-
See important disclosures, including any required research
certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of the Taiwan Sportswear
Sector
with a Positive view. Although the global sportswear brands have
faced
inventory issues in recent months, we are not concerned about
the impact
on the 3 stocks that we cover, which are leading players in the
fast-growing
global sportswear supply chain. As we see significant earnings
momentum
for the Taiwan players, we expect their shares to be
rerated.
Improving inventory days for global brands. Based on our
research,
Adidas’s and Under Armour’s inventory days improved in 3Q15 and
Nike’s
inventory accumulation in North America, due to the US West
Coast ports
shutdown in early 2015, will likely decline and revert to normal
levels in
1H16. We see global sportswear being a growth sector over
2016-17E and
believe that overstocking concerns are only a short-term
negative, with the
share prices of Eclat Textile and Taiwan Paiho having fallen by
around 30%
and 10%, respectively, since late September 2015.
Multifunctional and new products to expand margins. Global
brands
are focusing on providing “athleisure” (athletic/leisure) and
multifunctional
products to meet demand across categories. As the Taiwan
sportswear
players are targeting the relatively high-margin mid- to
high-end
multifunctional segments and offering one-stop-shop models, we
expect
them to benefit from supplier consolidation and gain market
share.
Catalysts: We believe the market has yet to factor in the
improving
inventory picture or the strong product pipelines of the global
brands. After
2 quarters of inventory digestion for the brands, we expect
visibility on
earnings growth in the Taiwan Sportswear sector to improve
appreciably by
3Q16, driven by robust demand and major sports events (ie, the
2016
Olympics), which should serve as share-price driver. Further
out, we look
for the stocks under coverage to reap Trans Pacific Partnership
(TPP)
benefits.
Valuation: We forecast sector earnings growth of 25% YoY for
2016, vs.
20% for 2015 (vs. a CAGR of 26% for 2013-15E). The sector is
trading at
21x 1-year forward PER, below the average of its
one-year-forward PER of
15-28x during 2015, and translating into 0.8x PEG for 2016. We
have Buy
(1) calls on Eclat Textile (1476 TT, TWD410) and Taiwan Paiho
(9938 TT,
TWD82.6), as we like their ongoing product upgrades and look for
their
product pipelines to underpin bottom-line growth. We rate Nike
play Feng
Tey (9910 TT, TWD177) as a Hold (3), mainly on valuation
grounds.
Risks: The main risk to our Positive rating would be if
inventory were to
build up due to weaker-than-expected demand.
8 March 2016
Taiwan Sportswear Sector
Initiation: setting the pace with the global brands
Interest in the Taiwan Sportswear stocks likely to return soon,
given their edge in operating efficiency, improving global
inventory
Rising demand for athleisure and multifunctional apparel should
further drive the sector’s earnings growth over 2016-17
We rate Eclat Textile and Taiwan Paiho as Buys (1); Feng Tay
rated a Hold (3) on valuation grounds
Key stock calls
Source: Daiwa forecasts
Helen Chien(886) 2 8758 6254
[email protected]
New Prev.
Eclat Textile (1476 TT)Rating Buy
Target 500.00
Upside p 22%
Taiwan Paiho (9938 TT)Rating Buy
Target 100.00
Upside p 21.1%
Feng Tay Enterprise (9910 TT)Rating Hold
Target 176.00
Downside q 0.6%
-
2
Taiwan Sportswear Sector: 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Taiwan Sportswear Sector: net profit YoY
growth
We expect the Taiwan sportswear stocks that we cover to
deliver an earnings CAGR of 22.4% for 2015-17E, driven
by an increase in the contribution of new or high-ASP
products, improving operating efficiency and the ongoing
vendor consolidation globally. We are upbeat on Eclat
Textile and Paiho, in particular, as we believe these
companies are offering the right products at the right time,
and that their complete product lines offer the global
brands a one-stop shopping experience. We like Feng
Tay’s record of innovation and its strong ties with sector
leader Nike, but we believe the fundamental positives are
factored into the current share.
Source: Daiwa forecasts
Valuation Taiwan Sportswear Sector: one-year forward PER
Currently, the Taiwan Sportswear ODM names are trading
at a one-year forward PER of 21x, below the average of
the trading range of 15-28x in 2015 and equating to 0.8x
PEG for 2016, which we see as undervalued. This is
because we expect the sector’s earnings to growth for
2016E to outpace 2015, at 25% vs. 20% YoY in 2015E.
Indeed, we expect the sector to be rerated back to its
recent PER high of 28x (early 3Q15) now that the inventory
build-up among the global sportswear brands has reversed
(since 3Q15), and given the Taiwan players’ strong product
line-ups and improved earnings momentum.
Source: Bloomberg
Earnings revisions Taiwan Sportswear Sector: Bloomberg-consensus
earnings revisions
Bloomberg consensus earnings forecasts for the 3 stocks
under Daiwa’s coverage have come down since 4Q15, due
to generally weak sentiment toward textile stocks on
inventory concerns in North America and the relatively
warm winter there. Our 2016-17 EPS forecasts for Eclat
and Paiho are 0-10% above the Bloomberg consensus, as
we are more positive on both companies’ earnings growth
prospects and segment positioning in multifunctional and
new products. For Feng Tay, our EPS forecasts are 1.7-
3.2% higher than the consensus for 2016-17E, as we see
the company as a solid partner of Nike, and expect it to
grow in step with Nike in the next few years.
Source: Bloomberg
15%
20%
25%
30%
35%
40%
2015E 2016E 2017E
Eclat Textile Feng Tay Taiwan Paiho
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(USDbn)
Market Cap 10x 14x
18x 22x 26x
38.0
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50.0
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Oct
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(TWD)
2016E EPS 2017E EPS
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3
Taiwan Sportswear Sector: 8 March 2016
Sector stocks: key indicators
Source: Bloomberg, Daiwa forecasts
Regional Sportswear Sector: valuation metrics
Companies Bloomberg code
Rating Market cap (USDm)
Share price (local curr.)
PER (x) PBR (x) ROE (%) Dividend yield (%)
2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
*ECLAT TEXTILE CO 1476 TT Buy 3,374 410.00 20.9 16.7 6.7 5.7
37.9 37.1 3.4 4.2
*TAIWAN PAIHO LTD 9938 TT Buy 752 82.60 17.4 14.1 3.2 2.9 19.4
21.7 3.7 4.6
*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177.00 21.1 18.0
7.0 6.0 35.5 36.0 3.3 3.9
DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7
13.3 2.3 1.9 10.7 15.1 1.3 1.8
PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.20 13.2 NA 1.6
NA 11.8 NA NA NA
TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.10 17.7
15.2 4.1 3.7 24.3 25.0 4.6 4.8
HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.50 14.0 NA NA
NA NA NA NA NA
FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53.00 19.1 13.1
1.2 1.0 6.5 8.0 4.9 6.1
Average 17.6 14.7 3.2 3.5 18.0 21.2 3.5 4.2
Regional peers
*SHENZHOU INTERNATIONAL GROUP 2313 HK Buy 6,933 38.50 16.4 13.6
3.1 2.7 21.2 22.6 3.6 4.3
*PACIFIC TEXTILES HOLDINGS 1382 HK Outperform 2,007 10.78 13.3
12.4 4.5 4.5 33.6 36.1 7.5 8.1
*BEST PACIFIC INTERNATIONAL H 2111 HK Buy 487 3.70 10.6 9.0 1.8
1.6 18.2 18.8 2.9 3.4
REGINA MIRACLE INTERNATIONAL 2199 HK Not rated 1,856 11.78 24.0
17.9 4.6 3.9 20.7 20.6 1.3 1.7
YUE YUEN INDUSTRIAL HLDG 551 HK Not rated 5,933 27.95 12.5 11.0
1.2 1.2 10.6 11.3 4.3 4.7
YOUNGONE CORP 111770 KS Not rated 1,885 51,300.00 14.0 13.0 1.8
1.6 13.2 12.5 0.4 0.4
Regional Average 15.1 12.8 2.8 2.6 19.6 20.3 3.3 3.8
Source: Bloomberg;*Daiwa forecasts Note: data is based on share
prices as at 7 March 2016; NA denotes no Bloomberg-consensus
forecasts
Taiwan Sportswear Sector: key assumptions
2010 2011 2012 2013 2014 2015E 2016E 2017E
Revenue (TWDm)
Eclat Textile 8,541 10,649 13,566 18,142 20,843 25,525 31,337
38,632
YoY 37.9% 24.7% 27.4% 33.7% 14.9% 22.5% 22.8% 23.3%
Taiwan Paiho 8,374 8,154 6,981 8,107 9,116 9,439 10,997
12,864
YoY 44.3% -2.6% -14.4% 16.1% 12.4% 3.5% 16.5% 17.0%
Feng Tay 29,973 35,604 36,517 38,148 47,654 55,754 64,294
72,353
YoY 12.5% 18.8% 2.6% 4.5% 24.9% 17.0% 15.3% 12.5%
Gross margin
Eclat Textile 23.8% 25.2% 27.8% 28.2% 26.2% 27.7% 28.3%
28.5%
Taiwan Paiho 26.4% 25.9% 28.6% 30.8% 33.5% 37.2% 38.0% 39.1%
Feng Tay 18.4% 16.2% 18.8% 19.5% 20.5% 20.5% 20.7% 20.9%
Operating margin
Eclat Textile 11.1% 13.6% 16.5% 18.1% 16.8% 19.1% 20.7%
21.0%
Taiwan Paiho 11.8% 10.7% 10.9% 13.8% 16.8% 20.4% 21.2% 22.4%
Feng Tay 5.4% 4.7% 6.9% 7.6% 9.4% 9.8% 10.3% 10.8%
Net profit (TWDm)
Eclat Textile 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618
YoY 102.6% 54.8% 51.5% 52.9% 9.7% 40.4% 25.3% 25.3%
Taiwan Paiho 1,178 584 454 705 980 1,133 1,415 1,746
YoY 439.5% -50.4% -22.3% 55.4% 38.9% 15.6% 24.8% 23.4%
Feng Tay 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878
YoY 2.5% -7.5% 17.3% 36.5% 34.6% 35.7% 19.6% 17.3%
Source: Company data, Daiwa forecasts
Share
Company Name Stock code Price New Prev. New Prev. % chg New
Prev. % chg New Prev. % chg
Eclat Textile 1476 TT 410.00 Buy 500.00 15.676 19.637
Feng Tay Enterprise 9910 TT 177.00 Hold 176.00 7.025 8.401
Taiwan Paiho 9938 TT 82.60 Buy 100.00 3.802 4.747
Rating Target price (local curr.) FY1
EPS (local curr.)
