1H17 preview: More positive on US exporting ODMs (FT and Eclat)

Deutsche Bank Markets Research Asia China Consumer Textiles & Apparel Industry Greater China Sporting Goods Date 4 August 2017 Forecast Change 1H17 preview: More positive on US-exporting ODMs (FT and Eclat) Buy FT & Eclat into sustainable upcycle, Anta for strong retail sales; avoid Giant ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. John Chou Research Analyst (+852) 2203 6196 john.chou@db.com Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Key Changes Company Target Price Rating 9910.TW 150.00 to 170.00(TWD) - 1476.TW 420.00 to 465.00(TWD) - 3813.HK 2.20 to 2.40(HKD) - 0551.HK 41.00 to 45.00(HKD) - 2313.HK 57.00 to 64.00(HKD) - Source: Deutsche Bank Top picks Feng Tay (9910.TW),TWD131.50 Buy Eclat Textile (1476.TW),TWD360.00 Buy Anta (2020.HK),HKD26.25 Buy Shenzhou (2313.HK),HKD51.95 Buy Giant Manufacturing (9921.TW),TWD151.50 Sell Source: Deutsche Bank The upcoming results could be generally positive for share prices. We believe US-exporting ODMs have exited painful adjustments & should enter a sustainable upcycle, with multiple structural drivers. We continue to recommend buying FT (Feng Tay) and Eclat into the results. We view Anta as a better proxy to enjoy accelerating consumption in China vs. Li Ning and Pou Sheng. M&A analysis suggests Asics could be an ideal candidate for Anta. We expect SZ (Shenzhou) to receive compensation from Nike before Flyknit capacity utilization recovers in 2H18, and disagree with the bears’ arguments. For Giant, its challenge may extend beyond revenue to utilization and margins. Upcoming results: in general positive, ODMs will likely outperform For ODMs: we expect generally good results from Eclat, YY (Yue Yuen) and SZ (mainly strong margins). Although FT has reported preliminary 2Q17 profit, we believe its monthly profit releases in 2H17 will drive up consensus earnings forecasts. We expect more positive comments on US demand in 2H17 and 2018 from management. For domestic sportswear companies: Anta’s 2Q17 retail sales may surprise consensus to the upside, boosting market confidence in its 2020 targets. Li Ning’s channel inventory and 2018 order book targets are likely positive for the share price. Pou Sheng: we see positive signs in 2Q17 operating margin, but still lack conviction in our forecasts. Giant: demand weakness may translate into capacity underutilization and hurt its margins. We have concerns about the financial standing of its wholesalers in China. Incremental on ODMs: more positive on US-exporting ODMs FT: contrary to bearish investors, we expect FT’s India expansion and China automation to boost operating profit significantly. Eclat’s growth sustainability may surprise the market to the upside. Its garment growth may beat the market’s expansion in the next 18 months due to Eclat’s heavy efforts in building a true vertically-integrated platform. SZ: Nike’s compensation to SZ on Flyknit capacity underutilization is likely an upside surprise. Textile operation remains very solid. YY’s improvement in ODM profitability will likely sustain into 2018E due to a strengthened supply chain in Vietnam. Incremental on domestic sportswear: Anta M&A analysis Anta: among the potential M&A targets that could be seen as well suited to Anta’s often mentioned M&A strategy, we find Asics the most suitable: (1) financial risk-reward on the investment is likely favorable to Anta, (2) the 2020 Tokyo Olympics, Asics’ huge potential in China and its relationship with YY makes Asics an ideal fit for Anta’s strategy. LN’s unique competitive edge in e-commerce should support its 2017E profit. Management’s initiatives to create omni-channel and enhance the supply chain should further boost its e-commerce capability. Valuation and risks to our positive industry view We value the sporting goods sector using DCF, as we expect investors to focus on the sector’s long-term value creation. For WACC, we follow DB’s view on RFR and ERP while assigning a beta between 0.9 to 1.3 and terminal growth of 1-2%. Downside risks: weaker cyclical recovery, weaker innovation, sports segmentation and e-commerce failing to drive sector growth. Upside risks (Giant): China banning bike sharing and/or allowing sports e-bikes. Distributed on: 03/08/2017 2