Greater China Sporting Goods

Deutsche Bank Markets Research

Asia

China

Consumer

Industry

Greater China Sporting Goods

Date

21 February 2017

Recommendation Change

FY16 preview: Time to buy US-exporting ODMs; upgrading YY to Buy Buy Eclat, YY, FT & PS; stay cautious into Anta’s 2H16 results

________________________________________________________________________________________________________________

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) 057/04/2016.

John Chou

Research Analyst

(+852 ) 2203 6196

[email protected]

Anne Ling

Research Analyst

(+852 ) 2203 6177

[email protected]

Key Changes

Company Target Price Rating

0551.HK 35.00 to 38.00(HKD)

Hold to Buy

1476.TW 435.00 to 430.00(TWD)

-

2313.HK 62.00 to 56.00(HKD)

-

9910.TW 170.00 to 156.00(TWD)

-

2020.HK 24.00 to 26.50(HKD)

Buy to Hold

2331.HK 6.20 to 5.90(HKD) -

Source: Deutsche Bank

Top picks

Yue Yuen (0551.HK),HKD26.95 Buy

Eclat Textile (1476.TW),TWD309.00 Buy

Feng Tay (9910.TW),TWD130.00 Buy

Pou Sheng (3813.HK),HKD1.94 Buy

Source: Deutsche Bank

The upcoming earnings could be mixed for the sporting goods space, with YY (Yue Yuen) likely delivering a more meaningful beat. Having said that, we believe the results and management comments will improve the sentiment for US-exporting ODMs. We thus recommend buying Eclat, FT (Feng Tay) and we upgrade YY to Buy. PS’s 2017 growth may surprise to the upside, but its 4Q16 results may miss. Any weakness post results should be a buying opportunity. We expect the market to digest emerging uncertainties on SZ (Shenzhou) and LN (Li Ning). We view Anta’s multi-brand strength as priced-in, with growing uncertainties on the Anta Adult orderbook. We thus downgrade it to Hold.

Upcoming results: be selective; US recovery is our best theme For ODMs: YY’s 4Q16 earnings may beat market expectations, while Eclat and FT could be mixed. Nevertheless, we expect the US-driven exporters to deliver positive comments regarding a US market recovery. SZ’s 2H16 results should be in line, but we anticipate more investor questions on its 2017 growth outlook. For domestic sportswear companies: Anta’s 2H16 earnings are likely to beat consensus, thanks to heavier inventory build by wholesalers during 2H16. We lack conviction on LN’s 2H16 earnings but expect positives including off-line and e-commerce sell-through growth. PS’s 4Q16 earnings may miss due to unsuccessful discount in November (highlighted previously).

Incremental to our view: higher conviction on US-exporting ODMs Eclat will likely add a new e-commerce private label client in 3Q17. Our recent conversations with Eclat’s private competitors show the strong demand for jacquard fabric and Eclat’s dominant position. YY will likely benefit from Adidas’s order shift from Apache. Our profit analysis uncovers YY’s significant non-recurring loss in 2016 and potential to recover. FT’s anchor basketball shoes have finally entered mass production. This, along with better demand for the Kobe Bryant series, will likely boost FT’s shares. PS should demonstrate stronger-than-expected momentum in 2017. We also detected the first breakeven of PS’s e-commerce business in 2016.

Some issues the markets need to digest SZ: 2017 gross margin pressure and a slowdown in Flyknit upper orders may lead to uncertainties. But we argue the negatives are temporary by nature. LN’s 2017 expenses outlook may be higher than some investors’ expectation. But we view the expenses as necessary investments to optimize its channels. Also, LN’s profitable e-commerce business shouldn’t be ignored by investors. Anta: we estimate a slight rise in inventory levels. Although the current level (5-6 months) is far from the crisis level (over 10 months), we anticipate Anta’s wholesalers to reduce orders from the 4Q17 sales fair, to take a breather.

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 of 0.9 to 1.3 and terminal growth of 1-2%. Downside risks: weaker cyclical recovery, weaker innovation, sports segmentation ad e-commerce failing to drive sector growth. Upside risks (Anta): faster destocking by wholesalers, stronger performance by new brands.

Distributed on: 20/02/2017 22:57:48 GMT

21 February 2017

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Page 2 Deutsche Bank AG/Hong Kong

2H16 /4Q16 preview

Our best ideas and what’s likely to drive the share price

Idea 1: Buy Eclat now New clients: likely including a private activewear label by a major e-

commerce operator (Figure 17).

New products in robust demand: private competitors’ interviews unveil the strong potential of jacquard (Figure 18).

Idea 2: Buy Yue Yuen now; upgrading it to Buy Painful plant shift finally done: The China plants profit analysis points

to significant room for improvement (Figure 31).

Adidas order shift boosts revenue: Apache’s order loss (Figure 39).

Idea 3: Buy Feng Tay now Lebron James Signature has started mass production and Kobe Bryant

line is surprisingly strong (Figure 50).

Nike’s recovery (Figure 52).

Idea 4: Buy Pou Sheng, any weakness post results should be seen as buying

opportunity 2017 revenue growth to outpace market expectation (Figure 65).

In-house e-commerce likely turned profitable in 2016 (Figure 66).

Concerns on accounting mistreatment soon removed.

Shenzhou: non-recurring negatives to drive Buy opportunities Gross margin pressure from once-every-three-year wage hike (Figure

80).

Flyknit order slowdown temporary (Figure 82).

Li Ning: constructively increasing 2017 expenses Investment in channels (Figure 93).

Profitable e-commerce business (Figure 96).

Anta: market may need to digest Anta Adult orderbook; downgrading to Hold Anta Adult wholesalers may need to destock (Figure 103).

Multi-brand strategy performing well (Figure 109).

Figure 1: Top picks – US-exporting ODMs (Eclat, Yue Yuen, Feng Tay), also Pou Sheng

Name Ticker Rating Mkt Cap Close PX Target PX Upside Methodology Revenue mix (2015) 17E PER 17E EPS Dividend

(USDbn) (local) (local) YoY Yield

Eclat 1476 HK Buy 2.5 309 430 39% DCF (25x PER*) Major sports brands (30%)

Private label (30%)

18 23% 3%

Yue Yuen 551 HK Buy 5.7 26.95 38 41% DCF (15x PER*) ODM: NKE (27%), ADS (23%) 11 9% 6%

Feng Tay 9910 TT Buy 2.3 130 156 20% DCF (19x PER*) NKE (81%, basketball shoes) 16 15% 4%

Pou Sheng 3813 HK Buy 1.3 1.94 3.1 60% DCF (14x PER*) Retail (80%), Wholesale (20%) 9 36% 2%

Shenzhou 2313 HK Buy 8.6 47.7

56 17% DCF (21x PER*) Uniqlo (30%), NKE (30%)

ADS (22%)

19 13% 3%

Li Ning 2331 HK Buy 1.5 5.15 5.9 15% DCF (21x PER*) Wholesale (55%), Retail (34%) 17 73% 2%

Anta 2020 HK Hold 8.1 25 26.5 6% DCF (21x PER*) Anta brand (83%), Fila (17%) 19 21% 3%

Source: Deutsche Bank estimates, Bloomberg Finance LP, Company data *2017 PER, Using closing price as of 20 February 2017

21 February 2017

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Deutsche Bank AG/Hong Kong Page 3

Figure 2: Revisions summary and how Deutsche Bank differs from Bloomberg Finance LP consensus

Name Ticker Close PX Rating change Target PX change EPS revision DBe earnings vs. consensus

(local) (local) 2016 2017 2018 2016 2017 2018

Eclat 1476 HK 309 Buy Maintain 430 -1% -3% -5% -1% -2.2% 4.4% 13.6%

Yue Yuen 551 HK 26.95 Buy U/G from

Hold 38 9% 7%. 6% 11% 1.2% 5.2% 7.8%

Feng Tay 9910 TT 130 Buy Maintain 156 -8% 6% -3% -2% 0.0% 4.0% 7.4%

Pou Sheng 3813 HK 1.94 Buy Maintain 3.1 0% -2% -3% -4% 2.7% 8.6% 5.3%

Shenzhou 2313 HK 47.7 Buy Maintain 56 -10% 0% -6% -4% 1.2% -4.6% -2.7%

Li Ning 2331 HK 5.15 Buy Maintain 5.9 -5% -8% -12% -8% 45.4% 7.3% 15.0%

Anta 2020 HK 25 Hold D/G from

Buy 26.5 10% 7% 8% 7% 3.4% 5.7% 5.6%

Source: Deutsche Bank estimates, Bloomberg Finance LP, using closing price as of 20 February 2017

Figure 3: Investment thesis: focus on ODM and US recovery into the results

Name Ticker Rating Investment Thesis

Eclat 1476 TT Buy (1) New clients (e-commerce private label), (2) Jacquard fabric in good demand, (3) New athleisure more positive to Eclat

Yue Yuen 551 HK Buy (1) Easing pain from plant relocation, (2) Taking orders from ADS’s second largest shoe maker, (3) Pou Sheng strong

Feng Tay 9910 TT Buy (1) Signature basketball shoes overhang removed, (2) Best proxy to play the Nike recovery

Pou Sheng 3813 HK Buy (1) Accelerating sales YoY in 2017, (2) In-house e-commerce turning profitable, (3) Governance overhang soon remove

Shenzhou 2313 HK Buy (1) Part of the gross margin pressure from one-off wage hikes, (2) Flyknit order slowdown temporary

Li Ning 2331 HK Buy (1) Increase expenses investment in channels in 2017, (2) e-commerce a profit driver

Anta 2020 HK Hold (1) Anta Adult wholesalers may need to destock, (2) Multi-brand & multi-channel strategy performing well. Source: Deutsche Bank estimates

2H16 / 4Q16 Preview

Figure 4: ODMs: we view Yue Yuen most likely to deliver an earnings beat

ODM (textile & footwear)

Impact to

Name Ticker shr PX Sales GM OP / EBIT NP Sales GM OP / EBIT NP Sales GM OP / EBIT NP

Eclat 1476 TT (TWDmn) In-line 6,845 28.7% 1,349 1,125 6,986 28.8% 1,331 1,203 -2% -7 bps 1% -6%

Debated outlook, we forecast market to pay more attention to its 2H17 outlook, which will be communicated in the upcoming analyst meeting (TBD)

Impact to


Yue Yuen 551 HK (USDmn) Positive 2,203 26.3% 129 115 2,216 25.0% 115 109 -1% 125 bps 12% 5%

Debated outlook, share price didn’t react to 3Q16 clean beat.

We forecast more positive sentiment if YY beat in 4Q16.

Impact to


Shenzhou 2313 HK (HKDmn) In-line 8,377 31.8% 1,852 1,582 8,368 31.7% 1,809 1,545 0% 9 bps 2% 2%

We forecast market to pay more attention to its 2017 outlook, which will be communicated in the upcoming analyst meeting (TBD)

Feng Tay (9910 TT) already reported preliminary 2016 revenue, operating income and pre-tax profit through monthly reporting

4Q16 DB 4Q16 consensus DB vs. consensus


2H16 DB 2H16 consensus DB vs. consensus

Source: Deutsche Bank estimates, company data, Bloomberg Finance LP consensus

21 February 2017

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Figure 5: Sportswear: we expect solid earnings and operation data from Anta, but 2017 orderbook outlook may see

risks. We forecast positive operation data from Li Ning

Sportswear (domestic brands & distributors)

Impact to


Anta 2020 HK (CNYmn) Positive 7,637 47.5% 1,785 1,339 7,204 47.8% 1,645 1,257 6% -27 bps 9% 7%

Strong earnings growth in 2H16 likely well-communicated with investors.

Impact to

shr PX +ve / -ve DB Consen. Previous +ve / -ve DB Consen. Previous +ve / -ve DB Consen. Previous*

Anta 2020 HK OP data Mixed +ve +HSD~LDD +HSD +LDD =ve +LSD~MSD +LSD~MSD +MSD -ve Guide dow n No change +MSD~HSD

We see more downside to 4Q17 orderbook YoY

*meaning previous target

Impact to


Li Ning 2331 HK (CNYmn)Positive (lack of

conviction)4,496 47.0% 291 415 4,461 45.6% 253 250 1% 138 bps 15% 66%*

We don't have conviction on the 2H16 earnings (due to the vast moving parts), but we remain confident in the turnaround trend

*our forecasts include DHS disposal & revaluation gains

Impact to

shr PX +ve / -ve DB Consen. Prev. +ve / -ve DB Consen. Prev. +ve / -ve DB Consen. Prev.*

Li Ning 2331 HK OP data Positive +ve +HSD~LDD +MSD~HSD +HSD +ve +HSD +MSD +HSD =ve no change n.a. +L-M teen

We expect acceleration in sellthrough driven by (1) off-line and (2) e-commerce

*meaning previous target

Impact to


Pou Sheng 3813 HK (CNYmn) Negative 4,114 34.7% 133 215 4,341 36.3% 146 195 -5% -162 bps -9% 10%

2017 consensus forecasts may be somewhat stall:

PS's reported 4Q16 revenue resulted lower than the headline consensus, but actually beat market's latest expectation (evidenced by share price rally).



4Q16 Sellthrough YoY 3Q17 Orderbook YoY 2017 Orderbook YoY


4Q16 SSSg 3Q17 Orderbook YoY 2017 Orderbook YoY

Source: Deutsche Bank estimates, company data, Bloomberg Finance LP consensus

Valuation tools

Figure 6: Valuation comps: textile and footwear ODMs

Name Ticker PX_Last Market Cap DB rating

(local cur.) (US$mn) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

Textile

Shenzhou 2313 HK 47.7 8,598 Buy 21.0 18.6 25% 13% 4.1 3.8 22.2% 24.3% 3.4% 3.3%

Eclat 1476 TT 309 2,699 Buy 22.8 18.4 -10% 23% 5.5 4.8 26.3% 29.3% 3.4% 3.0%

Texwinca 321 HK 5.15 917 Hold 10.1 13.3 36% -39% 1.9 1.4 18.5% 11.3% 8.1% 7.5%

Best Pacific 2111 HK 6.1 809 NR 14.2 12.0 28% 18% 3.1 2.7 23.1% 23.7% 2.8% 3.2%

Makalot 1477 TT 123 826 NR 13.3 16.1 -12% -17% 2.9 2.7 18.1% 17.5% 6.2% 5.0%

FENC 1402 TT 27.25 4,736 NR 24.3 19.2 -30% 27% 0.8 0.7 3.1% 3.9% 3.3% 3.8%

Formosa Taffeta 1434 TT 31.2 1,707 NR 15.3 13.5 22% 13% 1.0 1.0 6.3% 7.1% 4.6% 5.3%

Youngone 111770 KS 30100 1,163 NR 10.2 9.8 1% 4% 1.1 1.0 10.7% 10.2% 0.7% 0.7%

Hansae 105630 KS 25100 876 NR 14.3 13.2 -23% 8% 2.1 1.8 15.4% 15.0% 1.1% 1.2%

Pacific 1382 HK 8.75 1,631 NR 12.7 12.3 -7% 3% 3.8 3.8 30.0% 31.0% 8.2% 8.2%

Luthai 200726 CH 9.26 1,435 NR 9.7 8.6 13% 13% 1.0 0.9 10.6% 11.0% 6.9% 7.7%

Texhong 2678 HK 11.84 1,396 NR 8.3 7.6 89% 9% 2.0 1.7 25.7% 21.1% 3.6% 3.9%

Average 18.1 15.8 9% 12% 2.8 2.6 17.3% 18.0% 4.0% 4.1%

Footweaer ODM

Feng Tay 9910 TT 130 2,819 Buy 17.5 16.1 8% 8% 5.9 5.3 34.9% 37.8% 3.8% 4.0%

Yue Yuen 551 HK 26.95 5,726 Buy 11.6 10.6 20% 9% 1.2 1.2 10.1% 10.7% 5.2% 5.7%

Stella 1836 HK 10.78 1,103 NR 13.5 11.8 -33% 15% 1.1 1.1 8.1% 9.3% 7.4% 7.6%

Average 13.5 12.3 10% 10% 2.6 2.4 17.1% 18.5% 5.1% 5.4%

PE EPS YoY PB ROE Div. Yield

Source: Deutsche Bank estimates, Bloomberg Finance LP Note: companies under Deutsche Bank coverage use Deutsche Bank estimates; other companies use Bloomberg Finance LP consensus. To determine which companies are under Deutsche Bank coverage, please refer to column “DB rating.” Using closing price as of 17 February 2017.