FY2
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4
Taiwan Sportswear Sector: 8 March 2016
Table of contents
Setting the pace with the global sportswear brands
............................................. 5
Taiwan sportswear ODMs riding on rising global demand
..................................................5
Valuation and recommendations
...........................................................................15
The sector merits a rerating
.............................................................................................
15
Investment risks to our sector call
....................................................................................
16
Appendix
..................................................................................................................18
Global sportswear brands: the big are getting bigger
....................................................... 18
Company Section
Eclat Textile
.....................................................................................................................
21
Taiwan Paiho
...................................................................................................................
36
Feng Tay Enterprise
........................................................................................................
49
-
5
Taiwan Sportswear Sector: 8 March 2016
Setting the pace with the global sportswear brands
Taiwan sportswear ODMs riding on rising global demand
Given the rising popularity of sportswear, more fashion and
retail brands have launched
their own sportswear products, leading to “sportswear” becoming
a lifestyle concept rather
just something people wear in the gym. Hence, consumers are now
demanding functional
apparel that offers performance, fit and fashion. We expect the
arrival of even more new
innovative products (ie, even more lightweight and
multifunctional) from the major brands
globally, as well as their solid new sportswear pipelines, to
support the earnings growth of
the Taiwan Sportswear Sector, which accounts for a significant
part of the global supply
chain. Furthermore, we are still seeing increasing consumer
interest in health and wellness
matters globally, and with that more people taking part in
sports — developments that
should bode well for the stocks under our coverage, in our
opinion.
Inventory concerns look overdone when it comes to the Taiwan
players
The share prices of the Taiwan sportswear players have declined
by 20-25% since October
2015, along with the sector PER being derated to 21x, from a
high of 27x in early October
2015. The main reason for this was, in our view, the impact of
concerns among investors
as to the inventory adjustments in North America for the brand
names, including the build-
up of inventory following the labour strike and closure of the
US West Coast port in early
2015. This led to congestion at the port and delays in the
launch of the brands’ product
pipelines. Also, the warmer-than-expected winter in North
America has had an impact on
the sell-through of the major brands’ winter products. However,
we consider this inventory
accumulation to be a short-term issue that has largely played
out.
We note that the inventory build-up among the sportswear brands
started to reverse in
3Q15 for some brands. This is evident from the inventory days
data disclosed by Adidas
and Under Armour (see the following charts). And we expect
Nike’s data to show the same
trend in 1H16 as, according to our market research of the supply
chain, Nike has worked
efficiently to manage its flow of products in North America and
clear its excess inventory.
Adidas: inventory days Under Armour: inventory days
Source: Company Source: Company
According to Nike’s 2Q FY16 earnings conference call, the
company expects its inventory
levels in North America to normalise over the rest of FY16,
while it is also bringing a strong
pipeline of new innovative products to the market over the same
time horizon. While we
think the company’s excess inventory in North America stems
largely from the residual
impact of the West Coast port congestion, its inventory levels
in other markets remain
healthy.
0
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Under Armour Average
The sportswear sector
keeps on running
Away from the short-
term issue of inventory
build-up, long-term
growth trends appear to
be intact
-
6
Taiwan Sportswear Sector: 8 March 2016
Nike: inventory days
Source: Company
Besides, most of the listed Taiwan sportswear players have
fairly diverse client bases and
have partnered with global leading brands. For example, Eclat
Textile’s largest client is
Nike, accounting for around 10% of its 2015E revenue. For Paiho,
Nike accounted for 22%
of its 2015E revenue and Adidas for 18%. And for Feng Tay, 82%
of 2015E revenue is
attributable to Nike. In other words, 2 of the 3 stocks under
our coverage do not appear to
be subject to client concentration risk.
Taiwan sportswear ODMs offer better earnings visibility than
pure OEMs
Earnings visibility remains a top priority in our 2016
investment case. Generally speaking,
the Taiwan sportswear ODM players need 1-2 years to develop new
products with
sportswear brands and enjoy a 3-month to 1-year order
visibility. Thanks to their R&D
capability, these companies have the advantage of knowing the
upcoming trends 6-12
months ahead of the pure OEM suppliers. The lengthy product
development process
serves as a barrier to would-be market entrants, and gives these
companies a time
advantage to develop their new products to meet the right
trends.
From an investment perspective, we prefer companies with longer
earnings visibility,
especially in a relatively volatile stock investment environment
such as 2016.
Growing sportswear demand
Sales of global sports apparel to see a CAGR of 4.8% over
2014-19E from 4.1% in 2012-14
According to market data from Euromonitor, global sports apparel
sales value will rise at a
CAGR of 4.8% over 2014-19E, to USD215.9bn by 2019E from
USD170.4bn for 2014.
Among this, Euromonitor expects the functional sportswear’s
market value to increase to
USD95.6bn by 2019E (accounting for 44.3% of sportswear sector)
from USD75.3bn in
2014, translating into a 4.9% CAGR over 2014-19E. The functional
sportswear segment
posted the highest YoY growth in the sportswear sector in 2014
at 7.1% YoY, compared to
4.3% for outdoor wear and 3.6% for lifestyle wear.
In 2019E, Euromonitor sees functional sportswear, in terms of
value, remaining as the
major contributor to the sports apparel sector, accounting for
44.3% of the sector from
44.2% in 2014, followed by 38% for lifestyle wear (38.4% in
2014) and 17.7% for outdoor
wear (17.4% in 2014).
Global sports apparel market: growth in value
2012-14 CAGR 2014-19 CAGR
Functional sportswear 3.7% 4.9%
Outdoor wear 5.0% 5.2%
Lifestyle wear 3.6% 4.6%
Sportswear (in total) 4.1% 4.8%
Source: Euromonitor
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4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
Nike Average
Earnings visibility is one
of our top investment
considerations
Stronger global sports
apparel demand in 2014-
19E vs. 2012-14
-
7
Taiwan Sportswear Sector: 8 March 2016
Global sports footwear sales poised to rise at a CAGR of 1.6%
over 2015-19E
According to market data from Statista, the value of global
sports footwear sales will rise at
a CAGR of 1.6% over 2015-19E, aiming for a market value of
USD85.7bn for 2019E from
USD80.5bn for 2015, and from USD74.7bn for 2011. We believe
Taiwan sports footwear
companies have potential to gain global market share in light of
their strong client coverage
(such as Nike and Adidas) and seasoned management who have a
wealth of production
experience. We already saw this happen with Feng Tay thanks to
the support of its main
client, Nike.
Global sports footwear market
Source: Statista
We prefer US proxies in 2016; favourable currency is a bonus
For 2016, we prefer US proxy companies, which we expect to be
the main beneficiaries of
US economic growth continuing from 2015. As such, we think 2016
will be a good year for
the Taiwan Sportswear Sector given that these names export a
large amount of goods to
the US, and/or manufacture for US brands.
Eclat Textile (2015 top-4 clients: Nike, Gap [Athleta], Under
Armour and Lululemon),
Taiwan Paiho (2015 top-3 clients: Nike, Adidas and New Balance)
and Feng Tay (largest
client: Nike, for 82% of 2015 revenue) supply most of their
products to the US or for US
brands. Such exposure to the US bodes well for their earnings
growth prospects over the
next few years, in our view, as they ride on the growth of the
US economy and their clients’
stronger sportswear brand recognition.
Besides, most of the Taiwan sportswear ODM manufacturers’
accounts receivables are
priced in USD for the most part, and costs are in USD and Asian
currencies. Given the
trend of the strong USD vs. weak Asian currencies, we see Taiwan
sportswear players
benefiting from this favourable currency trend over 2016-17.
(According to Daiwa
forecasts, the USD/TWD would be 34.7 by the end of 2016E and
35.5 by the end of
2017E.)
Taiwan Sportswear: % of sales priced in USD Taiwan Sportswear: %
of 2015 sales to North America
Source: Company
Source: Company, Daiwa forecast Note: Taiwan Paiho provides
accessories needed by clients for their own operations (ie
footwear
manufacture) so the sales areas are not the final market.
