taiwan sportswear sectorasiaresearch.daiwacm.com/eg/cgi-bin/files/taiwan...taiwan sportswear sector...

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See important disclosures, including any required research certifications, beginning on page 63 Taiwan Consumer Discretionary Investment case: We initiate coverage of the Taiwan Sportswear Sector with a Positive view. Although the global sportswear brands have faced inventory issues in recent months, we are not concerned about the impact on the 3 stocks that we cover, which are leading players in the fast-growing global sportswear supply chain. As we see significant earnings momentum for the Taiwan players, we expect their shares to be rerated. Improving inventory days for global brands. Based on our research, Adidas’s and Under Armour’s inventory days improved in 3Q15 and Nike’s inventory accumulation in North America, due to the US West Coast ports shutdown in early 2015, will likely decline and revert to normal levels in 1H16. We see global sportswear being a growth sector over 2016-17E and believe that overstocking concerns are only a short-term negative, with the share prices of Eclat Textile and Taiwan Paiho having fallen by around 30% and 10%, respectively, since late September 2015. Multifunctional and new products to expand margins. Global brands are focusing on providing “athleisure” (athletic/leisure) and multifunctional products to meet demand across categories. As the Taiwan sportswear players are targeting the relatively high-margin mid- to high-end multifunctional segments and offering one-stop-shop models, we expect them to benefit from supplier consolidation and gain market share. Catalysts: We believe the market has yet to factor in the improving inventory picture or the strong product pipelines of the global brands. After 2 quarters of inventory digestion for the brands, we expect visibility on earnings growth in the Taiwan Sportswear sector to improve appreciably by 3Q16, driven by robust demand and major sports events (ie, the 2016 Olympics), which should serve as share-price driver. Further out, we look for the stocks under coverage to reap Trans Pacific Partnership (TPP) benefits. Valuation: We forecast sector earnings growth of 25% YoY for 2016, vs. 20% for 2015 (vs. a CAGR of 26% for 2013-15E). The sector is trading at 21x 1-year forward PER, below the average of its one-year-forward PER of 15-28x during 2015, and translating into 0.8x PEG for 2016. We have Buy (1) calls on Eclat Textile (1476 TT, TWD410) and Taiwan Paiho (9938 TT, TWD82.6), as we like their ongoing product upgrades and look for their product pipelines to underpin bottom-line growth. We rate Nike play Feng Tey (9910 TT, TWD177) as a Hold (3), mainly on valuation grounds. Risks: The main risk to our Positive rating would be if inventory were to build up due to weaker-than-expected demand. 8 March 2016 Taiwan Sportswear Sector Initiation: setting the pace with the global brands Interest in the Taiwan Sportswear stocks likely to return soon, given their edge in operating efficiency, improving global inventory Rising demand for athleisure and multifunctional apparel should further drive the sector’s earnings growth over 2016-17 We rate Eclat Textile and Taiwan Paiho as Buys (1); Feng Tay rated a Hold (3) on valuation grounds Key stock calls Source: Daiwa forecasts Helen Chien (886) 2 8758 6254 [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%

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Page 1: Taiwan Sportswear Sectorasiaresearch.daiwacm.com/eg/cgi-bin/files/Taiwan...Taiwan Sportswear Sector Initiation: setting the pace with the global brands Interest in the Taiwan Sportswear

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%

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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%

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2015E 2016E 2017E

Eclat Textile Feng Tay Taiwan Paiho

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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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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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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.

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The sportswear sector

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build-up, long-term

growth trends appear to

be intact

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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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Earnings visibility is one

of our top investment

considerations

Stronger global sports

apparel demand in 2014-

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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

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%

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(USDbn)

Value (LHS) YoY (RHS)

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Feng Tay Eclat Textile Taiwan Paiho

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US angle: support from

US economic growth

Taiwan sports footwear

companies likely to see

market-share gains on a

global basis

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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

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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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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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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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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 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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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

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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

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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%

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10%

15%

20%

25%

2012 2013 2014 2015E 2016E 2017E

Eclat Textile Taiwan Paiho Feng Tay

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(USDbn)

Market Cap 10x 14x

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200

300

400

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Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

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20

40

60

80

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Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

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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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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

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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

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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

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See important disclosures, including any required research certifications, beginning on page 63

Taiwan Consumer Discretionary

Investment case: We initiate coverage of 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

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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%

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2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net Profit (LHS) Net Margin (RHS)

CAGR of 25.3%

CAGR of 24.1%

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23

Eclat Textile (1476 TT): 8 March 2016

Financial summary

Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)

Source: FactSet, Daiwa forecasts

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Garment revenue growth (YoY %) 55.7 32.7 45.8 35.4 10.6 21.4 18.7 20.5

Fabric revenue growth (YoY %) 22.2 15.5 2.6 30.7 23.6 24.3 30.0 27.7

Gross margin (%) 23.8 25.2 27.8 28.2 26.2 27.7 28.3 28.5

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Garment revenue 4,603 6,110 8,907 12,059 13,333 16,191 19,211 23,151

Fabric revenue 3,919 4,525 4,643 6,069 7,503 9,326 12,119 15,474

Other Revenue 20 14 17 14 7 7 7 7

Total Revenue 8,541 10,649 13,566 18,142 20,843 25,525 31,337 38,632

Other income 0 0 0 0 0 0 0 0

COGS (6,508) (7,967) (9,792) (13,022) (15,372) (18,442) (22,453) (27,603)

SG&A (1,053) (1,181) (1,484) (1,727) (1,857) (2,067) (2,259) (2,743)

Other op.expenses (29) (53) (57) (102) (107) (128) (147) (174)

Operating profit 950 1,448 2,233 3,291 3,507 4,888 6,477 8,113

Net-interest inc./(exp.) (18) (27) (24) (17) (25) (30) (25) (21)

Assoc/forex/extraord./others (8) 36 (13) 45 256 284 29 29

Pre-tax profit 924 1,457 2,197 3,319 3,738 5,142 6,481 8,121

Tax (158) (274) (405) (579) (734) (926) (1,199) (1,502)

Min. int./pref. div./others (2) 0 (1) (1) (1) 0 0 0

Net profit (reported) 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618

Net profit (adjusted) 764 1,183 1,791 2,738 3,004 4,217 5,282 6,618

EPS (reported)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157 19.638 24.604

EPS (adjusted)(TWD) 3.832 5.598 7.752 10.912 11.508 16.157 19.638 24.604

EPS (adjusted fully-diluted)(TWD) 3.684 5.394 7.493 10.575 11.166 15.676 19.637 24.604

DPS (TWD) 2.000 3.000 5.324 7.000 8.000 11.310 13.746 17.223

EBIT 950 1,448 2,233 3,291 3,507 4,888 6,477 8,113

EBITDA 1,240 1,757 2,572 3,709 4,059 5,535 7,243 8,939

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 924 1,457 2,197 3,319 3,738 5,142 6,481 8,121

Depreciation and amortisation 290 310 338 418 552 647 765 826

Tax paid (158) (274) (405) (509) (657) (926) (1,199) (1,502)

Change in working capital (707) (311) (462) (744) (489) (794) (997) (1,257)

Other operational CF items (33) 62 63 50 (0) 30 25 21

Cash flow from operations 316 1,243 1,732 2,534 3,144 4,099 5,076 6,209

Capex (300) (692) (865) (1,641) (1,651) (1,221) (2,500) (2,000)

Net (acquisitions)/disposals 6 (20) (78) (53) 10 0 0 0

Other investing CF items (36) (60) (33) 0 (12) 0 0 0

Cash flow from investing (330) (772) (976) (1,693) (1,652) (1,221) (2,500) (2,000)

Change in debt 128 112 (100) 168 969 0 0 0

Net share issues/(repurchases) 0 0 1,000 0 0 0 2,560 0

Dividends paid (193) (399) (634) (1,230) (1,757) (2,088) (2,952) (3,698)

Other financing CF items 0 0 0 0 (11) 0 0 0

Cash flow from financing (65) (286) 266 (1,062) (798) (2,088) (392) (3,698)

Forex effect/others 43 (22) 37 (5) (52) 0 0 0

Change in cash (36) 164 1,059 (226) 642 790 2,184 511

Free cash flow 15 551 867 893 1,493 2,878 2,576 4,209

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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.

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25

Eclat Textile (1476 TT): 8 March 2016

Why buy Eclat?

Major clients’ inventory days are reversing

Even though Eclat has quite a diverse client base (over 150 garment customers and 300-

400 fabric customers, for brand and retail brands as well as department stores for the

North America, Europe and Asia markets), its share price has corrected by 20-25% since

October 2015. We attribute the decline to inventory concerns in North America resulting

from US West Coast port congestion and the warmer-than-expected winter in North

America.

However, some of its major clients’ inventory days have improved since 3Q15 (as shown in

the charts below), such as Under Amour (around 6% of 2015 revenue), Gap (6%) and JC

Penny (3%).

Some of Eclat’s clients, such as Nike and Lululemon, are clearing their inventories. Nike

(Eclat’s largest client in 2015, accounting for around 10% of revenue last year) expects its

inventory levels in North America to normalise over the course of 1H16, while bringing a

strong pipeline of new innovative products to the market over the same period. While its

excess inventory in North America stems from the residual impact of the West Coast port

congestion earlier in 2015, its other markets’ inventory levels remain healthy. Hence, we

expect Nike’s inventory days to return to a normal level in the next 2 quarters.

Meanwhile, Lululemon (around 6% of 2015 revenue) indicated that there was some

improvement in its inventory levels in 4Q15, but that levels were still elevated; however,

during its annual conference in January 2016, the company stated that in 1Q16 its

inventory growth should be in line with sales growth.

Under Amour: inventory days GAP: inventory days

Source: Company Source: Company

JC Penny: inventory days Nike: inventory days

Source: Company Source: Company

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26

Eclat Textile (1476 TT): 8 March 2016

Lululemon: inventory days

Source: Company

We saw a reversal of the inventory days trend in 3Q15 for some global sportswear and

retail brands, and expect a number of them soon to see a return of inventory days to

normal levels after a 2-quarter adjustment. Indeed, inventory concerns in 4Q15 were not

about end-demand per se, but rather the lingering impact of the West Coast port

congestion in early 2015 (delays in product pipelines), as well as the warmer-than-

expected winter (affecting sell-through of winter products). Hence, we look for progress on

this front to assuage investor concerns.

Rising demand for synthetic fabric thanks to the multi-function and athlesiure trend

Eclat specialises in manufacturing nylon- and polyester-based synthetic fabric (vs. regional

peers’ focus on synthetic cotton-based products) and is on the preferential list of a number

of global sportswear brands for mid- to high-end functional fabric based on its better

production know-how for synthetics.

Eclat focuses on developing mid- to high-end products which combine function, fashion

and casual themes, in an effort to pursue ASP improvements rather than volume growth.

We forecast its synthetic fabric sales to account for over 25% of its fabric sales in 2016,

from 18% in 2015 and 8% in 2014, driving revenue momentum for the next 5 years.

According to our research in the market, plans are underway in the industry to launch a

number of new synthetic products, though we do not yet know the details. In our view,

Eclat, leveraging its R&D capability for new products, stands to benefit from these

developments by winning new orders from global sportswear brands’ aggressive approach

to bringing strong pipelines of innovative products to the market (eg, Nike), in addition to

clearing their excess inventories in North America.

ASP and gross margin set to expand in 2016-17

We expect the ASP for Eclat’s fabric business to grow by 12-13% in 2016-17 on an

enlarged revenue contribution from: 1) synthetic fabric, with an ASP at least 10-15% higher

than non-synthetic fabric, and we forecast the sales proportion to hit over 25% of fabric

sales in 2016, from 18% in 2015 and 8% in 2014, 2) new and customised products, and 3)

the upgrading of ongoing products.

In addition, thanks to the rising proportion of internal-use fabric in the garment business,

we look for a 3-5% YoY increase in Eclat’s garment business ASP for 2016-17, and expect

its fabric for internal use as a proportion of total fabric to expand to 38% in 2016 from 35%

in 2015 and 32% for 2014.

Given a limited number of suppliers in the synthetic fabric space (ie, complex hybrid

products [nylon plus wool, nylon plus cashmere, etc]) compared with other mass-market

products, we see Eclat facing less pricing pressure than other mass-market players.