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Figure 7: Valuation comps: sportswear brands and distributors

Name Ticker PX_Last Market Cap DB rating

(local cur.) (US$mn) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

China Sportswear Brands & Distributors

Anta 2020 HK 25 8,061 Hold 22.5 18.5 21% 21% 5.9 5.4 25.2% 27.8% 2.7% 3.2%

Li Ning 2331 HK 5.15 1,443 Buy 21.2 17.4 >100% 73% 1.5 2.1 17.1% 19.0% 2.0% 2.5%

Belle 1880 HK 5.1 5,542 Buy 8.9 10.1 -10% -12% 1.7 1.6 17.2% 14.6% 4.9% 5.9%

Pou Sheng 3813 HK 1.94 1,334 Buy 11.9 8.8 66% 36% 1.5 1.3 13.3% 16.3% 0.0% 2.2%

XTEP 1368 HK 3.58 1,024 NR 10.0 9.0 9% 11% 1.4 1.3 14.1% 14.6% 5.8% 6.5%

CNDX 3818 HK 1.49 1,063 NR 8.6 10.5 5% -18% 0.7 0.7 8.7% 7.2% 6.8% 5.8%

361 Degrees 1361 HK 3.08 821 NR 10.9 9.5 0% 15% 1.0 0.9 9.0% 9.9% 5.8% 4.8%

Average 15.8 14.0 11% 14% 3.3 3.1 19.3% 19.9% 3.6% 4.3%

Global SPA

Inditex ITX SQ 31.245 103,427 Hold 33.8 30.3 15% 12% 8.5 7.8 26.3% 26.8% 2.2% 2.5%

H&M HMB SS 244 45,329 Sell 21.7 19.6 -11% 10% 6.6 6.1 31.2% 32.4% 4.5% 4.5%

Fast Retailing 9983 JP 34990 32,825 Hold 71.2 28.1 -56% 154% 6.0 5.2 7.0% 18.9% 1.1% 1.3%

Average 37.6 27.2 -4% 37% 7.6 6.9 24.0% 26.8% 2.6% 2.8%

Global Sports Brands

Lululemon LULU US 66.73 9,147 Hold 35.8 31.3 -1% 14% 9.1 6.8 24.8% 24.7% 0.0% 0.0%

Under Armour UA US 19.75 9,082 Hold 34.0 n.a. 10% n.a. 4.3 3.9 14.0% 8.7% 0.0% 0.0%

Adidas ADS GR 148.9 33,087 Buy 32.0 25.3 31% 26% 5.0 4.8 17.8% 19.6% 1.4% 1.6%

Amer Sports AMEAS FH 22.4 2,820 Buy 19.0 16.2 9% 17% 2.6 2.4 13.0% 14.8% 3.1% 3.0%

Puma PUM GY 299.75 4,802 Buy 71.9 35.9 68% 100% 2.6 2.5 3.8% 7.1% 0.3% 0.6%

Skechers SKX US 26.28 4,167 NR 16.7 14.9 5% 13% 2.6 2.2 16.6% 15.5% 0.0% 0.0%

VF VFC US 52.68 21,794 NR 16.8 n.a. 3% n.a. 4.3 4.4 25.1% 28.5% 3.1% 3.1%

Columbia COLM US 56.81 3,965 NR 20.9 20.2 11% 3% 2.5 2.3 13.0% 12.0% 1.4% 1.5%

Nike NKE US 56.75 93,892 Buy 26.3 24.2 17% 9% 8.1 7.9 30.1% 32.5% 1.2% 1.3%

Average 27.0 24.8 16% 13% 6.7 6.5 25.6% 27.3% 1.3% 1.4%

Global Apparel Brands

RL RL US 78.39 6,445 NR 12.3 n.a. -19% n.a. 1.8 1.8 13.8% 8.8% 2.8% 2.9%

GAP GPS US 24.47 9,761 Hold 10.1 12.1 -14% -17% 4.0 3.3 33.3% 23.7% 4.2% 4.2%

A&F ANF US 12.2 826 Sell 10.9 n.a. -27% n.a. 0.7 0.7 5.8% -0.9% 7.3% 7.4%

Guess GES US 13.02 1,098 NR 26.2 19.8 -50% 32% 1.1 1.1 5.4% 6.3% 7.8% 8.0%

Average 11.9 12.9 -19% -12% 2.9 2.5 23.4% 16.2% 4.1% 4.1%

Average 32.0 25.8 3% 27% 7.0 6.5 24.5% 26.3% 2.2% 2.4%

PB ROE Div. YieldPER EPS YoY

Source: Deutsche Bank estimates, Bloomberg Finance LP Note: companies under Deutsche Bank coverage use Deutsche Bank estimates; other companies use Bloomberg Finance LP consensus. To determine which companies are under Deutsche Bank coverage, please refer to column “DB rating.” Using closing price as of 17 February 2017.

Figure 8: Eclat: consensus PER (12-month forward) Figure 9: Yue Yuen: consensus PER (12-month forward)

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Source: Deutsche Bank, Bloomberg Finance LP


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Figure 10: Feng Tay: consensus PER (12-month forward)

Figure 11: Pou Sheng: consensus PER (12-month

forward)

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Figure 12: Shenzhou: consensus PER (12-month forward) Figure 13: Li Ning: consensus PER (12-month forward)

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Figure 14: Anta: consensus PER (12-month forward)

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Eclat (1476 TT): All about product cycles; Buy

Stock drivers

1. Changing athleisure/functional sports product cycle will be even more

positive for Eclat We don’t think the athleisure trend is fading, but growth is shifting from

penetration to differentiation. Low-end athleisure “copy cats” will likely suffer, but high-end innovative players should benefit. Evidence:

(1) Checks suggest global Lycra (high-end elastic fiber) demand will grow by 8-10% in 2017 (vs. 10%/8% in 2015/2016).

(2) US synthetic knitted trouser import ASP continues to increase (Figure 15). Taiwan knitted stretchable fabric export ASP continues to increase as well.

Figure 15: US import ASP grew in 2016: low end suffers

while high end thrives

Figure 16: Same trend seen for Taiwan knitted

stretchable fabric export prices

-30%

-20%

-10%

0%

10%

20%

30%

40%

-10%

-5%

0%

5%

10%

15%

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

US import ASP YoY: man-made fiber trouser (men & women

combined) (LHS)

Import volume YoY (RHS)

"Copy cats" flooding the market

-15%

-10%

-5%

0%

5%

10%

15%

1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16

TW export ASP YoY: knitted fabric with Spandex content of

over 5%

Source: Deutsche Bank, US Customs Source: Deutsche Bank, Taiwan Customs

(3) Innovative brands like Lululemon continue to outperform. The Lululemon CEO said during the ICR conference that “[when] we look[ed] at December as a whole, we were really pleased…we saw really strong full-price selling”.

Eclat’s recent investments in jacquard fabric and digital printing are aimed at monetizing brands’ demand for innovation.

2. New clients Eclat is reducing its exposure to low-end private label clients. We can

already see the positive impact on the gross margin.

Eclat is embracing a new breed of private label (Figure 17). The company said it will add three new clients in 2017. We expect at least one of them to be private activewear label by a scaled e-commerce operator since the company is reducing its exposure to low-end private label clients. The

21 February 2017

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three new clients combined should contribute 15-20% of Eclat’s revenue in 2018, according to public company guidance.

At the same time, Eclat’s leading sports clients are buying more innovative products; a clear example is Under Armour.

Figure 17: Shifting client mix to match the new industry trends

0%

10%

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50%

60%

70%

80%

90%

100%

2015 2016 2017 2018

Lululemon

Nike

Under Armuor

Other sports brands

New clients (2016)

Other private label

Source: Deutsche Bank estimates, company data

3. New products Jacquard stretchable fabric capacity is scarce: We recently interviewed six

of Eclat’s direct competitors (Yue Yuang, Rui Yi, Yi Feng, Little King, Ecoinn and FENC). We were surprised that only one of them (Little King) has body-mapping jacquard stretchable fabric capability.

Eclat’s jacquard mass-shipment delay is NOT because of demand but product design complexity. We continue to believe jacquard fabric will account for 20% of fabric output value in 2H17 (from high-single-digit PPT in 1H17).

Jacquard stretchable fabric could represent 50% of Eclat’s revenue by 2020 (Figure 18; we assume jacquard is 14% of the total knitted stretchable market and Eclat has a 70% market share).

Figure 18: We estimate jacquard to be 14% of total

knitted stretchable fabric market by 2020

Figure 19: Jacquard can represent 50% of Eclat’s fabric

output (assuming it holds 70% market share in jacquard)

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200720082009201020112012201320142015 16E 17E 18E 19E 20E

Jacquard revenue (LHS)

Others (single jersey) revenue (LHS)

Jacquard as a % of total (RHS)

(USDbn)

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Jacquard revenue (LHS)

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Jacquard as a % of total (RHS)

(USDbn)

Source: Deutsche Bank estimates, US Customs, Euromonitor Source: Deutsche Bank estimates, US Customs, Euromonitor

21 February 2017

Consumer



Line of Thinking

Figure 20: Eclat’s share price Figure 21: Eclat consensus earnings revision

2

102

202

302

402

502

602

Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17

Share price

U/G to

Buy

Initiate

with Sell

12

14

16

18

20

22

24

26

10

12

14

16

18

20

22

24

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

2016 consensus EPS (LHS) 2017 consensus EPS (RHS)


Source: Deutsche Bank, Bloomberg Finance LP consensus

We initiated with Sell due to (1) saturating product demand (single

jersey) and more competition; and (2) US over-inventory (especially by

private labels).

Our upgrade to Buy was wrong on timing, as we underestimated the

inventory digestion in the US. But we still have conviction in our Buy

thesis on (1) cyclical recovery and (2) new products & new clients.

We believe 2H17 will be the inflection point for the aforementioned

drivers to be reflected in Eclat’s financials.

Earnings revisions and DBe vs. consensus

Figure 22: Earnings revisions: cutting 2017 outlook to factor in slower-than-expected recovery in 1H17

2016E 2017E 2018E

(TWD mn) New Old Diff New Old Diff New Old Diff

USD-TWD FX 32.3 32.4 -0.3% 33.3 32.9 1.3% 34.0 33.0 3.0%

Revenue 24,525 25,039 -2.1% 27,854 28,887 -3.6% 33,663 33,872 -0.6%

Gross Profit 6,882 7,042 -2.3% 8,026 8,347 -3.8% 9,922 9,989 -0.7%

Op.Income 4,549 4,663 -2.4% 5,499 5,773 -4.7% 6,960 7,042 -1.2%

Recur.NP 3,652 3,747 -2.5% 4,507 4,731 -4.7% 5,704 5,771 -1.2%

Recur. EPS (TWD) 13.58 13.93 -2.5% 16.76 17.59 -4.7% 21.21 21.45 -1.2%

Gross Margin (%) 28.1% 28.1% -0.1% 28.8% 28.9% -0.1% 29.5% 29.5% 0.0%

Op. Margin (%) 18.5% 18.6% -0.1% 19.7% 20.0% -0.2% 20.7% 20.8% -0.1%

Recur. Net Margin (%) 14.9% 15.0% -0.1% 16.2% 16.4% -0.2% 16.9% 17.0% -0.1% Source: Deutsche Bank estimates note: use recurring earnings in revision for better comparison

21 February 2017

Consumer



Figure 23: DBe vs. consensus: we are significantly more positive on 2H17 and 2018

2016E 2017E 2018E

(TWD mn) DBe Consensus Diff DBe Consensus Diff DBe Consensus Diff

Revenue 24,525 24,666 -0.6% 27,854 27,257 2.2% 33,663 30,815 9.2%

Gross Profit 6,882 6,931 -0.7% 8,026 7,795 3.0% 9,922 8,927 11.1%

Op.Income 4,549 4,531 0.4% 5,499 5,278 4.2% 6,960 6,218 11.9%

Net Income 3,425 3,504 -2.2% 4,507 4,319 4.4% 5,704 5,020 13.6%

EPS (TWD) 12.73 13.03 -2.2% 16.76 16.06 4.4% 21.21 18.66 13.6%

Gross Margin (%) 28.1% 28.1% 0.0% 28.8% 28.6% 0.2% 29.5% 29.0% 0.5%

Op. Margin (%) 18.5% 18.4% 0.2% 19.7% 19.4% 0.4% 20.7% 20.2% 0.5%

Net Margin (%) 14.0% 14.2% -0.2% 16.2% 15.8% 0.3% 16.9% 16.3% 0.7% Source: Deutsche Bank estimates, Bloomberg Finance LP

Valuation, risks and financial summary

Cutting target price by 1%, in line with earnings revisions on 2018E

We have trimmed our DCF-based target price to TWD430 to reflect downward

earnings revisions to 2018E. We use the discounted cash flow (DCF) method

as our primary approach to value Eclat’s shares. We adopt DCF as we expect

investors to focus more on Eclat’s long-term innovations. In our DCF model,

we apply a WACC of 6.61% with a cost of equity of 7.08% (risk-free

rate=1.8%, beta=0.94, market risk premium=5.6%) and a cost of debt of

2.43%.

We increased our assumed long-term growth rate to 1%. This is still at the low

end of the 1-2% assumptions we use for other ODMs under our coverage. We

view Eclat’s innovator business model as highly reliant on the new product

cycle. In the past we were skeptical on whether Eclat could innovate beyond

its single jersey category. But with its new jacquard fabric, we are more

positive on Eclat’s ability to sustain its innovation pipeline. We thus increase

the assumption to 1%. Terminal value now represents 45% of Eclat’s total

value.

Figure 24: DCF sales, margin assumptions and sensitivity Figure 25: Free cash flow to equity profile

Two-stage DCF:

1. FCF forecasts from model 2018-2020

2. Explicit forecast period 2021-2030

2018~2021 2022~2025 2026~2030 2018~2030

Revenue CAGR: 20.9% 3.8% 1.0% 6.1%

Average EBIT margin: 21.2% 21.0% 20.1% 20.7%

FCF CAGR: 12.6% 2.1% -0.4% 3.3%

Source: Deutsche Bank estimates

Source: Deutsche Bank estimates, Note: representing free cash flow for equity (in line with Deutsche Bank RTN)

430 7.6% 7.1% 6.6% 6.1% 5.6%

-1.00% 331 351 374 401 431

0.00% 347 371 398 430 467

1.00% 368 397 430 470 519

2.00% 397 433 476 530 599

3.00% 438 486 548 628 740

WACC

Terminal

Growth-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2015 2018 2021 2024 2027 2030

Free Cashflow (LHS)

YoY (RHS)(NT$mn)

21 February 2017

Consumer



Figure 26: Discounted cash flow valuation – key assumptions

Share & Market Information Note

Valuation date 12 month forward

Current Stock Price 309

Issued Shares (million) 269 Weighted average shares

DCF Target Price 430

Implied Upside (Downside) 39%

Valuation metrics

FY16 PER (recurring) 31.7


FY16 PBR 7.8

FY17 PBR 6.8

Cost of Equity 7.08%

Risk Free Rate (%) 1.80% Deutsche Bank assumption for Taiwan

Beta 0.94 Bloomberg 1-year beta

Market Risk Premium (%) 5.60% Deutsche Bank assumption for Taiwan

Cost of Debt (after tax) 2.43%

Cost of Debt 3.00% Company long-term borrowing rate

Tax Rate 19.00% Long-term tax rate

Target Debt / (Debt + Equity) 10%

WACC 6.61%

DCF Model LT growth 1.0% We are more positive on Eclat’s ability to sustain innovations.


PE valuation supports our DCF target price; we now shift target multiple to 2-

year mean

Our target price of TWD430 represents c.25x of 2017E recurring EPS. The

multiple is in line with Eclat’s two-year mean forward DB PER. We didn’t

change this implied multiple.

