clients, according to as Nike and Under our research in the market. Currently, most of Eclat’s revenue is derived from North Amour 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 Eclat can compete on The company has 15 garment production bases globally, in Vietnam, China and Cambodia, Vietnam capacity and as well as having strategic outsourcing partners in South Africa, Vietnam, Cambodia, R&D 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
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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.
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Financial analysis
Strong revenue growth expected to resume in 2016-17 We forecast a 2015-17 Eclat’s total revenue rose by 33.7% YoY in 2013 and 14.9% YoY in 2014, and is expected revenue CAGR of 23% 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 (TWDm) 45,000 40% CAGR of 23.0% 40,000 35% 35,000 30,000 30% 25,000 25% 20,000 15,000 20% 10,000 15% 5,000 0 10% 2010 2011 2012 2013 2014 2015 2016E 2017E Total revenue (LHS) YoY (RHS)
Source: Company, Daiwa forecasts
Eclat: garment revenue growth trend and forecasts over 2010-17 Eclat: fabric revenue growth and forecasts for 2010-17 (TWDm) (TWDm) 25,000 CAGR of 19.6% 60% 18,000 CAGR of 28.8% 35% 16,000 30% 50% 20,000 14,000 25% 40% 12,000 15,000 10,000 20% 30% 8,000 10,000 15% 20% 6,000 10% 4,000 5,000 10% 2,000 5% 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2010 2011 2012 2013 2014 2015 2016E 2017E Garment revenue (LHS) YoY (RHS) Fabric revenue (LHS) YoY (RHS)
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Improving gross and operating margins in 2016-17 A margin expansion In 2016 and 2017, we look for Eclat’s gross profit margin and operating margin to climb to story in 2016-17 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
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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 (TWDm) (TWDm) CAGR of 24.8% 12,000 29% 9,000 CAGR of 28.8% 25% 28% 8,000 10,000 27% 7,000 20% 8,000 6,000 26% 15% 5,000 6,000 25% 4,000 24% 10% 4,000 3,000 23% 2,000 2,000 5% 22% 1,000 0 21% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross Profit (RHS) Gross Margin (LHS) Operating Profit (LHS) Operating Margin (RHS)
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
Overhead 34% Overhead Raw material 43% 52% Raw material 50%
Labor cost Labor cost 5% 16%
Source: Company Source: Company
Sustainable net margin; set to rise in 2016-17 We forecast a net We forecast Eclat to book net income of TWD5.3bn in 2016 and TWD6.6bn in 2017. income CAGR of 25.3% Further, we forecast its net-profit margin to improve to 16.9% in 2016 and 17.1% in 2017, in 2015-17 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.
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Eclat: pre-tax margin by product
25%
20%
15%
10%
5%
0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Fabric Garment
Source: Company
Eclat: net income trend (TWDm) 7,000 18% 6,000 16% 14% 5,000 12% 4,000 10% 3,000 8% 6% 2,000 4% 1,000 2% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Net Profit (LHS) Net Margin (RHS)
Source: Company, Daiwa forecasts
Strong ROE and solid balance sheet We expect the company Eclat’s ROE has strengthened since 2008, reaching 40.3% in 2015E (our forecast) from to be in stronger net 34.2% in 2014. Taking into account its fund-raising exercise at end-2015 and receipt of the cash and free cash flow proceeds in February 2016 (total proceeds of TWD2.56bn from 8m shares offered at positions in 2016-17 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.
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Eclat Textile (1476 TT): 8 March 2016
Valuation and risks Valuations undemanding 12-month target price of Our 12-month target price of TWD500 is set at a 2016E PER of 25x, based on a 1x PEG TWD500 based on 2016E over 2015-17E, which we believe is fair given the company’s strong earnings growth PER of 25x 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 (TWD) (TWD) 700 350
600 30x 300 24x
500 25x 250 20x 1 1 400 20x 200 16x 1 1 300 15x 150 12x 1 1 200 10x 100 8x 50 100 0 0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
Shenzhou international: 1-year forward PER bands Youngone: 1-year forward PER bands (HKD) (KSD) 60 100,000 22x 90,000 50 22x 80,000 19x 18x 40 70,000 16x1 60,000 14x 13x 30 1 50,000 1 10x 10x 40,000 20 1 30,000 1 6x 10 20,000 10,000 0 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg, Daiwa forecasts Source: Bloomberg
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Eclat Textile (1476 TT): 8 March 2016
Valuation: Eclat and its peers Bloomberg Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%) Companies code Rating (USDm) (local curr.) 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.