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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

Rising synthetic demand

bodes well for Eclat’s

earnings growth

ASP and margin drivers:

new products and

upgrading of existing

ones

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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)

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28

Eclat Textile (1476 TT): 8 March 2016

Eclat: sensitivity of 2017E EPS to changes in revenue growth for garment and fabric business

Change to 2017E EPS Garment revenue YoY growth

19.5% 20.0% 20.5% 21.0% 21.5%

Fabric revenue YoY

growth

28.7% 25.1% 25.4% 25.7% 26.0% 26.3%

28.2% 24.9% 25.2% 25.5% 25.8% 26.1%

27.7% 24.7% 25.0% 25.3% 25.6% 25.9%

27.2% 24.5% 24.8% 25.1% 25.4% 25.7%

26.7% 24.3% 24.6% 24.9% 25.2% 25.5%

Source: Daiwa estimates; Note: Columns and rows in blue represent our base-case assumptions

Potential market-share gains in Europe, as well as with existing clients

We see a high possibility of Eclat gaining more share of the European market, as it is

aggressively pitching to customers based in Europe, where orders have relatively high

ASPs and gross margins. Pricing in Europe is also more stable and there is a high

acceptance of the service Eclat can provide, especially among SME clients, according to

our research in the market. Currently, most of Eclat’s revenue is derived from North

America (55% of 2015 total revenue, from 63% from 2012), Europe 15-20%, Japan 5%,

Australia 5%, and Asia accounts (the remainder).

For the next 3-5 years, we expect Eclat to increase its revenue proportion from Europe to

25% (vs. 8% for 2014 and a target of 18-20% for 2016). Also, we expect the revenue

contribution from Japan and Australia to increase as the company aims to diversify its

revenue sources and ease the swings in its quarterly revenue (resulting from different

weather patterns and hence peak selling seasons in the northern and southern

hemispheres). Besides, assuming incremental gains revenue from its non-US clients, we

see it making likely market-share gains at existing clients, such as Nike and Under Amour,

over 2016-17, driven by their new product pipelines. We expect the revenue contribution

from these 2 clients to grow faster than the company’s top line in 2016-17 and remain

among Eclat’s top-4 clients over the same horizon.

We know Eclat has 6 SME customers on the books in Europe, the US and Canada, all of

which have the potential to place an increasing number of orders with Eclat, as was the

case in the early stages of Eclat’s business relationships with Lululemon and Under Amour.

Well prepared to reap potential TPP benefits

The company has 15 garment production bases globally, in Vietnam, China and Cambodia,

as well as having strategic outsourcing partners in South Africa, Vietnam, Cambodia,

Taiwan and China. In terms of garment capacity distribution, Vietnam is the company’s

largest production site, accounting for 60-70% of its total capacity as at end-2015, followed

by South Africa (10-20%), Cambodia, Taiwan and China. The company has over 10 years’

production experience in Vietnam and targets to assign more production orders to its 4

plants there in 2016-17, eyeing potential benefits from the Trans Pacific Partnership (TPP),

which should increase its bargaining power over its clients.

As we highlight in the accompanying sector report, the textile supply chain in Taiwan

favours Eclat, given the company’s ability to source raw materials that are of better quality

and more price competitive than those of its regional peers, as well as its quicker, more

competitive service for clients, regardless of whether the clients assigning the orders to the

company’s major production bases of Taiwan or Vietnam. Moreover, as a result of the

company’s coverage of the complete Taiwan textile supply chain, we think Eclat should be

able to maintain its garment outsourcing ratio at 40% in 2016-17, in line with the figure for

2015 and up from 20-30% in 2014. Outsourcing allows Eclat to more easily allocate

capacity between its peak and off-peak seasons, and maintain its operating flexibility.

The company specialises in producing functional elastic circular knitting fabrics (ie,

Nylon66 and Nylon6 based vs. cotton-based) and garments for performance as well as

fashion sports. On the expansion of its internal garment capacity, we expect its internal-use

Eclat stands to gain

market share from

European clients, as well

as existing clients, such

as Nike and Under

Amour

Eclat can compete on

Vietnam capacity and

R&D

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29

Eclat Textile (1476 TT): 8 March 2016

fabric ratio to rise in the coming years to 38% by 2016, from 35% in 2015 and 32% in

2014, which should provide scope for gross-margin expansion and underpin Eclat’s

earnings growth prospects.

Eclat continues to develop innovative, professional, flexible and functional knit fabric and

apparel through its 170-member R&D team, which works in collaboration with global

leading brands in order to keep its product line in step with fashion trends. The company

has thus established a preferential position in the textile supply chain, in our view. On

average, it takes 1.5-2 years for Eclat and its client brands to work together in developing

new product items, on which Eclat then has order visibility for 6-9 months.

Eclat develops over 3,000 new fabric products every year and more than 150 new garment

samples every day for its clients. Over the past 10 years, Eclat has successfully developed

Dri-FIT UV, a high-performance fabric that wicks moisture away from the skin and towards

the fabric surface where it evaporates, to help the wearer stay dry and comfortable, and

also provides a minimum UPF 30 ultraviolet protection. More recently, it developed

Coolmax, a performance fabric featuring a fibre-based moisture management system

designed to allow the wearer to feel cooler.

In addition, Eclat has developed eco-friendly and functional fabric products, such as those

allowing for moisture management, high elasticity and UV protection, and are water-proof,

wind-proof water-repellent, dirt-repellent, and lightweight – all of which we believe are in

step with emerging sportswear trends.

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30

Eclat Textile (1476 TT): 8 March 2016

Financial analysis

Strong revenue growth expected to resume in 2016-17

Eclat’s total revenue rose by 33.7% YoY in 2013 and 14.9% YoY in 2014, and is expected

to rise to 22.5% YoY in 2015. We attribute the slowdown in momentum in 2014 to the

slower-than-expected revenue growth for its garment business as a result of new

employees in Vietnam coming up the learning curve as the company expanded capacity

there. Looking to 2016-17, we expect revenue momentum to resume and forecast revenue

growth of 22.8% YoY in 2016 and 23.3% YoY in 2017 on both ASP and shipment growth.

Besides, Eclat plans to expand its Vietnam garment manufacturing capacity by 20% by

1Q17, and we expect Eclat to raise its internal-use fabric ratio (ie, fabric used for garment

manufacturing vs. fabric sold to clients), which we think should boost profitability.

On our forecasts, Eclat’s garment revenue would rise by 18.7% YoY in 2016 (on 5% YoY

ASP growth and 13% YoY shipment growth) and 20.5% YoY in 2017 (on 3% YoY ASP

growth and 17% YoY shipment growth). Besides, in light of Eclat’s strong R&D capability

and its leading position in the elastic fabric market, we forecast its fabric revenue to grow

by 30% YoY in 2016 and 27.7% YoY in 2017.

Eclat: total revenue growth trend and forecasts for 2010-17

Source: Company, Daiwa forecasts

Eclat: garment revenue growth trend and forecasts over 2010-17 Eclat: fabric revenue growth and forecasts for 2010-17

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Improving gross and operating margins in 2016-17 In 2016 and 2017, we look for Eclat’s gross profit margin and operating margin to climb to

28.3% and 28.5% (from 27.7% in 2015E) and 20.7% and 21.0% (from 19.1% in 2015E),

respectively. Eclat’s gross margin improved to 28.2% in 2013, from 18.8% in 2008.

However, its gross margin fell to 26.2% in 2014 (26.8% in 1Q14, 25% in 2Q14, 25.7% in

3Q14 and 27.5% in 4Q15) as the company expanded its garment capacity in Vietnam and

new employees there came up the learning curve. Eclat targets a 20% increase in new

capacity at 2 of its 4 plants in Vietnam by 1Q17, and as such we expect gross-margin

10%

15%

20%

25%

30%

35%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2010 2011 2012 2013 2014 2015 2016E 2017E

(TWDm)

Total revenue (LHS) YoY (RHS)

CAGR of 23.0%

0%

10%

20%

30%

40%

50%

60%

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014 2015 2016E 2017E

(TWDm)

Garment revenue (LHS) YoY (RHS)

CAGR of 19.6%

0%

5%

10%

15%

20%

25%

30%

35%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2010 2011 2012 2013 2014 2015 2016E 2017E

(TWDm)

Fabric revenue (LHS) YoY (RHS)

CAGR of 28.8%

We forecast a 2015-17

revenue CAGR of 23%

A margin expansion

story in 2016-17

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31

Eclat Textile (1476 TT): 8 March 2016

expansion to slow YoY in 2017 (we forecast gross-margin expansion of 0.6pp in 2016 and

0.2pp in 2017).

Eclat: gross profit and gross margin outlook Eclat: operating profit and operating margin outlook

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Favourable currency trends Over 90% of Eclat’s sales are priced in USD. Thus, its currency risk is naturally partly

hedged by having USD accounts payable. Its major cost comprises CNY, TWD, USD and

some other Asian currencies for labour costs. In sum, the strong USD vs. Asian currencies

is favourable for Eclat. We believe the likely trend of an appreciating USD against Asian

currencies would be favourable for Eclat (ie, Daiwa forecasts call for the TWD/USD to

reach 34.7 by the end of 2016 and 35.5 by the end of 2017). We estimate that for every

1% rise in the USD against the TWD, Eclat’s earnings would see a positive impact of 3-4%.

Eclat: cost structure for fabric manufacturing Eclat: cost structure for garment manufacturing

Source: Company Source: Company

Sustainable net margin; set to rise in 2016-17 We forecast Eclat to book net income of TWD5.3bn in 2016 and TWD6.6bn in 2017.

Further, we forecast its net-profit margin to improve to 16.9% in 2016 and 17.1% in 2017,

from 16.5% in 2015E and 14.4% in 2014. Its pre-tax profit margin for the fabric and

garment segments rose to 13.9% and 16.5% in 9M15, from troughs of 8% and 11.7% in

2Q14, respectively, likely due to the increased contribution from its high-ASP products and

improving production efficiency. Note that Eclat is due to release its 4Q15 results during

the week of 21 March.

21%

22%

23%

24%

25%

26%

27%

28%

29%

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Gross Profit (RHS) Gross Margin (LHS)

CAGR of 24.8%

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Operating Profit (LHS) Operating Margin (RHS)

CAGR of 28.8%

Raw material52%

Labor cost5%

Overhead43% Raw material

50%

Labor cost16%

Overhead34%

We forecast a net

income CAGR of 25.3%

in 2015-17

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32

Eclat Textile (1476 TT): 8 March 2016

Eclat: pre-tax margin by product

Source: Company

Eclat: net income trend

Source: Company, Daiwa forecasts

Strong ROE and solid balance sheet Eclat’s ROE has strengthened since 2008, reaching 40.3% in 2015E (our forecast) from

34.2% in 2014. Taking into account its fund-raising exercise at end-2015 and receipt of the

proceeds in February 2016 (total proceeds of TWD2.56bn from 8m shares offered at

TWD320/share), we forecast Eclat’s ROE to decline to 37.9% in 2016 and 37.1% in 2017.

We forecast Eclat’s cash balance to be TWD4.8bn (20.3% of total assets) in 2016 and

TWD5.3bn (19.5% of total assets) in 2017, after considering the incremental USD2.56bn

capital-raising (with a 3.1% share dilution effect) in December 2015. We expect its net cash

position to increase to TWD3.0bn in 2017 from TWD337m in 2015. This improved net cash

position should allow the company to maintain a dividend payout ratio of around 70%, for a

dividend yield of 3.4-4.2% over 2016-17E.

We forecast Eclat to generate free cash flow (FCF) of TWD2.6bn in 2016 and TWD4.2bn in

2017, after incorporating our respective TWD2.5bn and TWD2.0bn capex forecasts for

these years. This capex is mostly for its Vietnam garment capacity expansion.

0%

5%

10%

15%

20%

25%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Fabric Garment

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net Profit (LHS) Net Margin (RHS)

We expect the company

to be in stronger net

cash and free cash flow

positions in 2016-17

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33

Eclat Textile (1476 TT): 8 March 2016

Valuation and risks

Valuations undemanding

Our 12-month target price of TWD500 is set at a 2016E PER of 25x, based on a 1x PEG

over 2015-17E, which we believe is fair given the company’s strong earnings growth

outlook.

We forecast an earnings CAGR of 24.1% in 2013-15, during which time the stock traded at

an average PER of 30x. For 2015-17, we forecast Eclat to deliver a stronger earnings

CAGR of 25.3%, and we see the potential for a rerating back to the average of its trading

PER of 30x (17-43x over 2013-15E).

Compared with regional fabric and garment makers, such as Shenzhou (2313

HK,HKD38.5, Buy [1]) and Youngone (1117770 KS, KRW51,300, Not rated), our target

2016E PER of 25x for Eclat looks fair, due to: 1) our forecast for the company’s earnings to

rise by 25.3% over 2015-17 vs. Shenzhou’s 20.6% over the same period, based on Daiwa

forecasts, and Youngone’s 14.1% over the same period, based on the Bloomberg

consensus forecasts; and 2) the tendency for investors in Taiwan to ascribe higher

multiples to textile- and apparel-related companies than investors in other markets.