Figure 27: Eclat: consensus PER (12 month forward) Figure 28: Consensus PER vs. earnings growth

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DB PER

Mean +

2Std dev

Mean +

1Std dev

2Y Mean

Mean - 1Std

dev

Mean - 2Std

dev

(x)

-60%

-10%

40%

90%

140%

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DB PER (LHS) 2Y Mean (LHS) Earnings growth(x)

Source: Deutsche Bank estimates, Bloomberg Finance LP


21 February 2017

Consumer



Downside risks to our view Weaker-than-expected demand for the jacquard knitted stretchable

fabric. This would affect Eclat's revenue and gross margin.

Less favorable FX environment. Heavy TWD appreciation against the

USD would lead to gross margin contraction and non-operating

losses.

Weaker-than-expected demand from major clients in 2017 due to

disappointing inventory clearance. This would significantly affect

Eclat's sales and capacity utilization.

Figure 29: Eclat: quarterly financial summary

Income Statement- Consolidated

3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2016E 2017E 2018E

Net Sa les 6,262 6,845 5,536 6,119 7,724 8,474 24,525 27,854 33,663

Garment 4,077 4,725 3,566 3,726 5,098 5,813 16,135 18,204 21,633

Fabric & others 2,185 2,120 1,970 2,393 2,626 2,661 8,390 9,650 12,030

Costs 4,468 4,884 4,047 4,386 5,436 5,958 17,643 19,827 23,740

Gross prof it 1,794 1,961 1,489 1,733 2,288 2,517 6,882 8,026 9,922

Operating expenses 587 613 545 580 658 744 2,334 2,527 2,962

Operating Prof it 1,207 1,349 944 1,152 1,630 1,773 4,549 5,499 6,960

Investment income, net 0 0 0 0 0 0 2 0 0

Other net non-op -180 6 6 8 8 9 -275 30 48

Tota l non-operating income -180 6 6 8 8 9 -273 30 48

Pretax prof it 1,028 1,355 950 1,160 1,638 1,782 4,276 5,530 7,008

Taxes (negative for credit) 181 230 176 255 289 303 851 1,023 1,303

Minority 0 0 0 0 0 0 0 0 0

Reported Net Income 846 1,125 774 905 1,349 1,479 3,425 4,507 5,704

Reported EPS (NT$) 3.15 4.18 2.88 3.36 5.01 5.50 12.73 16.76 21.21

Prof itab il ity 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2016E 2017E 2018E

Gross margin 28.6% 28.7% 26.9% 28.3% 29.6% 29.7% 28.1% 28.8% 29.5%

Operating margin 19.3% 19.7% 17.0% 18.8% 21.1% 20.9% 18.5% 19.7% 20.7%

OPEX to sales 9.4% 9.0% 9.8% 9.5% 8.5% 8.8% 9.5% 9.1% 8.8%

Pretax margin 16.4% 19.8% 17.2% 19.0% 21.2% 21.0% 17.4% 19.9% 20.8%

Net Margin 13.5% 16.4% 14.0% 14.8% 17.5% 17.5% 14.0% 16.2% 16.9%

Growth 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2016E 2017E 2018E

Revenue- YoY -9% -6% -1% 5% 23% 24% -4% 14% 21%

EPS- YoY -36% -9% 19% 13% 59% 32% -20% 32% 27%

Sales breakdown 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2016E 2017E 2018E

Garment 65% 69% 64% 61% 66% 69% 66% 65% 64%

Fabric & others 35% 31% 36% 39% 34% 31% 34% 35% 36% Source: Deutsche Bank estimates, company data

21 February 2017

Consumer



Model updated:20 February 2017

Running the numbers

Asia

Taiwan

Textiles & Apparel

Eclat Textile Reuters: 1476.TW Bloomberg: 1476 TT

Buy Price (20 Feb 17) TWD 309.00

Target Price TWD 430.00

52 Week range TWD 281.50 - 462.00

Market Cap (m) TWDm 76,783

USDm 2,494

Company Profile

Eclat Textile CO LTD (Eclat) is one of the leaders in 4-way stretch nylon fabric. The company has fabric manufacturing capabilities in Taiwan and Vietnam, as well as garment manufacturing bases in China, Vietnam and Cambodia. The company works with leading sportswear brands worldwide to provide base layer fabric & garment design /production services.

Price Performance

200

300

400

500

600

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

Eclat TextileTaiwan Stock Exchange (TWSE) (Rebased)

Margin Trends

17

18

20

21

23

24

13 14 15 16E 17E 18E

EBITDA Margin EBIT Margin

Growth & Profitability

0

10

20

30

40

50

-10

0

10

20

30

40

13 14 15 16E 17E 18E

Sales growth (LHS) ROE (RHS)

Solvency

0

50

100

150

200

250

-50

-40

-30

-20

-10

0

10

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

John Chou

+852 2203 6196 [email protected]

Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (TWD) 10.87 10.93 15.03 13.58 16.76 21.21

Reported EPS (TWD) 11.02 11.74 15.99 12.73 16.76 21.21

DPS (TWD) 7.00 8.00 10.50 8.91 11.73 15.90

BVPS (TWD) 32.6 37.0 45.1 55.4 63.3 71.1

Weighted average shares (m) 248 256 261 269 269 269

Average market cap (TWDm) 52,550 77,369 113,229 76,783 76,783 76,783

Enterprise value (TWDm) 52,726 77,850 111,964 71,607 70,716 68,935

Valuation Metrics P/E (DB) (x) 19.5 27.7 28.9 22.8 18.4 14.6

P/E (Reported) (x) 19.2 25.8 27.1 24.3 18.4 14.6

P/BV (x) 9.70 8.67 10.05 5.58 4.88 4.35

FCF Yield (%) 1.7 1.9 3.4 5.1 4.0 5.9

Dividend Yield (%) 3.3 2.6 2.4 2.9 3.8 5.1

EV/Sales (x) 2.9 3.7 4.4 2.9 2.5 2.0

EV/EBITDA (x) 14.2 19.2 20.0 13.3 11.1 8.7

EV/EBIT (x) 16.0 22.2 23.1 15.7 12.9 9.9

Income Statement (TWDm)

Sales revenue 18,142 20,843 25,521 24,525 27,854 33,663

Gross profit 5,538 6,024 7,909 7,702 8,909 10,849

EBITDA 3,709 4,060 5,594 5,368 6,382 7,886

Depreciation 418 552 756 819 883 926

Amortisation 0 0 0 0 0 0

EBIT 3,290 3,507 4,838 4,549 5,499 6,960

Net interest income(expense) -17 -25 -29 8 31 48

Associates/affiliates 0 0 3 2 0 0

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 45 256 309 -283 -1 0

Profit before tax 3,318 3,739 5,121 4,276 5,530 7,008

Income tax expense 579 734 947 851 1,023 1,303

Minorities 1 1 0 0 0 0

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 2,738 3,004 4,173 3,425 4,507 5,704

DB adjustments (including dilution) -37 -206 -252 227 0 0

DB Net profit 2,701 2,798 3,922 3,652 4,507 5,704

Cash Flow (TWDm)

Cash flow from operations 2,534 3,144 4,663 5,024 4,691 5,836

Net Capex -1,638 -1,642 -771 -774 -1,400 -900

Free cash flow 896 1,502 3,893 4,250 3,291 4,936

Equity raised/(bought back) 0 0 0 2,560 0 0

Dividends paid -1,230 -1,757 -2,088 -2,824 -2,398 -3,155

Net inc/(dec) in borrowings 168 969 40 -805 -517 -900

Other investing/financing cash flows -84 -75 -33 -57 -3 0

Net cash flow -251 639 1,811 3,124 373 881

Change in working capital -860 -409 -677 801 -994 -1,178

Balance Sheet (TWDm)

Cash and other liquid assets 1,210 1,850 3,661 6,785 7,158 8,040

Tangible fixed assets 4,985 6,563 6,591 6,247 6,764 6,738

Goodwill/intangible assets 0 0 0 0 0 0

Associates/investments 1 13 14 14 14 14

Other assets 6,350 6,498 7,416 7,352 8,770 9,463

Total assets 12,546 14,925 17,682 20,398 22,706 24,254

Interest bearing debt 1,378 2,343 2,410 1,623 1,106 206

Other liabilities 3,051 3,104 3,498 3,881 4,576 4,923

Total liabilities 4,429 5,447 5,908 5,503 5,682 5,129

Shareholders' equity 8,107 9,478 11,774 14,895 17,024 19,125


Total shareholders' equity 8,117 9,478 11,774 14,895 17,024 19,125

Net debt 168 494 -1,251 -5,163 -6,053 -7,834

Key Company Metrics

Sales growth (%) 33.7 14.9 22.4 -3.9 13.6 20.9

DB EPS growth (%) 34.9 0.6 37.5 -9.7 23.4 26.6

EBITDA Margin (%) 20.4 19.5 21.9 21.9 22.9 23.4

EBIT Margin (%) 18.1 16.8 19.0 18.5 19.7 20.7

Payout ratio (%) 63.5 68.2 65.7 70.0 70.0 75.0

ROE (%) 37.1 34.2 39.3 25.7 28.2 31.6

Capex/sales (%) 9.0 7.9 3.1 3.2 5.0 2.7

Capex/depreciation (x) 3.9 3.0 1.0 1.0 1.6 1.0

Net debt/equity (%) 2.1 5.2 -10.6 -34.7 -35.6 -41.0

Net interest cover (x) 191.3 140.9 168.1 nm nm nm

Source: Company data, Deutsche Bank estimates

21 February 2017

Consumer



Yue Yuen (551 HK): Seeing the end to five-year down-cycle; upgrading to Buy

Stock drivers

1. Painful plant shift largely done By early Feb-2017, we estimate that YY had largely completed the

plant relocations of its Guangdong plants.

We adopt a three-step analysis to understand the impact from YY’s

Guangdong plant shutdown and model for the future. We conclude

that there should be a stronger-than-expected profitability recovery for

YY’s ODM operation. We forecast YY’s ODM EBIT margin to deliver a

steady recovery to 7.2%/7.6%/8.4% in 16E/17E/18E, vs. consensus

forecasts of 6.4%/6.0%/6.4%, respectively (Figure 30).

Step 1: obtaining the recurring profit: we adopt the public subsidiary

profit information reported by YY. There has been a surge in losses in

YY’s Guangdong production cluster in YT3Q16 (Figure 31). We

estimate a majority of the additional losses are extraordinary in nature.

Figure 31: Profit (losses) from YY’s China plants

(USDmn) 2010 2011 2012 2013 2014 2015 YT3Q15 YT3Q16

Guangdong 12 16 15 (11) (6) (6) (5) (48)

Hunan (1) 1 1 (2) (4) (9) (9) (2)

Hubei (0) (6) 1 0 (2) (7) (7) (2)

Anhui & Jiangsu 16 9 13 (28) (17) (5) (4) (14)

Jiangxi (10) (17) (8) (15) (2) 3 (1) (5)

Prof it ( loss) 17 3 22 (56) (32) (24) (26) (71)

% of ODM profit 5% 1% n.a. -13% -10% -7% -11% -23%

% of consolidated profit 5% 1% n.a. -13% -10% -6% -8% -17% Source: Deutsche Bank estimates, company data

We can then break down YY’s profit into the below three segments to

simplify our analysis (Figure 32):

(1) China recurring profit

(2) Non-China recurring profit

(3) Extraordinary (non-recurring): USD90m/over USD30m provisions made

in 2014/2015 to compensate employees in the China plants.

Figure 30: Consensus seeing flattish

EBIT margin trend for YY ODM

(YT3Q16= 6.8%, up 1.7 ppt YoY)

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2014 2015 16E 17E 18E

DB Consensus implied

YY: ODM EBIT margin


21 February 2017

Consumer



Figure 32: YY: ODM operating profit breakdown

(200)

(100)

-

100

200

300

400

500

600

2010 2011 2012* 2013 2014 2015 YT3Q16

Extraordinary (non-recurring)

Non-China: recurring

China: recurring

(USDmn)

Source: Deutsche Bank estimates, company data *no available disclosure

Step 2: sanity checks of our profit breakdown exercise: We view the

profit estimates as reasonable. Figure 33 suggests YY’s poor

profitability (measured by operating profit per pair) in China due to

plant migrations since 2010. The profitability of YY’s non-China plants

also took a hit as they absorbed production capacity relocated from

China. Nevertheless, we saw a profitability recovery for YY’s non-

China plants in YT3Q16. Figure 34 suggests YY’s non-China plants are

operating at good efficiency (similar to Feng Tay’s plants), while YY’s

China operation remains a profit drag.

Figure 33: The time series is reasonable from an

operating profit per pair perspective

Figure 34: YY’s profit per pair vs. Feng Tay’s

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012* 2013 2014 2015 YT3Q16

China

Non China

(USD per pair)

1. Plant migration

started

2. Overseas plants

suffer from inefficiency

3. Overseas plants

regaining efficiency

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012* 2013 2014 2015 YT3Q16

YY: China YY: Non China Feng Tay: consolidated

(USD per pair)

Source: Deutsche Bank estimates, company data *No available data for YY

Source: Deutsche Bank estimates, company data *No available data for YY

Step 3: model for the future: We estimate YY’s ODM operating profit

to grow by 11%/12% in 2017/2018, respectively. This implies YY’s

operating profit per pair will increase by 6%/10% in 2017/2018. We

view our assumptions as conservative, considering that we estimate

YY’s profit per pair to increase to USD1.59 by 2020 vs. USD1.96 at

Feng Tay during 2015 (Figure 35). Feng Tay’s historical plant

profitability (Figure 36) points to a significant profitability recovery

(toward 8% operating margin) as plant operations stabilize.

Blue-sky scenario: if YY’s consolidated operating profit per pair

increases to USD1.96 (Feng Tay’s 2015level) in 2017, YY’s ODM

operating profit will reach USD657mn (37% higher than our base case).

Such leads to 28% upside to DB’s consolidated earnings forecasts.

21 February 2017

Consumer



Figure 35: Operating profit per pair assumptions for YY

(vs. Feng Tay): conservative, in our view

Figure 36: FT’s historical by-plant operating margin:

strong improvement seen once production stabilized

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 16E 17E 18E 19E 20E

Feng Tay: Consolidated Feng Tay: China

YY: Consolidated

(USD per pair)

Gap comes from:

(1) Tech service revenue

(2) High-end basketball shoes

-15%

-10%

-5%

0%

5%

10%

15%

2010 2011 2012 2013 2014 2015

India

Indonesia

Vietnam

China


Source: Deutsche Bank estimates, company data Note: solid red line is the theoretical operating margin for Nike and Adidas’ footwear ODMs (8%).

Key assumptions:

(1) China recurring profitability to recover: as the magnitude of plant

migration in China eases into 2017, we forecast YY’s China recurring

profitability to improve gradually. YY has established a task team

(authorized by the head of each major department) specialized in

solving production inefficiency. In addition, we believe YY’s heavy

investment in fast-replenishment production lines (Figure 37) will pay

off. We note that YY is now one of the major fast response suppliers

for both Nike and Adidas (Figure 38).

Figure 37: Fast response production line in a nutshell

Traditional (centralized production)

Stations A

Stations B

Now (lean, fast response)

Stations A

Stations B

Model AModel A

Model AModel A

Model A

Model A

Model B

Model C

Model D

Model E

- Traditionally, shoe makers use multiple forms

of equipment to produce one model at the

same time.

- Advantages: easier to manage, efficiency

differences among equipment types can be

cushioned (as multiple forms of equipment are

working on the same component).

- Disadvantages: less flexible, leads to heavier

WIP inventory.

- Lean production aims to shift to “one-to-one”

production.

- Advantages: more flexible and can yield faster

response.

- Disadvantages: volatility in production

efficiency hard to be cushioned (as every

station now works on a different model). As a

result, automated tools are introduced to

reduce volatility in efficiency.


21 February 2017

Consumer



(2) Non-China recurring profit still has room for improvement: we

witnessed YY’s efforts to further strengthen its raw material supply in

Vietnam. Also, we believe the production in Vietnam has been

stabilizing following the reduced capacity reallocation from China.