34
Eclat Textile (1476 TT): 8 March 2016
Appendix Company background The chairman is also Eclat was founded in 1977 in Taiwan by Zhen-Hai Hong, Hsien-Chin, Tsai, Li-Chen, Wang responsible for R&D and Wan-Shun, Hsu, as a textile trading company to offer fabric and garment buying and development 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 7.78 Ching-Fang Chen 3.48 Zhen-Hai Hung 3.26 Chin-Chih Cheng Wang 3.05 Li-Chen Wang 2.86
Source: Bloomberg
35
Taiwan Consumer Discretionary 8 March 2016
Taiwan Paiho (9938 TT) Tai wan Pai ho
Target price: TWD100.00
Share price (7 Mar): TWD82.60 | Up/downside: +21.1%
Initiation: flying high
Ongoing product upgrades driving gross margin expansion Helen Chien (886) 2 8758 6254 New shoe-face products benefiting from success of Nike’s Flyknit [email protected] Initiating with a Buy (1) rating and 12-month TP of TWD100
Investment case: We initiate coverage of niche sportswear accessory ODM Share price performance company Taiwan Paiho (Paiho) with a Buy (1) rating. Over 2016-17, we see an (TWD) (%) increasing revenue contribution from Paiho’s higher gross margin products, 100 165 and believe the company is well positioned to benefit from rising order 89 146 allocations from the world’s leading sportswear brands (ie, Nike and Adidas). 78 128 66 109
55 90 Profitable products bode well for margin expansion and bottom-line Mar-15 Jun-15 Sep-15 Dec-15 growth. We forecast Paiho’s gross margin to expand to 38.0% for 2016 Taiwan Pai (LHS) Relative to TWSE Index (RHS) 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 12-month range 60.00-99.30 contribution from high value-added products. We see ongoing product Market cap (USDbn) 0.75 upgrades and its solid relationships with the global leading sportswear 3m avg daily turnover (USDm) 5.61 Shares outstanding (m) 298 brands as the main drivers of its earnings growth over our forecast period. Major shareholder Cheng family (35.0%)
Paiho’s shoe-face products likely to benefit from success of Nike’s Financial summary (TWD) Flyknit. Some of Paiho’s new shoe-face products started to contribute to Year to 31 Dec 15E 16E 17E revenue in 2015, and we forecast these products to account for a combined Revenue (m) 9,439 10,997 12,864 Operating profit (m) 1,929 2,330 2,879 3.6% of total revenue for 2016, and 4.3% for 2017. Although this Net profit (m) 1,133 1,415 1,746 contribution is minor, we think the future bodes well for Paiho, as we are Core EPS (fully-diluted) 3.802 4.747 5.859 seeing more global sportswear brands developing products similar to EPS change (%) 15.8 24.8 23.4 Daiwa vs Cons. EPS (%) 0.1 0.1 9.9 Nike’s Flyknit (and Paiho is one of a few sportswear accessory ODMs in PER (x) 21.7 17.4 14.1 Taiwan to have developed a similar shoe-face to the one used in Flyknit). Dividend yield (%) 3.0 3.7 4.6 These new products are more functional and offer consumers greater DPS 2.5 3.1 3.8 PBR (x) 3.5 3.2 2.9 flexibility. They are also cheaper and quicker to manufacture, which means EV/EBITDA (x) 10.2 8.6 7.1 we see less pressure (vs. peers) on Paiho to cut its prices going forward. ROE (%) 16.5 19.4 21.7 Source: FactSet, Daiwa forecasts 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.