1.3%1.4%
1.5% 1.5%1.4% 1.4%
1.3%1.2%
1.3% 1.3%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
65
70
75
80
85
90
2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
(USDbn)
Value (LHS) YoY (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Feng Tay Eclat Textile Taiwan Paiho
0%
10%
20%
30%
40%
50%
60%
70%
Feng Tay Eclat Textile Taiwan Paiho
US angle: support from
US economic growth
Taiwan sports footwear
companies likely to see
market-share gains on a
global basis
-
8
Taiwan Sportswear Sector: 8 March 2016
EPS sensitivity to USD vs. TWD
Every 1% USD appreciated against the TWD 2016E EPS 2017E EPS
Eclat Textile 3-4% 3-4%
Taiwan Paiho 0-1% 0-1%
Feng Tay 4-5% 4-5%
Source: Daiwa forecasts
Relatively complete Taiwan supply chain for sportswear
As the charts below show, Taiwan’s textile and footwear sectors
both have complete supply
chains in Taiwan, which provide flexibility for textile players’
business models, such as
Eclat Textile’s garment outsourcing ratio of 40% for 2015 and
15% for Makalot.
We believe such a complete supply chain in Taiwan favours the
suppliers, allowing them to
source the raw material at competitive prices and within a short
space of time, and hence
provide a quick service for clients. Besides, Taiwan sportswear
companies’ strong
synthetic fabric technology and capability in new product
development stand these
companies in good stead when it comes to being the production
partners of global
sportswear brands, particularly given the prevailing current
multi-function and athleisure
trend.
According to our market research, Taiwan is the world’s leading
functional textile products
provider (especially in nylon- and polyester-based synthetic
products) and is on the
preferential list of most global sportswear brands for the
Taiwanese companies’ ability to
source mid to high end functional fabric given their superior
manufacturing know-how (ie,
around 40% of Nike’s functional fabric is sourced from Taiwan).
With the global adoption
rate of functional textile products at less than 10% currently,
we see an opportunity for the
Taiwan textile suppliers.
As we understand it, most Taiwan textile or footwear suppliers
specialise in high value
added products and tend to pursue ASP growth over shipment
growth. These companies
target the mid to high end products to form relatively high
entry barriers for other regional
peers (see the following reports for further details: Everest
Textile (1460 TT): Focus on
knitted fabrics , dated at 11 September, 2015; Hong Yi Fiber
Industry (1452 TT): Growing
with demand for high-end hybrid yarn, dated at 5 June 2015, Nan
Liu Enterprise (6504 TT):
A leading nonwoven fabric supplier in Asia, 2 September 2015;
Toung Loong Textile: The largest provider of nylon 66 yarn in Asia,
15 January 2016. Benefiting from booming demand for sportswear, 1
March 2016.)
The chart below explains the specialisation of the textile and
footwear industries. Take the
textile industry for example. The manufacturing process starts
with producing the fibre and
processing it into yarn (the upstream space), fabric finishing
and dyeing (the midstream
space), and finally garment manufacturing (the downstream
space). In the Taiwan textile
industry, the textile players focus on what they excel at by
focusing on specific
manufacturing processes, and thus form a solid supply chain
network to boost the
synergies as much as possible.
Taiwan sportswear:
growth potential for
synthetic segment and
complete supply chain
cluster
http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150911tw_Everest_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150911tw_Everest_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150605tw_Hong_Yi_Fiber_Industry.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150605tw_Hong_Yi_Fiber_Industry.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150902tw_Nan_Liu_Enterprise.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20150902tw_Nan_Liu_Enterprise.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160115tw_Toung_Loong_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160115tw_Toung_Loong_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160115tw_Toung_Loong_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160115tw_Toung_Loong_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160115tw_Toung_Loong_Textile.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160226tw_De_Licacy_Industrial.pdf#page=1http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160226tw_De_Licacy_Industrial.pdf#page=1
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9
Taiwan Sportswear Sector: 8 March 2016
Textile: manufacturing process
Source: Daiwa
Taiwan textile supply chain
Source: Daiwa
Footwear: manufacturing process
Source: Daiwa
Material preparation
Shoe face
Shoe bottom
Cutting Sewing
Material preparation
Mixing/hot-pressing/ infusing/setting
Deburring Sole laying
Processing Packaging
Upstream
Midstream
Downstream
Raw material > yarn > textured yarn
Spinning > weaving > finishing
Garment manufacturing
Zig Sheng (1455 TT)/ Hong Yi Fiber (1452 TT)/ Lealea (1444 TT)/
Shinkong Synthetic
Fiber (1409 TT)/ Toung Loong Textile (4401 TT)/ Lan Fa Textile
(1459 TT)
Eclat Textile(1476 TT)/ Everest Textile (1460 TT)/Far Eastern
New Century (1402 TT)/Le Licacy (1464 TT)/Tex-Ray (1467 TT)
Eclat Textile (1476 TT)/Makalot Industrial (1477 TT)/Hakers
(4432 TT)/Nien Hsing (1451 TT)/Tainan Enterprise (1473 TT)/Carnival
Industry (1417 TT)/Tex-Ray (1467 TT)/Quang Viet (4438 TT)
Spinning mill
Textile mill
Dyeing and finishing mill
Twisted yarn
Dyeing, printing and
finishing
Vertical –integration
model: grey, dyeing, printing
and finishing
Fabric
Home and furniture
textile
Industrial goods
Natural fibre and synthetic fibre
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10
Taiwan Sportswear Sector: 8 March 2016
Taiwan footwear supply chain
Source: Daiwa
Strong R&D capabilities in Taiwan’s sportswear supply chain
Taiwan textile and footwear companies are good R&D partners for
international brands like
Nike, Adidas, Under Armour. They specialise in each focus
segment, hence forming a
competitive league against other regional peers, thus raising
their bargaining power and
enhancing their preferential position in the supply chain.
Strong innovation is the key component on which the Taiwan
sportswear players compete.
These companies devote themselves to: 1) providing innovative
products to international
brand clients, 2) enhancing their capability to co-develop new
products with clients, 3)
providing clients with a one-stop shop and solutions, and 4)
shortening lead times and
dealing with rush orders to strengthen their relationships with
clients and overcome the
competition.
Eclat Textile
Eclat Textile develops over 3,000 new fabric products every year
and over 150 new
garment samples every day for its clients. In the past, Eclat
has successfully developed
Dri-FIT UV, which is a high-performance fabric that wicks
moisture away from the skin and
toward the fabric surface, where it evaporates, to help the
wearer stay dry and
comfortable, while also providing the minimum UPF 30 ultraviolet
protection. It has also
developed Coolmax, a performance fabric featuring a fibre-based
moisture management
system designed to allow the wearer to feel cooler.
Other advanced innovations of Eclat Textile include Coldblack, a
special finishing
technology for textiles which reduces heat build-up and provides
reliable protection from
UV rays. Eclat X-POLE Cool Fabric is based on a cool-sensation
fibre and chemically
modified fabric that features strong heat resistance. Fabrics
made from cool-sensation
fibres provide coolness from heat and humidity transfer, are
soft and comfortable to wear,
and have superior wicking to keep the body dry. Another of
Eclat’s innovations is X – Pole
Thermo 1.0~2.0, which is a light weight fabric, with good
thermal resistance, and moisture
control function. And Eclon is a nylon yarn and fabric developed
by Eclat, whose name is a
combination of “Eclat” and “nylon”. It is widely adopted in
sportswear, active wear trendy
fashion and sleepwear.
Upstream
Midstream
Downstream
Raw material (leather, rubber, chemical feedstock)
Leather processing, synthetic leather processing, sole
processing, shoe accessories provider
Footwear manufacturing
TSRC (2103 TT)/Pontex Polyblend (8935 TT)
Taiwan Paiho (9938 TT)/Paiho Shih (8406 TT)/Li Cheng (4426
TT)/San Fang Chemical (1307 TT)/Long John (unlisted)
Feng Tay (9910 TT)/Pou Chen (9904 TT)/Fulgent Sun (9802 TT)
/Deanshoes (unlisted) /Ching Luh (unlisted)
Key to success of the
Taiwan sportswear
players: innovation
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11
Taiwan Sportswear Sector: 8 March 2016
Eclat Textile: performance sportswear Eclat Textile: fashion
sportswear
Source: Company Source: Company
Taiwan Paiho
Taiwan Paiho develops a number of innovative products every year
(for which it secures
the patent), in order to meet the sportswear trends, as well as
the requirements of its
footwear and apparel clients to reduce material and labour
costs. In the table below, we
show Taiwan Paiho’s product roadmap since 1979.
Paiho: product roadmap
Year Creative products
1979 Touch fasteners
1990 Elastic
1993 Webbing
1996 Reflective material, braid fabric
2003 Moulded hooks, apparel zipper pullers, consumption
products, easy tape products
2005 Injection hooks and loop products, computer cable ties,
outdoor sports appliances
2007 Easy tape, changeable soles
2009 Spandex knitted elastic, anti-slip cobra shoelaces
2011 Eco-friendly dyed shoelaces
2013 Four-way stretch knitted shoe uppers, blended coloured
shoelaces, spandex elastics
2015 Neon/reflective webbing, elastic shoelaces, mesh topped
jacquard fabric
Source: Company
Among some of the innovative products recently developed by
Taiwan Paiho are what the
company terms “new shoe-faced products”, namely, moulded hooks,
one-piece shoe
uppers, 4-way stretchable elastic tape, and warp-knitted
jacquard fabric, all of which it
launched between 4Q13 and 4Q15.