Eclat: 1-year forward PER bands Makalot: 1-year forward PER bands

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

Shenzhou international: 1-year forward PER bands Youngone: 1-year forward PER bands

Source: Bloomberg, Daiwa forecasts Source: Bloomberg

0

100

200

300

400

500

600

700

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

25x

1

1

1

30x

15x

20x

10x

0

50

100

150

200

250

300

350

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

20x

1

1

1

24x

12x

16x

8x

0

10

20

30

40

50

60

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

(HKD)

19x

1

1

1

22x

13x

16x

10x

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

(KSD)

18x

11

1

22x

10x

14x

6x

12-month target price of

TWD500 based on 2016E

PER of 25x

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34

Eclat Textile (1476 TT): 8 March 2016

Valuation: Eclat and its peers

Companies Bloomberg code Rating

Market cap (USDm)

Share price (local curr.)

PER (x) PBR (x) ROE (%) Dividend yield (%)

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

*ECLAT TEXTILE CO 1476 TT Buy 3,374 410 20.9 16.7 6.7 5.7 37.9 37.1 3.4 4.2

*TAIWAN PAIHO LTD 9938 TT Buy 752 82.6 17.4 14.1 3.2 2.9 19.4 21.7 3.7 4.6

*MAKALOT INDUSTRIAL 1477 TT Buy 1,192 196 15.6 12.9 4.1 3.7 27.9 31.1 5.6 6.8

TAINAN ENTERPRISES CO LTD 1473 TT Not rated 167 37.35 13.6 9.2 1.3 NA 9.4 12.1 5.4 8

DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7 13.3 2.3 1.9 10.7 15.1 1.3 1.8

PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.2 13.2 NA 1.6 NA 11.8 NA NA NA

TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.1 17.7 15.2 4.1 3.7 24.3 25 4.6 4.8

HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.5 14 NA NA NA NA NA NA NA

Average 16.0 12.9 2.8 3.6 17.3 21.0 4.0 5.0

Regional peers

*SHENZHOU INTERNATIONAL GROUP 2313 HK Buy 6,933 38.5 16.4 13.6 3.1 2.7 21.2 22.6 3.6 4.3

*PACIFIC TEXTILES HOLDINGS 1382 HK Outperform 2,007 10.78 13.3 12.4 4.5 4.5 33.6 36.1 7.5 8.1

*BEST PACIFIC INTERNATIONAL H 2111 HK Buy 487 3.7 10.6 9 1.8 1.6 18.2 18.8 2.9 3.4

REGINA MIRACLE INTERNATIONAL 2199 HK Not rated 1,856 11.78 24.0 17.9 4.6 3.9 20.7 20.6 1.3 1.7

YOUNGONE CORP 111770 KS Not rated 1,885 51,300.00 14.0 13.0 1.8 1.6 13.2 12.5 0.4 0.4

Regional Average 15.7 13.2 3.2 2.9 21.4 22.1 3.1 3.6

Source: Bloomberg;*Daiwa forecasts Note: data is based on share prices as at 7 March 2016; NA denotes no Bloomberg-consensus forecasts

Risks to our call

Weaker-than-expected global demand. A sharper-than-expected macro-driven

slowdown could drag down global sportswear demand, leading to weaker-than-expected

shipments by Eclat. We saw this scenario play out during the GFC in 2008, with Eclat’s

revenue declining by 7.7% YoY in 2009. This is the major risk to our call.

Weaker-than-expected gross margin expansion. Should Eclat’s gross margins expand

more slowly and weakly than we expect as a result of: 1) slower-than-expected new

product launches, 2) stronger price competition from peers or pricing pressure from clients,

3) lower-than-expected production yields and utilisation rates at its production bases, this

would have a negative impact on its earnings. For example, we estimate that every 0.5pp

decline in its gross margin would lead to Eclat’s EPS falling by 3-4% over 2016-17.

Worse-the-expected new product demand. We view Eclat’s R&D capability in synthetic

fabric and ongoing product upgrades as the most important drivers of its ASP growth.

Should such demand fall away, we estimate that every 1% decline in the ASPs for both the

fabric and garment businesses would affect Eclat’s EPS by 1-2% in 2016-17.

Labour issues. Another secondary risk involves labour costs and disputes. Our earnings

forecasts could be at risk if basic labour costs at production sites increase by more than we

expect and labour disputes start to occur, or if the learning curve for new employees in

Vietnam proves to be steeper than we expect. Labour costs account for around 5% of

Eclat’s COGS for fabric (raw material: 52%, overhead: 43%), and 16% of COGS for the

garment business (raw materials: 50%, overhead: 34%), and we estimate that every 10%

higher-than-expected increase in labour costs would have a 4-5% negative impact on EPS

in 2016-17.

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35

Eclat Textile (1476 TT): 8 March 2016

Appendix

Company background

Eclat was founded in 1977 in Taiwan by Zhen-Hai Hong, Hsien-Chin, Tsai, Li-Chen, Wang

and Wan-Shun, Hsu, as a textile trading company to offer fabric and garment buying and

selling services, as well as a fabric outsourcing manufacturing business. The company

started its own flexible knit fabric production in 1983, and during the 1990s, it launched a

garment business, completing the vertical integration model.

In 1985, Mr Zhen-Hai Hong was appointed chairman from predecessor, Mr Hsien-Chin

Tsai. In 1993, the company launched its R&D and inspection centre; it also was qualified

by Dupont with a Q Mark quality certification, becoming the first Dupont-certified vendor in

Pan Pacific Asia, effectively endorsing Eclat's quality and development capability for

producing flexible Lycra fabric.

In 1996, Eclat set up sales offices in Hong Kong and New York to expand its business in

these markets, and 1 year later it launched its own fabric brand, ”Eclon”.

In the 1990 and 2000s, in order to avoid labour costs and develop overseas production

bases, Eclat established its WuXi (China) plant, Cambodia plant and Vietnam plant. In

2007, Eclat completed the vertical integration of its Vietnam plant (dyeing, finishing and

garment-making) in an attempt to lower production costs, raising its competitiveness and

providing total service solutions.

Eclat was listed on the Taiwan Stock Exchange in April 2001. Its management team has an

average of 40 years’ experience in the industry.

Eclat: management team (February 2016)

Management Position Background and experience

Zhen-Hai Hong Chairman Mr. Hong has operated Eclat for over 30 years and is also responsible for the R&D division.

Ren-Chieh Lo Vice-president / CFO Mr Lo joined Eclat in 2001. He is responsible for finance and accounting. He also focuses on investment and overseas production sites.

Chun-Chin Tsai Division General Manager Mr. Tsai is responsible for the group’s fabric business.

Kun-Tang Chen Division General Manager Mr. Chen is responsible for the group’s garment business.

Source: Company

Eclat: major shareholders (as of 3 March 2016)

Holder Share (%)

Yi-Yuan Investment Co. Ltd 9.29

Hsien-Chin Tsai

Ching-Fang Chen

Zhen-Hai Hung

Chin-Chih Cheng Wang

Li-Chen Wang

7.78

3.48

3.26

3.05

2.86

Source: Bloomberg

The chairman is also

responsible for R&D

development

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See important disclosures, including any required research certifications, beginning on page 63

Taiwan Consumer Discretionary

Investment case: We initiate coverage of niche sportswear accessory ODM

company Taiwan Paiho (Paiho) with a Buy (1) rating. Over 2016-17, we see an

increasing revenue contribution from Paiho’s higher gross margin products,

and believe the company is well positioned to benefit from rising order

allocations from the world’s leading sportswear brands (ie, Nike and Adidas).

Profitable products bode well for margin expansion and bottom-line

growth. We forecast Paiho’s gross margin to expand to 38.0% for 2016

and 39.1% for 2017, from 37.2% in 2015 and 33.5% in 2014, due to its

more favourable product mix, better economies of scale and greater

contribution from high value-added products. We see ongoing product

upgrades and its solid relationships with the global leading sportswear

brands as the main drivers of its earnings growth over our forecast period.

Paiho’s shoe-face products likely to benefit from success of Nike’s

Flyknit. Some of Paiho’s new shoe-face products started to contribute to

revenue in 2015, and we forecast these products to account for a combined

3.6% of total revenue for 2016, and 4.3% for 2017. Although this

contribution is minor, we think the future bodes well for Paiho, as we are

seeing more global sportswear brands developing products similar to

Nike’s Flyknit (and Paiho is one of a few sportswear accessory ODMs in

Taiwan to have developed a similar shoe-face to the one used in Flyknit).

These new products are more functional and offer consumers greater

flexibility. They are also cheaper and quicker to manufacture, which means

we see less pressure (vs. peers) on Paiho to cut its prices going forward.

Catalysts: We view Paiho’s new shoe-face products as potential share-price

and rerating catalysts, driven by more sportswear brands developing products

similar to Nike’s Flyknit. The catalysts would come from higher revenue

guidance being issued for 2016 and/or new orders from Adidas in 2Q16.

Valuation: We initiate coverage with a 12-month target price of TWD100,

based on a 2016E PER of 21x, which is the mid-point of its 2015E PER

trading range, and translates into a 2015-17E PEG of 0.9x. Based on the

strong net profit growth of 24.8% and 23.4% that we expect for 2016 and

2017 (vs. 15.6% for 2015E), we believe the stock deserves to be rerated

back to at least the mid-point of its 2015E PER trading range of 15-29x.

Risks: The main risks to our 2016-17 earnings forecasts are: 1) weaker-

than-expected global demand, 2) slower-than-expected adoption of new

products, and 3) lower-than-expected gross margin expansion if its product

mix were to turn out to be less favourable than we expect, or if it were to

cut its ASP.

8 March 2016

Tai wan Pai ho

Initiation: flying high

Ongoing product upgrades driving gross margin expansion

New shoe-face products benefiting from success of Nike’s Flyknit

Initiating with a Buy (1) rating and 12-month TP of TWD100

Source: FactSet, Daiwa forecasts

Taiwan Paiho (9938 TT)

Target price: TWD100.00

Share price (7 Mar): TWD82.60 | Up/downside: +21.1%

Helen Chien(886) 2 8758 6254

[email protected]

90

109

128

146

165

55

66

78

89

100

Mar-15 Jun-15 Sep-15 Dec-15

Share price performance

Taiwan Pai (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 60.00-99.30

Market cap (USDbn) 0.75

3m avg daily turnover (USDm) 5.61

Shares outstanding (m) 298

Major shareholder Cheng family (35.0%)

Financial summary (TWD)

Year to 31 Dec 15E 16E 17E

Revenue (m) 9,439 10,997 12,864

Operating profit (m) 1,929 2,330 2,879

Net profit (m) 1,133 1,415 1,746

Core EPS (fully-diluted) 3.802 4.747 5.859

EPS change (%) 15.8 24.8 23.4

Daiwa vs Cons. EPS (%) 0.1 0.1 9.9

PER (x) 21.7 17.4 14.1

Dividend yield (%) 3.0 3.7 4.6

DPS 2.5 3.1 3.8

PBR (x) 3.5 3.2 2.9

EV/EBITDA (x) 10.2 8.6 7.1

ROE (%) 16.5 19.4 21.7

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37

Taiwan Paiho (9938 TT): 8 March 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Paiho: net profit and growth

Given that Paiho’s product mix has improved and its

increasing revenue contribution from higher gross margin

products (including new shoe-face products), we are

upbeat on the company’s earnings outlook for 2015-17.

We forecast revenue and earnings CAGRs of 16.7% and

24.1%, respectively, over 2015-17, with the gross margin

improving by 0.8-1.1pp over the same period.

Source: Company, Daiwa forecasts Note: the net profit declined YoY for 2012, due to weak sales of 3C (computer, communication

and consumer electronics) products

Valuation Paiho: one-year forward PER bands

Our target price of TWD100 is based on a fully diluted

2016E PER of 21x, which is the average of its PER trading

multiple for 2015. We forecast stronger bottom-line growth

of 24.8% YoY for 2016 and 23.4% for 2017 (vs. 15.6% for

2015E), and believe the stock has the potential to be

rerated to at least the mid-point of the 2015E trading range

of 15-29x.

Our target PER of 21x translates into a 2015-17E PEG of

0.9x, which we see as undemanding.

Source: Bloomberg, Daiwa forecasts

Earnings revisions Paiho: Bloomberg-consensus earnings forecast revisions

The Bloomberg consensus has been raising its EPS

forecasts for 2017 for Paiho since December 2015. But

there was a slight cut made to the 2016E EPS (in

December 2015), which we think was probably due to the

delay in the company’s new shoe-face products being

adopted by some of its global sportswear brand clients, to

2017 from 2016.