See important disclosures, including any required research certifications, beginning on page 63
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 (TWDm) increasing revenue contribution from higher gross margin 2,000 CAGR of 24.1% 60% products (including new shoe-face products), we are 50% upbeat on the company’s earnings outlook for 2015-17. 1,500 40% 30%
20% 1,000 We forecast revenue and earnings CAGRs of 16.7% and 10% 24.1%, respectively, over 2015-17, with the gross margin 0% improving by 0.8-1.1pp over the same period. 500 (10%) (20%) 0 (30%) 2012 2013 2014 2015E 2016E 2017E Net income (LHS) YoY (RHS)
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 (TWD) 2016E PER of 21x, which is the average of its PER trading 140 multiple for 2015. We forecast stronger bottom-line growth 120 24x of 24.8% YoY for 2016 and 23.4% for 2017 (vs. 15.6% for 100 20x 2015E), and believe the stock has the potential to be 1 rerated to at least the mid-point of the 2015E trading range 80 16x 1 of 15-29x. 60 12x 1 40 8x Our target PER of 21x translates into a 2015-17E PEG of 20 0.9x, which we see as undemanding. 0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Source: Bloomberg, Daiwa forecasts
Earnings revisions Paiho: Bloomberg-consensus earnings forecast revisions
The Bloomberg consensus has been raising its EPS (TWD) forecasts for 2017 for Paiho since December 2015. But 5.5 there was a slight cut made to the 2016E EPS (in 5.3 December 2015), which we think was probably due to the delay in the company’s new shoe-face products being 5.1 adopted by some of its global sportswear brand clients, to 4.9 2017 from 2016. 4.7
4.5
Oct-15
Jan-16
Feb-16
Nov-15 Dec-15 2016E EPS 2017E EPS
Source: Bloomberg
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Taiwan Paiho (9938 TT): 8 March 2016
Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Webbings/shoe lace revenue YoY 27.7 10.1 8.7 23.5 24.0 23.3 25.0 20.0 growth (%) 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
Profit and loss (TWDm) 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
Cash flow (TWDm) 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 Source: FactSet, Daiwa forecasts
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Taiwan Paiho (9938 TT): 8 March 2016
Financial summary continued … Balance sheet (TWDm) 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
Key ratios (%) 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 Source: FactSet, Daiwa forecasts
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.
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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 is now providing Paiho’s new shoe-face products (has been making one-piece shoe uppers since 4Q13, shoe-face materials. It four-way stretchable elastic tape since 4Q13, and warp-knitted jacquard fabric since 4Q15) was previously a pure have been contributing to its revenue since 2015, and for 2016-17, we forecast this accessory components contribution to reach 3.6-4.3% of revenue, and 4.8-5.5% of earnings. provider 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
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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 Ongoing product In a bid to expand its gross margin, Paiho has expanded into more products with higher upgrades should drive margins, and has also been continually upgrading existing products over the past 5 years. gross margin expansion This has led to its gross margin hitting 37.2% in 2015E, from 25.9% in 2011. Furthermore, over our current forecast 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 horizon 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
0.1% 4.6% Webbing/shoelaces 7.8% Touch fasteners
8.4% 3C accessories Elastic 9.8% 46.1% Molded hooks
0.8% Powder coating 22.0% Others
New shoe face products
Source: Daiwa forecasts Source Company Note:3C refers to computer, communication and consumer electronics-related products
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Taiwan Paiho (9938 TT): 8 March 2016
Paiho: each product as a % of total revenue Paiho: gross margin trends for its main products 60% 60% 50% 50% 40% 30% 40% 20% 30% 10% 0% 20%
10%
Elastic Others 0%
Moldedhooks 2013 2014 2015E 2016E 2017E
3C accessories 3C
Powdercoating Touchfasteners
Webbing/shoelaces 2013 2014 2015E 2016E 2017E Webbing/shoelaces Elastic Molded Hooks
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Paiho’s products used mainly in sports apparel and footwear segments Riding the sportswear Based on Euromonitor data, the sizes of the global sports apparel and footwear markets trend 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 40% 38%
35% 31% 29% 29% 30% 27% 28% 25% 26% 25% 20% 15% 10% 5% 0% 2012 2013 2014 2015 E Footwear Apparel
Source: Company Source: Company, Daiwa forecasts
Favourable client coverage should boost earnings growth and product penetration Strong client profile Paiho supplies products to the global leading sportswear brands such as Nike (22% of includes Nike, Adidas, Paiho’s 2015E revenue), Adidas (18%), New Balance (3.8%), Reebok (3.1%), Under New Balance, Reebok, Armour (3%) and Skechers (1.5%), all of which should account for 51.4% of the company’s and Under Armour total revenue for 2015E. The diversified client base gives the company more revenue growth potential going forward, in our view.