The advantages of these products over their traditional
counterparts are numerous. For
example, the advantages of Paiho’s moulded hooks compared to
traditional hooks and
loops include: 1) the more delicate moulded hook has strong
shear strength and forms a
strong seal when closed, 2) quiet closure, 3) more comfortable
and easy to use, and 4)
can be used repeatedly. Paiho is mainly focused on developing
innovative and upgraded
products, which is also the core value of the company.
Paiho: moulded hook application (automobile, diaper and apparel,
etc)
Paiho: the difference between a traditional hook and loop vs.
Paiho’s patented moulded hook
Source: Company Source: Company
Ongoing product
upgrades and new
products to drive Paiho’s
profitability
Traditional
hook and loop
Paiho’s patented
moulded hook
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12
Taiwan Sportswear Sector: 8 March 2016
We view these new shoe face products as having strong potential
to boost the company’s
earnings together with global sportswear brands’ aggressive
development of similar
products after the success of Nike’s Flyknit and Adidas’s
Primeknit.
These products all have the qualities of being comfortable to
wear, providing ventilation
and being light in weight. While sport shoes are usually made
from many separate pieces,
these new products allow shoemakers to fine-tune the exact
amount of flexibility and
support needed in every part of the shoe. This means lightweight
comfort that wraps
around the foot, and fewer materials mean less waste. And above
all, they reflect current
trends.
Taiwan Paiho: 1-piece shoe upper application for Camper Taiwan
Paiho: 4-way stretchable elastic application for
Skechers
Source: Company
Source: Company
Taiwan Paiho: 4-way stretchable elastic tape application for
Adidas
Source: Company
Feng Tay
Feng Tay has co-operated with Nike since 1977 and has developed
several innovative
material and products for Nike, such as Flyknit (2011), Flyweave
(2014) and basketball
shoes (Jordan series, since 1980s). It dedicates itself to
R&D activities (at a cost of 2-3%
of sales per year) and is well-positioned in the global
sportswear sector in light of its strong
relationship with Nike, the sportswear leader, in our view.
Besides, we think Feng Tay
stands to see its earnings increase along with Nike in China and
India, 2 markets with the
potential to grow in the long term.
-
13
Taiwan Sportswear Sector: 8 March 2016
In addition to its R&D centre in Taiwan, the company has
built another R&D centre in
Vietnam which commenced operations in May 2015 to expand its
development scale in its
largest production base.
FengTay: Nike Shox FengTay: Nike Flyknit Racer
Source: Company Note: a shoe midsole made of small hollow
columns of special materials that help to "bounce
back" and absorb the impact from heel strikes while running and
jumping.
Source: Company
Potential Trans-Pacific Partnership (TPP) benefits Most of
Taiwan’s sportswear suppliers moved their production bases out of
China in the
1990s and into Vietnam. We believe their 10+ years’ experience
in Vietnam have
strengthened their production site management capability, and
together with the potential
benefits of the TPP (due to come into effect in 2018), the
earnings-growth outlook for these
companies is favourable and their bargaining power over brand
clients is rising. Successful
implementation of the planned TPP would also allow the companies
to capitalise on the
favourable tariff treatment for companies in Vietnam, which
would mean brand customers
pay zero import tariffs, from an average Vietnam apparel tariff
to the US of 17.5% currently
and an average footwear tariff of 14.5%.
Vietnam capacity as a percentage of total production
% of capacity in Vietnam as of 2015 First Vietnam plant since
when
Eclat Textile 60-70% 2005
Makalot Industrial 33% 2002
Feng Tay 53% 1999
Pou Chen 42% 1994
Taiwan Paiho 28% 1999
Source: Company
Under the TPP framework, TPP members will benefit from an
immediate 70.2-100.0%
reduction in tariffs on certain product items, and a 67.4-100.0%
reduction on certain
volumes; and after 15 years, the tariffs will be almost
completely abolished.
TPP: tariff reduction framework
Country % of tariff cancellation by product item immediately
% of tariff cancellation by volume of trade immediately
% of tariff cancellation by product item after 15 years
% of tariff cancellation by volume of trade after 15 years
Japan 95.3% 99.1% 100.0% 100.0%
United States 90.9% 67.4% 100.0% 100.0%
Canada 96.9% 68.4% 100.0% 100.0%
New Zealand 93.9% 98.0% 100.0% 100.0%
Australia 91.8% 94.2% 99.8% 99.8%
Brunei 90.6% 96.4% 100.0% 100.0%
Chile 94.7% 98.9% 100.0% 100.0%
Malaysia 78.8% 77.3% 100.0% 100.0%
Mexico 77.0% 94.6% 99.6% 99.4%
Peru 80.2% 98.2% 100.0% 100.0%
Singapore 100.0% 100.0% 100.0% 100.0%
Vietnam 70.2% 72.1% 100.0% 100.0%
Source: Chung-Hua Institution for Economic Research (CIER)
Well prepared to reap
TPP benefits
Long established
capacity in Taiwan
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14
Taiwan Sportswear Sector: 8 March 2016
Taiwan Sportswear: monthly wages in 2014 by production site
Source: Company and Daiwa
Diversifying to withstand the weather impact
In our view, the weather has become less and less of an issue
for most sportswear brands
as they have diversified their product lines and regions, and
began operating on more of a
global basis.
Eclat Textile’s products include fabric (functional,
sustainable, innovation and outdoor
series) and garments (performance sports, fashion sports,
seamless) for sportswear,
casual wear, underwear, pyjamas, yoga clothes, and fashionable
dress. In our view, the
effect on Eclat Textile’s earnings of the warm winter period in
the US in December 2015 will
be limited on the back of its various product lines and usage.
On the contrary, the warm
winter is likely to increase the sports participation rate.
Taiwan Paiho’s products also cover diversified segments, such as
sportswear (apparel
and footwear, accounting for 67% of 2015E revenue), and
accessories used in the
medical, diapers, autos and aircraft industries.
Feng Tay manufactures sports shoes (83% of 2015 revenue) and
casual shoes (10%),
mainly for Nike (82% of 2015 revenue). Given Nike’s leading
position in the global
sportswear market and the favourable revenue growth outlook for
Nike, we believe Feng
Tay will grow with Nike, and as such we are less concerned about
Feng Tay’s client
concentration as a risk. Our view is also supported by the
Bloomberg consensus’s upward
EPS revisions of Nike’s earnings since mid-2015.
Nike: earnings revisions
Source: Bloomberg
686
319 300271.15 252
219
0
100
200
300
400
500
600
700
800
China Vietnam Philippines India Indonesia Cambodia
(USD)
1.5
1.7
1.9
2.1
2.3
2.5
2.7
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Dec
-12
Jan-
13
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
(TWD)
2016E 2017E
-
15
Taiwan Sportswear Sector: 8 March 2016
Valuation and recommendations
The sector merits a rerating
We initiate coverage of the Taiwan Sportswear Sector with a
Positive rating. The sector is
trading currently at a 2016E PER of 21x, slightly higher than
the midpoint (19x) of its past
3-year trading PER of 10-28x and equal to a 0.8x PEG for 2016.
The sector was derated
from 27x in October 2015 due we believe to concerns about
inventory accumulation in
North America as a result of the West Coast port issue in early
2015 and the warm spell of
winter weather in North America in December 2015.
Based our and the Bloomberg forecasts, sector earnings look set
to grow by 25% YoY for
2016 compared with 20% YoY for 2015, after posting a CAGR of 26%
over 2013-15.
We believe the major Taiwan sportswear players (Eclat Textile
and Taiwan Paiho) deserve
a rerating, as:
1) The inventory build-up by the sportswear brands in 2Q15 is
starting to reverse.
In our view, the inventory accumulation was triggered by the US
West Coast port
turmoil and weather effects, not weak end demand. In addition,
we see improving
inventory days for the global sportswear brands providers like
Adidas and Under
Armour. We also expect Nike’s inventory in North America to
return to normal levels
after 2 quarters of digestion in addition to other markets
maintaining healthy inventory
levels. From a long-term investment perspective, we see the
inventory concerns in late
2015 as only a short-term negative.
2) Robust revenue growth and margin expansion. For 2016 and
2017, we look for
Eclat Textile’s revenue to increase by 22.8% YoY and 23.3% YoY,
respectively, along
with 0.2-0.6pp gross margin expansion due to the higher
contribution from new and
high ASP products. For Taiwan Paiho, we forecast revenue growth
of 16.5% YoY for
2016 and 17.0% for 2017, and 0.8-1.1pp gross margin expansion in
light of product
upgrades and the contribution from the new shoe face
products.
3) Rerating likely. We forecast EPS for Eclat and Paiho to rise
by 23-25% per year in
2016 and 2017, due to solid revenue growth and margin expansion
on the back of new
and upgraded products as well as greater operating efficiency.
This rate of increase is
in line with their 2013-15 earnings CAGR but valuations have
declined by 20-30% over
the past 5 months to 2016 PERs of 20.9x/17.4x on our forecasts,
respectively, due to
inventory concerns for the rising sportswear brands. With this
trend reversing, and
assuming the stocks stage a rerating back to recent PER highs,
they look attractive to
us.