(3) Extraordinary (non-recurring) items to reduce: we view YY as still

adjusting its capacity in China, but the amount of extraordinary items

should drop significantly going forward.

2. Adidas order shift to boost revenue According to Ching Luh, (a private competitor of Apache's), Apache (

萬邦鞋業 ) one of Adidas’ major footwear manufacturers, was

reported to have violated its labor welfare compliance protocols in

2016. We forecast Adidas will gradually shift its orders to YY and

Ching Luh.

We conservatively estimate that the shift can boost YY’s 2017 volume

by 1-3% (Figure 39).

YY’s ability to take on additional orders from Adidas also cements its

relationship with the brand, in our view.

Figure 39: Scale comparison among Adidas’ major shoe manufacturers

-

5.0

10.0

15.0

20.0

25.0

30.0

YY Ching Luh Apache

Other brands Adidas

(mn pairs per month)


Figure 38: Major fast response

sports shoes manufacturers

0%

5%

10%

15%

20%

25%

Yue Yuen Feng Tay Ching Luh

Fast replenishment order % of

total orders


21 February 2017

Consumer



3. Easing price pressure YY faced heavier pricing pressure in 2016 − partly reflecting the FX

pressure experienced by Adidas, in our view. Nevertheless, with the

USD strengthening against the EUR, we forecast less pricing pressure

from Adidas.

In addition, YY has been strengthening its cooperation with Adidas

through:

(a) Taking on additional footwear orders from Apache,

(b) Preparing knitted upper production for Adidas,

(c) Expanding the “Boost” midsole production in Vietnam, and

(d) Helping Adidas execute growth in China through the retail

operation (Pou Sheng).

We view our ASP growth forecasts as conservative, considering the

rising raw material prices and the “cost-plus” pricing model.

4. Beneficiary of the “modern retro” style A major comeback has been seen for retro sneakers in the production

pipeline: namely, the Nike Air Max series, Air Force 1, etc.

Modern technology with authentic design means better profitability

for ODMs: these retro shoes have been continuously produced by

ODMs, so factory workers are very familiar with the production

process. We estimate the profitability for retro shoes to be higher than

for other shoes, thanks to more advanced production technology and

material science.

Flyknit order cut partly reflects the come-back of retro shoes: we

believe traditional shoe makers will see easing pressure from knitted

uppers in 2017.

Line of Thinking

Figure 41: YY’s share price Figure 42: YY consensus earnings revisions

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0


Share price

Initiate

with Hold U/G to Buy

450

470

490

510

530

550

570

590

610

450

470

490

510

530

550

570

590


2016 consensus earnings (LHS) 2017 consensus earnings (RHS)



We initiated with Hold as we expected continued challenges with YY’s

ODM business, despite strong growth from the retail business (Pou

Sheng).

We upgraded to Buy as we were more positive on the ODM profit

recovery, as well as incremental positives including order shifts from

Apache.

Figure 40: Our (conservative) ASP

forecasts

-4%

-2%

0%

2%

4%

6%

8%

10%

2010 2012 2014 16E 18E 20E

Blended ASP YoY


21 February 2017

Consumer




Figure 43: Earnings revisions: we factor in a stronger ODM earnings recovery

2016E 2017E 2018E

(USD mn) New Old Diff New Old Diff New Old Diff

Revenue 8,497 8,487 0% 9,050 8,714 4% 9,446 9,078 4%

Gross Profit 2,141 2,129 1% 2,358 2,249 5% 2,511 2,421 4%

Op.Income 553 526 5% 627 592 6% 714 643 11%

Recur.NP 494 462 7% 539 508 6% 593 534 11%

Recur. EPS (USD) 0.30 0.28 7% 0.33 0.31 6% 0.36 0.32 11%

Gross Margin (%) 25.2% 25.1% 0.1% 26.1% 25.8% 0.2% 26.6% 26.7% -0.1%

Op. Margin (%) 6.5% 6.2% 0.3% 6.9% 6.8% 0.1% 7.6% 7.1% 0.5%

Recur. Net Margin (%) 5.8% 5.4% 0.4% 6.0% 5.8% 0.1% 6.3% 5.9% 0.4% Source: Deutsche Bank estimates note: use recurring earnings in revision for better comparison

Figure 44: DBe vs. consensus: we are more positive on 2017 and 2018

2016E 2017E 2018E

(USD mn) DBe Consensus Diff DBe Consensus Diff DBe Consensus Diff

Revenue 8,497 8,509 -0.1% 9,050 8,835 2.4% 9,446 9,154 3.2%

Gross Profit 2,141 2,117 1.1% 2,358 2,244 5.1% 2,511 2,386 5.3%

Op.Income 553 539 2.6% 627 560 12.1% 714 619 15.3%

Net Income 494 488 1.2% 539 512 5.2% 593 550 7.8%

EPS (USD) 0.30 0.30 1.2% 0.33 0.31 5.2% 0.36 0.33 7.8%

Gross Margin (%) 25.2% 24.9% 0.3% 26.1% 25.4% 0.6% 26.6% 26.1% 0.5%

Op. Margin (%) 6.5% 6.3% 0.2% 6.9% 6.3% 0.6% 7.6% 6.8% 0.8%

Net Margin (%) 5.8% 5.7% 0.1% 6.0% 5.8% 0.2% 6.3% 6.0% 0.3% Source: Deutsche Bank estimates, Bloomberg Finance LP


DCF-based target price increased to HKD38

The 9% increase (from HKD35) is intended to reflect upward earnings

revisions, reflecting a stronger outlook for YY’s ODM business. We use

discounted cash flow (DCF) as our primary approach to value YY’s shares. Our

DCF methodology reflects our expectation that investors will focus more on

YY’s long-term value creation. In our DCF model, we derive a WACC of 7.94%

with a cost of equity of 8.66% (risk-free rate=3.9%, beta=0.85, market risk

premium=5.6%) and a cost of debt of 3.87%. We assume a long-term growth

rate of 1%, which is in line with Deutsche Bank’s Hong Kong and China

consumer discretionary coverage.

21 February 2017

Consumer




Two-stage DCF:



2018~2021 2022~2025 2026~2030 2018~2030

Revenue CAGR: 6.6% 4.1% 2.3% 3.7%


FCF CAGR: 17.3% 3.1% 0.8% 5.0%

-70%

-50%

-30%

-10%

10%

30%

50%

-

100

200

300

400

500

600

700

2012 2015 2018 2021 2024 2027 2030

Free Cashflow to Equity (LHS)

YoY (RHS)(USDmn)






Current Stock Price 26.95

Issued Shares (million) 1,646 Weighted average shares

DCF Target Price 38


Valuation metrics



FY16 PBR 1.7

FY17 PBR 1.6


Risk Free Rate (%) 3.9% Deutsche Bank assumption for China


Market Risk Premium (%) 5.60% Deutsche Bank assumption for China





WACC 7.94%

DCF Model LT growth 1.0% In-line with DB consumer discretionary coverage space


SoTP analysis suggests ODM values not fully priced in

We support our valuation using a sum-of-the-parts (SoTP) analysis. If we derive

YY’s ODM value using the current value of Pou Sheng (the group’s retail

operation), YY’s ODM value is implied at HKD38bn, or 12.6x ODM earnings. If

we assign Pou Sheng’s value using our targeted corporate value (derived from

the target price), ODM business is trading at 11.4x.

38 8.9% 8.4% 7.9% 7.4% 6.9%

-1.00% 30 32 34 36 38

0.00% 31 33 36 38 41

1.00% 33 35 38 41 44

2.00% 35 37 41 44 49

3.00% 37 41 45 49 56

WACC

Terminal

Growth

21 February 2017

Consumer



Figure 48: Yue Yuen group − Sum-of-the-parts valuation

Market Cap PX Last 17E EPS PER % of total

(HKDmn) (HKD) (HKD) value

Yue Yuen- consolidated 44,356 26.9 2.55 10.5 100%

Pou Sheng- current 10,356 1.9 0.21 9.1 23%

Pou Sheng- targeted 16,548 3.1 0.21 14.3 37%

Holding % in Pou Sheng 61.8%

implied ODM value

Using PS' current val. 37,956 12.6 86%

Using PS' targeted va l. 34,129 11.4 77% Source: Deutsche Bank estimates

Downside risks to our view Weaker-than-expected performance at PS: Potential retail discounts

and heavier competition from DTC could hurt YY’s revenue and profit

growth.

Lower-than-expected order gain from Adidas: This would hurt YY’s

revenue and profit growth.

A weaker-than-expected efficiency recovery in China would lead to

disappointing earnings growth.

Less favorable raw material costs would affect YY’s profitability.

Figure 49: YY: quarterly financial summary


3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015A 2016E 2017E 2018E

Net Sa les 2,013 2,203 2,238 2,361 2,150 2,300 8,435 8,497 9,050 9,446

Footwear ODM 1,266 1,440 1,361 1,549 1,323 1,476 5,476 5,435 5,708 5,765

Retail 576 601 738 669 656 662 2,298 2,444 2,725 3,064

Other Revenue 171 163 140 144 171 163 661 617 617 617

Costs 1,510 1,625 1,669 1,756 1,593 1,674 6,463 6,356 6,693 6,935

Gross prof it 503 579 569 605 557 627 1,972 2,141 2,358 2,511

Footwear ODM & Others 294 361 306 357 315 379 1,206 1,262 1,357 1,385

Pou Sheng 209 218 263 248 242 248 766 878 1,001 1,126

Operating expenses 408 477 453 433 445 515 1,665 1,702 1,847 1,918

Operating prof it 130 129 147 192 149 139 438 553 627 714

Tota l non-operating income 23 33 22 23 21 21 46 83 87 90

Pretax prof it 154 162 169 215 170 160 484 636 714 803

Taxes (negative for credit) 13 29 27 27 19 25 66 87 98 110

Minority 11 18 20 20 20 18 28 55 78 101

Net Income 130 115 122 168 131 118 390 494 539 593

EPS (USD) 0.23 0.30 0.33 0.36

Prof itab il ity 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015A 2016E 2017E 2018E

Gross margin 25.0% 26.3% 25.4% 25.6% 25.9% 27.2% 23.4% 25.2% 26.1% 26.6%

Operating margin 6.5% 5.8% 6.6% 8.1% 6.9% 6.1% 5.2% 6.5% 6.9% 7.6%

OPEX to sales 20.3% 21.7% 20.3% 18.3% 20.7% 22.4% 19.7% 20.0% 20.4% 20.3%

Pretax margin 7.6% 7.4% 7.6% 9.1% 7.9% 7.0% 5.7% 7.5% 7.9% 8.5%

Net Margin 6.5% 5.2% 5.5% 7.1% 6.1% 5.1% 4.6% 5.8% 6.0% 6.3%

Growth 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015A 2016E 2017E 2018E

Revenue- YoY -1% 2% 10% 5% 7% 4% 5% 1% 7% 4%

EPS- YoY 23% 28% 9% 10% Source: Deutsche Bank estimates, company data

21 February 2017

Consumer




Running the numbers

Asia

Hong Kong

Textiles & Apparel

Yue Yuen Reuters: 0551.HK Bloomberg: 551 HK

Buy Price (20 Feb 17) HKD 26.95

Target Price HKD 38.00

52 Week range HKD 25.48 - 35.40

Market Cap (m) HKDm 44,366

USDm 5,716

Company Profile

Yue Yuen Industrial (Holdings) Limited is the world's largest athletic and casual footwear manufacturer, established by Pou Chen Group. Yue Yuen is not only an original equipment manufacturer and original design manufacturer (OEM/ODM) of athletic footwear, but also an operator of a retail network in the Greater China region that sells international brand name footwear and apparel.

Price Performance

20

24

28

32

36


Yue Yuen HANG SENG INDEX (Rebased)

Margin Trends

35689

1112

13 14 15 16E 17E 18E



02468101214

01234567

13 14 15 16E 17E 18E


Solvency

0

20

40

60

80

100

-5

-4

-3

-2

-1

0

1

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (USD) 0.26 0.19 0.23 0.30 0.33 0.36

Reported EPS (USD) 0.25 0.19 0.23 0.30 0.33 0.36

DPS (USD) 0.14 0.15 0.15 0.18 0.20 0.22

BVPS (USD) 2.6 2.7 2.7 2.9 3.0 3.1

Weighted average shares (m) 1,649 1,649 1,647 1,646 1,646 1,646

Average market cap (USDm) 4,339 4,817 5,600 5,716 5,716 5,716

Enterprise value (USDm) 3,894 4,295 4,874 5,109 5,126 5,066


P/E (Reported) (x) 10.5 15.4 14.6 11.6 10.6 9.7

P/BV (x) 1.13 1.26 1.21 1.22 1.17 1.12

FCF Yield (%) 11.0 6.0 7.1 3.2 6.2 8.4

Dividend Yield (%) 5.4 5.1 4.6 5.2 5.7 6.2

EV/Sales (x) 0.5 0.5 0.6 0.6 0.6 0.5

EV/EBITDA (x) 5.9 7.7 7.2 6.4 5.8 5.1

EV/EBIT (x) 9.2 13.0 11.1 9.2 8.2 7.1

Income Statement (USDm)

Sales revenue 7,582 8,013 8,435 8,497 9,050 9,446

Gross profit 1,887 2,003 2,214 2,386 2,620 2,786

EBITDA 662 559 680 798 889 988

Depreciation 240 229 242 245 262 275


EBIT 422 330 438 553 627 714

Net interest income(expense) -15 -7 -10 -13 -10 -9



Other pre-tax income/(expense) 5 45 -26 36 36 36

Profit before tax 454 380 484 636 714 803

Income tax expense 25 37 66 87 98 110

Minorities -6 12 28 55 78 101


Net profit 435 331 390 494 539 593

DB adjustments (including dilution) 11 0 1 0 0 0

DB Net profit 446 331 391 494 539 593

Cash Flow (USDm)

Cash flow from operations 624 571 792 570 718 828

Net Capex -146 -281 -392 -385 -366 -348

Free cash flow 478 289 400 185 352 481

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -266 -234 -255 -255 -296 -323

Net inc/(dec) in borrowings -180 30 -146 267 -100 0

Other investing/financing cash flows 64 -20 61 -54 -56 -59

Net cash flow 97 65 60 143 -100 98

Change in working capital -33 81 197 -165 -92 -67

Balance Sheet (USDm)

Cash and other liquid assets 906 971 1,031 1,174 1,074 1,172



Associates/investments 857 882 866 926 987 1,050

Other assets 3,067 3,113 3,047 3,121 3,287 3,408

Total assets 6,993 7,171 7,264 7,681 7,912 8,267

Interest bearing debt 919 949 803 1,070 970 970




Minorities 398 382 368 423 501 601


Net debt 13 -22 -228 -104 -104 -202

Key Company Metrics

Sales growth (%) nm 5.7 5.3 0.7 6.5 4.4

DB EPS growth (%) na -25.9 23.3 28.1 9.2 9.9

EBITDA Margin (%) 8.7 7.0 8.1 9.4 9.8 10.5

EBIT Margin (%) 5.6 4.1 5.2 6.5 6.9 7.6

Payout ratio (%) 53.8 73.9 65.4 60.0 60.0 60.0

ROE (%) 10.0 7.6 8.8 10.7 11.2 11.9

Capex/sales (%) 2.3 3.8 4.8 4.5 4.0 3.7


Net debt/equity (%) 0.3 -0.5 -4.7 -2.0 -1.9 -3.5

Net interest cover (x) 27.7 48.4 43.4 43.5 62.2 82.0


21 February 2017

Consumer



Feng Tay (9910 TT): Feel the Nike recovery

Stock drivers

1. Basketball shoes overhang removed Lebron James Signature mass production has started: we estimate

that the mass production of Lebron James 14 did, after a delay, finally

start in late 4Q16. We note that FT significantly missed its shipment

target in 4Q16 (Figure 50). We attribute the miss to the delay of the

model (from October 2016 to January 2017 launch). We do not think

the revised retail price of the Lebron James 14 (to USD175 vs.

USD200 for the 13) will hurt FT’s profitability.