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Taiwan Paiho (9938 TT): 8 March 2016
Global sports footwear brand market share for 2014 by retail Paiho: brand coverage price
Nike 11.8% 2.3% 1.1% 40.0% Adidas 1.3% VF Corporation 3.2% New Balance Asics 4.5% Sketcher 5.1% Puma 5.3% Crocs 7.5% Anta Mizuno 17.9% Others Footwear Apparel
Source: Sporting Goods Intelligence Source: Company Note: Nike’s brands include Converse and Adidas’s include Reebok, denotes Paiho’s end-clients
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Taiwan Paiho (9938 TT): 8 March 2016
Financial analysis 2016-17 revenue prospects: regaining momentum 2015-17E: revenue We forecast Paiho’s revenue to rise by 3.5% YoY for 2015 (vs. 12.4% YoY for 2014), due to CAGR of 16.7% 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 (TWDm) 14,000 CAGR of 16.7% 50% 12,000 40% 10,000 30% 8,000 20% 6,000 10% 4,000 0% 2,000 (10%) 0 (20%) 2010 2011 2012 2013 2014 2015E 2016E 2017E Total revenue (LHS) YoY (RHS)
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 60%
50%
40%
30%
20%
10%
0% 2013 2014 2015E 2016E 2017E Others 3C accessories Powder coating Molded Hooks Touch Fasteners Elastic Webbing/shoelaces
Source: Company, Daiwa forecasts
Paiho: product mix changes 100%
80%
60%
40%
20%
0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Webbing/shoelaces Touch Fasteners 3C accessories Elastic Molded Hooks Powder coating New products Others
Source: Company, Daiwa forecasts Note: New products include one-piece shoe-uppers, four-way stretchable elastic tape and warp-knitted jacquard fabric
44
Taiwan Paiho (9938 TT): 8 March 2016
Gross and operating margin expansion under way 2015-17E: gross profit For 2016-17, we forecast Paiho’s gross and operating margins to reach respective 38.0% CAGR of 19.7% vs. and 39.1% (from 37.2% in 2015E), and 21.2% and 22.4% (from 20.4% in 2015E). The operating profit CAGR margin expansion should be driven mainly by the gross margin on Paiho’s ability to of 22.2% 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
(TWDm) (TWDm) CAGR of 22.2% 6,000 CAGR of 19.7% 45% 3,500 25% 40% 5,000 3,000 35% 20% 2,500 4,000 30% 25% 2,000 15% 3,000 20% 1,500 10% 2,000 15% 10% 1,000 1,000 5% 5% 500 0 0% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross profit (RHS) Gross margin (LHS) Operating profit (LHS) Operating margin (RHS)
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Net margins set to rise over 2016-17 2015-17E: net profit We expect Paiho to record net income of TWD1.41bn for 2016 and TWD1.75bn for 2017, CAGR of 24.1% 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 (TWDm) 2,000 CAGR of 24.1% 500% 400% 1,500 300%
1,000 200%
100% 500 0%
0 (100%) 2010 2011 2012 2013 2014 2015E 2016E 2017E Net income (LHS) YoY (RHS)
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 Stronger net cash and We forecast Paiho’s cash position to reach TWD4.4bn (26% of its total assets) in 2017, free cash flow positions from TWD3.7bn (27% of total asset) in 2015, and TWD3.8bn for 2016 (25% of its total for 2015-17 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.