Source: Bloomberg

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

0

500

1,000

1,500

2,000

2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net income (LHS) YoY (RHS)

CAGR of 24.1%

0

20

40

60

80

100

120

140

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

20x 1

1

1

24x

12x

16x

8x

4.5

4.7

4.9

5.1

5.3

5.5

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

(TWD)

2016E EPS 2017E EPS

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38

Taiwan Paiho (9938 TT): 8 March 2016

Financial summary

Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)

Source: FactSet, Daiwa forecasts

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Webbings/shoe lace revenue YoY

growth (%)27.7 10.1 8.7 23.5 24.0 23.3 25.0 20.0

Elastics revenue YoY growth (%) 20.3 16.9 (0.1) 27.7 11.0 33.5 25.0 20.0

Molded Hook revenue YoY growth (%) 20.3 (2.6) 2.7 14.2 35.3 22.5 25.0 20.0

New shoe face products (TWDm) 0 0 0 0 0 49 400 550

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Webbings/shoe lace 1,926 2,120 2,304 2,846 3,528 4,351 5,439 6,527

Touch Fasteners 2,261 2,039 1,885 2,148 2,197 2,077 2,077 2,077

Other Revenue 4,187 3,996 2,792 3,113 3,391 3,011 3,481 4,261

Total Revenue 8,374 8,154 6,981 8,107 9,116 9,439 10,997 12,864

Other income 0 0 0 0 0 0 0 0

COGS (6,162) (6,045) (4,981) (5,611) (6,061) (5,928) (6,816) (7,832)

SG&A (1,083) (1,099) (1,054) (1,190) (1,295) (1,333) (1,562) (1,814)

Other op.expenses (139) (138) (185) (188) (226) (249) (290) (340)

Operating profit 989 873 761 1,117 1,533 1,929 2,330 2,879

Net-interest inc./(exp.) (85) (62) 17 2 21 40 43 51

Assoc/forex/extraord./others 650 37 (53) 5 12 (3) 9 9

Pre-tax profit 1,554 847 726 1,124 1,566 1,966 2,381 2,938

Tax (308) (173) (204) (334) (417) (593) (667) (823)

Min. int./pref. div./others (67) (90) (67) (85) (170) (240) (300) (370)

Net profit (reported) 1,178 584 454 705 980 1,133 1,415 1,746

Net profit (adjusted) 1,178 584 454 705 980 1,133 1,415 1,746

EPS (reported)(TWD) 4.015 1.862 1.521 2.368 3.288 3.802 4.747 5.859

EPS (adjusted)(TWD) 4.015 1.862 1.521 2.368 3.288 3.802 4.747 5.859

EPS (adjusted fully-diluted)(TWD) 4.010 1.858 1.517 2.364 3.282 3.802 4.747 5.859

DPS (TWD) 3.000 0.280 0.998 1.500 2.000 2.472 3.086 3.809

EBIT 989 873 761 1,117 1,533 1,929 2,330 2,879

EBITDA 1,539 1,454 1,290 1,660 2,090 2,569 3,050 3,670

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 1,554 847 726 1,124 1,566 1,966 2,381 2,938

Depreciation and amortisation 550 581 529 543 557 639 721 791

Tax paid (308) (173) (204) (190) (211) (593) (667) (823)

Change in working capital (829) (59) 181 (98) 45 (119) (504) (513)

Other operational CF items (470) 123 66 84 46 (41) (43) (51)

Cash flow from operations 497 1,320 1,299 1,463 2,003 1,852 1,888 2,344

Capex (432) (500) (773) (826) (617) (1,100) (1,100) (800)

Net (acquisitions)/disposals 1,204 108 55 54 12 0 0 0

Other investing CF items (400) 63 66 (917) 37 0 0 0

Cash flow from investing 371 (328) (652) (1,688) (568) (1,100) (1,100) (800)

Change in debt 159 182 (342) 312 (134) 0 0 0

Net share issues/(repurchases) 0 (84) (276) 0 0 0 0 0

Dividends paid (140) (880) (84) (298) (447) (596) (736) (919)

Other financing CF items (26) 625 (32) (47) 592 0 0 0

Cash flow from financing (7) (157) (733) (33) 10 (596) (736) (919)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash 860 834 (86) (258) 1,446 156 52 624

Free cash flow 64 821 525 638 1,386 752 788 1,544

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39

Taiwan Paiho (9938 TT): 8 March 2016

Financial summary continued …

Balance sheet (TWDm)

Key ratios (%)

Source: FactSet, Daiwa forecasts

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 1,742 2,556 2,394 2,064 3,561 3,718 3,770 4,394

Inventory 1,938 1,798 1,662 1,789 1,731 1,794 2,017 2,268

Accounts receivable 1,886 1,646 1,581 1,685 1,860 1,926 2,309 2,702

Other current assets 417 230 194 138 120 1,462 1,589 1,723

Total current assets 5,984 6,231 5,831 5,677 7,272 8,900 9,685 11,086

Fixed assets 4,072 4,249 4,322 4,588 4,399 5,114 5,493 5,502

Goodwill & intangibles 661 796 758 313 309 0 0 0

Other non-current assets 203 127 110 1,839 2,378 0 0 0

Total assets 10,919 11,403 11,021 12,417 14,359 14,014 15,178 16,588

Short-term debt 1,623 1,500 1,169 1,502 1,699 1,699 1,699 1,699

Accounts payable 1,303 812 894 1,016 1,152 1,245 1,431 1,645

Other current liabilities 220 160 190 266 428 352 352 352

Total current liabilities 3,146 2,472 2,253 2,784 3,279 3,296 3,482 3,696

Long-term debt 1,191 1,554 1,496 1,497 1,242 1,242 1,242 1,242

Other non-current liabilities 519 660 705 921 1,047 241 241 241

Total liabilities 4,855 4,686 4,454 5,203 5,567 4,778 4,965 5,178

Share capital 2,935 2,935 2,980 2,980 2,980 2,980 2,980 2,980

Reserves/R.E./others 2,325 2,440 2,301 2,866 3,766 3,971 4,649 5,475

Shareholders' equity 5,260 5,375 5,281 5,846 6,746 6,950 7,628 8,455

Minority interests 805 1,342 1,286 1,369 2,046 2,286 2,586 2,955

Total equity & liabilities 10,919 11,403 11,021 12,417 14,359 14,014 15,178 16,588

EV 26,488 26,451 26,169 26,916 26,037 26,120 26,368 26,114

Net debt/(cash) 1,072 498 271 935 (620) (778) (829) (1,453)

BVPS (TWD) 17.922 18.316 17.723 19.618 22.639 23.325 25.601 28.375

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 44.3 (2.6) (14.4) 16.1 12.4 3.5 16.5 17.0

EBITDA (YoY) 49.0 (5.6) (11.2) 28.6 25.9 22.9 18.8 20.3

Operating profit (YoY) 97.2 (11.8) (12.8) 46.8 37.3 25.8 20.7 23.6

Net profit (YoY) 439.5 (50.4) (22.3) 55.4 38.9 15.6 24.8 23.4

Core EPS (fully-diluted) (YoY) 439.4 (53.7) (18.4) 55.8 38.9 15.8 24.8 23.4

Gross-profit margin 26.4 25.9 28.6 30.8 33.5 37.2 38.0 39.1

EBITDA margin 18.4 17.8 18.5 20.5 22.9 27.2 27.7 28.5

Operating-profit margin 11.8 10.7 10.9 13.8 16.8 20.4 21.2 22.4

Net profit margin 14.1 7.2 6.5 8.7 10.7 12.0 12.9 13.6

ROAE 23.7 11.0 8.5 12.7 15.6 16.5 19.4 21.7

ROAA 11.9 5.2 4.1 6.0 7.3 8.0 9.7 11.0

ROCE 11.9 9.4 8.0 11.5 14.0 16.1 18.4 20.9

ROIC 11.4 9.7 7.8 10.5 13.8 16.2 18.8 21.4

Net debt to equity 20.4 9.3 5.1 16.0 n.a. n.a. n.a. n.a.

Effective tax rate 19.8 20.5 28.1 29.7 26.6 30.2 28.0 28.0

Accounts receivable (days) 66.8 79.1 84.4 73.5 71.0 73.2 70.3 71.1

Current ratio (x) 1.9 2.5 2.6 2.0 2.2 2.7 2.8 3.0

Net interest cover (x) 11.6 14.0 n.a. n.a. n.a. n.a. n.a. n.a.

Net dividend payout 74.7 15.1 65.6 63.4 60.8 65.0 65.0 65.0

Free cash flow yield 0.3 3.3 2.1 2.6 5.6 3.1 3.2 6.3

Company profile

Founded in 1985 in Taiwan, Taiwan Paiho (Paiho) is one of the world’s leading accessory ODM

manufacturers (webbing and shoe laces, touch fasteners, elastic and molded hooks, etc), mainly

for the leading sports apparel and shoe brands, such as Nike, Adidas and New Balance.

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40

Taiwan Paiho (9938 TT): 8 March 2016

Doing the right thing at the right time

New shoe-face products: a new chapter for the company

These are likely to be share-price catalysts given the success of Nike’s Flyknit

Paiho’s new shoe-face products (has been making one-piece shoe uppers since 4Q13,

four-way stretchable elastic tape since 4Q13, and warp-knitted jacquard fabric since 4Q15)

have been contributing to its revenue since 2015, and for 2016-17, we forecast this

contribution to reach 3.6-4.3% of revenue, and 4.8-5.5% of earnings.

Despite the minor revenue contribution currently, we think these new shoe-face products

have the potential to become significant earnings drivers (they offer a gross margin that is

higher than the company’s average) as more global sportswear brands are developing

sports footwear products that follow on the heels of Nike’s Flyknit (launched in February

2012; Adidas launched its Primeknit in July 2012). Since then, these 2 brands have

promoted various models in various categories, such as running, football and basketball.

Since 2014, Paiho has been successfully selling its products to the global sportswear

brands, such as Camper, Puma, Under Armour, Reebok, Skechers and Adidas. While sport

shoes are usually made from many separate pieces, these new products allow

shoemakers to fine-tune the exact amount of flexibility and support needed in every part of

the shoe. This means lightweight comfort that wraps around foot, and fewer materials

mean less waste.

Although the party has not started properly yet for Paiho’s shoe-face products, we foresee

a rising revenue contribution from these products over 2016-20, given the still low adoption

rate of such products among existing clients and categories, and the likely addition of new

clients as more of them adopt these aspects into their own designs.

Paiho’s warp-knitted jacquard fabric was launched in November 2015, and is now being

tested by 2 of the global leading sportswear brands, reaffirming our view that its products

are now on trend.

Paiho: its 4-way stretchable elastic tape Paiho: warp-knitted jacquard fabric

Source: Company

Source: Company

Paiho is now providing

shoe-face materials. It

was previously a pure

accessory components

provider

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41

Taiwan Paiho (9938 TT): 8 March 2016

Paiho: one-piece shoe upper used by Puma Paiho: 4-way stretchable elastic tape used by Adidas (the majority of upper is made of elastic tape)

Source: Company Source: Company

Accessory products, a cash-cow business

Favourable product mix to boost Paiho’s gross margin expansion

In a bid to expand its gross margin, Paiho has expanded into more products with higher margins, and has also been continually upgrading existing products over the past 5 years. This has led to its gross margin hitting 37.2% in 2015E, from 25.9% in 2011. Furthermore, we see less ASP or margin pressure for Paiho compared to its sportswear OEM manufacturer peers, given its continuous innovation and R&D capability. We forecast its gross margin for 2016 and 2017 to expand by 0.8pp and 1.1pp, respectively.

Among its accessory products, we expect its webbing/shoelaces, elastic and molded

hooks (together accounting for 69% and 71% of 2016E and 2017E revenue, respectively,

and 77% of its net profit for 2016E and 78% for 2017E) to remain the major revenue

drivers for 2016-17, versus its other products (ie, touch fasteners and powder coating). We

also see gross margin expansion potential for these products (higher than the company’s

average gross margin).

In light of its improving function and economies of scale, Paiho has seen the gross margin

of its webbing/shoe-lace products improve to 40.5% in 2015E, from 38.7% in 2014, and we

forecast this to rise to 41.5% for 2016 and 41.8% for 2017. The gross margin of its elastics

products has expanded to 39.1% in 2015E, from 36.1% in 2014, and we estimate 40% for

2016 and 40.5% for 2017.

Meanwhile, for its molded hooks, we expect the gross margin to rise to 52.5% for 2017,

from 52% in 2016, 51.1% in 2015, and 40.4% in 2014, as the company is 1 of only 6

fastener providers globally that are able to provide molded hooks and is the only company

with a production base in Asia, benefitting from low manufacturing costs and its close

proximity to footwear OEM production sites. Its global peers are 3M, Aplix, Binder, Velcro

and YKK.