Our 2016-17 EPS forecasts for Eclat Textile are 5-7% above the
consensus for 2016-
17E, as we like its niche segmentation in elastic fabric and
innovative capability. For
Taiwan Paiho, we are also 10% above consensus for 2017E, as we
are more positive
on its new products’ revenue contribution and gross margin
expansion. For Feng Tay,
our EPS forecast is also higher than the market by about 2-3%,
however, we believe
the current share price already reflects the fundamental
positives, such as its proven
innovation and execution skills, high ROE and close ties with
Nike.
In our view, Taiwan’s small- and mid-caps typically trade in
line with the market’s view
of their earnings-growth potential. According to our forecasts,
for Eclat Textile and
Taiwan Paiho, a similar earnings CAGR over 2015-17E vs. 2013-15E
would support a
rerating of these stocks over 2016-17.
4) Enhancing ROE performance and margins. We see ROE and margins
both
improving as a result of margin enhancement, greater operating
leverage and better
economies of scale.
Stronger earnings
growth for 2016E vs.
2015 offers rerating
potential for the Taiwan
Sportswear Sector
-
16
Taiwan Sportswear Sector: 8 March 2016
ROE: Taiwan Sportswear Operating margins: Taiwan Sportswear
Source: Daiwa forecast Source: Daiwa forecast
Taiwan Sportswear Sector: 1-year forward PER bands Eclat
Textile: 1-year forward PER bands
Source: Bloomberg
Source: Bloomberg
Taiwan Paiho: 1-year forward PER bands Feng Tay: 1-year forward
PER bands
Source: Bloomberg
Source: Bloomberg
Investment risks to our sector call
Weaker-than-expected global demand
The main risk to our call on the sector would be a
sharper-than-expected macro-driven
slowdown dragging down global demand for sportswear and
therefore affecting the
revenue growth of Taiwan’s sportswear ODMs. As a result of the
Global Financial Crisis of
2008, Eclat Textile, Taiwan Paiho and Feng Tay saw their
revenues fall by 7.7%, 6.1% and
2% YoY, respectively, in 2009 (though demand returned the
following year, supporting
revenue YoY growth of 37.9%, 44.3% and 12.5% YoY for 2010,
respectively).
Larger-than-expected price cuts
Stronger-than-expected price competition from their peers, or
pricing pressure from clients,
would be a risk to our sector view. Although the sportswear ODM
players are likely to gain
greater bargaining power by virtue of having production capacity
in Vietnam (potential TPP
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2012 2013 2014 2015E 2016E 2017E
Eclat Textile Taiwan Paiho Feng Tay
0%
5%
10%
15%
20%
25%
2012 2013 2014 2015E 2016E 2017E
Eclat Textile Taiwan Paiho Feng Tay
0
2
4
6
8
10
12
Jan-
06M
ay-0
6S
ep-0
6F
eb-0
7Ju
n-07
Oct
-07
Mar
-08
Jul-0
8D
ec-0
8A
pr-0
9A
ug-0
9Ja
n-10
May
-10
Sep
-10
Feb
-11
Jun-
11O
ct-1
1M
ar-1
2Ju
l-12
Dec
-12
Apr
-13
Aug
-13
Jan-
14M
ay-1
4S
ep-1
4F
eb-1
5Ju
n-15
Nov
-15
(USDbn)
Market Cap 10x 14x
18x 22x 26x
0
100
200
300
400
500
600
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
25x
1
1
1
30x
15x
20x
10x
0
20
40
60
80
100
120
140
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
20x1
1
1
24x
12x
16x
8x
0
50
100
150
200
250
300
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Jan-16
(TWD)
22x
1
1
1
26x
14x
18x
10x
-
17
Taiwan Sportswear Sector: 8 March 2016
benefits for clients, innovation capability), raw-material costs
and currency and weather
trends are swing factors in the ASPs of the Taiwan Sportswear
ODM players.
Unforeseen labour issues
A larger-than-expected rise in basic labour costs at the
companies’ production sites would
be a risk to our sector call. In the same vein, labour disputes
at production sites and
weaker-than-expected yields or utilisation rates could weigh on
companies’ gross margins.
We estimate that labour costs account for 5% and 16% of Eclat
Textile’s cost of goods sold
for its fabric and garment business, respectively. Meanwhile,
labour costs account for 12%
of Taiwan Paiho’s COGS and 16% for Feng Tay, on our
estimates.
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18
Taiwan Sportswear Sector: 8 March 2016
Appendix
Global sportswear brands: the big are getting bigger
International brands dominate global sportswear demand
According to Sporting Goods Intelligence, as of 2014, Nike and
Adidas together accounted
for 58% of the global footwear market and 23% of the global
sports apparel market.
Most of the Taiwan sportswear suppliers serve as original design
manufacturers (ODMs) or
original equipment manufacturers (OEMs) for international brands
such as Nike, Adidas
and Under Armour.
Global sports footwear brands: market share by retail price
(2014)
Global sports apparel brands: market share by retail price
(2014)
Source: Sporting Goods Intelligence
Note: Nike brand includes Converse; Adidas includes Reebok
Source: Sporting Goods Intelligence
Athleisure products
Lifestyle consumers are driving demand
Arguably the biggest trend in sportswear right now is
athleisure, which is best described as
fashion meets function. This trend has seen established
sportswear brands such as Nike,
Adidas, Under Armour, Reebok and Puma competing with outdoor
brands such as the
North Face, Arc'teryx and Patagonia and fast-fashion players
such as H&M and Zara. In
our view, getting ahead of the pack in athleisure is likely to
be key to various brands’
growth prospects in the coming years.
Echoing the athleisure trend, Nike has indicated that short-term
fitness trends are being
superseded by a sustained interest in healthy living, with
female consumers spearheading
the change. Highlighting the change in buying habits, Nike noted
in its 2015 investor
meeting that global athletic apparel sales have grown at a
faster rate than overall apparel
sales over the past 4 years.
Rising awareness of health and wellness globally
As part of this healthy living push, global consumers are
increasingly turning to sports and
outdoor/adventure activities, and their buying habits are
changing as a result. Products
such as sports shoes, apparel and accessories, along with a
variety of sports gear and
equipment, have become must-have items. And we expect the trend
to continue as
consumers’ disposable incomes increase globally, which should
benefit the Taiwan
sportswear sector as a whole.
For example, growing numbers of people in China are exercising
regularly as rising
affluence is accompanied by increased awareness of health
matters. According to one
national survey, the number of Chinese citizens paying to
exercise rose to 164m in 2014,
from 98m in 2007, backed by the central government’s efforts to
encourage mass
participation in sports by building more sports facilities.
Also, the number of marathons held
in the country rose to 56 in 2015, from 33 in 2012. China’s
General Administration of
40.00%
17.90%
7.50%
5.30%
5.10%
4.50%
3.20%
2.30%
1.30%
1.10%
11.80%Nike
Adidas
VF Corporation
New Balance
Asics
Sketcher
Puma
Crocs
Anta
Mizuno
Others
11.70%
11.00%
5.70%
3.30%
3.10%
2.20%
63.00%
Nike
Adidas
VF Corporation
Under Armour
Gildan
Columbia
Others
Nike and Adidas are the
No.1 and No.2 players in
sports footwear and
apparel
The rise of “athleisure”
Sportswear demand is
rising on the back of
growing incomes and
awareness of health
issues
-
19
Taiwan Sportswear Sector: 8 March 2016
Sports is targeting for sports to contribute 1% of China’s GDP
by 2020E, which is just half
the equivalent figure for the EU in 2014.
Consumers looking for multi-function sportswear
With consumers’ tastes becoming ever more sophisticated, we are
seeing more multi-
function sportswear products hitting the market. We consider
these multi-function products
to make up a new category, ie, one separate and distinct from
sportswear and mass-
market products, as such products tend to feature performance
fabrics (ie, lightweight,
breathable, water-proof, UV-cutting and thermal control) that
consumers seem prepared to
pay a premium for.
Supporting our view of the rise in multi-function sportswear
demand, we note that
Alibaba.com recently added a new “functional sportswear”
category to its sportswear
section. Besides, sportswear brands such as Nike, Adidas, and
Puma are offering more
multifunctional sportswear to meet consumers’ growing demand,
backed by innovations in
raw materials (so-called functional fabrics).
Growth potential for international brands in developing
geographies
Value for money is key, but foreign brands are on the rise
According to Euromonitor, the leading international brands, such
as Nike and Adidas,
together claimed 28% of China’s sportswear market as of 2014, up
from 23% in 2013. We
think these companies’ market-share gains reflect the
willingness of Chinese consumers to
pay a price premium for international brands. Indeed, in
mid-October 2015, Nike stated
that it expects a mid-teen-percentage annual growth rate in its
footwear revenue from
Greater China over the next 5 years; for the sake of comparison,
it is looking for low-
double-digit annual growth in emerging markets and high
single-digit growth rates for
developed geographies over the same timeframe.
Sportswear is a growing pie
Euromonitor estimates that China’s sportswear market was worth
USD22bn for 2015, and
forecasts it to grow to USD28.4bn by 2018. The implied 8.9% CAGR
for China’s
sportswear market over 2015-18E is above Euromonitor’s forecast
CAGR of 6.1% for
global sports apparel and 1.6% CAGR for global sports footwear
over the same horizon.