45
Taiwan Paiho (9938 TT): 8 March 2016
Valuation, rating and risks Valuation looks attractive Stronger earnings We initiate coverage with a Buy (1) rating and 12-month target price of TWD100, based on growth for 2016-17E a fully diluted 2016E PER of 21x, the average of its 2015 trading PER (equal to a PEG of underpins rerating 0.9x over 2015-17E). Based on the stronger earnings growth that we see, at 24.8% for potential, in our view 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
(TWD) (x) 140 60 50 120 24x 100 40 20x 1 30 80 16x 1 60 12x 20 1 10 40 8x 20 0 0
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
25-Oct-14 25-Apr-14 25-Apr-15 25-Oct-15
25-Jun-14 25-Jun-15
25-Feb-14 25-Feb-15 25-Feb-16
25-Dec-14 25-Aug-15 25-Dec-15 25-Aug-14 Source: Bloomberg, Daiwa forecast Source: TEJ; Note: No Bloomberg consensus
Valuation: Paiho and its peers Bloomberg Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%) Companies code Rating (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,
46
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.
47
Taiwan Paiho (9938 TT): 8 March 2016
Appendix Company background Management team has San Ho Shin Limited (Paiho’s predecessor) was set up by Mr Sen-Mei Cheng and his 2 over 30 years’ textile brothers, Kuo-Sen Cheng and Kuo-Yen Cheng in 1979 to supply hook and loop products industry experience 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
Paiho (9938 TT)
China Star Wuxi Paisen PT. Paiho Vietnam Paiho Paiho Shih Holdings International Limited Chemical Fibre Co Ltd Indonesia Limited Corporation (8404 TT)
Dougguan Paiho Powder Wuxi Paiho Textile Coating Co., Ltd Co., Ltd
Dongguan Paihong Industry Co., Ltd
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
48
Taiwan Consumer Discretionary 8 March 2016
Feng Tay Enterprise (9910 TT) Feng T ay Enterprise
Target price: TWD176.00
Share price (7 Mar): TWD177.00 | Up/downside: -0.6%
Initiation: valuation running in line with fundamentals
Pure Nike play based in Taiwan with proven R&D capabilities Helen Chien (886) 2 8758 6254 Current premium valuation looks to factor in fundamental positives [email protected] Initiating with a Hold (3) rating and 12-month TP of TWD176
Investment case: We initiate coverage of Feng Tay Enterprise, a leading Share price performance
ODM sports and casual footwear maker based in Taiwan, with a Hold (3) (TWD) (%) rating on valuation grounds. We like Feng Tay’s proven innovation and 210 190 execution skill, high ROE and close ties with Nike, the world’s largest 190 168 sports footwear brand. But, while we forecast solid earnings growth over 170 145 150 123
2016-17, driven mainly by the growth prospects of Nike, we believe the 130 100 current share price already reflects the fundamental positives. Mar-15 Jun-15 Sep-15 Dec-15 Feng Tay (LHS) Relative to TWSE Index (RHS) 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 12-month range 135.43-206.50 expect this order allocation ratio to be stable in the coming few years, on Market cap (USDbn) 3.22 Feng Tay’s co-development capabilities, preferential supply chain position, 3m avg daily turnover (USDm) 6.87 Shares outstanding (m) 596 and 40-plus-year relationship with Nike. On a stable ASP in USD terms, we Major shareholder Wang family (60.0%) 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 Financial summary (TWD) 2016-20. Given Nike’s 40% share of the global sports footwear segment, Year to 31 Dec 15E 16E 17E we believe Feng Tay will remain a top-line expansion story through 2020. 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 Besides, in light of the favourable raw-material environment (low oil price), Core EPS (fully-diluted) 7.025 8.401 9.856 increasing production efficiency, and improving operating leverage, we EPS change (%) 35.7 19.6 17.3 Daiwa vs Cons. EPS (%) 0.1 3.2 1.7 forecast Feng Tay’s operating margin to expand by 0.5pp for both 2016 and PER (x) 25.2 21.1 18.0 2017. Hence, we forecast a revenue CAGR of 13.9% and earnings CAGR Dividend yield (%) 2.8 3.3 3.9 of 18.4% for 2015-17. DPS 4.9 5.9 6.9 PBR (x) 8.1 7.0 6.0 EV/EBITDA (x) 15.6 13.1 11.3 Positives look priced in. The share price has almost doubled since 2015, ROE (%) 35.0 35.5 36.0 and we believe the above-mentioned positives are priced into the current Source: FactSet, Daiwa forecasts 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.