Paiho: product mix by end-2015E Paiho: major products

Source: Daiwa forecasts Note:3C refers to computer, communication and consumer electronics-related products

Source Company

46.1%

22.0%

0.8%

9.8%

8.4%

4.6%7.8%

0.1%

Webbing/shoelaces

Touch fasteners

3C accessories

Elastic

Molded hooks

Powder coating

Others

New shoe face products

Ongoing product

upgrades should drive

gross margin expansion

over our current forecast

horizon

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42

Taiwan Paiho (9938 TT): 8 March 2016

Paiho: each product as a % of total revenue Paiho: gross margin trends for its main products

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Paiho’s products used mainly in sports apparel and footwear segments

Based on Euromonitor data, the sizes of the global sports apparel and footwear markets

are expected to grow at CAGRs of 4.2% and 1.6% over 2015-19, respectively. Sportswear

brand clients today want products that are lightweight, provide ventilation and are

multifunctional (as we highlight in the main section of our report). They also want to cut

material waste and labour costs. Paiho can offer all of this, and we expect it to not only

benefit from the growth of the sportswear industry globally but also gain market share on

its competitive product categories and one-stop shopping service.

Its rising sportswear-related sales proportion (apparel and footwear, vs. 3C) over 2012-15E

was up to 67% for 2015E, from 52% for 2012 (combined percentages in the following

chart), and indicates to us that Paiho has won market share and that the adoption rate of

its products has increased. We believe this trend will continue in light of its more functional

and innovative products vs. peers.

Paiho: product applications Paiho: % of its applications used in sports footwear/apparel

Source: Company Source: Company, Daiwa forecasts

Favourable client coverage should boost earnings growth and product penetration

Paiho supplies products to the global leading sportswear brands such as Nike (22% of

Paiho’s 2015E revenue), Adidas (18%), New Balance (3.8%), Reebok (3.1%), Under

Armour (3%) and Skechers (1.5%), all of which should account for 51.4% of the company’s

total revenue for 2015E. The diversified client base gives the company more revenue

growth potential going forward, in our view.

0%

10%

20%

30%

40%

50%

60%

Web

bing

/sho

elac

es

Tou

ch fa

sten

ers

3C a

cces

sorie

s

Ela

stic

Mol

ded

hook

s

Pow

der

coat

ing

Oth

ers

2013 2014 2015E 2016E 2017E

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015E 2016E 2017E

Webbing/shoelaces Elastic Molded Hooks

25%

29%31%

38%

27% 26%28% 29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 2013 2014 2015 E

Footwear Apparel

Riding the sportswear

trend

Strong client profile

includes Nike, Adidas,

New Balance, Reebok,

and Under Armour

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43

Taiwan Paiho (9938 TT): 8 March 2016

Global sports footwear brand market share for 2014 by retail price

Paiho: brand coverage

Source: Sporting Goods Intelligence Note: Nike’s brands include Converse and Adidas’s include Reebok,

denotes Paiho’s end-clients

Source: Company

40.0%

17.9%

7.5%5.3%

5.1%

4.5%

3.2%

2.3%

1.3%

1.1%11.8%

Nike

Adidas

VF Corporation

New Balance

Asics

Sketcher

Puma

Crocs

Anta

Mizuno

Others Apparel Footwear

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44

Taiwan Paiho (9938 TT): 8 March 2016

Financial analysis

2016-17 revenue prospects: regaining momentum

We forecast Paiho’s revenue to rise by 3.5% YoY for 2015 (vs. 12.4% YoY for 2014), due to

its slower revenue momentum for 2015 on product-mix adjustments. In other words, it cut

the revenue contribution from its 3C accessories (computer, communication and consumer

electronics related), which are its lowest gross margin products, in order to improve

profitability. Looking at 2016 and 2017, we expect its higher gross margin products, such as

webbing/shoelaces, elastic and molded hooks, to be its main revenue drivers, in addition to

the incremental revenue contribution that we see from its new shoe-face products over this

period. Thus, we forecast 16.5% YoY revenue growth for 2016 and 17.0% for 2017.

Paiho: total revenue growth forecasts

Source: Company, Daiwa forecasts Note: 3C revenue decreased YoY over 2010-15E

Paiho has been able to continuously enhance its gross margin since 2013 by optimising its

product mix and increasing the gross margin of the majority of its product lines.

Paiho: gross margin trend by product line-up

Source: Company, Daiwa forecasts

Paiho: product mix changes

Source: Company, Daiwa forecasts Note: New products include one-piece shoe-uppers, four-way stretchable elastic tape and warp-knitted jacquard fabric

(20%)

(10%)

0%

10%

20%

30%

40%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Total revenue (LHS) YoY (RHS)

CAGR of 16.7%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015E 2016E 2017E

Others 3C accessories Powder coating Molded Hooks Touch Fasteners Elastic Webbing/shoelaces

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015E 2016E 2017E

Webbing/shoelaces Touch Fasteners 3C accessories Elastic Molded Hooks Powder coating New products Others

2015-17E: revenue

CAGR of 16.7%

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45

Taiwan Paiho (9938 TT): 8 March 2016

Gross and operating margin expansion under way

For 2016-17, we forecast Paiho’s gross and operating margins to reach respective 38.0%

and 39.1% (from 37.2% in 2015E), and 21.2% and 22.4% (from 20.4% in 2015E). The

margin expansion should be driven mainly by the gross margin on Paiho’s ability to

upgrade existing products, as well as the growing contribution from its new products and

better economies of scale.

Paiho: gross profit and gross margin outlook Paiho: operating profit and operating margin outlook

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Net margins set to rise over 2016-17

We expect Paiho to record net income of TWD1.41bn for 2016 and TWD1.75bn for 2017,

from TWD1.1bn for 2015, and for its net margin to improve to 12.9% for 2016 and 13.6% for

2017, from 12.0% for 2015 and 10.7% for 2014. We see greater net profit growth than

operating profit growth, as we expect a lower effective tax rate for 2016 and 2017, vs. 2015,

for Vietnam and China, on tax benefits from local governments.

Paiho: net income

Source: Company, Daiwa forecasts Note: for 2012, Paiho had a one-time gain of about TWD682m from an investment disposal

Balance sheet and cash flow

We forecast Paiho’s cash position to reach TWD4.4bn (26% of its total assets) in 2017,

from TWD3.7bn (27% of total asset) in 2015, and TWD3.8bn for 2016 (25% of its total

assets), and for its net cash position to increase to TWD1.5bn in 2017, from TWD778m in

2015 , and TWD829m for 2016. The high cash position should allow Paiho to maintain its

cash dividend pay-out policy at 60-70% for 2016-17 (likely to be close to the high end, on

our forecasts).

We forecast Paiho to generate free cash flow of TWD788m and TWD1.5bn for 2016 and

2017, respectively, after incorporating our respective TWD1.1bn and TWD0.8bn capex

forecasts for those years. The capex would be mostly used for the expansion of its

Indonesia, Vietnam and Taiwan plants and to procure new equipment. In our view, Paiho’s

strong FCF will allow the company to maintain a dividend payout ratio of around 65%, with

a dividend yield of 3.0-4.6% over 2015-17E.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Gross profit (RHS) Gross margin (LHS)

CAGR of 19.7%

0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Operating profit (LHS) Operating margin (RHS)

CAGR of 22.2%

(100%)

0%

100%

200%

300%

400%

500%

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net income (LHS) YoY (RHS)

CAGR of 24.1%

2015-17E: gross profit

CAGR of 19.7% vs.

operating profit CAGR

of 22.2%

2015-17E: net profit

CAGR of 24.1%

Stronger net cash and

free cash flow positions

for 2015-17

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46

Taiwan Paiho (9938 TT): 8 March 2016

Valuation, rating and risks

Valuation looks attractive

We initiate coverage with a Buy (1) rating and 12-month target price of TWD100, based on

a fully diluted 2016E PER of 21x, the average of its 2015 trading PER (equal to a PEG of

0.9x over 2015-17E). Based on the stronger earnings growth that we see, at 24.8% for

2016 and 23.4% for 2017 vs. 15.6% in 2015, we believe the stock deserves to rerated, at

least at least the mid-point of its 2015 trading range of 15-29x. The stock is trading

currently at 2016E PER of 17.4x.

Taiwan-based peer Li Cheng (4426TT, not rated) also provides shoe and apparel material

to the global leading sports brands, and its PER has been rerated to an average of 31x

since 2015, from an average PER of 15x over 2012-14. Li Cheng manufactures shoe

material products for Nike that are similar to Paiho’s new shoe-face products (ie, its warp-

knitted jacquard fabric). Paiho’s Taiwan textile and footwear peers are trading at an

average 2016E PER of 16.4x, on our and the Bloomberg consensus forecasts. Our target

PER for Paiho of 21x is a 25% premium to the sector average PER, supported by our

strong EPS growth forecast of 24.8% YoY for 2016 vs. the 20% EPS growth for its peers

over the same period.

Paiho: one-year forward PER bands Li Cheng: historical PER

Source: Bloomberg, Daiwa forecast Source: TEJ; Note: No Bloomberg consensus

Valuation: Paiho and its peers

Companies

Bloomberg

Rating

Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%)

code (USDm) (local curr.) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

*TAIWAN PAIHO LTD 9938 TT Buy 752 82.6 17.4 14.1 3.2 2.9 19.4 21.7 3.7 4.6

*ECLAT TEXTILE CO 1476 TT Buy 3,374 410 20.9 16.7 6.7 5.7 37.9 37.1 3.4 4.2

*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177 21.1 18 7 6 35.5 36 3.3 3.9

TAINAN ENTERPRISES CO LTD 1473 TT Not rated 167 37.35 13.6 9.2 1.3 NA 9.4 12.1 5.4 8

DE LICACY INDUSTRIAL CO LTD 1464 TT Not rated 312 37.55 20.7 13.3 2.3 1.9 10.7 15.1 1.3 1.8

PAIHO SHIH HOLDINGS CORP 8404 TT Not rated 234 34.2 13.2 NA 1.6 NA 11.8 NA NA NA

TOUNG LOONG TEXTILE MANUF CO 4401 TT Not rated 335 91.1 17.7 15.2 4.1 3.7 24.3 25 4.6 4.8

HAKERS ENTERPRISE CO LTD 4432 TT Not rated 123 79.5 14 NA NA NA NA NA NA NA

FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53 19.1 13.1 1.2 1 6.5 8 4.9 6.1

POU CHEN 9904 TT Not rated 3,772 41.9 10.4 9.1 1.4 1.2 11.1 13.4 4.3 4.7

Average

16.4 13.8 3.0 3.5 16.8 19.7 3.9 4.8

Source: Bloomberg;*Daiwa forecasts; Note: data is based on share prices as at 7 March 2016; NA denotes no Bloomberg-consensus forecasts

Risks to our call

Weaker-than-expected global demand. A sharper-than-expected macro-driven

slowdown globally could drag down global sportswear demand. During the global financial

crisis in 2008, Paiho’s revenue was down 6.1% YoY (although for 2009, demand bounced

back, lifting revenue growth by 44.3% YoY). This is the major risk to our call.

A secondary risk would be slower-than-expected gross margin expansion, which

could be due to: 1) Paiho’s product mix turning out to be a weaker than expected. We

expect Paiho’s more favourable product mix to be the main earnings driver over 2016-17,

0

20

40

60

80

100

120

140

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

20x 1

1

1

24x

12x

16x

8x

0

10

20

30

40

50

60

25-F

eb-1

4

25-A

pr-1

4

25-J

un-1

4

25-A

ug-1

4

25-O

ct-1

4

25-D

ec-1

4

25-F

eb-1

5

25-A

pr-1

5

25-J

un-1

5

25-A

ug-1

5

25-O

ct-1

5

25-D

ec-1

5

25-F

eb-1

6

(x)

Stronger earnings

growth for 2016-17E

underpins rerating

potential, in our view

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47

Taiwan Paiho (9938 TT): 8 March 2016

2) stronger-than-expected price competition from its peers or pricing pressure from clients.

We estimate that every 0.5pp decline in the gross margin decline would lower Paiho’s EPS

by 2-3% for 2016-17.

Slower-than-expected adoption rate of its new products. As we view Paiho’s new

shoe-face products as potential revenue drivers for the next 5 years, any downtrends in

demand for such products would impact our earnings forecasts.

Labour issues. If the company’s basic labour costs at its production sites were to increase

by more than we expect or if it were disrupted by labour disputes at these production sites,

then this would impact our forecasts. Labour costs account for around 12% of Paiho’s

COGS (raw materials: 60% and overheads: 28%), and we estimate that for every 10% rise

in its labour costs, its EPS would decline by 3-4% for 2016-17.

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48

Taiwan Paiho (9938 TT): 8 March 2016

Appendix

Company background

San Ho Shin Limited (Paiho’s predecessor) was set up by Mr Sen-Mei Cheng and his 2

brothers, Kuo-Sen Cheng and Kuo-Yen Cheng in 1979 to supply hook and loop products

for apparel, footwear, medical use. In 1985, San Ho Shin entered into a joint venture with

Velcro Industries USA and the company was renamed Taiwan Paiho Limited. In 1990, the

Cheng family bought back all of its 49% stake in Velcro Industries. Following that, Paiho

started to set up its global production distribution network: Dongguan Paiho in 1992,

Vietnam Paiho in 1999, Wuxi Paiho in 2001, Europe Paiho and North America Paiho in

2004, and Indonesia Paiho in 2010. Paiho was listed on the Taiwan Stock Exchange in

January 2001.