Quality and value for money continue to be the top
considerations among Chinese
consumers when purchasing sportswear, according to our research
in the market.
However, with consumers’ disposable income rising, we believe
their purchasing
preferences will shift from value-for-money choices to more
expensive brands. While
international brands already command consumers’ attention in
China, they do not yet
dominate the market, which we think underlines the growth
prospects for international
brands that have yet to establish a presence in China.
Based on data from Euromonitor, Nike and Adidas were the largest
international players in
China’s sportswear market in 2015, with respective market shares
of 14.3% (up from
11.2% in 2011) and 13.8% (up from 8.5% in 2011). Their
market-share gains have likely
come at the expense of small domestic brands in the face of
ongoing industry
consolidation.
Multi-function =
sportswear + casual
wear + fashion wear
Scope for leading global
sportswear players to
grow in developing
markets
-
20
Taiwan Sportswear Sector: 8 March 2016
China: Nike and Adidas’ sportswear market share
Source: Euromonitor
Fuelled by increasing sports participation and government
support
Sports participation in China continues to rise, backed by a
combination of consumers’
growing affluence and a concerted push from the government. In
October 2014, China’s
State Council formally announced plans to promote the sports
industry in the country’s 12th
Five-Year Plan with the longer-term goal of making the industry
a CNY5trn sector by 2025.
The table below shows the size of major apparel markets in 2012
and 2025E, according to
Statista. On Statista’s forecasts, the US apparel market will
expand from USD225bn in
2012 to USD285bn in 2025, implying a CAGR of 2%. By contrast,
Statista forecasts a 10%
CAGR for the China apparel market (USD540bn in 2025E, from
USD150bn in 2012E) and
a 12% CAGR for India’s apparel market (USD200bn in 2025E, from
USD45bn in 2012).
Size of major apparel markets
Region (USDbn) 2012 2025E CAGR
China 150 540 10%
EU-27 350 440 2%
United States 225 285 2%
India 45 200 12%
Japan 110 150 2%
Russia 40 105 8%
Brazil 55 100 5%
Canada 30 50 4%
Australia 25 45 5%
Rest of the World 75 195 8%
Global 1105 2110 5%
Source: Statista
11.20%
14.30%
8.50%
13.80%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 2015
Nike Adidas
-
See important disclosures, including any required research
certifications, beginning on page 63
Taiwan Consumer Discretionary
Investment case: We initiate coverage of Eclat Textile, a
leading global
manufacturer of functional elastic knitted fabrics and garments,
with a Buy
(1) call. We foresee the sportswear trend continuing over the
next 2 years
and believe Eclat’s capability in product development and its
strategic
position with global-brand customers will support revenue growth
across
the functional sportswear, outdoor wear and lifestyle wear
segments.
Inventory days reversing since 3Q15. Eclat’s share price is down
by 20-
25% since October 2015 due to inventory concerns in North
America
resulting from the US West Coast port congestion and the warm
winter in
North America in late 4Q15. However, inventory levels at the
company’s
major clients, such as Under Amour (since 3Q15), Gap (4Q15) and
JC
Penny (4Q15), look to be improving. Nike and Lululemon have been
trying
to lower their inventories to a healthy level, and we believe
new innovative
products will stimulate demand within the space.
More multi-function and athleisure demand, more demand for
synthetic products. We expect the sales proportion of synthetic
fabric to
hit over 25% of total fabric sales in 2016, from 18% in 2015 and
8% in
2014, thanks to Eclat specialising in the manufacture of nylon
and
polyester-based synthetic fabric (vs. regional peers’ synthetic
cotton-based
products) and its preferential position that allows global
brands to source
mid- to high-end functional fabric based on Eclat’s
manufacturing know-
how. In 2016-17, we expect its fabric ASP to rise by 12-13% and
its
garment ASP to rise by 3-5%, due mainly to the change in the
company’s
product mix (rising revenue from synthetic fabric and fabric for
use in its
own garment products rather than for sale to clients).
Catalysts: We believe the market has yet to factor in the
improving
inventory situation since 3Q15 or the new product pipeline from
global
sportswear players. Also, we see now as a good time to
accumulate the
stock in light of robust sportswear demand, in addition to the
company’s
new product pipeline and its clients’ improving inventory
situation.
Valuation: We initiate coverage with a Buy (1) rating and
12-month target
price of TWD500, based on a 2016E PER of 25x, which translates
into a
2015-17E PEG of 1x. We see this target multiple as fair based on
our
2015-17 earnings CAGR forecast of 25.3%, below the midpoint of
Eclat’s
2013-15E PER of 17-43x and close to its earnings CAGR of
24.1%.
Risks: Main risks to our call: 1) weaker-than-expected global
demand, and
2) disappointing gross margin expansion on slower-than-expected
new
product launches or weaker ASP expansion and utilisation
rate.
8 March 2016
Eclat Textile
Initiation: leading the pack
Inventory days at Eclat’s clients have been improving since
3Q15
Synthetic fabric demand set to drive ASP growth in 2016-17
Initiating with a Buy (1) rating and 12-month TP of TWD500
Source: FactSet, Daiwa forecasts
Eclat Textile (1476 TT)
Target price: TWD500.00
Share price (7 Mar): TWD410.00 | Up/downside: +22.0%
Helen Chien(886) 2 8758 6254
[email protected]
90
109
128
146
165
360
408
455
503
550
Mar-15 Jun-15 Sep-15 Dec-15
Share price performance
Eclat Text (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 369.43-529.04
Market cap (USDbn) 3.37
3m avg daily turnover (USDm) 17.67
Shares outstanding (m) 269
Major shareholder Zhen-Hai Hong (Chairman) (3.3%)
Financial summary (TWD)
Year to 31 Dec 15E 16E 17E
Revenue (m) 25,525 31,337 38,632
Operating profit (m) 4,888 6,477 8,113
Net profit (m) 4,217 5,282 6,618
Core EPS (fully-diluted) 15.676 19.637 24.604
EPS change (%) 40.4 25.3 25.3
Daiwa vs Cons. EPS (%) 0.9 5.1 7.0
PER (x) 26.2 20.9 16.7
Dividend yield (%) 2.8 3.4 4.2
DPS 11.3 13.7 17.2
PBR (x) 9.3 6.7 5.7
EV/EBITDA (x) 19.9 14.9 12.0
ROE (%) 40.3 37.9 37.1
-
22
Eclat Textile (1476 TT): 8 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Eclat: earnings outlook
For 2015-17, we forecast Eclat’s revenue to see a CAGR
of 23% and its gross margin to improve by 0.2-0.6pp. As
such, we forecast a stronger earnings CAGR of 25.3% in
2015-17 vs. 24.1% in 2013-15E, based on its new product
pipeline, ongoing vendor consolidation and rising demand
for multi-functional products, after a slight slowdown in
YoY
revenue growth in 2014 as the company ramped up new
garment capacity in Vietnam.
Source: Company, Daiwa forecasts
Valuation Eclat: 1-year forward PER bands
Our target price of TWD500 is based on a 2016E PER of
25x, which translates into a 2015-17E PEG of 1x, which we
believe is in line with the stock’s earnings growth outlook.
During 2013-15, the stock traded at an average PER of
30x, and we believe it has potential to rerate to the
midpoint of its trading PER of 17-43x over 2013-15, based
on what we see as stronger earnings growth prospects
over 2015-17.
Source: Bloomberg, Daiwa forecasts
Earnings revisions Eclat: Bloomberg-consensus earnings
revisions
The Bloomberg consensus 2017E EPS had been rising
since April 2015, due we believe to the company’s better-
than-expected gross margin trajectory and stronger-than-
expected high-end product launches.
However, the market’s forecasts have come down since
4Q15, due to generally weak sentiment toward textile
stocks on inventory concerns in North America and the
warm winter there.