See important disclosures, including any required research certifications, beginning on page 63
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 (TWDm) grow in step with Nike’s footwear business. We forecast 7,000 CAGR of 18.4% 40% revenue and earnings CAGRS of 13.9% and 18.4%, 6,000 30% respectively, for 2015-17. 5,000 4,000 20%
We forecast 10% shipment YoY growth for 2016-17 3,000 10% alongside a flat ASP (around USD16-17 per pair). 2,000 0% However, we see some ASP upside potential from the 1,000 likely trend of the TWD depreciating against the USD over 0 (10%) 2016-17 (Daiwa’s house view). 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (RHS) YoY (LHS)
Also, we forecast a 0.5pp improvement in Feng Tay’s Source: Company, Daiwa forecasts operating margin for both 2016 and 2017.
Valuation Feng Tay: one-year forward PER bands Our target price of TWD176 is based on a 2016E PER of (TWD) 21x, which is 30% higher than its peers’ PER trading 300 26x multiple of 16x. We believe our target multiple is 250 reasonable considering Feng Tay’s stronger earnings 22x 200 CAGR of 18.4% over 2015-17E vs. peers’ 14.8%, as well 18x1 as our expectation of a solid ROE performance (35.5% for 150 1 14x 2016 vs. peers’ 8.5%) and 36.0% for 2017 vs. peers’ 9.6%) 100 10x1 (note: Bloomberg consensus data for its peers). 50 Feng Tay’s share price has almost doubled since 2015 and 0 the stock is currently trading at 21.1x 2016E PER. Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
Source: Bloomberg, Daiwa forecasts
Earnings revisions Feng Tay: Bloomberg-consensus earnings revisions The Bloomberg consensus 2016 and 2017 EPS forecasts (TWD) for Feng Tay have come down since early 3Q15, likely due 11 to slower-than-expected operating-margin expansion and 10 delayed orders for casual shoes at end-2015 (Converse and Bauer brands), which were shipped in January 2016. 10
9
9
8 May-15 Aug-15 Nov-15 Feb-16 2016E EPS 2017E EPS
Source: Bloomberg forecasts
50
Feng Tay Enterprise (9910 TT): 8 March 2016
Financial summary Key assumptions 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
Profit and loss (TWDm) 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
Cash flow (TWDm) 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 Source: FactSet, Daiwa forecasts
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Feng Tay Enterprise (9910 TT): 8 March 2016
Financial summary continued … Balance sheet (TWDm) 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
Key ratios (%) 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 Source: FactSet, Daiwa forecasts
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%).
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Feng Tay Enterprise (9910 TT): 8 March 2016
Valuation running in line with fundamentals Pure Nike play Global production Feng Tay engages in the manufacture of sports shoes (83% of 2015 sales), casual shoes partner of Nike, with (10%), sports balls (particularly golf and soccer) (2%), as well as generating other retail which it has a 40-year- revenue (5%). In terms of client coverage, Nike is the main revenue contributor (82% of plus relationship revenue for 2015E), followed by Bauer, Converse and Salomon.
Feng Tay: client mix 100%
80%
60%
40% 82% 84% 82.1% 82% 82% 82% 76% 76% 70% 73%
20%
0% 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Nike Bauer Converse Salomon Others
Source: Company, Daiwa forecasts
The company’s share of The company is a long-term production partner of Nike, and on our estimates supplied Nike orders looks around 17% of Nike’s global shipment demand in 2015 (from 16.7% in 2014). We believe sustainable 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.