Paiho: company structure

Source: Company

Paiho: management team (February 2016)

Management Position Background and experience

Sen-Mei Cheng Chairman/General Manager Founder of Taiwan Paiho. Mr. Cheng has more than 35 years’ experience in the textiles industry

Guei-Zhu Ye Vice-president Mrs Ye joined Paiho in 1992. She is responsible for procurement, new-plants expansion and production. She has over 20 years’ industry experience.

Cheng-Tsung Cheng Vice-president Mr. Cheng is responsible for brand and market development. He is the son of chairman.

Huan-Dung Tseng Director Mr. Tseng focuses on R&D and has over 30 years’ industry experience.

Yao-Da Huang Director Mr. Huang focuses on finance affairs and has been with Paiho for at least 5 years.

Source: Company

Paiho: major milestones

Year Milestones

2012 Awarded by Adidas: “Best Supplier (Speed/Agility)”

2013 Awarded by Adidas: “FACT division 1 supplier”

2014 Paiho became one of the 11 members in Adidas’s A-Team and was the only supplier of accessories used in sportswear (ed, shoe laces). It was named a “pioneer supplier” for garments by Nike, as well as one of its strategic partners.

Source: Company

Paiho: major shareholders (as of 3 March 2016)

Holder Share (%)

Chih-Yu Cheng 4.95

Kuo-Yen Cheng 3.08

Sen-Mei Cheng 2.80

A-Wei Chen Cheng 2.24

Hsin-Lung Cheng 1.68

Cheng-Tsung Cheng 1.60

Cheng-I Cheng 1.60

Source: Bloomberg

Paiho (9938 TT)

China Star International Limited

Wuxi Paisen Chemical Fibre Co Ltd

PT. Paiho Indonesia

Vietnam Paiho Limited

Paiho Shih Holdings Corporation (8404 TT)

Dougguan Paiho Powder Coating Co., Ltd

Wuxi Paiho Textile Co., Ltd

Dongguan Paihong Industry Co., Ltd

Management team has

over 30 years’ textile

industry experience

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See important disclosures, including any required research certifications, beginning on page 63

Taiwan Consumer Discretionary

Investment case: We initiate coverage of Feng Tay Enterprise, a leading

ODM sports and casual footwear maker based in Taiwan, with a Hold (3)

rating on valuation grounds. We like Feng Tay’s proven innovation and

execution skill, high ROE and close ties with Nike, the world’s largest

sports footwear brand. But, while we forecast solid earnings growth over

2016-17, driven mainly by the growth prospects of Nike, we believe the

current share price already reflects the fundamental positives.

Pure Nike play. We estimate that Feng Tay supplied about 17% of Nike’s

global footwear shipment demand in 2015 (up from 16.7% in 2014), and we

expect this order allocation ratio to be stable in the coming few years, on

Feng Tay’s co-development capabilities, preferential supply chain position,

and 40-plus-year relationship with Nike. On a stable ASP in USD terms, we

forecast Feng Tay to see 10% shipment YoY growth over 2016-17, in line

with Nike’s mid-October 2015 target for a revenue CAGR of 10.3% over

2016-20. Given Nike’s 40% share of the global sports footwear segment,

we believe Feng Tay will remain a top-line expansion story through 2020.

Besides, in light of the favourable raw-material environment (low oil price),

increasing production efficiency, and improving operating leverage, we

forecast Feng Tay’s operating margin to expand by 0.5pp for both 2016 and

2017. Hence, we forecast a revenue CAGR of 13.9% and earnings CAGR

of 18.4% for 2015-17.

Positives look priced in. The share price has almost doubled since 2015,

and we believe the above-mentioned positives are priced into the current

share price, given its peers’ trading PER of 16x.

Catalysts: We would see stronger-than-expected order allocation from

Nike as a near-term catalyst for the shares, and market-share gains by

Nike as a longer-term catalyst.

Valuation: We initiate coverage with a 12-month TP of TWD176, based on

a 2016E PER of 21x, which is 30% higher than regional peers’ Yue Yuen

(551 HK) and Fulgent Sun’s (9802 TT) average PER trading multiple of

16x, based on Feng Tay’s stronger earnings CAGR of 18.4% over 2015-

17E vs. regional peers’ 14.8% (Bloomberg consensus forecasts), and our

expectation of an improving ROE trend over 2015-17.

Risks: The key risks to our call are: 1) stronger- or weaker-than-expected

global demand, 2) better- or worse-than-expected operating efficiency, and

3) stronger- or weaker-than expected YoY growth in its ASP.

8 March 2016

Feng Tay Enterprise

Initiation: valuation running in line with fundamentals

Pure Nike play based in Taiwan with proven R&D capabilities

Current premium valuation looks to factor in fundamental positives

Initiating with a Hold (3) rating and 12-month TP of TWD176

Source: FactSet, Daiwa forecasts

Feng Tay Enterprise (9910 TT)

Target price: TWD176.00

Share price (7 Mar): TWD177.00 | Up/downside: -0.6%

Helen Chien(886) 2 8758 6254

[email protected]

100

123

145

168

190

130

150

170

190

210

Mar-15 Jun-15 Sep-15 Dec-15

Share price performance

Feng Tay (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 135.43-206.50

Market cap (USDbn) 3.22

3m avg daily turnover (USDm) 6.87

Shares outstanding (m) 596

Major shareholder Wang family (60.0%)

Financial summary (TWD)

Year to 31 Dec 15E 16E 17E

Revenue (m) 55,754 64,294 72,353

Operating profit (m) 5,475 6,635 7,793

Net profit (m) 4,189 5,010 5,878

Core EPS (fully-diluted) 7.025 8.401 9.856

EPS change (%) 35.7 19.6 17.3

Daiwa vs Cons. EPS (%) 0.1 3.2 1.7

PER (x) 25.2 21.1 18.0

Dividend yield (%) 2.8 3.3 3.9

DPS 4.9 5.9 6.9

PBR (x) 8.1 7.0 6.0

EV/EBITDA (x) 15.6 13.1 11.3

ROE (%) 35.0 35.5 36.0

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50

Feng Tay Enterprise (9910 TT): 8 March 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Feng Tay: earnings

Being a pure Nike player, Feng Tay looks positioned to

grow in step with Nike’s footwear business. We forecast

revenue and earnings CAGRS of 13.9% and 18.4%,

respectively, for 2015-17.

We forecast 10% shipment YoY growth for 2016-17

alongside a flat ASP (around USD16-17 per pair).

However, we see some ASP upside potential from the

likely trend of the TWD depreciating against the USD over

2016-17 (Daiwa’s house view).

Also, we forecast a 0.5pp improvement in Feng Tay’s

operating margin for both 2016 and 2017.

Source: Company, Daiwa forecasts

Valuation Feng Tay: one-year forward PER bands

Our target price of TWD176 is based on a 2016E PER of

21x, which is 30% higher than its peers’ PER trading

multiple of 16x. We believe our target multiple is

reasonable considering Feng Tay’s stronger earnings

CAGR of 18.4% over 2015-17E vs. peers’ 14.8%, as well

as our expectation of a solid ROE performance (35.5% for

2016 vs. peers’ 8.5%) and 36.0% for 2017 vs. peers’ 9.6%)

(note: Bloomberg consensus data for its peers).

Feng Tay’s share price has almost doubled since 2015 and

the stock is currently trading at 21.1x 2016E PER.

Source: Bloomberg, Daiwa forecasts

Earnings revisions Feng Tay: Bloomberg-consensus earnings revisions

The Bloomberg consensus 2016 and 2017 EPS forecasts

for Feng Tay have come down since early 3Q15, likely due

to slower-than-expected operating-margin expansion and

delayed orders for casual shoes at end-2015 (Converse

and Bauer brands), which were shipped in January 2016.

Source: Bloomberg forecasts

(10%)

0%

10%

20%

30%

40%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net profit (RHS) YoY (LHS)

CAGR of 18.4%

0

50

100

150

200

250

300

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(TWD)

22x

1

1

1

26x

14x

18x

10x

8

9

9

10

10

11

May-15 Aug-15 Nov-15 Feb-16

(TWD)

2016E EPS 2017E EPS

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51

Feng Tay Enterprise (9910 TT): 8 March 2016

Financial summary

Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)

Source: FactSet, Daiwa forecasts

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Shipment growth (YoY %) 18.9 13.1 (6.3) 6.2 15.9 12.5 10.0 10.0

Shipment (m pair) 60.7 68.6 64.3 68.3 79.2 89.0 97.9 107.7

ASP growth (YoY %) (5.4) 5.0 9.5 (1.6) 7.8 4.0 4.8 2.3

ASP 493.8 518.7 567.7 558.5 602.1 626.4 656.7 671.8

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

North America 15,852 18,531 19,387 22,390 27,810 32,895 38,166 38,802

Asia 3,761 3,368 6,017 7,594 8,506 10,036 12,086 14,205

Other Revenue 10,360 13,705 11,113 8,165 11,338 12,823 14,041 19,346

Total Revenue 29,973 35,604 36,517 38,148 47,654 55,754 64,294 72,353

Other income 0 0 0 0 0 0 0 0

COGS (24,468) (29,838) (29,644) (30,708) (37,885) (44,313) (50,972) (57,217)

SG&A (2,936) (3,087) (3,316) (3,445) (3,990) (4,516) (5,079) (5,571)

Other op.expenses (937) (1,020) (1,030) (1,090) (1,278) (1,450) (1,607) (1,773)

Operating profit 1,632 1,659 2,528 2,905 4,501 5,475 6,635 7,793

Net-interest inc./(exp.) (47) (67) (70) (51) (40) (40) (38) (35)

Assoc/forex/extraord./others 497 469 262 538 594 759 664 669

Pre-tax profit 2,082 2,061 2,721 3,393 5,055 6,194 7,261 8,427

Tax (331) (438) (671) (769) (1,613) (1,588) (1,815) (2,107)

Min. int./pref. div./others (203) (191) (369) (330) (355) (417) (436) (442)

Net profit (reported) 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878

Net profit (adjusted) 1,548 1,432 1,680 2,294 3,087 4,189 5,010 5,878

EPS (reported)(TWD) 2.979 2.675 3.018 3.962 5.332 7.025 8.401 9.856

EPS (adjusted)(TWD) 2.979 2.675 3.018 3.962 5.332 7.025 8.401 9.856

EPS (adjusted fully-diluted)(TWD) 2.979 2.675 3.018 3.962 5.177 7.025 8.401 9.856

DPS (TWD) 1.800 1.800 2.200 3.300 3.700 4.917 5.881 6.899

EBIT 1,632 1,659 2,528 2,905 4,501 5,475 6,635 7,793

EBITDA 2,793 2,871 3,843 4,138 5,820 6,907 8,218 9,541

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 2,082 2,061 2,721 3,393 5,055 6,194 7,261 8,427

Depreciation and amortisation 1,162 1,213 1,315 1,233 1,319 1,432 1,583 1,749

Tax paid (331) (438) (554) (586) (1,500) (1,588) (1,815) (2,107)

Change in working capital (361) (175) 431 (140) (302) (580) (1,042) (981)

Other operational CF items (234) 6 4 (8) 81 (14) (22) (30)

Cash flow from operations 2,318 2,667 3,916 3,891 4,653 5,444 5,965 7,057

Capex (1,816) (1,562) (1,342) (1,016) (2,054) (2,500) (3,000) (3,000)

Net (acquisitions)/disposals 204 21 229 371 82 0 0 0

Other investing CF items (77) (121) (77) 9 47 0 0 0

Cash flow from investing (1,688) (1,662) (1,189) (635) (1,925) (2,500) (3,000) (3,000)

Change in debt 1,083 488 (896) (1,189) 484 0 0 0

Net share issues/(repurchases) (100) (135) 0 0 0 0 0 0

Dividends paid (883) (936) (936) (1,178) (1,837) (2,142) (2,933) (3,507)

Other financing CF items (905) (147) (261) (1,079) (967) (162) 0 0

Cash flow from financing (804) (730) (2,093) (3,445) (2,320) (2,304) (2,933) (3,507)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash (175) 275 634 (190) 408 639 32 550

Free cash flow 502 1,105 2,575 2,875 2,599 2,944 2,965 4,057

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52

Feng Tay Enterprise (9910 TT): 8 March 2016

Financial summary continued …

Balance sheet (TWDm)

Key ratios (%)

Source: FactSet, Daiwa forecasts

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 1,222 1,303 1,808 1,583 1,891 2,531 2,563 3,113