Kobe Bryant series still hot in the market: demand for the Kobe Bryant

shoes was stronger than our expectation, despite the retirement of the

player. We note that the Kobe Bryant line is one of FT’s major

businesses (Figure 51). We forecast Nike to extend the Kobe Bryant

franchise by continuing to launch retro shoes, as well as potentially

recruiting new players to endorse the Kobe series.

Figure 50: FT’s targeted shipment vs. actual shipment:

China plants suffered from the delay of LeBron James 14

Figure 51: FT: revenue mix

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1Q13 4Q13 3Q14 2Q15 1Q16 4Q16

China plants

Total

Basketball-

Jordan

Basketball-

Kobe

Basketball-

Lebron

Basketball-

others

NSW

Other shoes

Retail and

equipments

Source: Deutsche Bank, company data


2. Growing conviction in Nike’s order recovery in 2017 North America likely approaching the end of a major destocking: we

forecast Nike’s orders to resume growth, based on the following

reasons: (1) we believe Nike’s futures (orderbook, a way to gauge

future product delivery) are led by retailers’ sell-through (Figure 52). (2)

We view Nike as being deep in the current destocking cycle (which

started in 3Q15) and we forecast the company to start restocking soon

(Figure 53). Our conversation with private shoe makers like Ching Luh

and Shoetown indicates accelerating overall footwear orders from

1Q17.

21 February 2017

Consumer



Figure 52: Deutsche Bank sourcing model: sell-through

leads Nike’s North America future (orderbook) growth

Figure 53: Deutsche Bank sourcing model: Nike’s North

America inventory vs. distributor channel inventory

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

C3Q09 C2Q10 C1Q11 C4Q11 C3Q12 C2Q13 C1Q14 C4Q14 C3Q15 C2Q16

North America athletic retailers' revenue growth (LHS)

NKE NA orderbook YoY (9 months lag) (RHS)

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-10%

0%

10%

20%

30%

40%

50%

C1Q11 C4Q11 C3Q12 C2Q13 C1Q14 C4Q14 C3Q15 C2Q16

NKE NA inventory YoY (LHS)

North America athletic retailers' inventory days YoY (RHS)(1 )

(2 )(3 )

Source: Deutsche Bank, company data, Bloomberg Finance LP

Source: Deutsche Bank, company data, Bloomberg Finance LP

China: embracing a strong restocking: we forecast Nike to provide

sufficient products to its distributors in China (namely Pou Sheng and

Belle Sportswear). We thus anticipate strong restocking growth in

China.

Technology service revenue is the most significant upside risk to our

forecasts: we expect sustainable income from FT’s contracted R&D

projects (automation tools to enhance China factory efficiency, TPU

Foaming midsole and next generation HyperAdapt, etc.). Nevertheless,

we conservatively assume a decline in technology service revenue in

2017, followed by very mild growth.

3. Beneficiary of the “modern retro” style A major comeback has been seen in retro sneakers in the production

pipeline: namely, Nike Air Max series, Air Force 1, etc.

Modern technology with authentic design means better profitability

for ODMs: these retro shoes have been continuously produced by

ODMs, so factory workers are very familiar with the production

process. We estimate the profitability of retro shoes to be higher than

for other shoes, thanks to more advanced production technology and

material science.

Flyknit order cut partly reflects the come-back of retro shoes: we

believe traditional shoe makers will see easing pressure from knitted

uppers in 2017.

Figure 54: FT: technology service

revenue YoY

-20%

-10%

0%

10%

20%

30%

40%

2010 2012 2014 16E 18E 20E

Technology service revenue- YoY


21 February 2017

Consumer



Line of Thinking

Figure 55: FT’s share price Figure 56: FT consensus earnings revisions

60

80

100

120

140

160

180

200

220


Share price

Initiate

with Buy

4400

4600

4800

5000

5200

5400

5600

5800

6000

6200

3,000

3,500

4,000

4,500

5,000

5,500

6,000





We initiated with Buy as we expect Nike’s momentum to recover with

the launch of the delayed Lebron James 14 and sustainable

technology service revenue. We remain confident in our thesis.


Figure 57: Earnings revisions: Reducing earnings to (conservatively) reflect weaker Lebron James 14 volume upon

launch delay

2016E 2017E 2018E

(TWD mn) New Old Diff New Old Diff New Old Diff

Revenue 58,062 61,803 -6% 65,931 70,545 -7% 75,980 78,913 -4%

Gross Profit 13,360 14,113 -5% 15,616 16,516 -5% 18,236 18,948 -4%

Op.Income 6,421 6,801 -6% 7,474 7,909 -6% 8,663 9,005 -4%

Net Profit 5,034 4,729 6% 5,391 5,573 -3% 6,264 6,368 -2%

Gross Margin (%) 23.0% 22.8% 0.2% 23.7% 23.4% 0.3% 24.0% 24.0% 0.0%

Op. Margin (%) 11.1% 11.0% 0.1% 11.3% 11.2% 0.1% 11.4% 11.4% 0.0%

Recur. Net Margin (%) 8.7% 7.7% 1.0% 8.2% 7.9% 0.3% 8.2% 8.1% 0.2% Source: Deutsche Bank estimates note: use recurring earnings in revision for better comparison


2016A 2017E 2018E

(USD mn) DBe Reported Diff DBe Consensus Diff DBe Consensus Diff

Revenue 58,062 58,062 0.0% 65,931 64,228 2.7% 75,980 72,069 5.4%

Gross Profit 13,360 13,006 2.7% 15,616 14,773 5.7% 18,236 16,792 8.6%

Op.Income 6,421 6,421 0.0% 7,474 7,111 5.1% 8,663 8,063 7.4%

Net Income 5,034 5,034 0.0% 5,391 5,182 4.0% 6,264 5,833 7.4%

EPS (TWD) 7.96 7.96 0.0% 8.07 7.76 4.0% 9.38 8.73 7.4%

Gross Margin (%) 23.0% 22.4% 0.6% 23.7% 23.0% 0.7% 24.0% 23.3% 0.7%

Op. Margin (%) 11.1% 11.1% 0.0% 11.3% 11.1% 0.3% 11.4% 11.2% 0.2%

Net Margin (%) 8.7% 8.7% 0.0% 8.2% 8.1% 0.1% 8.2% 8.1% 0.2% Source: Deutsche Bank estimates, Bloomberg Finance LP

21 February 2017

Consumer




DCF-based target price reduced to TWD156

The target price cut is intended to reflect downward earnings revisions in

2018; the 8% cut is largely in line with the earnings revision. We use

discounted cash flow (DCF) as our primary approach to value FT’s shares. We

adopt DCF methodology as we expect investors to focus more on FT’s long-

term value creation. In our DCF model, we derive a WACC of 7.72% with a

cost of equity of 7.96% (risk-free rate=1.8%, beta=1.10, market risk







Current Stock Price 130

Issued Shares (million) 632 Weighted average shares

DCF Target Price 156


Valuation metrics



FY16 PBR 6.6

FY17 PBR 6.2


Risk Free Rate (%) 1.8% Deutsche Bank assumption for Taiwan


Market Risk Premium (%) 5.60% Deutsche Bank assumption for Taiwan





WACC 7.72%

DCF Model LT growth 1.0% In-line with DB consumer discretionary coverage space


21 February 2017

Consumer




Two-stage DCF:



2018~2021 2022~2025 2026~2030 2018~2030

Revenue CAGR: 16.3% 7.5% 3.6% 7.3%


FCF CAGR: 33.8% 3.5% -1.6% 7.4%


Source: Deutsche Bank estimates, Company data Note: representing free cash flow for equity (in line with Deutsche Bank RTN)

DCF-based target price supported by PER valuation

Our DCF-based target price suggests 19x 2017E PER, in line with the two-year

mean of 19x. We haven’t changed our target multiple in this update.

Figure 62: Historical PER Figure 63: PER vs. earnings growth

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DB PER

Mean +

2Std dev

Mean +

1Std dev

2Y Mean

Mean - 1Std

dev

Mean - 2Std

dev

(x)

2010, 2%

2011, -7%

2012, 17%

2013, 37%2014, 35%

2015, 37%

2016, 3%

-20%

-10%

0%

10%

20%

30%

40%

50%

-20

-10

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015 2016 2017

DB PER (LHS) 2Y Mean (LHS) Earnings growth(x)(x)



Downside risks to our view

Sharp reduction in demand: This is a potential result of overall weak

demand in North America and/or Nike & Jordan losing market share in

the high-end basketball segment. This would dampen FT’s revenue

growth and gross margin.

Ineffective R&D would lead to waste in R&D investments and affect

FT’s gross margin, operating margin and long-term revenue potential.

Heavy FX volatility: Strong appreciation of the TWD against the USD

will erode FT’s gross margin and incur a non-operating loss.

Labor strike: This would lead to reduced revenue and operating

deleverage.

156 8.7% 8.2% 7.7% 7.2% 6.7%

-1.00% 124 132 140 149 159

0.00% 129 138 147 157 169

1.00% 136 145 156 168 183

2.00% 144 155 168 184 202

3.00% 155 169 186 206 232

WACC

Terminal

Growth-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2012 2015 2018 2021 2024 2027 2030


YoY (RHS)(TWDmn)

21 February 2017

Consumer



Figure 64: FT: quarterly financial summary


3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015A 2016E 2017E 2018E

Net Sa les 14,100 14,387 14,968 17,106 16,297 17,560 55,804 58,062 65,931 75,980

Shipment (mn units) 89 95 104 118

ASP (USD) 17.7 17.8 18.1 18.2

Costs 10,742 11,084 11,677 12,965 12,291 13,382 44,038 44,702 50,315 57,744

Gross prof it 3,358 3,303 3,291 4,141 4,006 4,177 11,766 13,360 15,616 18,236

Operating expenses 1,759 1,675 1,841 2,207 2,005 2,090 6,244 6,939 8,142 9,573

Operating Prof it 1,599 1,628 1,450 1,934 2,001 2,088 5,522 6,421 7,474 8,663

Investment income, net 25 0 0 0 0 0 72 23 0 0

Other net non-op 98 252 128 127 127 127 664 608 509 566

Tota l non-operating income 123 252 128 127 127 127 736 632 509 566

Pretax prof it 1,723 1,880 1,578 2,062 2,129 2,215 6,259 7,053 7,983 9,228

Taxes (negative for credit) 418 226 442 474 553 576 1,597 1,521 2,045 2,362

Minority 139 97 122 165 153 107 424 497 547 602

Net Income 1,165 1,557 1,015 1,422 1,422 1,532 4,238 5,034 5,391 6,264

DB EPS (TWD) 1.74 2.33 1.52 2.13 2.13 2.29 6.90 7.44 8.07 9.38


Gross margin 23.8% 23.0% 22.0% 24.2% 24.6% 23.8% 21.1% 23.0% 23.7% 24.0%


OPEX to sales 12.5% 11.6% 12.3% 12.9% 12.3% 11.9% 11.2% 12.0% 12.3% 12.6%

Pretax margin 12.2% 13.1% 10.5% 12.1% 13.1% 12.6% 11.2% 12.1% 12.1% 12.1%

Net Margin 8.3% 10.8% 6.8% 8.3% 8.7% 8.7% 7.6% 8.7% 8.2% 8.2%


Revenue- YoY -5% -3% 6% 11% 16% 22% 17% 4% 14% 15%

EPS- YoY -17% 19% -1% -9% 22% -2% 30% 8% 8% 16%


21 February 2017

Consumer




Running the numbers

Asia

Taiwan

Textiles & Apparel

Feng Tay Reuters: 9910.TW Bloomberg: 9910 TT

Buy Price (20 Feb 17) TWD 130.00

Target Price TWD 156.00

52 Week range TWD 106.97 - 160.00

Market Cap (m) TWDm 70,984

USDm 2,306

Company Profile

Feng Tay Enterprises Co., Ltd. is a major sports shoes manufacturer in Taiwan. The company offers products including sports shoes, casual shoes, sandals and slippers, rollerblades, skate shoes, etc. Feng Tay distributes products within domestic market as well as to overseas markets, including America, Europe and Asia.

Price Performance

80

100

120

140

160

180


Feng TayTaiwan Stock Exchange (TWSE) (Rebased)

Margin Trends

8

9

11

12

14

15

13 14 15 16E 17E 18E



0

10

20

30

40

0

5

10

15

20

25

30

13 14 15 16E 17E 18E


Solvency

0

200

400

600

800

-30

-20

-10

0

10

20

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (TWD) 4.13 5.31 6.90 7.44 8.07 9.38

Reported EPS (TWD) 4.20 5.44 7.21 7.96 8.07 9.38

DPS (TWD) 3.30 3.70 5.00 5.57 5.65 7.03

BVPS (TWD) 17.8 19.1 22.3 23.8 25.1 28.1

Weighted average shares (m) 546 568 588 632 668 668

Average market cap (TWDm) 22,831 36,955 82,483 70,984 70,984 70,984

Enterprise value (TWDm) 25,258 39,317 83,559 70,214 69,480 68,248


P/E (Reported) (x) 10.0 12.0 19.5 16.3 16.1 13.9

P/BV (x) 3.06 4.16 6.53 5.47 5.18 4.63

FCF Yield (%) 14.2 7.0 4.9 6.7 5.8 6.2

Dividend Yield (%) 7.9 5.7 3.6 4.3 4.3 5.4

EV/Sales (x) 0.7 0.8 1.5 1.2 1.1 0.9

EV/EBITDA (x) 6.1 6.8 11.9 8.7 7.5 6.5

EV/EBIT (x) 8.7 8.7 15.1 10.9 9.3 7.9

Income Statement (TWDm)

Sales revenue 38,148 47,654 55,804 58,062 65,931 75,980

Gross profit 8,673 11,087 13,236 15,053 17,423 20,054

EBITDA 4,138 5,820 6,993 8,114 9,281 10,481

Depreciation 1,233 1,319 1,470 1,693 1,807 1,818


EBIT 2,905 4,501 5,522 6,421 7,474 8,663

Net interest income(expense) -3 -40 -36 -18 -11 10



Other pre-tax income/(expense) 457 531 700 626 519 556


Income tax expense 769 1,613 1,597 1,521 2,045 2,362

Minorities 330 355 424 497 547 602


Net profit 2,294 3,087 4,238 5,034 5,391 6,264

DB adjustments (including dilution) -40 -73 -185 -328 0 0

DB Net profit 2,254 3,014 4,053 4,706 5,391 6,264

Cash Flow (TWDm)


Net Capex -645 -1,972 -2,859 -3,036 -3,000 -2,000

Free cash flow 3,240 2,590 4,005 5,478 5,047 5,350


Dividends paid -1,178 -1,837 -2,142 -2,982 -3,723 -3,773

Net inc/(dec) in borrowings -1,136 597 -620 -633 -85 -1,100

Other investing/financing cash flows -1,152 -1,041 -760 -376 -42 -43

Net cash flow -225 308 483 1,487 1,197 434

Change in working capital -490 -1,313 52 239 -1,203 -1,018

Balance Sheet (TWDm)




Associates/investments 675 655 896 852 852 1,152

Other assets 8,985 11,370 12,154 11,867 14,036 15,712

Total assets 21,497 25,397 28,697 30,514 35,073 37,664

Interest bearing debt 3,159 3,338 2,569 2,085 2,000 900




Minorities 1,526 1,571 1,777 1,858 2,405 3,007


Net debt 1,576 1,446 195 -1,776 -3,058 -4,591

Key Company Metrics

Sales growth (%) nm 24.9 17.1 4.0 13.6 15.2

DB EPS growth (%) na 28.6 29.9 7.9 8.4 16.2

EBITDA Margin (%) 10.8 12.2 12.5 14.0 14.1 13.8

EBIT Margin (%) 7.6 9.4 9.9 11.1 11.3 11.4

Payout ratio (%) 78.5 68.1 69.3 70.0 70.0 75.0

ROE (%) 23.5 30.0 35.4 35.8 33.9 35.3

Capex/sales (%) 2.7 4.3 5.3 5.3 4.6 2.6


Net debt/equity (%) 14.0 11.6 1.3 -10.5 -16.0 -21.1

Net interest cover (x) nm 113.3 155.0 359.2 705.7 nm


21 February 2017

Consumer



Pou Sheng (3813 HK): Stronger-than-expected top-line growth

Stock drivers

1. 2017 revenue growth to outpace market expectation 2017 drivers intact: (a) more sufficient inventory from Nike, (b) flagship

stores & efficiency programs by Adidas, and (c) high-margin Sketchers

business growing fast (Figure 65).