Source: Bloomberg
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
(TWDm)
Net Profit (LHS) Net Margin (RHS)
CAGR of 25.3%
CAGR of 24.1%
0
100
200
300
400
500
600
700
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
(TWD)
25x
1
1
1
30x
15x
20x
10x
15
17
19
21
23
25
27
Mar
-15
Apr
-15
May
-15
Jun-
15
Jun-
15
Jul-1
5
Aug
-15
Aug
-15
Sep
-15
Oct
-15
Oct
-15
Nov
-15
Dec
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
(TWD)
2016E EPS 2017E EPS
-
23
Eclat Textile (1476 TT): 8 March 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Garment revenue growth (YoY %) 55.7 32.7 45.8 35.4 10.6 21.4
18.7 20.5
Fabric revenue growth (YoY %) 22.2 15.5 2.6 30.7 23.6 24.3 30.0
27.7
Gross margin (%) 23.8 25.2 27.8 28.2 26.2 27.7 28.3 28.5
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Garment revenue 4,603 6,110 8,907 12,059 13,333 16,191 19,211
23,151
Fabric revenue 3,919 4,525 4,643 6,069 7,503 9,326 12,119
15,474
Other Revenue 20 14 17 14 7 7 7 7
Total Revenue 8,541 10,649 13,566 18,142 20,843 25,525 31,337
38,632
Other income 0 0 0 0 0 0 0 0
COGS (6,508) (7,967) (9,792) (13,022) (15,372) (18,442) (22,453)
(27,603)
SG&A (1,053) (1,181) (1,484) (1,727) (1,857) (2,067) (2,259)
(2,743)
Other op.expenses (29) (53) (57) (102) (107) (128) (147)
(174)
Operating profit 950 1,448 2,233 3,291 3,507 4,888 6,477
8,113
Net-interest inc./(exp.) (18) (27) (24) (17) (25) (30) (25)
(21)
Assoc/forex/extraord./others (8) 36 (13) 45 256 284 29 29
Pre-tax profit 924 1,457 2,197 3,319 3,738 5,142 6,481 8,121
Tax (158) (274) (405) (579) (734) (926) (1,199) (1,502)
Min. int./pref. div./others (2) 0 (1) (1) (1) 0 0 0
Net profit (reported) 764 1,183 1,791 2,738 3,004 4,217 5,282
6,618
Net profit (adjusted) 764 1,183 1,791 2,738 3,004 4,217 5,282
6,618
EPS (reported)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157
19.638 24.604
EPS (adjusted)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157
19.638 24.604
EPS (adjusted fully-diluted)(TWD) 3.684 5.394 7.493 10.575
11.166 15.676 19.637 24.604
DPS (TWD) 2.000 3.000 5.324 7.000 8.000 11.310 13.746 17.223
EBIT 950 1,448 2,233 3,291 3,507 4,888 6,477 8,113
EBITDA 1,240 1,757 2,572 3,709 4,059 5,535 7,243 8,939
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 924 1,457 2,197 3,319 3,738 5,142 6,481
8,121
Depreciation and amortisation 290 310 338 418 552 647 765
826
Tax paid (158) (274) (405) (509) (657) (926) (1,199) (1,502)
Change in working capital (707) (311) (462) (744) (489) (794)
(997) (1,257)
Other operational CF items (33) 62 63 50 (0) 30 25 21
Cash flow from operations 316 1,243 1,732 2,534 3,144 4,099
5,076 6,209
Capex (300) (692) (865) (1,641) (1,651) (1,221) (2,500)
(2,000)
Net (acquisitions)/disposals 6 (20) (78) (53) 10 0 0 0
Other investing CF items (36) (60) (33) 0 (12) 0 0 0
Cash flow from investing (330) (772) (976) (1,693) (1,652)
(1,221) (2,500) (2,000)
Change in debt 128 112 (100) 168 969 0 0 0
Net share issues/(repurchases) 0 0 1,000 0 0 0 2,560 0
Dividends paid (193) (399) (634) (1,230) (1,757) (2,088) (2,952)
(3,698)
Other financing CF items 0 0 0 0 (11) 0 0 0
Cash flow from financing (65) (286) 266 (1,062) (798) (2,088)
(392) (3,698)
Forex effect/others 43 (22) 37 (5) (52) 0 0 0
Change in cash (36) 164 1,059 (226) 642 790 2,184 511
Free cash flow 15 551 867 893 1,493 2,878 2,576 4,209
-
24
Eclat Textile (1476 TT): 8 March 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 244 384 1,462 1,212 1,850 2,640
4,824 5,335
Inventory 1,588 1,919 2,461 3,233 3,099 3,718 4,527 5,565
Accounts receivable 1,086 1,221 1,741 2,295 2,788 3,415 4,192
5,168
Other current assets 169 203 249 239 328 300 300 300
Total current assets 3,087 3,727 5,913 6,979 8,065 10,073 13,843
16,368
Fixed assets 2,798 3,262 3,915 4,985 6,563 7,860 9,595
10,768
Goodwill & intangibles 116 115 134 24 23 23 23 23
Other non-current assets 142 214 115 558 274 261 261 261
Total assets 6,143 7,318 10,077 12,546 14,925 18,216 23,721
27,420
Short-term debt 933 1,174 1,116 1,330 2,229 2,229 2,229
2,229
Accounts payable 703 680 1,149 2,223 2,259 2,710 3,299 4,056
Other current liabilities 494 754 930 614 585 1,429 1,454
1,476
Total current liabilities 2,129 2,608 3,195 4,167 5,073 6,368
6,982 7,760
Long-term debt 189 63 24 0 74 74 74 74
Other non-current liabilities 178 181 204 262 300 300 300
300
Total liabilities 2,497 2,852 3,423 4,429 5,447 6,742 7,356
8,134
Share capital 1,993 2,112 2,460 2,509 2,610 2,610 2,690
2,690
Reserves/R.E./others 1,645 2,346 4,184 5,598 6,868 8,864 13,675
16,596
Shareholders' equity 3,638 4,458 6,645 8,107 9,478 11,474 16,365
19,286
Minority interests 8 8 9 10 0 0 0 0
Total equity & liabilities 6,143 7,318 10,077 12,546 14,925
18,216 23,721 27,420
EV 111,171 111,146 109,972 110,413 110,738 109,948 107,764
107,253
Net debt/(cash) 878 853 (322) 118 453 (337) (2,521) (3,032)
BVPS (TWD) 18.255 21.106 27.008 32.306 36.315 43.965 60.839
71.697
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) 37.9 24.7 27.4 33.7 14.9 22.5 22.8 23.3
EBITDA (YoY) 34.4 41.7 46.4 44.2 9.4 36.3 30.9 23.4
Operating profit (YoY) 41.5 52.4 54.3 47.3 6.6 39.4 32.5
25.2
Net profit (YoY) 102.6 54.8 51.5 52.9 9.7 40.4 25.3 25.3
Core EPS (fully-diluted) (YoY) 97.0 46.4 38.9 41.1 5.6 40.4 25.3
25.3
Gross-profit margin 23.8 25.2 27.8 28.2 26.2 27.7 28.3 28.5
EBITDA margin 14.5 16.5 19.0 20.4 19.5 21.7 23.1 23.1
Operating-profit margin 11.1 13.6 16.5 18.1 16.8 19.1 20.7
21.0
Net profit margin 8.9 11.1 13.2 15.1 14.4 16.5 16.9 17.1
ROAE 22.8 29.2 32.3 37.1 34.2 40.3 37.9 37.1
ROAA 13.5 17.6 20.6 24.2 21.9 25.4 25.2 25.9
ROCE 21.5 27.6 33.1 38.2 33.0 38.2 39.9 40.3
ROIC 19.0 23.9 31.3 37.3 31.0 38.0 42.3 43.9
Net debt to equity 24.1 19.1 n.a. 1.5 4.8 n.a. n.a. n.a.
Effective tax rate 17.1 18.8 18.4 17.5 19.6 18.0 18.5 18.5
Accounts receivable (days) 41.5 39.5 39.8 40.6 44.5 44.3 44.3
44.2
Current ratio (x) 1.4 1.4 1.9 1.7 1.6 1.6 2.0 2.1
Net interest cover (x) 51.4 54.4 93.6 191.3 140.9 164.1 255.9
381.3
Net dividend payout 52.2 53.6 68.7 64.1 69.5 70.0 70.0 70.0
Free cash flow yield 0.0 0.5 0.8 0.8 1.4 2.6 2.3 3.8
Company profile
Eclat Textile (Eclat) is a technology-based Taiwanese textiles
company that supplies functional and
flexible knitwear fabrics, as well as sports apparel products,
to a diversified client base. Its major
clients include Nike, Gap (Athleta), Under Amour and
Lululemon.
-
25
Eclat Textile (1476 TT): 8 March 2016
Why buy Eclat?
Major clients’ inventory days are reversing
Even though Eclat has quite a diverse client base (over 150
garment customers and 300-
400 fabric customers, for brand and retail brands as well as
department stores for the
North America, Europe and Asia markets), its share price has
corrected by 20-25% since
October 2015. We attribute the decline to inventory concerns in
North America resulting
from US West Coast port congestion and the warmer-than-expected
winter in North
America.
However, some of its major clients’ inventory days have improved
since 3Q15 (as shown in
the charts below), such as Under Amour (around 6% of 2015
revenue), Gap (6%) and JC
Penny (3%).
Some of Eclat’s clients, such as Nike and Lululemon, are
clearing their inventories. Nike
(Eclat’s largest client in 2015, accounting for around 10% of
revenue last year) expects its
inventory levels in North America to normalise over the course
of 1H16, while bringing a
strong pipeline of new innovative products to the market over
the same period. While its
excess inventory in North America stems from the residual impact
of the West Coast port
congestion earlier in 2015, its other markets’ inventory levels
remain healthy. Hence, we
expect Nike’s inventory days to return to a normal level in the
next 2 quarters.
Meanwhile, Lululemon (around 6% of 2015 revenue) indicated that
there was some
improvement in its inventory levels in 4Q15, but that levels
were still elevated; however,
during its annual conference in January 2016, the company stated
that in 1Q16 its
inventory growth should be in line with sales growth.
Under Amour: inventory days GAP: inventory days
Source: Company Source: Company
JC Penny: inventory days Nike: inventory days
Source: Company Source: Company
0
50
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Under Armour Average
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JC Penny Average
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1Q16
Nike Average
Trends in inventory days
for global sportswear
brands have reversed
since 3Q15
-
26
Eclat Textile (1476 TT): 8 March 2016
Lululemon: inventory days
Source: Company
We saw a reversal of the inventory days trend in 3Q15 for some
global sportswear and
retail brands, and expect a number of them soon to see a return
of inventory days to
normal levels after a 2-quarter adjustment. Indeed, inventory
concerns in 4Q15 were not
about end-demand per se, but rather the lingering impact of the
West Coast port
congestion in early 2015 (delays in product pipelines), as well
as the warmer-than-
expected winter (affecting sell-through of winter products).