Inventory 3,113 3,903 3,735 4,045 5,233 6,120 7,040 7,903

Accounts receivable 3,048 3,014 2,518 3,139 4,138 4,357 5,024 5,654

Other current assets 733 1,065 925 666 844 696 696 696

Total current assets 8,117 9,285 8,986 9,432 12,106 13,704 15,323 17,365

Fixed assets 10,069 10,947 10,529 10,254 11,480 12,575 14,021 15,304

Goodwill & intangibles 595 665 634 354 361 361 361 361

Other non-current assets 797 873 782 1,457 1,449 986 986 986

Total assets 19,578 21,769 20,931 21,497 25,397 27,626 30,691 34,016

Short-term debt 2,335 2,534 2,023 2,652 1,978 1,978 1,978 1,978

Accounts payable 2,232 2,353 2,100 2,302 3,101 3,627 4,172 4,683

Other current liabilities 1,681 2,152 1,939 2,490 3,144 2,626 3,069 3,512

Total current liabilities 6,248 7,040 6,062 7,445 8,223 8,231 9,219 10,174

Long-term debt 1,950 2,330 1,854 89 1,360 1,360 1,360 1,360

Other non-current liabilities 1,255 1,560 1,799 2,692 3,391 3,391 3,391 3,391

Total liabilities 9,453 10,930 9,715 10,226 12,973 12,981 13,969 14,924

Share capital 5,197 5,197 5,353 5,567 5,790 5,964 5,964 5,964

Reserves/R.E./others 2,828 3,511 3,674 4,178 5,063 7,110 9,188 11,558

Shareholders' equity 8,025 8,708 9,028 9,745 10,853 13,074 15,151 17,522

Minority interests 2,101 2,131 2,189 1,526 1,571 1,571 1,571 1,571

Total equity & liabilities 19,578 21,769 20,931 21,497 25,397 27,626 30,691 34,016

EV 110,722 111,251 109,816 108,242 108,575 107,936 107,904 107,354

Net debt/(cash) 3,063 3,561 2,069 1,158 1,446 807 775 225

BVPS (TWD) 15.441 16.267 16.215 16.831 18.744 21.922 25.406 29.381

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 12.5 18.8 2.6 4.5 24.9 17.0 15.3 12.5

EBITDA (YoY) (19.6) 2.8 33.8 7.7 40.6 18.7 19.0 16.1

Operating profit (YoY) (30.7) 1.7 52.4 14.9 54.9 21.6 21.2 17.4

Net profit (YoY) 2.5 (7.5) 17.3 36.5 34.6 35.7 19.6 17.3

Core EPS (fully-diluted) (YoY) 2.5 (10.2) 12.8 31.3 30.7 35.7 19.6 17.3

Gross-profit margin 18.4 16.2 18.8 19.5 20.5 20.5 20.7 20.9

EBITDA margin 9.3 8.1 10.5 10.8 12.2 12.4 12.8 13.2

Operating-profit margin 5.4 4.7 6.9 7.6 9.4 9.8 10.3 10.8

Net profit margin 5.2 4.0 4.6 6.0 6.5 7.5 7.8 8.1

ROAE 19.1 17.1 18.9 24.4 30.0 35.0 35.5 36.0

ROAA 8.0 6.9 7.9 10.8 13.2 15.8 17.2 18.2

ROCE 11.3 11.0 16.4 20.0 30.2 32.5 34.9 36.7

ROIC 10.5 9.5 13.8 17.5 23.3 27.8 30.2 31.8

Net debt to equity 38.2 40.9 22.9 11.9 13.3 6.2 5.1 1.3

Effective tax rate 15.9 21.3 24.7 22.7 31.9 25.6 25.0 25.0

Accounts receivable (days) 31.9 31.1 27.6 27.1 27.9 27.8 26.6 26.9

Current ratio (x) 1.3 1.3 1.5 1.3 1.5 1.7 1.7 1.7

Net interest cover (x) 34.6 24.9 36.3 57.4 113.3 136.5 175.1 224.7

Net dividend payout 60.4 67.3 72.9 83.3 69.4 70.0 70.0 70.0

Free cash flow yield 0.5 1.0 2.4 2.7 2.5 2.8 2.8 3.8

Company profile

Founded in 1971, Feng Tay manufactures sports shoes, casual shoes, and sports balls (particularly

golf and soccer). Its major clients include Nike (82% of 2015 sales), Bauer (3.5%), Converse (3%),

Salomon (2.5%) and others (9%).

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53

Feng Tay Enterprise (9910 TT): 8 March 2016

Valuation running in line with fundamentals

Pure Nike play

Feng Tay engages in the manufacture of sports shoes (83% of 2015 sales), casual shoes

(10%), sports balls (particularly golf and soccer) (2%), as well as generating other retail

revenue (5%). In terms of client coverage, Nike is the main revenue contributor (82% of

revenue for 2015E), followed by Bauer, Converse and Salomon.

Feng Tay: client mix

Source: Company, Daiwa forecasts

The company is a long-term production partner of Nike, and on our estimates supplied

around 17% of Nike’s global shipment demand in 2015 (from 16.7% in 2014). We believe

Feng Tay’s order allocation from Nike will be sustained at around the current level in the

coming years, as we think the companies’ long-established relationship is based on Feng

Tay’s proven R&D capabilities and flexible production strategy.

Over the past 10 years, Nike’s footwear revenue has recorded a CAGR of 9.7%, outpacing

the US company’s revenue from the apparel business (8.4% CAGR) as a result of its

dominant 40% share of the global sports footwear market.

Nike: footwear and apparel revenue YoY growth Feng Tay: share price performance vs. Nike

Source: Bloomberg Source: Bloomberg

In mid-October 2015, Nike announced it was targeting annual revenue of USD50bn by

end-2020, from USD30.6bn in 2015, translating into a revenue CAGR of 10.3% over 2016-

20E. For its more-developed geographic markets (North America, Western Europe and

Japan), Nike expects high-single-digit revenue growth per annum over the next 5 years; for

its developing geographic markets (Emerging Markets, Greater China, and Central and

Eastern Europe), the US company expects low-double-digit annual revenue growth over

the same horizon. Within the latter segment, the company expects its Emerging Markets

geography to deliver low-double-digit average annual revenue growth and Greater China

mid-teen growth over the next 5 years. For Greater China we see total annual revenue of

76% 76% 70% 73%82% 84% 82.1% 82% 82% 82%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Nike Bauer Converse Salomon Others

(10%)

(5%)

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Footwear Apparel

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

(USD)(TWD)

Feng Tay (LHS) Nike (RHS)

Global production

partner of Nike, with

which it has a 40-year-

plus relationship

The company’s share of

Nike orders looks

sustainable

Nike’s footwear business

has outpaced its apparel

business in recent years

The US company is

targeting a revenue

CAGR of 10.3% over

2016-20

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54

Feng Tay Enterprise (9910 TT): 8 March 2016

USD6.5bn by 2020, vs.USD3.1bn for 2015, an implied revenue CAGR of 16%. We believe

this development will bode well for Feng Tay’s top-line growth through to 2020.

Global sports footwear brands: market share as of 2014 by retail price

Global sports apparel brands: market share as of 2014 by retail price

Source: Sporting Goods Intelligence; Note: Nike brand include Converse and Adidas include Reebok

Source: Sporting Goods Intelligence

On the favourable raw material environment, alongside the company’s improving

production efficiency across its different production sites and expanding sales scale and

operating leverage, we forecast Feng Tay’s gross margin to expand by 0.2pp in each of

2016 and 2017 and its operating margin to expand by 0.5pp in each of 2016 and 2017.

Vietnam is the company’s largest production base

As of 2015, Vietnam accounted for 53% of Feng Tay’s shipment capacity, followed by India

(20%), China (15%) and Indonesia (12%). We believe this skew in capacity towards

Vietnam should allow the company to capitalise on the favourable tariff treatment planned

for companies in Vietnam under the TPP, whereby brand customers will effectively pay

zero import tariffs (they will no longer have to pay the average Vietnam footwear tariff of

14.5%).

Feng Tay: capacity allocation

Source: Company, Daiwa forecasts

Besides, in order to bring down its labour costs, Feng Tay plans to increase its production

capacity in Indonesia (it had added 2 buildings as of end-2015 and plans to establish

another new plant to boost its production capacity by 2017-18) and India (targets to set up

a second production site, with manufacturing planned to commence by mid-2017). We

expect this capacity expansion effort to have a limited negative impact on its net profit

performance in the early stages, since the company can draw on its management

experience of the past 10 years and emulate previous successes on this front.

Nike40.0%

Adidas17.9%

VF Corporation7.5%

New Balance5.3%

Asics5.1%

Sketcher4.5%

Puma3.2%

Crocs2.3%

Anta1.3%

Mizuno1.1%

Others11.8%

Nike11.7%

Adidas11.0%

VF Corporation5.7%

Under Armour3.3%

Gildan3.1%

Columbia2.2%

Others63.0%

21% 21% 17% 15% 13% 11%

50% 50%51% 53% 52% 51%

16% 15%13% 12% 13% 14%

13% 14% 19% 20% 22% 24%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 E 2016 E 2017 E

China Vietnam Indonesia India

Feng Tay’s Vietnam

focus should be positive

in terms of TPP benefits

Planning to expand

production capacity in

India and Indonesia

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55

Feng Tay Enterprise (9910 TT): 8 March 2016

Competitive landscape: strong R&D

Feng Tay has been co-operating with Nike since 1977 and together the companies have

developed several innovative materials and products, including Flyknit and Flyweave

footwear and basketball shoes (Jordan series). Flyknit and Flyweave are made from

synthetic yarn that is woven together by a knitting machine, thus reducing the weight of the

shoe and the number of stages needed in the production process. Through its focus on

R&D (2-3% of revenue pa) and co-developing products with Nike, we believe Feng Tay is

well positioned for future developments in the global sportswear sector.

Nike: Flyknit Nike: Flyweave

Source: Nike

Source: Nike Note: Flyweave technology has been implemented on the Air Jordan 29 (basketball), Nike TW ’15

(golf), Nike CJ Elite TD Cleat (football), and Nike CJ3 Flyweave Trainer (training) lines.

In addition to its established R&D centre in Taiwan, which commenced operations in 2008,

Feng Tay built another R&D centre in Vietnam, which started up in May 2015, to expand its

development efforts alongside its largest production base.

Nike: Flyknit vs. Flyweave

Material name Launch time Light weight Precision fit Reduce waste Flexible More stability and support

Flyknit 2012 V V V V

Flyweave 2015 V V V V V

Source: Daiwa

Feng Tay: R&D development for Nike

Year Creative products

1977 Began producing high-end canvas and leather athletic shoes for Nike

1979 Began producing Nike tennis shoes with two-coloured outsole

1985 Began producing Nike Air shoes - Air Condition

1987 Began developing signature shoe models (Air Jordan) for Michael Jordan, a Nike-contracted NBA athlete

1992 Nike’s first Research and Development Centre based in Asia is established in Douliu City, Taiwan.

1993 Collaborated with Nike on the SOTAP (State of the Art Production) project

1997 Began producing Bauer ice and inline skates

2000 Began producing the first generation Nike Shox

2003 Began developing signature shoe models for LeBron James, a Nike-contracted NBA athlete

2006 Began producing air bags and golf balls for Nike

2009 Produced ice hockey helmets for Bauer

2010 Began producing vulcanized shoes for Converse; began producing ice hockey goalkeeper helmets for Bauer

2011 Established knit technology in Taiwan; began producing soccer balls for Nike

2012 Developed and produced Nike Flyknit Racer, selected by Time magazine as one of the "Best Inventions of the Year 2012"

2013 Began producing male casual shoes for Cole Haan and ice hockey sticks and gloves for Bauer; successfully developed and began producing non-hand-sewn elite footballs for Nike

2015 First generation of Flyweave for Nike; upgraded Flyknit technology and developed first generation Flyknit soccer boots as wel l as Air Jordan Future

Source: Company

1.85

1.90

1.95

2.00

2.05

2.10

2.15

2.20

5.0

6.0

7.0

8.0

9.0

10.0

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

(USD) (TWD)

Feng Tay (LHS) Nike (RHS)

2.20

2.25

2.30

2.35

2.40

2.45

2.50

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

May

-15

Aug

-15

Nov

-15

(USD) (TWD)

Feng Tay (LHS) Nike (RHS)

Record of innovation:

Flyknit, Flyweave and

Jordan series

Now has R&D centres in

Taiwan and Vietnam

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56

Feng Tay Enterprise (9910 TT): 8 March 2016

Financial analysis

2016-17E: solid revenue and earnings growth trajectory

We forecast Feng Tay to deliver an earnings CAGR of 18.4% for 2015-17, on a 13.9%

sales CAGR and an expanding operating-profit margin of 0.5pp for both 2016 and 2017.