Nike’s footwear business Over the past 10 years, Nike’s footwear revenue has recorded a CAGR of 9.7%, outpacing has outpaced its apparel the US company’s revenue from the apparel business (8.4% CAGR) as a result of its business in recent years dominant 40% share of the global sports footwear market.
Nike: footwear and apparel revenue YoY growth Feng Tay: share price performance vs. Nike 20% (TWD) (USD) 250 80 15% 70 200 10% 60 150 50 5% 40 0% 100 30 20 (5%) 50 10 (10%) 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Footwear Apparel Feng Tay (LHS) Nike (RHS)
Source: Bloomberg Source: Bloomberg
The US company is In mid-October 2015, Nike announced it was targeting annual revenue of USD50bn by targeting a revenue end-2020, from USD30.6bn in 2015, translating into a revenue CAGR of 10.3% over 2016- CAGR of 10.3% over 20E. For its more-developed geographic markets (North America, Western Europe and 2016-20 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
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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 Global sports apparel brands: market share as of 2014 by retail price price
Anta Mizuno Others 1.3% 1.1% 11.8% Adidas Crocs Nike 11.0% 2.3% 11.7% Puma VF Corporation 3.2% Nike 5.7% Sketcher 40.0% 4.5% Others Under Armour Asics 63.0% 3.3% 5.1% Gildan New Balance 3.1% 5.3% Columbia VF Corporation Adidas 2.2% 7.5% 17.9%
Source: Sporting Goods Intelligence; Note: Nike brand include Converse and Adidas include Source: Sporting Goods Intelligence Reebok
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 Feng Tay’s Vietnam As of 2015, Vietnam accounted for 53% of Feng Tay’s shipment capacity, followed by India focus should be positive (20%), China (15%) and Indonesia (12%). We believe this skew in capacity towards in terms of TPP benefits 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 100% 13% 14% 19% 20% 22% 24% 80% 16% 15% 13% 12% 13% 14% 60%
50% 50% 40% 51% 53% 52% 51%
20% 21% 21% 17% 15% 13% 11% 0% 2012 2013 2014 2015 E 2016 E 2017 E China Vietnam Indonesia India
Source: Company, Daiwa forecasts
Planning to expand Besides, in order to bring down its labour costs, Feng Tay plans to increase its production production capacity in capacity in Indonesia (it had added 2 buildings as of end-2015 and plans to establish India and Indonesia 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.
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Feng Tay Enterprise (9910 TT): 8 March 2016
Competitive landscape: strong R&D Record of innovation: Feng Tay has been co-operating with Nike since 1977 and together the companies have Flyknit, Flyweave and developed several innovative materials and products, including Flyknit and Flyweave Jordan series 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
(TWD) (USD) (TWD) (USD) 10.0 2.20 12.0 2.50 2.15 11.0 9.0 2.45 2.10 10.0 2.40 8.0 2.05 9.0 2.35 7.0 2.00 8.0 2.30 1.95 7.0 6.0 1.90 6.0 2.25
5.0 1.85 5.0 2.20
Feb-15
Nov-14 Aug-15 Nov-15
May-15
Aug-15 Nov-15 May-15 Feng Tay (LHS) Nike (RHS) Feng Tay (LHS) Nike (RHS) 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.