Hence, we look for progress on
this front to assuage investor concerns.
Rising demand for synthetic fabric thanks to the multi-function
and athlesiure trend
Eclat specialises in manufacturing nylon- and polyester-based
synthetic fabric (vs. regional
peers’ focus on synthetic cotton-based products) and is on the
preferential list of a number
of global sportswear brands for mid- to high-end functional
fabric based on its better
production know-how for synthetics.
Eclat focuses on developing mid- to high-end products which
combine function, fashion
and casual themes, in an effort to pursue ASP improvements
rather than volume growth.
We forecast its synthetic fabric sales to account for over 25%
of its fabric sales in 2016,
from 18% in 2015 and 8% in 2014, driving revenue momentum for
the next 5 years.
According to our research in the market, plans are underway in
the industry to launch a
number of new synthetic products, though we do not yet know the
details. In our view,
Eclat, leveraging its R&D capability for new products,
stands to benefit from these
developments by winning new orders from global sportswear
brands’ aggressive approach
to bringing strong pipelines of innovative products to the
market (eg, Nike), in addition to
clearing their excess inventories in North America.
ASP and gross margin set to expand in 2016-17
We expect the ASP for Eclat’s fabric business to grow by 12-13%
in 2016-17 on an
enlarged revenue contribution from: 1) synthetic fabric, with an
ASP at least 10-15% higher
than non-synthetic fabric, and we forecast the sales proportion
to hit over 25% of fabric
sales in 2016, from 18% in 2015 and 8% in 2014, 2) new and
customised products, and 3)
the upgrading of ongoing products.
In addition, thanks to the rising proportion of internal-use
fabric in the garment business,
we look for a 3-5% YoY increase in Eclat’s garment business ASP
for 2016-17, and expect
its fabric for internal use as a proportion of total fabric to
expand to 38% in 2016 from 35%
in 2015 and 32% for 2014.
Given a limited number of suppliers in the synthetic fabric
space (ie, complex hybrid
products [nylon plus wool, nylon plus cashmere, etc]) compared
with other mass-market
products, we see Eclat facing less pricing pressure than other
mass-market players.
0
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Lululemon Average
Rising synthetic demand
bodes well for Eclat’s
earnings growth
ASP and margin drivers:
new products and
upgrading of existing
ones
-
27
Eclat Textile (1476 TT): 8 March 2016
Indeed, Eclat has more bargaining power with its clients in
terms of pricing thanks to its
know-how in processing elastic yarn and synthetic fabric, better
sourcing opportunities
from the Taiwan supply chain, as well as the capability and
flexibility to develop new and
customised items for clients (vs. regional peers that target
large-scale orders). Besides, we
expect to see a rising revenue contribution from global brands,
such as for Nike, Under
Armour and Adidas (vs. department stores and retailers) in 2016,
of up to 40% in 2016
from 30% in 2015, leading to an uptick in Eclat’s ASPs in
2016-17.
On the margin front, Eclat’s gross margin in 2014 declined to
26.2% from 28.2% in 2013,
after a c.40% expansion in garment capacity at its plants in
Vietnam in 2014. With new
employees in Vietnam coming up the learning curve, the gross
margin rose to 27.6% in
9M15 and we forecast a further increase to 27.7% in 2015 and
28.3% in 2016. For 2017,
Eclat plans to expand its total garment capacity globally to
7.7m pieces per month by
1Q17, from current 6.4m currently, translating into 20% capacity
growth. Hence, we only
assume a 0.2pp gross-margin expansion in 2017 after considering
its new Vietnam
capacity expansion and the company’s experience in training new
employees in garment
manufacturing capability and efficiency.
In our view, the changing product mix for the both fabric and
garment business toward
higher-margin items will be the main driver of Eclat’s ASP
growth over our forecast horizon.
Eclat: garment ASP trend Eclat: fabric ASP trend
Source: Company, Daiwa forecasts Note: The ASP drop in 2013 and
2014 due to its capacity expansion in Vietnam and take more
low ASP order to train new employees
Source: : Company, Daiwa forecasts
Eclat: garment shipment trend Eclat: fabric shipment trend
Source: : Company, Daiwa forecasts Source: : Company, Daiwa
forecasts
Eclat: sensitivity of 2016E EPS to changes in revenue growth for
garment and fabric business
Change to 2016E EPS Garment revenue YoY growth
17.7% 18.2% 18.7% 19.2% 19.7%
Fabric revenue YoY
growth
31.0% 25.0% 25.3% 25.6% 26.0% 26.3%
30.5% 24.8% 25.1% 25.5% 25.8% 26.1%
30.0% 24.6% 24.9% 25.3% 25.6% 25.9%
29.5% 24.4% 24.8% 25.1% 25.4% 25.7%
29.0% 24.2% 24.6% 24.9% 25.2% 25.5%
Source: Daiwa estimates; Note: Columns and rows in blue
represent our base-case assumptions
(8%)
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2011 2012 2013 2014 2015E 2016E 2017E
(TWD)
Garment's ASP in TWD per dozen (LHS) YoY (RHS)
(5%)
0%
5%
10%
15%
20%
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2011 2012 2013 2014 2015E 2016E 2017E
(TWD)
Fabric's ASP in TWD per ton (LHS) YoY (RHS)
0%
10%
20%
30%
40%
50%
0
2
4
6
8
10
2011 2012 2013 2014 2015E 2016E 2017E
(m dozen)
Garment shipment (LHS) YoY (RHS)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
0
5,000
10,000
15,000
20,000
25,000
2011 2012 2013 2014 2015E 2016E 2017E
(tons)
Fabric shipment YoY (LHS)
-
28
Eclat Textile (1476 TT): 8 March 2016
Eclat: sensitivity of 2017E EPS to changes in revenue growth for
garment and fabric business
Change to 2017E EPS Garment revenue YoY growth
19.5% 20.0% 20.5% 21.0% 21.5%
Fabric revenue YoY
growth
28.7% 25.1% 25.4% 25.7% 26.0% 26.3%
28.2% 24.9% 25.2% 25.5% 25.8% 26.1%
27.7% 24.7% 25.0% 25.3% 25.6% 25.9%
27.2% 24.5% 24.8% 25.1% 25.4% 25.7%
26.7% 24.3% 24.6% 24.9% 25.2% 25.5%
Source: Daiwa estimates; Note: Columns and rows in blue
represent our base-case assumptions
Potential market-share gains in Europe, as well as with existing
clients
We see a high possibility of Eclat gaining more share of the
European market, as it is
aggressively pitching to customers based in Europe, where orders
have relatively high
ASPs and gross margins. Pricing in Europe is also more stable
and there is a high
acceptance of the service Eclat can provide, especially among
SME clients, according to
our research in the market. Currently, most of Eclat’s revenue
is derived from North
America (55% of 2015 total revenue, from 63% from 2012), Europe
15-20%, Japan 5%,
Australia 5%, and Asia accounts (the remainder).
For the next 3-5 years, we expect Eclat to increase its revenue
proportion from Europe to
25% (vs. 8% for 2014 and a target of 18-20% for 2016). Also, we
expect the revenue
contribution from Japan and Australia to increase as the company
aims to diversify its
revenue sources and ease the swings in its quarterly revenue
(resulting from different
weather patterns and hence peak selling seasons in the northern
and southern
hemispheres). Besides, assuming incremental gains revenue from
its non-US clients, we
see it making likely market-share gains at existing clients,
such as Nike and Under Amour,
over 2016-17, driven by their new product pipelines. We expect
the revenue contribution
from these 2 clients to grow faster than the company’s top line
in 2016-17 and remain
among Eclat’s top-4 clients over the same horizon.
We know Eclat has 6 SME customers on the books in Europe, the US
and Canada, all of
which have the potential to place an increasing number of orders
with Eclat, as was the
case in the early stages of Eclat’s business relationships with
Lululemon and Under Amour.
Well prepared to reap potential TPP benefits
The company has 15 garment production bases globally, in
Vietnam, China and Cambodia,
as well as having strategic outsourcing partners in South
Africa, Vietnam, Cambodia,
Taiwan and China. In terms of garment capacity distribution,
Vietnam is the company’s
largest production site, accounting for 60-70% of its total
capacity as at end-2015, followed
by South Africa (10-20%), Cambodia, Taiwan and China. The
company has over 10 years’
production experience in Vietnam and targets to assign more
production orders to its 4
plants there in 2016-17, eyeing potential benefits from the
Trans Pacific Partnership (TPP),
which should increase its bargaining power over its clients.
As we highlight in the accompanying sector report, the textile
supply chain in Taiwan
favours Eclat, given the company’s ability to source raw
materials that are of better quality
and more price competitive than those of its regional peers, as
well as its quicker, more
competitive service for clients, regardless of whether the
clients assigning the orders to the
company’s major production bases of Taiwan or Vietnam. Moreover,
as a result of the
company’s coverage of the complete Taiwan textile supply chain,
we think Eclat should be
able to maintain its garment outsourcing ratio at 40% in
2016-17, in line with the figure for
2015 and up f