We believe the company’s revenue growth for 2016-17 will be driven mainly by shipment

growth, with a flat ASP of USD16-17 per pair (up in TWD terms).

Daiwa’s house forecasts call for the TWD/USD rate to reach 34.7 by the end of 2016 and

35.5 by the end of 2017, and these figures are factored into our ASP assumptions for Feng

Tay over 2016-17.

Feng Tay: sensitivity of 2016E EPS to changes in shipment and ASP growth

Change to 2016E EPS Shipment YoY growth

6.0% 8.0% 10.0% 12.0% 14.0%

ASP YoY growth (TWD)

8.8% 19.6% 21.8% 24.1% 26.3% 28.6%

6.8% 17.4% 19.6% 21.8% 24.0% 26.2%

4.8% 15.2% 17.4% 19.6% 21.7% 23.9%

2.8% 13.1% 15.2% 17.3% 19.4% 21.5%

0.8% 10.9% 12.9% 15.0% 17.1% 19.2%

Source: Daiwa estimates

Note: columns and rows in blue represent our base-case assumptions

Feng Tay: sensitivity of 2017E EPS to changes in in shipment and ASP growth

Change to 2017E EPS Shipment YoY growth

6.0% 8.0% 10.0% 12.0% 14.0%

ASP YoY growth (TWD)

6.3% 17.5% 19.7% 21.9% 24.1% 26.3%

4.3% 15.3% 17.5% 19.6% 21.8% 24.0%

2.3% 13.1% 15.2% 17.3% 19.5% 21.6%

0.3% 10.9% 13.0% 15.1% 17.1% 19.2%

-2.3% 8.0% 10.1% 12.1% 14.1% 16.2%

Source: Daiwa estimates

Note: columns and rows in blue represent our base-case assumptions

On 11 January 2016, the company guided for its production volume to grow by 10% YoY

and delivery volume to grow by 8% YoY for 1Q16. Its 4Q15 production volume and delivery

volume fell short of the company’s guidance by 1.3% and 3.2%, respectively, which we

attribute to inventory digestion of casual shoes from Converse and Bauer.

Feng Tay: difference between reported and guided production volume and delivery volume

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Actual production volume 18,319 18,992 20,576 22,224 20,705 22,010 21,873 23,877

Production volume guidance 17,520 18,920 20,100 21,640 21,000 21,800 21,800 24,200 22,700

Difference 4.6% 0.4% 2.4% 2.7% -1.4% 1.0% 0.3% -1.3%

Actual delivery volume 17,823 20,984 19,435 21,118 20,616 23,951 21,791 22,642

Delivery volume guidance 17,510 20,440 18,810 20,420 20,000 23,100 21,700 23,400 22,200

Difference 1.8% 2.7% 3.3% 3.4% 3.1% 3.7% 0.4% -3.2%

Source: Company

Feng Tay: revenue trend Feng Tay: net income trend

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

0%

5%

10%

15%

20%

25%

30%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Revenue (RHS) YoY (LHS)

CAGR of 13.9%

(10%)

0%

10%

20%

30%

40%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

(TWDm)

Net profit (RHS) YoY (LHS)

CAGR of 18.4%

We forecast a net

earnings CAGR of 18.4%

and revenue CAGR of

13.9% over 2015-17

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57

Feng Tay Enterprise (9910 TT): 8 March 2016

Improving gross and operating margins

Feng Tay had delivered an improving gross margin to 20.5% in 2015 from 19.5% in 2013;

and operating margin of 9.8% in 2015 from 7.6% in 2013, we attribute this to the improving

production effectiveness across its diversified manufacturing sites, favourable raw material

environment and enhancing sales scale, which allow it to improve its operating leverage

and offset the rising labour costs. For 2016, we forecast a gross margin of 20.7% and

operating margin of 10.3%; and for 2017, we forecast a gross margin of 20.9% and

operating margin of 10.8%.

Feng Tay: gross and operating profit margin trends

Source: Company, Daiwa forecast

As shown below, in 9M15, Feng Tay recorded the highest operating-profit margin among

other regional ODM footwear makers, such as Fulgent Sun (9802 TT) and Yue Yuen (551

HK).

Feng Tay: gross margin performance compared with peers

% 2011 2012 2013 2014 9M15

Feng Tay 16.2 18.8 19.5 20.5 20.5

Fulgent Sun 17.7 15.6 15.1 16.0 12.1

Yue Yuen 22.1 22.8 21.7 22.1 22.7

Source: Company, Bloomberg

Feng Tay: operating margin performance compared with peers

% 2011 2012 2013 2014 9M15

Feng Tay 4.7 6.9 7.6 9.4 9.5

Fulgent Sun 8.3 3.8 3.7 5.6 1.6

Yue Yuen 6.2 6.3 5.4 3.5 5.0

Source: Company, Bloomberg

Feng Tay: ROE compared with peers

% 2011 2012 2013 2014 9M15

Feng Tay 17.1 18.9 24.4 30.0 26.0

Fulgent Sun 13.0 6.5 5.2 7.6 1.6

Yue Yuen 12.8 16.3 10.4 7.6 10.1

Source: Company, Bloomberg Note:* 1H15 data

Balance sheet and cash flow

We forecast Feng Tay’s cash position to reach TWD3.1bn (9% of total assets) in 2017,

from TWD2.5bn (9% of total assets) in 2015, while its net debt position should narrow to

TWD225m in 2017, from TWD807m in 2015. Incorporating our capex forecasts of

TWD3.0bn for both years, we look for the company to generate free cash flow (FCF) of

TWD3.0bn for 2016 and TWD4.1bn for 2017. We assume most of the capex will be put

towards the company’s new plants in Indonesia and India, as well as new equipment

procurement. In our view, Feng Tay’s strong FCF would allow the company to maintain a

cash dividend payout ratio of around 70%, for dividend yields of 2.8-3.9% over 2015-17E.

18.4% 16.2%18.8%

19.5% 20.5% 20.5%20.7% 20.9%

5.4% 4.7%6.9%

7.6%9.4% 9.8%

10.3% 10.8%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015E 2016E 2017E

Gross margin Operating margin

We expect the

company’s operating

efficiency to continue

improving

Feng Tay has been

outperforming its peers

on operating margin and

ROE

We forecast Feng Tay’s

net cash position and

FCF to improve over

2016-17

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58

Feng Tay Enterprise (9910 TT): 8 March 2016

Valuation and risks

Strong fundamentals appear to be priced in

Our 12-month target price of TWD176 is based on a fully diluted 2016E target PER of 21x,

which is 30% higher than the 16x average multiple of regional peers Yue Yuen and Fulgent

Sun. In our view, Feng Tay merits a higher PER multiple than its peers because of its

stronger net earnings growth of 18.4% vs. peers’ 14.8% over 2015-17E and superior ROEs

of 35.5% (vs. peers’ 8.5%) for 2016E and 36.0% (vs. peers’ 9.6%) for 2017E, according to

Daiwa and Bloomberg forecasts.

On valuation grounds, we initiate coverage with a Hold (3) rating.

Feng Tay: one-year forward PER bands Fulgent Sun: one-year forward PER bands

Source: Bloomberg, Daiwa forecast Source: Bloomberg

Yue Yuen: one-year forward PER bands Pou Chen: one-year forward PER bands

Source: Bloomberg Source: Bloomberg

Valuation: Feng Tay and its peers

Companies Bloomberg code Rating

Market cap (USDm)

Share price (local curr.)

PER (x) PBR (x) ROE (%) Dividend yield (%)

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

*FENG TAY ENTERPRISE CO LTD 9910 TT Hold 3,227 177 21.1 18 7 6 35.5 36 3.3 3.9

YUE YUEN INDUSTRIAL HLDG 551 HK Not rated 5,933 27.95 12.5 11 1.2 1.2 10.6 11.3 4.3 4.7

FULGENT SUN INTERNATIONAL 9802 TT Not rated 215 53 19.1 13.1 1.2 1 6.5 8 4.9 6.1

POU CHEN 9904 TT Not rated 3,772 41.9 10.4 9.1 1.4 1.2 11.1 13.4 4.3 4.7

Average

15.8 14.0 3.1 2.7 17.5 18.4 4.2 4.9

Source: Bloomberg;*Daiwa forecasts Note: data is based on share prices as at 7 March 2016

Risks to our call

The main risk to our Hold (3) rating on Feng Tay would be weaker- or stronger-than-

expected global sports footwear demand driving up or dragging down the company’s YoY

shipment growth.

Upside risks to our Hold call include: 1) stronger-than-expected global sports footwear

demand, 2) faster-than-expected market-share gains by Feng Tay in terms of its share of

0

50

100

150

200

250

300

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(TWD)

22x

1

1

1

26x

14x

18x

10x

0

10

20

30

40

50

60

70

80

90

100

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(TWD)

25x

1

1

1

30x

15x

20x

10x

0

5

10

15

20

25

30

35

40

45

50

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

(HKD)

14x1

1

1

16x

10x

12x

8x

0

10

20

30

40

50

60

70

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(TWD)

12x1

1

1

14x

8x

10x

6x

We see limited upside

from current premium

valuation

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59

Feng Tay Enterprise (9910 TT): 8 March 2016

Nike’s business or by Nike at the expense of other global sports footwear providers, 3)

stronger-than-expected gross- and operating-margin expansion on favourable raw-material

prices, better scale economies, and operating efficiency, 4) higher-than-expected

depreciation in Asian currencies relative to the USD, and 5) smaller-than-expected rises in

basic labour costs at production sites or higher-than-expected utilisation rates.

Downside risks to our Hold call include: 1) softer-than-expected global sports footwear

demand, 2) loss of market share by Feng Tay in terms of its share of Nike’s business or by

Nike to other global sports footwear providers, 3) weaker-than-expected gross- and

operating erosion due to unfavourable raw-material prices and higher-than-expected

operating expenses, 4) Lower-than-expected depreciation in Asian currencies relative to

the USD, and 5) higher-than-expected rises in basic labour costs at production sites or

lower-than-expected utilisation rates.

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60

Feng Tay Enterprise (9910 TT): 8 March 2016

Appendix

Company background

Feng Tay was established by Mr Chiu-Hsiung Wang in July 1971 as a trading company

specialising in rubber canvas shoes. It started producing sports shoes in 1973 and began

cooperating with Nike 4 years later. Since the late 1980s, Feng Tay has expanded its

global production network to China (1988), Indonesia (1992), Vietnam (1999) and India

(2007), with the goal of lowering its labour costs and diversifying its country risk.

In 1999, the company began to produce casual shoes, outdoor shoes and snowshoes. It

further broadened its product portfolio in the mid-2000s by starting to make golf and soccer

balls, ice hockey helmets and other sports equipment.

Feng Tay was listed on the Taiwan Stock Exchange in February 1992. Its management

team has an average of 30 years’ experience in the industry.

Feng Tay: management team (January 2016)

Management Position Background and experience

Chiu-Hsiung Wang Chairman Founder of Feng Tay. Mr Wang has more than 45 years’ experience in the industry.

Chien-Hung Wang Group president Mr Wang joined Feng Tay as the manager of moulding department. He has over 20 years’ industry experience.

Chia-Chi Hsu General manager in R&D department

Mr. Hsu has worked for Nike (R&D manager), K-Swiss (Country manager). After that, Mr. Hsu joined Feng Tay as manager of production, technology and R&D department and accumulated over 30 years’ experience in the industry.

Chao-Chi Chen General manager in the first department

Mr. Chen is responsible for sports shoe business (Nike) and has over 20 years’ industry experience.

Chien-Jung Wang General manager in the second department

Mr. Wang is responsible for casual shoe, balls and sport equipment businesses and has over 15 years’ industry experience. .

Li-Chin Chen CFO/spokeswoman Mrs. Chen is responsible for finance and accounting departments and she has over 20 years’ experience in the industry.

Source: Company

Feng Tay : major shareholders (as of 3 March 2016)

Holder Share (%)

Chiu-Hsiung Wang 11.11

Mei-Huei Liu Wang

Hui-Ling Chen

Shih-Jung Chen

Tsai-Yun Wang Chen

Chien-Hung Wang

Chien-Jung Wang

Li-Chuan Wang

10.87

6.47

5.42

5.15

2.80

2.80

2.68

Source: Bloomberg

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Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected]

Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Brian LAM (852) 2532 4341 [email protected]

Transportation – Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected]

Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected]

Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

Kevin JIN (82) 2 787 9168 [email protected]

Small/Mid Cap

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Christie CHIEN (886) 2 8758 6257 [email protected]

Banking; Insurance (Taiwan); Macro Economics (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected]

Banking; Property and REITs

Shane GOH (65) 64996546 [email protected]

Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

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Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

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(973) 17 534 452 (973) 17 535 113

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(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302,Kerry Center,1 Guanghua Road,Chaoyang District,

Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,

Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

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(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. 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 Phil ippines 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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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