Please refer to “Pou Sheng − Remain positive on 2017 outlook”,

published on 2017-Jan-17.

In-house e-commerce turned profitable in 2016: based on public profit

data reported by the Yue Yuen Group, we estimate PS’s e-commerce

operation generated a profit of RMB21m during YT3Q16. This is likely

the first turnaround since the department was founded in 2013 (Figure

66).

(a) We note that PS’s in-house e-commerce revenue accounts for 10% of

2016 revenue. We remain confident that the company‘s e-commerce

will reach 20% of consolidated revenue in 2020.

(b) PS has been investing aggressively in in-house e-commerce to

enhance its back-end processing capability and CRM (Customer

Relationship Management). PS also aims to create an O2O ecosystem

leveraging its Sports City stores.

Figure 65: PS: revenue mix by brand Figure 66: PS: in-house e-commerce turned profitable

ADS

NKE

SKX

Others

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

(120)

(100)

(80)

(60)

(40)

(20)

-

20

2013 2014 2015 YT3Q15 YT3Q16

E-commerce profit (LHS) As a % of consolidated pre-tax (RHS)

(RMBmn)


Source: Deutsche Bank estimated, company data

21 February 2017

Consumer



Monitor retail discount: one of the most important research focus

points for PS in 2017 is the level of the retail discount (given that both

PS and Belle Sportswear hold sufficient Nike products). Based on our

January channel observations, we see limited retail discounts ahead.

Our gross margin forecasts imply a normal retail discount level of c.

15%-off in 2016 and beyond.

Please refer to “China Sportswear − CNY channel observations”,

published on 2017-Feb-9.

2. Concerns about accounting mistreatment may soon ease We reiterate our view that PS will report minimum-to-none accounting

restatements when releasing the audit report in March. The potential

effects on future fundamentals from the incident are as follows:

(a) A debate surrounding resale business: PS may decide to close down

the resale business, which represents 5% of PS’s revenue. It will be

positive to PS’s in-house e-commerce business if it decides to close

the resale business, as this will effectively reduce the product supply

to selected competing e-commerce operators.

(b) No changes to corporate strategy: despite the rather heavy

management reshuffle, we expect PS to maintain its strategy. We note

that PS is pivotal to executing the 2020 strategies for both Nike and

Adidas.

Line of Thinking

Figure 68: PS’s share price Figure 69: PS’s consensus earnings revisions

0.0

0.5

1.0

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2.0

2.5

3.0


Share price

Initiate

with Buy

0

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Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16




We initiated with Buy: we didn’t detect heavier-than-expected

promotions in November and the accounting misstatement incident.

But we believe the fundamental positives are still intact.

Please refer to “Pou Sheng − Remain positive on 2017 outlook”,

published on 2017-Jan-17.

Figure 67: Underlying retail discount

assumptions

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2010 2012 2014 16E 18E 20E

Retail discount (%-off, implied by

gross margin)

Positive to

margins

Negative to

margins


21 February 2017

Consumer




Figure 70: Earnings revisions: we forecast higher revenue growth but conservatively model more retail discount

2016E 2017E 2018E

(CNY mn) New Old Diff New Old Diff New Old Diff

Revenue 16,279 16,279 0% 19,445 18,782 4% 22,673 21,371 6%

Gross Profit 5,781 5,868 -1% 7,146 7,104 1% 8,332 8,117 3%

Op.Income 940 963 -2% 1,283 1,324 -3% 1,583 1,664 -5%

Recur.NP 761 778 -2% 1,044 1,076 -3% 1,262 1,321 -4%

Recur. EPS (HKD) 0.17 0.17 -2% 0.22 0.22 -3% 0.25 0.27 -4%

Gross Margin (%) 35.5% 36.0% -0.5% 36.7% 37.8% -1.1% 36.7% 38.0% -1.2%

Op. Margin (%) 5.8% 5.9% -0.1% 6.6% 7.0% -0.4% 7.0% 7.8% -0.8%

Recur. Net Margin (%) 4.7% 4.8% -0.1% 5.4% 5.7% -0.4% 5.6% 6.2% -0.6% Source: Deutsche Bank estimates note: use recurring earnings in revision for better comparison


2016E 2017E 2018E

(USD mn) DBe Consensus Diff DBe Consensus Diff DBe Consensus Diff

Revenue 2,446 2,391 2.3% 2,723 2,574 5.8% 3,064 2,894 5.9%

Gross Profit 869 851 2.0% 1,001 934 7.1% 1,126 1,049 7.3%

Op.Income 141 143 -1.2% 180 185 -2.6% 214 220 -2.7%

Net Income 114 111 2.7% 146 135 8.6% 171 162 5.3%

EPS (USD) 0.02 0.02 2.7% 0.03 0.03 8.6% 0.03 0.03 5.3%

Gross Margin (%) 35.5% 35.6% -0.1% 36.7% 36.3% 0.4% 36.7% 36.3% 0.5%

Op. Margin (%) 5.8% 6.0% -0.2% 6.6% 7.2% -0.6% 7.0% 7.6% -0.6%

Net Margin (%) 4.7% 4.7% 0.0% 5.4% 5.2% 0.1% 5.6% 5.6% 0.0% Source: Deutsche Bank estimates, Bloomberg Finance LP Note: we use USD financials to better compare with consensus


DCF-based target price maintained at HKD3.1

We use discounted cash flow (DCF) as our primary approach to value PS’s

shares. We adopt DCF methodology as we expect investors to focus more on

PS’s long-term value creation. In our DCF model, we derive a WACC of 10.18%

with a cost of equity of 10.34% (risk-free rate=3.9%, beta=1.15, market risk




21 February 2017

Consumer








DCF Target Price 3.1


Valuation metrics



FY16 PBR 2.4

FY17 PBR 2.1



Beta 1.15 Bloomberg Finance LP 1-year beta






WACC 10.18%

DCF Model LT growth 2.0% In line with Deutsche Bank consumer discretionary coverage space

Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP


Two-stage DCF:



2018~2021 2022~2025 2026~2030 2018~2030

Revenue CAGR: 19.0% 8.8% 4.2% 8.5%


FCF CAGR: 186.6% 11.7% 2.4% 33.1%

-130%

-110%

-90%

-70%

-50%

-30%

-10%

10%

30%

50%

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

2012 2015 2018 2021 2024 2027 2030


YoY (RHS)(RMBmn)




Our DCF-based target price suggests 14x 2017E PER, in line with PS’s one-

year mean plus one standard deviation (15x). The target multiple is not

changed.

3 11.2% 10.7% 10.2% 9.7% 9.2%

0.00% 2.5 2.7 2.8 3.0 3.2

1.00% 2.6 2.8 3.0 3.2 3.4

2.00% 2.7 2.9 3.1 3.3 3.6

3.00% 2.9 3.1 3.3 3.6 3.9

4.00% 3.0 3.3 3.6 3.9 4.3

WACC

Terminal

Growth

21 February 2017

Consumer



Figure 75: PS − consensus PER Figure 76: PS − consensus PER vs. earnings growth

0

2

4

6

8

10

12

14

16

18 DB PER

Mean +

2Std dev

Mean +

1Std dev

1Y Mean

Mean - 1Std

dev

Mean - 2Std

dev

(x)

2014, 0%

2015, 1359%

2016, 92%

0%

200%

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600%

800%

1000%

1200%

1400%

1600%

-20

-10

0

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40

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2014 2015 2016



Source: Deutsche Bank estimates, Bloomberg Finance LP consensus


Heavier-than-expected retail discount would erode profitability and

dampen revenue growth.

A significant decline in sportswear demand in China would lead to

reduced per store sales for PS and consequent operating deleverage.

Nike and Adidas’s heavier DTC efforts to compete with distributors

would lead to reduced per store sales at PS and consequent operating

deleverage.

Less consumer appreciation for PS’s channel brands would lead to

worse-than-expected revenue from PS’s channel brand stores and

dilute its profitability.

Figure 77: PS − quarterly financial summary


(CNYmn) 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015A 2016E 2017E 2018E

Net Sa les 3,852 4,114 5,140 4,749 4,661 4,896 14,451 16,279 19,445 22,673

SSSg 0.0% 7.0% 9.0% 5.1% 10.0%

Costs 2,457 2,686 3,311 2,988 2,940 3,060 9,637 10,497 12,299 14,341

Gross prof it 1,395 1,428 1,829 1,760 1,721 1,836 4,814 5,781 7,146 8,332

Operating expenses 1,219 1,344 1,490 1,420 1,468 1,713 4,327 5,047 6,092 7,006

Other OP gains 46 50 59 63 52 56 119 205 230

Operating prof it 222 133 398 403 304 178 607 940 1,283 1,583

Tota l non-operating income (11) 137 (20) (69) (10) 222 -66 112 123 133

Pretax prof it 211 270 378 335 294 400 541 1,051 1,407 1,716


Minority (0) (15) 3 2 - (15) -14 -4 -10 -9

Net Income 161 215 242 265 221 315 406 761 1,044 1,262


Gross margin 36.2% 34.7% 35.6% 37.1% 36.9% 37.5% 33.3% 35.5% 36.7% 36.7%


OPEX to sales 30.4% 31.5% 27.9% 28.6% 30.4% 33.9% 29.9% 31.0% 31.3% 30.9%

Pretax margin 5.5% 6.6% 7.3% 7.0% 6.3% 8.2% 3.7% 6.5% 7.2% 7.6%

Net Margin 4.2% 5.2% 4.7% 5.6% 4.7% 6.4% 2.8% 4.7% 5.4% 5.6%


Revenue- YoY 10% 16% 18% 20% 21% 19% 18% 13% 19% 17%

Earnings- YoY 33% 78% 45% 22% 37% 47% 1359% 87% 37% 21%

High-Single Digit ppt


21 February 2017

Consumer




Running the numbers

Asia

Hong Kong

Textiles & Apparel

Pou Sheng Reuters: 3813.HK Bloomberg: 3813 HK



52 Week range HKD 1.53 - 2.78


USDm 1,345

Company Profile

Pou Sheng International (Holdings) Limited is one of the largest sportswear retailers in Mainland China under the brand of YY Sports. Its brand portfolio of footwear includes Nike, Adidas, Asics, Reebok, PUMA...etc.

Price Performance

0.40.81.21.62.02.42.83.2


Pou Sheng HANG SENG INDEX (Rebased)

Margin Trends

0235689

13 14 15 16E 17E 18E



-10

-5

0

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20

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10

15

20

25

13 14 15 16E 17E 18E


Solvency

0

20

40

60

80

100

120

-505

1015202530

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (CNY) -0.04 0.01 0.09 0.14 0.20 0.24

Reported EPS (CNY) -0.04 0.01 0.08 0.14 0.20 0.24

DPS (CNY) 0.00 0.00 0.00 0.04 0.06 0.10

BVPS (CNY) 1.0 1.0 1.0 1.2 1.3 1.5


Average market cap (CNYm) 1,815 2,351 4,230 9,237 9,237 9,237

Enterprise value (CNYm) 3,065 3,206 4,421 8,870 8,940 8,801

Valuation Metrics P/E (DB) (x) nm 69.2 9.2 11.9 8.8 7.3

P/E (Reported) (x) nm 84.6 10.5 12.1 8.8 7.3

P/BV (x) 0.31 0.60 1.47 1.45 1.29 1.15

FCF Yield (%) 4.1 17.5 15.2 4.6 0.6 4.3

Dividend Yield (%) 0.0 0.0 0.0 2.1 3.5 5.6

EV/Sales (x) 0.3 0.3 0.3 0.5 0.5 0.4

EV/EBITDA (x) 8.3 8.0 5.4 7.6 5.9 4.8

EV/EBIT (x) 28.5 15.6 7.3 9.4 7.0 5.6

Income Statement (CNYm)

Sales revenue 10,929 12,202 14,451 16,279 19,445 22,673

Gross profit 3,421 3,773 5,025 6,002 7,366 8,567

EBITDA 368 402 817 1,160 1,504 1,819

Depreciation 261 196 210 221 220 235


EBIT 108 206 607 940 1,283 1,583




Other pre-tax income/(expense) -218 -42 -29 152 150 148

Profit before tax -186 125 541 1,051 1,407 1,716


Minorities 1 11 -14 -4 -10 -9


Net profit -236 28 406 761 1,044 1,262


DB Net profit -216 34 463 770 1,044 1,262

Cash Flow (CNYm)

Cash flow from operations 183 573 915 710 364 712

Net Capex -108 -162 -274 -299 -314 -330

Free cash flow 75 410 641 411 50 382


Dividends paid 0 0 0 0 -190 -313

Net inc/(dec) in borrowings -367 -438 -794 -241 0 0

Other investing/financing cash flows -238 36 53 -8 107 59

Net cash flow -530 9 -99 162 -32 128

Change in working capital -230 324 680 -103 -773 -629

Balance Sheet (CNYm)

Cash and other liquid assets 253 269 176 337 305 433




Other assets 7,168 6,459 6,583 6,846 7,969 8,998

Total assets 8,978 8,185 8,175 8,830 9,967 11,220

Interest bearing debt 1,646 1,211 441 200 200 200




Minorities 99 90 43 40 30 21


Net debt 1,392 941 266 -137 -105 -233

Key Company Metrics

Sales growth (%) nm 11.6 18.4 12.6 19.4 16.6

DB EPS growth (%) na na 1,269.1 66.2 35.6 20.9

EBITDA Margin (%) 3.4 3.3 5.7 7.1 7.7 8.0

EBIT Margin (%) 1.0 1.7 4.2 5.8 6.6 7.0

Payout ratio (%) nm 0.0 0.0 25.0 30.0 40.0

ROE (%) -4.4 0.5 7.5 13.1 15.9 17.1

Capex/sales (%) 1.1 1.3 2.0 1.8 1.6 1.5


Net debt/equity (%) 25.2 17.5 4.8 -2.2 -1.5 -3.0

Net interest cover (x) 1.4 5.2 16.6 23.1 47.6 106.7


21 February 2017

Consumer



Shenzhou (2313 HK): Temporary negatives to drive Buy opportunities

Stock drivers

1. Gross margin pressure likely temporary Raw material prices shouldn’t be as bad as in 2011: SZ’s gross margin

dropped by 109bps YoY in 2011 due to a sharp rise in raw material

costs (Figure 78). We expect the gross margin pressure from raw

material to be significantly lower this time, owing to:

(1) No cotton yarn shortage. Cotton yarn is in sufficient supply, vs. a

shortage throughout the supply chain in 2011.

(2) Higher exposure to higher value-added synthetics: when

compared to cotton yarn, synthetic yarn in general delivered fewer

price hikes (due to heavy inventory and oversupply).

(3) SZ’s bargaining power: SZ’s revenue scale increased c. 70% vs.

2011. New products like the Flyknit upper also enhanced SZ’s

bargaining power.

Figure 78: SZ gross margin vs. cotton prices Figure 79: SZ gross margin vs. polyester yarn prices

5

10

15

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25

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35

20.0%

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26.0%

28.0%

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32.0%

34.0%

1Q06 3Q07 1Q09 3Q10 1Q12 3Q13 1Q15 3Q16

Gross Margin (LHS) China-328 (RHS) (RMB '000

/MT)

1.0

1.2

1.4

1.6

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1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Gross Margin (LHS)

150D/24F DTY- Taiwan (RHS)

(US$'000 /MT)



21 February 2017

Consumer



Major wage hike in 4Q16 unlikely to recur in 2017 & 2018: we

estimate SZ had a major wage hike in October 2016. We believe the

line workers and managers received a pay-raise of on average

RMB400-500/month (vs. ordinary adjustment of RMB200/month)

(Figure 80).

(1) The hike likely impacted the 2017 gross margin by 50-100bps

(based on conservative estimates).

(2) The hike acts as an incentive to encourage employees, so it

cannot be 100% passed on to SZ’s clients.

