Taiwan Consumer Discretionary Navigating through cyclical headwinds Consumer Discretionary | Sector Review Figure 1: We estimate Taiwan Apparel and Footwear’s sales growth to accelerate to 32% in 2H22, partly off a low base for sports-centric textiles OEMs Source: Company data, Credit Suisse estimates Priced for substantial earnings downside. Year to date, Taiwan consumer discretionary stocks under CS coverage corrected by over 27% (or underperformed Taiex by 15%). We believe such a large share price correction for the sector was mainly triggered by an earlier and much more conservative guidance by apparel OEMs earlier this year. At the same time, Nien Made (window covering) also de-rated on concern over slower US housing markets. We estimate current valuations for apparel OEMs and Nien Made reached prior cycle trough, which implied for more than 20% earnings downside in the next 12-18 months. 2H22 slowdown may be better than feared. While there could still be lingering concern on consumer demand into 2H22-23, we believe earnings slowdown in 2H22 could be less than feared as also evidenced by incrementally better corporate guidance in recent weeks. Importantly, we believe solid pricing, especially for high-end apparel makers, and the ability for some OEMs to pass through some of the higher costs, should mitigate some of the pressure into 2H22 with better margin support. In addition, Nien Made also recently hiked prices again for its custom-made products, to pass-through higher cost pressure. We estimate most sports-centric textiles OEMs and Nien Made to see better earnings momentum into 3Q21, partly off a lower base last year and sequentially better margins. ...with favourable FX to provide additional tailwinds. In addition, currency fluctuations could have large earnings swings to the sector, given most companies under our coverage have high USD revenues (70%-95%) with most non-material cost in EM currencies. We estimate every 1% increase in USD (against TWD) could boost operating profits by 2-3%. With USD appreciation against TWD to accelerate from March, we expect favourable FX impact to sales/margin to be more visible from 2Q22. Separately, while it is not factored into our current forecasts currently, there has been some discussion on potential cuts of US tariff on China imports (Nien Made), which could be a potential catalyst if materialized. Accumulate selectively. We would recommend investors to accumulate quality names post correction, especially those with better pricing, high leverage to stronger USD, and lower valuation. Our top picks are Feng Tay (solid 2H22 with lower valuation), Eclat (expectation reset with incrementally better 2H22 outlook), and Nien Made (priced for significant U.S. housing slowdown; beneficiary of potential tariff removal), which we expect could trade better into stronger earnings momentum in 3Q22. 20%17%0%0%10%11%-5%11%19%32%11%-10%0%10%20%30%40%201420152016201720182019202020211H22E2H22E2023ETaiwan Apparel and Footwear Sector's sales growth6 June 2022 Equity Research Taiwan (Chinese Taipei) DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Research Analysts Chien Po Huang 886 2 2715 6342 chien-po.huang@credit-suisse.com Chung Hsu, CFA 886 2 2715 6362 chung.hsu@credit-suisse.com 6 June 2022 Taiwan Consumer Discretionary 2 Focus chart and table Figure 2: We estimate Taiwan Apparel and Footwear Sector is currently trading at 17-18x, at trough valuation (vs previous inventory destocking cycle in 2016-17) Figure 3: Nien Made is currently trading at 13-14x forward P/E, close to the valuation trough of prior rate hike cycle, but against much more favourable FX movements Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse estimates Figure 4: Stronger USD (against TWD)—for most companies under CS coverage with high USD revenues (70%-95%) and most non-material cost in EM currencies—could provide additional support to margin Figure 5: Monthly earnings revisions for Eclat / Nien Made turned positive in May, on improving guidance for 2H22 and better-than-expected margin (partly due to FX tailwinds) Source: Company data, Credit Suisse estimates Source: Reuters, Credit Suisse estimates Figure 6: Valuation table for Taiwan Consumer Discretionary Sector Source: Company data, Credit Suisse estimates 10.015.020.025.030.035.0Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19Sep-19Jan-20May-20Sep-20Jan-21May-21Sep-21Jan-22May-22Taiwan Textiles Se