Now has R&D centres in In addition to its established R&D centre in Taiwan, which commenced operations in 2008, Taiwan and Vietnam 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 More stability Material name Launch time Light weight Precision fit Reduce waste Flexible 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 well as Air Jordan Future Source: Company
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Feng Tay Enterprise (9910 TT): 8 March 2016
Financial analysis 2016-17E: solid revenue and earnings growth trajectory We forecast a net We forecast Feng Tay to deliver an earnings CAGR of 18.4% for 2015-17, on a 13.9% earnings CAGR of 18.4% sales CAGR and an expanding operating-profit margin of 0.5pp for both 2016 and 2017. and revenue CAGR of We believe the company’s revenue growth for 2016-17 will be driven mainly by shipment 13.9% over 2015-17 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% 8.8% 19.6% 21.8% 24.1% 26.3% 28.6% 6.8% 17.4% 19.6% 21.8% 24.0% 26.2% ASP YoY 4.8% 15.2% 17.4% 19.6% 21.7% 23.9% growth (TWD) 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% 6.3% 17.5% 19.7% 21.9% 24.1% 26.3% 4.3% 15.3% 17.5% 19.6% 21.8% 24.0% ASP YoY 2.3% 13.1% 15.2% 17.3% 19.5% 21.6% growth (TWD) 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 (TWDm) (TWDm) 80,000 CAGR of 13.9% 30% 7,000 CAGR of 18.4% 40% 70,000 6,000 25% 30% 60,000 5,000 20% 50,000 4,000 20% 40,000 15% 3,000 10% 30,000 10% 2,000 20,000 0% 5% 1,000 10,000 0 (10%) 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (RHS) YoY (LHS) Revenue (RHS) YoY (LHS)
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
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Feng Tay Enterprise (9910 TT): 8 March 2016
Improving gross and operating margins We expect the Feng Tay had delivered an improving gross margin to 20.5% in 2015 from 19.5% in 2013; company’s operating and operating margin of 9.8% in 2015 from 7.6% in 2013, we attribute this to the improving efficiency to continue production effectiveness across its diversified manufacturing sites, favourable raw material improving 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 25% 20.7% 20.9% 19.5% 20.5% 20.5% 20% 18.8% 18.4% 16.2% 15% 10.3% 10.8% 9.4% 9.8% 10% 7.6% 6.9% 5.4% 4.7% 5%
0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross margin Operating margin
Source: Company, Daiwa forecast
Feng Tay has been As shown below, in 9M15, Feng Tay recorded the highest operating-profit margin among outperforming its peers other regional ODM footwear makers, such as Fulgent Sun (9802 TT) and Yue Yuen (551 on operating margin and HK). ROE 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 We forecast Feng Tay’s cash position to reach TWD3.1bn (9% of total assets) in 2017, net cash position and from TWD2.5bn (9% of total assets) in 2015, while its net debt position should narrow to FCF to improve over TWD225m in 2017, from TWD807m in 2015. Incorporating our capex forecasts of 2016-17 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.
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Valuation and risks Strong fundamentals appear to be priced in We see limited upside Our 12-month target price of TWD176 is based on a fully diluted 2016E target PER of 21x, from current premium which is 30% higher than the 16x average multiple of regional peers Yue Yuen and Fulgent valuation 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 (TWD) (TWD) 300 100 30x 26x 90 250 80 25x 22x 70 200 18x1 60 20x1 150 50 1 1 15x 14x 40 100 10x1 30 10x1 20 50 10 0 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Source: Bloomberg, Daiwa forecast Source: Bloomberg
Yue Yuen: one-year forward PER bands Pou Chen: one-year forward PER bands (HKD) (TWD) 50 70 45 60 14x 40 16x 35 50 12x 14x 30 1 1 12x 40 10x 25 1 8x1 20 10x 30 8x1 6x1 15 20 10 10 5 0 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
Source: Bloomberg Source: Bloomberg
Valuation: Feng Tay and its peers Bloomberg Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%) Companies code Rating (USDm) (local curr.) 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
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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.
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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 Mr. Hsu has worked for Nike (R&D manager), K-Swiss (Country manager). After that, Mr. department 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 Mr. Chen is responsible for sports shoe business (Nike) and has over 20 years’ industry department experience. Chien-Jung Wang General manager in the Mr. Wang is responsible for casual shoe, balls and sport equipment businesses and has second department 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 10.87 Hui-Ling Chen 6.47 Shih-Jung Chen 5.42 Tsai-Yun Wang Chen 5.15 Chien-Hung Wang 2.80 Chien-Jung Wang 2.80 Li-Chuan Wang 2.68
Source: Bloomberg
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Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities
Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy 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)
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Taiwan Sportswear Sector: 8 March 2016
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Taiwan Sportswear Sector: 8 March 2016
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Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.
Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.
There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither 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 accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. 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
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
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).
Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
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.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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