(3) SZ enjoyed very smooth worker return in 2017 after the Chinese

New Year.

(4) We note that SZ undertakes major wage adjustments once every

three years. The previous major hike took place in late 2013,

based on our estimates.

Rising Vietnam production mix supports gross margins: theoretically,

the Vietnam plant generates a higher gross margin thanks to a more

favorable cost structure (Figure 81).

2. Flyknit slowdown temporary, next generation product in the pipeline We now forecast Flyknit upper volume growth of 15% YoY in 2017 (vs.

50% YoY previously, Figure 82). The rather drastic cut reflects:

(1) The preparation of the next generation product launch: we believe

Nike is creating tight supply in preparation for the next generation

product (manufactured using Japanese solutions instead of

German ones).

(2) An overhaul of the existing production facilities aimed at ceasing

production of some of the existing machines to increase efficiency

and reduce costs.

(3) The “modern retro” sneakers style

SZ’s market is not lost; in fact, we forecast SZ to obtain dominant

market share in the second generation product: we also highlight that

the full automation program (Project Flex) remains at a very early

stage.

Embracing a much stronger Flyknit business from 2018: we forecast

Flyknit to deliver (a) more cost-efficient production, (b) newer design &

functionality and (c) play a main role in the recently-launched “Express

Lane” program.

Figure 80: SZ wage hike cycles

20%

21%

22%

23%

24%

25%

26%

27%

28%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2014 2015 16E 17E

Wage YoY (LHS)

Labor cost a % of textile revenue (RHS)


Figure 81: SZ garment capacity mix

(by volume capacity)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 16E 17E 18E 19E 20E

Vietnam

Cambodia

Xuzhou

Anhui

Ningbo


Figure 82: SZ’s Flyknit upper volume

forecasts

-25%

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-15%

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-5%

0%

5%

10%

0%

20%

40%

60%

80%

100%

120%

140%

2014 2015 16E 17E 18E 19E 20E

Upper volume YoY (LHS)

Per machine output YoY (RHS)

Production

optimization


21 February 2017

Consumer



Line of Thinking

Figure 83: SZ’s share price Figure 84: SZ consensus earnings revisions

2

12

22

32

42

52


Share price

Initiate

with Buy

2500

2700

2900

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3500

3700

3900

2,000

2,200

2,400

2,600

2,800

3,000

3,200

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3,800

4,000





We initiated with Buy: The 2017 earnings momentum was weaker

than our expectation due to temporary negatives. We remain

confident in SZ’s core competencies: execution and growing

innovation.


Figure 85: Earnings revisions: we factor in temporary slowdowns in 2017

2016E 2017E 2018E

(CNY mn) New Old Diff New Old Diff New Old Diff

Revenue 15,328 15,328 0% 17,455 17,888 -2% 19,909 20,324 -2%

Gross Profit 4,881 4,881 0% 5,498 5,857 -6% 6,386 6,747 -5%

Op.Income 3,382 3,382 0% 3,804 4,123 -8% 4,485 4,757 -6%

Recur.NP 3,032 3,032 0% 3,418 3,637 -6% 3,990 4,177 -4%

Recur. EPS (CNY) 2.17 2.17 0% 2.44 2.60 -6% 2.85 2.99 -4%

Gross Margin (%) 31.8% 31.8% 0.0% 31.5% 32.7% -1.2% 32.1% 33.2% -1.1%

Op. Margin (%) 22.1% 22.1% 0.0% 21.8% 23.1% -1.3% 22.5% 23.4% -0.9%

Recur. Net Margin (%) 19.8% 19.8% 0.0% 19.6% 20.3% -0.7% 20.0% 20.6% -0.5% Source: Deutsche Bank estimates note: use recurring earnings in revision for better comparison


2016E 2017E 2018E

(CNY mn) DBe Consensus Diff DBe Consensus Diff DBe Consensus Diff

Revenue 15,328 15,320 0.1% 17,455 17,856 -2.2% 19,909 20,562 -3.2%

Gross Profit 4,881 4,871 0.2% 5,498 5,727 -4.0% 6,386 6,606 -3.3%

Op.Income* 3,656 3,590 1.8% 4,094 4,286 -4.5% 4,789 4,987 -4.0%

Net Income 3,032 2,995 1.2% 3,418 3,584 -4.6% 3,990 4,101 -2.7%

EPS (CNY) 2.02 1.99 1.2% 2.28 2.39 -4.6% 2.66 2.73 -2.7%

Gross Margin (%) 31.8% 31.8% 0.0% 31.5% 32.1% -0.6% 32.1% 32.1% 0.0%

Op. Margin (%) 23.8% 23.4% 0.4% 23.5% 24.0% -0.5% 24.1% 24.3% -0.2%

Net Margin (%) 19.8% 19.5% 0.2% 19.6% 20.1% -0.5% 20.0% 19.9% 0.1% Source: Deutsche Bank estimates, Bloomberg Finance LP *including non-recurring items to fit the reporting style

21 February 2017

Consumer




DCF-based target price of HKD56

We cut our DCF-based target price by 10% to HKD56, mainly to reflect

downward earnings revisions. We use discounted cash flow (DCF) as our

primary approach to value SZ’s shares. We adopt DCF methodology as we

expect investors to focus more on SZ’s long-term value creation. In our DCF

model, we derive a WACC of 8.35% with a cost of equity of 8.94% (risk-free

rate=3.9%, beta=0.9, market risk premium=5.6%) and a cost of debt of 4.0%.

We assume a long-term growth rate of 2%, which is in line with DB’s Hong

Kong and China consumer discretionary coverage.

Figure 87: Discounted cash flow valuation – Key assumptions





DCF Target Price 56


Valuation metrics



FY16 PBR 5.5

FY17 PBR 5.1









WACC 8.35%

DCF long-term growth 2.0% In-line with DB consumer discretionary coverage space


21 February 2017

Consumer




Two-stage DCF:



2018~2021 2022~2025 2026~2030 2018~2030

Revenue CAGR: 15.9% 7.6% 5.1% 7.9%


FCF CAGR: 40.2% 6.6% 3.9% 11.9%

-90%

-70%

-50%

-30%

-10%

10%

30%

50%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2012 2015 2018 2021 2024 2027 2030


YoY (RHS)(RMBmn)




Our DCF-based target price suggests 21x 2017E PER, in line with SZ’s one-

year mean plus one standard deviation (21x). The target multiple is not

changed.

Figure 90: SZ consensus PER Figure 91: SZ consensus PER vs. earnings growth

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DB PER

Mean +

2Std dev

Mean +

1Std dev

2Y Mean

Mean - 1Std

dev

Mean - 2Std

dev

(x)

2010, 2%

2011, 34%

2012, -5%

2013, 11%

2014, 15% 2015, 14%

2016, 29%

-10%

0%

10%

20%

30%

40%

50%

-20

-10

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015 2016 2017



Source: Deutsche Bank estimates, Bloomberg Finance LP consensus


Significant competition would lead to price erosion and operating

deleverage.

Heavy volatility in raw material prices would lead to greater volatility in

SZ’s gross margin and affect its clients’ ability to place orders

smoothly.

A yield rate issue with new textile capacity would affect SZ’s

profitability and may lead to order loss.

Sharp reduction in Flyknit demand would affect SZ’s growth

momentum and lead to operating deleverage.

56 9.3% 8.8% 8.3% 7.8% 7.3%

0.00% 43 45 49 52 57

1.00% 45 48 52 56 61

2.00% 48 52 56 61 68

3.00% 51 56 62 69 77

4.00% 57 63 70 80 92

WACC

Terminal

Growth

21 February 2017

Consumer



Figure 92: SZ financial summary


1H15A 2H15A 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Net Sa les 5,577 7,063 6,952 8,377 7,800 9,656 12,640 15,328 17,455 19,909

Sports (ex Flyknit) 3,271 4,125 4,053 4,777 4,535 5,536 7,396 8,830 10,070 11,577

Flyknit 335 297 436 550 496 633 632 986 1,129 1,637

Casual & Lingerie 1,972 2,640 2,463 3,050 2,769 3,488 4,612 5,513 6,256 6,695

Costs 3,940 4,851 4,736 5,712 5,350 6,608 8,791 10,448 11,958 13,523

Gross prof it 1,637 2,212 2,216 2,665 2,450 3,048 3,849 4,881 5,498 6,386

Operating expenses 568 650 686 813 757 937 1,218 1,499 1,693 1,901

Operating prof it 1,069 1,562 1,529 1,852 1,693 2,111 2,631 3,382 3,804 4,485

Government grant 212 5 239 30 250 40 216 269 290 305

Other non-OP 73 (34) (14) 90 45 45 39 76 90 95

Tota l non-operating income 284 (29) 224 120 295 85 256 344 380 399

Pretax prof it 1,354 1,533 1,754 1,972 1,988 2,196 2,887 3,726 4,184 4,884


Minority (0) 0 0 - - - 0 0 0 0

Net Income 1,120 1,234 1,450 1,582 1,650 1,768 2,355 3,032 3,418 3,990

EPS (CNY) 0.80 0.88 1.04 1.13 1.18 1.26 1.61 2.02 2.28 2.66

Prof itab il ity 1H15A 2H15A 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Gross margin 29.4% 31.3% 31.9% 31.8% 31.4% 31.6% 30.5% 31.8% 31.5% 32.1%


OPEX to sales 10.2% 9.2% 9.9% 9.7% 9.7% 9.7% 9.6% 9.8% 9.7% 9.6%

Pretax margin 24.3% 21.7% 25.2% 23.5% 25.5% 22.7% 22.8% 24.3% 24.0% 24.5%

Net Margin 20.1% 17.5% 20.9% 18.9% 21.2% 18.3% 18.6% 19.8% 19.6% 20.0%

Growth 1H15A 2H15A 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Revenue- YoY 12% 15% 25% 19% 12% 15% 14% 21% 14% 14%

EPS- YoY 19% 10% 29% 28% 14% 12% 12% 25% 13% 17% Source: Deutsche Bank estimates, company data

21 February 2017

Consumer




Running the numbers

Asia

China

Textiles & Apparel

Shenzhou Reuters: 2313.HK Bloomberg: 2313 HK



52 Week range HKD 35.69 - 55.05


USDm 8,598

Company Profile

Shenzhou International Group Holdings Limited is the largest vertically integrated manufacturer of knitwear and the largest exporter in China. The company engages in manufacturing, processing, and selling knitwear products on an OEM basis. Shenzhou focuses on producing sports product, casual wear and lingerie wear.

Price Performance

20

30

40

50

60


Shenzhou HANG SENG INDEX (Rebased)

Margin Trends

20

21

23

24

26

27

13 14 15 16E 17E 18E



0

5

10

15

20

25

30

0

5

10

15

20

25

13 14 15 16E 17E 18E


Solvency

-30

-20

-10

0

10

20

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (CNY) 1.35 1.45 1.61 2.02 2.28 2.66

Reported EPS (CNY) 1.32 1.45 1.57 2.02 2.28 2.66

DPS (CNY) 0.95 1.35 1.42 1.39 1.44 1.65

BVPS (CNY) 7.7 8.4 9.3 10.2 11.0 12.2





P/E (Reported) (x) 12.9 13.3 18.1 20.9 18.5 15.9

P/BV (x) 2.77 2.28 3.76 4.14 3.83 3.46

FCF Yield (%) 4.0 2.9 0.6 1.5 3.1 4.2

Dividend Yield (%) 5.6 7.0 5.0 3.3 3.4 3.9

EV/Sales (x) 2.0 2.2 3.0 3.8 3.3 2.9

EV/EBITDA (x) 8.5 9.3 12.0 14.5 13.1 11.2

EV/EBIT (x) 10.2 11.2 14.3 17.1 15.3 12.9


Sales revenue 10,047 11,132 12,640 15,328 17,455 19,909

Gross profit 3,246 3,669 4,371 5,481 6,122 7,068

EBITDA 2,384 2,628 3,154 3,983 4,429 5,167

Depreciation 407 443 522 601 624 683


EBIT 1,978 2,186 2,631 3,382 3,804 4,485

Net interest income(expense) 23 79 124 70 90 95








Net profit 1,803 2,066 2,355 3,032 3,418 3,990

DB adjustments (including dilution) 34 -4 69 -4 0 0

DB Net profit 1,837 2,062 2,424 3,027 3,418 3,990

Cash Flow (CNYm)


Net Capex -789 -1,128 -2,033 -1,764 -1,350 -1,150

Free cash flow 920 791 226 876 1,836 2,505

Equity raised/(bought back) 1,217 0 0 0 0 0

Dividends paid -755 -825 -1,104 -1,610 -1,948 -2,020

Net inc/(dec) in borrowings -786 2,911 862 181 -61 -210

Other investing/financing cash flows -131 -4,058 403 321 66 -197

Net cash flow 465 -1,181 388 -232 -107 79

Change in working capital -483 -374 -774 -901 -766 -841





Associates/investments 231 4,019 3,919 3,598 3,438 3,566

Other assets 4,160 5,436 6,036 6,951 7,751 8,656

Total assets 11,317 15,943 18,362 19,887 21,145 22,724

Interest bearing debt 0 2,911 3,774 3,955 3,894 3,684

Other liabilities 986 1,220 1,498 1,657 1,808 1,969

Total liabilities 986 4,132 5,272 5,611 5,702 5,653


Minorities 15 16 16 16 16 16


Net debt -2,609 1,483 1,958 2,371 2,417 2,128

Key Company Metrics

Sales growth (%) nm 10.8 13.5 21.3 13.9 14.1

DB EPS growth (%) na 7.4 11.7 24.9 12.9 16.7

EBITDA Margin (%) 23.7 23.6 25.0 26.0 25.4 26.0

EBIT Margin (%) 19.7 19.6 20.8 22.1 21.8 22.5

Payout ratio (%) 71.0 91.4 84.4 64.3 59.1 58.0

ROE (%) 17.5 18.7 18.9 22.2 23.0 24.6

Capex/sales (%) 7.9 10.2 16.1 11.5 7.7 5.8


Net debt/equity (%) -25.3 12.6 15.0 16.6 15.7 12.5

Net interest cover (x) nm nm nm nm nm nm


21 February 2017

Consumer



Li Ning (2331 HK): Take the offensive (look beyond expenses); Buy

Market may need to digest its 2017 expenses outlook

Investment in channels and sales team We believe the additional expenses will be invested more in channels

than in expanding the Danskin brand. We expect LN to invest in:

(1) Direct operated outlets: LN delivered very strong destocking with its

retail network in 2016. However, the destocking at its wholesalers was

likely below management’s expectation (Figure 93). This is driven by

the existence of less cooperative wholesalers. We expect LN to install

more direct-operated outlets from 2017 as it aims to collect inventory

from the wholesalers to help them destock.

(2) Better communication with franchisees: in the past, franchisees were

managed by LN’s first-tier wholesalers. We expect LN to launch a

program to interact directly with franchisees in terms of product flow

and cash flow.

(3) Consignment stores in Southern China: we expect LN to install some

consignment stores in regions where its presence is weaker. This is

aimed at incentivizing local wholesalers to open new stores (given that

under a consignment model the inventory risks shift from wholesalers

to LN).

Better service wholesalers: LN is likely recruiting more salespeople to

better service its wholesalers. The newly-recruited employees include

product and retail specialists that can add more value to its

wholesalers than generalist sales workers, in our view.

A grand goal for the channels: through the aforementioned points, we

anticipate LN to sustain a mid-to-high single-digit SSSg for its off-line

channels (Figure 94).

21 February 2017

Consumer



Figure 93: LN channel inventory trend Figure 94: LN per store sales YoY

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2011 2012 2013 2014 2015 16E 17E

Average Retail Wholesale & e-commerce

(months of sales equivalent)

Channel reform:

inventory buyback

Helping wholesalers destock

is a must

-30%

-20%

-10%

0%

10%

20%

30%

2010 2011 2012 2013 2014 1H15 15E 16E 17E

Consolidated Wholesale

Retail

Focusing on driving sellthrough

(even with smaller stores)

Source: Deutsche Bank estimates, company

Source: Deutsche Bank estimates, company

LN’s e-commerce business emerging to become a major profit driver A clear outperformer in 2017: we expect LN’s e-commerce revenue

grew over 80% in 2017 (surpassing the company’s target).

A profitable business: we estimate LN’s e-commerce business to carry

over its 15% EBIT margin, making it one of LN’s most profitable

businesses. We note that LN management targets a normalized e-

commerce EBIT margin of 30%, while we anticipate Anta’s e-

commerce to deliver a c. 30% EBIT margin in 2016.

Figure 95: LN revenue mix by channel Figure 96: LN profit mix by channel

95% 92%85% 81% 77%

72% 68%

5% 8%15% 19% 23%

28% 32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 16E 17E 18E 19E 20E

e-commerce Physical channels

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

2014 2015 16E 17E 18E 19E 20E

e-commerce Physical channels(RMBmn)



A series of reforms on management structure and production

We also witnessed drastic efforts by the company to streamline its

management structure, including trimming the sales team structure to two

major districts (vs. seven in the past) as well as increasing the importance of

the channel department.

On the other hand, we expect the company to further enhance its production

capability.

21 February 2017

Consumer



Line of Thinking

Figure 97: LN share price Figure 98: LN consensus earnings revisions

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5


Share price

U/G to

Hold (1)U/G to

Buy (2)

Buy (3)

Buy (4)

300

350

400

450

500

550

600

650

700

200

250

300

350

400

450

500

550

600

650





Buy (3): we suggest buying into 1H16 results due to a likely

turnaround in LN’s retail business.

Buy (4): we argue there was a stronger-than-expected earnings

recovery from the multi-channel strategy.

Latest view: We believe LN may incur more expenses in 2017 due to

channel investments, but this is a must to sustain long-term growth.


Figure 99: Earnings revisions: we factor in heavier investments in channel in 2017

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Revenue 8,092 9,270 10,625 8,079 9,121 10,404 0.2% 1.6% 2.1%

Gross profit 3,828 4,509 5,319 3,822 4,450 5,209 0.2% 1.3% 2.1%

EBIT 476 777 1,237 538 889 1,353 -11.5% -12.6% -8.6%

Headline NP 528 642 1,020 577 729 1,111 -8.4% -11.9% -8.1%

Profitability

Gross margin 47.3% 48.6% 50.1% 47.3% 48.8% 50.1% 0.0% -0.1% 0.0%

EBIT margin 5.9% 8.4% 11.6% 6.7% 9.7% 13.0% -0.8% -1.4% -1.4%

Net margin 6.5% 6.9% 9.6% 7.1% 8.0% 10.7% -0.6% -1.1% -1.1%

RMBm YE DecNew forecast New vs. Old forecastOld forecast


21 February 2017

Consumer



Figure 100: DBe vs. consensus: we are more positive on 2017 and 2018 (note DBe earnings are higher in 2016, partly

as we factored in the Double Happiness disposal & revaluation gains).

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Revenue 8,092 9,270 10,625 8,057 9,073 10,112 0.4% 2.2% 5.1%

Gross profit 3,828 4,509 5,319 3,749 4,322 4,899 2.1% 4.3% 8.6%

EBIT 476 777 1,237 438 718 1,099 8.7% 8.3% 12.5%

Headline NP 528 642 1,020 363 598 887 45.4% 7.3% 15.0%

Profitability

Gross margin 47.3% 48.6% 50.1% 46.5% 47.6% 48.4% 0.8% 1.0% 1.6%

EBIT margin 5.9% 8.4% 11.6% 5.4% 7.9% 10.9% 0.4% 0.5% 0.8%

Net margin 6.5% 6.9% 9.6% 4.5% 6.6% 8.8% 2.0% 0.3% 0.8%

Market consensus New vs. Market forecastRMBm YE Dec

New forecast



DCF-based target price reduced to HKD5.9

We cut our DCF-based target price to HKD5.9 (from HKD6.1 previously). The c.

3% cut is intended to reflect the earnings downward revision as well as our

growing conviction in LN’s long-term growth potential.

We value LN using DCF methodology as we expect investors to focus on the

company’s long-term growth profile. The cost of equity of 11.2% entails a risk-

free rate of 3.9% (Deutsche Bank assumption), equity risk premium of 5.6%

(Deutsche Bank assumption), and beta of 1.3. We assume a perpetual growth

rate of 1%, in line with the Hong Kong and China consumer discretionary

space’s rate of 1-2%.

Figure 101: DCF sensitivity for LN

DCF Sensit iv ity Analys is (HK$) DCF Sensit iv ity Analys is on FY17E PE (x)

WACC -2.0% -0.5% 1.0% 2.5% 4.0% WACC -2.0% -0.5% 1.0% 2.5% 4.0%

9.2% 6.3 6.6 7.1 7.9 9.0 9.2% 22.3 28.7 30.9 34.0 39.0

10.2% 5.8 6.1 6.4 7.0 7.7 10.2% 25.0 26.3 27.9 30.1 33.4

11.2% 5.4 5.6 5.9 6.3 6.8 11.2% 23.3 24.2 20.9 27.1 29.4

12.2% 5.0 5.2 5.4 5.7 6.1 12.2% 21.7 22.5 23.4 24.7 26.4

13.2% 4.7 4.9 5.0 5.3 5.6 13.2% 20.4 21.0 21.8 22.7 24.0

Long run growth Long run growth



Execution: Our conversations with experts continue to suggest that the company is still in a relatively weak position in terms of systematic management. This may lead to poorer execution. We continue to believe LN needs a more comprehensive management system to enhance efficiency and sustainability.

Transitional volatility in gross margin: A weaker-than-expected improvement in gross margin is the most significant downside risk to our thesis. This may stem from disappointing retail discounts for the retail

21 February 2017

Consumer



business and/or a lower sell-through contribution from new products. Given LN’s low EBIT margin, a disappointment in the gross margin result in a very heavy swing to our 2016E EBIT and profit estimates.

Weaker revenue growth, especially at wholesaler business: LN’s wholesaler channel inventory level remains far from optimal. As a result, negative development in end-demand may hinder wholesalers’ willingness to order, in turn hurting LN’s revenue. Also, significant inventory shortages at outlet stores may affect LN’s revenue.

Weaker-than-expected improvement in store efficiency: If LN is unable to further improve its store productivity, this could hurt its operating leverage.

Figure 102: LN financial summary


1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Net Sa les 3,596 4,496 4,161 5,109 7,089 8,092 9,270 10,625

Li Ning brand-sales 3,553 4,421 4,111 5,024 6,972 7,974 9,135 10,481

Li Ning brand-store 6,169 6,409 6,509 6,609 6,133 6,409 6,609 6,909

Other brands-sales 43 75 50 85 118 118 135 144

Costs 1,882 2,382 2,155 2,606 3,966 4,264 4,761 5,306

Gross prof it 1,714 2,115 2,006 2,503 3,124 3,828 4,509 5,319

Operating expenses 1,410 1,729 1,580 1,940 2,957 3,139 3,520 3,866

Operating prof it 185 291 320 457 (33) 476 777 1,237

Government grant 33 16 27 27 31 49 54 59

Other non-OP (84) 220 (7) 14 137 136 7 33

Tota l non-operating income (51) 236 20 41 168 186 61 93

Pretax prof it 135 527 340 498 135 662 838 1,330

Taxes (negative for credit) 20 111 78 115 74 131 193 306

Minority 1 2 2 2 47 3 3 4

Net Income 113 415 260 382 14 528 642 1,020

Fully d iluted EPS (RMB) 0.008 0.215 0.262 0.416

Prof itab il ity 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Gross margin 47.7% 47.0% 48.2% 49.0% 44.1% 47.3% 48.6% 50.1%

Operating margin 5.2% 6.5% 7.7% 9.0% -0.5% 5.9% 8.4% 11.6%

OPEX to sales 39.2% 38.5% 38.0% 38.0% 41.7% 38.8% 38.0% 36.4%

Pretax margin 3.7% 11.7% 8.2% 9.7% 1.9% 8.2% 9.0% 12.5%

Net Margin 3.2% 9.2% 6.3% 7.5% 0.2% 6.5% 6.9% 9.6%

Growth 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Revenue- YoY -1% 8% 16% 14% 5% 1% 7% 4%

EPS- YoY 2679% 22% 59%

Unconsolidated DHS Unconsolidated DHS


21 February 2017

Consumer




Running the numbers

Asia

China

Textiles & Apparel

Li Ning Co Ltd Reuters: 2331.HK Bloomberg: 2331 HK



52 Week range HKD 3.12 - 5.89


USDm 1,251

Company Profile

Li Ning is a leading PRC sports brand, specializing in the design and the distribution of footwear and accessories under the brand name Li Ning.

Price Performance

2.0

3.0

4.0

5.0

6.0


Li Ning Co Ltd HANG SENG INDEX (Rebased)

Margin Trends

-20

-10

0

10

20

13 14 15 16E 17E 18E



-40-30-20-100102030

-15-10-505

101520

13 14 15 16E 17E 18E


Solvency

0

5

10

15

20

25

-50-40-30-20-10

0102030

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (CNY) -0.65 -0.52 -0.05 0.16 0.28 0.42

Reported EPS (CNY) -0.25 -0.48 0.01 0.22 0.26 0.42

DPS (CNY) 0.00 0.00 0.00 0.08 0.10 0.22

BVPS (CNY) 2.0 1.4 1.7 1.9 2.1 2.4




Valuation Metrics P/E (DB) (x) nm nm nm 28.1 16.3 11.0

P/E (Reported) (x) nm nm 398.9 21.2 17.4 11.0

P/BV (x) 2.47 2.21 2.02 2.42 2.15 1.86

FCF Yield (%) nm nm nm 4.0 5.9 10.4

Dividend Yield (%) 0.0 0.0 0.0 1.8 2.2 4.7

EV/Sales (x) 1.1 1.0 0.7 0.9 0.8 0.6

EV/EBITDA (x) nm nm 14.4 10.3 7.0 4.4

EV/EBIT (x) nm nm 49.1 16.0 9.4 5.4


Sales revenue 5,824 6,728 7,812 8,092 9,270 10,625

Gross profit 2,390 2,886 3,443 3,828 4,509 5,319

EBITDA -517 -439 359 738 1,043 1,513

Depreciation 193 198 254 262 265 276


EBIT -710 -638 105 476 777 1,237





Profit before tax -317 -665 168 662 838 1,330




Net profit -392 -781 14 528 642 1,020

DB adjustments (including dilution) -613 -57 -116 -130 45 0

DB Net profit -1,005 -838 -102 398 688 1,020

Cash Flow (CNYm)

Cash flow from operations -97 -629 179 752 789 1,212

Net Capex -286 -327 -327 -405 -278 -319

Free cash flow -382 -956 -148 347 511 893

Equity raised/(bought back) 1,480 0 1,172 0 0 0

Dividends paid 0 0 0 -71 -174 -290

Net inc/(dec) in borrowings -1,053 480 -249 -200 -298 0

Other investing/financing cash flows -17 227 4 200 0 0

Net cash flow 28 -249 779 276 39 603

Change in working capital 566 -1 -1 121 -46 -34



Tangible fixed assets 1,344 1,500 906 1,049 1,062 1,105


Associates/investments 193 200 207 1,291 1,429 1,582

Other assets 3,197 3,305 3,971 2,963 3,326 3,738

Total assets 6,017 6,040 6,897 7,360 7,912 9,124

Interest bearing debt 1,046 1,525 1,277 1,077 778 778




Minorities 208 218 231 234 237 240


Net debt -237 491 -537 -979 -1,317 -1,920

Key Company Metrics

Sales growth (%) -12.8 15.5 16.1 3.6 14.6 14.6

DB EPS growth (%) -100.1 20.6 89.3 na 72.9 48.4

EBITDA Margin (%) -8.9 -6.5 4.6 9.1 11.2 14.2

EBIT Margin (%) -12.2 -9.5 1.3 5.9 8.4 11.6

Payout ratio (%) nm nm 0.0 30.0 30.0 40.0

ROE (%) -18.2 -33.7 0.6 15.7 17.0 23.7

Capex/sales (%) 4.9 4.9 4.2 5.0 3.0 3.0


Net debt/equity (%) -8.2 22.7 -15.7 -25.9 -31.1 -39.6

Net interest cover (x) nm nm 0.8 4.6 10.2 20.4


21 February 2017

Consumer



Anta (2020 HK): Time to take a breather; downgrading to Hold

Market may need to digest weaker Anta Adult orderbook

1. Anta Adult wholesalers need to take a breather Wholesalers may need to destock: based on Anta’s reported data, we

estimate a slight pick-up in Anta’s channel inventory (meaning more

Anta products are being held by its wholesalers). We have witnessed

an increasing gap between sell-in (orderbook) and sell-through (Figure

103). We think part of the widening gap reflects growing channel

inventory (after adjusting for changes in retail discount; Figure 104).

Channel inventory situation is less than optimal, but far better than

that in 2012: our channel checks suggest Anta Adult inventory levels

at selected wholesalers had reached 5-6 months as of the end of 2016.

This is not optimal (vs. optimal level of 4-5 months) but still

significantly better than that in 2012-13 (in which the worst inventory

level surpassed 10 months). We do not expect the 2012-13 inventory

crisis to recur, as Anta has significantly improved its supervision of

wholesaler conditions.

Please refer to “China Sportswear − CNY channel observations”,

published on 2017-Feb-9.

Figure 103: Widening gap between Anta brand

orderbook growth (sell-in) and sell-through

Figure 104: Channel inventory indicator suggests heavier

channel inventory build during 1Q16 to 4Q16E

-5%

0%

5%

10%

15%

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E

Orderbook growth over SSSg/ sellthrough growth

Orderbook growth

SSSg / sellthrough*

Hi gher inventory

or more discount

Lower inventory or

less discount

3%

4%

5%

6%

7%

8%

9%

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E

Channel inventory indicator

Source: Deutsche Bank estimates, company data Note: Anta changed its sell-through reporting in 1Q16. We adjust the reported growth based on management comments to understand the sell-through growth at Anta Adult off-line stores.

Source: Deutsche Bank estimates, company data Note: the indicator reflects the gap between sell-in and sell-through adjusted by changes in the Anta brand retail discount.

Some of Anta’s policies are disincentive to wholesaler orders:

(1) 6-quarter inventory system adds pressure to wholesalers: this new

inventory system introduced in 2016 forbids wholesalers from

selling products that are launched more than 6-quarters ago.

21 February 2017

Consumer



(2) Anta’s DTC e-commerce strategy also exerts pressure on

wholesalers: Anta has been cracking down on wholesaler resale e-

commerce using its DTC (direct-to-consumer) e-commerce. But in

the process of shutting down wholesaler e-commerce, excessive

inventory is being created.

Anta’s orderbook growth was likely supported by the addition of new

wholesalers: our checks suggest Anta recruited a group of wholesalers

from XDLong (which declared bankruptcy in 2016) and Peak. We thus

forecast Anta to deliver 3Q17 orderbook growth of low-to-mid-single

digit ppt YoY (Figure 105).

Anta has been preparing fast-replenishment facilities. But wholesalers

may need to digest inventory first in order to leverage the new

facilities.

2. Multi-brand strategy still performing well

As our core investment thesis, we remain positive toward Anta’s multi-brand &

multi-channel strategy. Our upward earnings revision in this report also reflects

the increasingly positive aspects of Anta’s operations (beyond the Anta Adult

off-line business).

Figure 106: Revenue mix by channel Figure 107: Earnings (EBIT) mix by channel

95% 93% 88% 83% 78% 75% 72%

5% 8% 12% 17% 22% 25% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 16E 17E 18E 19E 20E

e-commerce (Anta brand) Physical channels

94% 91%83% 76%

69% 65% 62%

6% 9%17% 24%

31% 35% 38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 16E 17E 18E 19E 20E

e-commerce (Anta brand) Physical channels



Figure 108: Revenue mix by brand Figure 109: Earnings (EBIT) mix by brand

86% 83% 80% 78% 76% 74% 73%

14% 17% 20% 21% 21% 21% 20%

1% 3% 6%7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 16E 17E 18E 19E 20E

Descente Fila Anta Brand (Adult, Kids, e-commerce)

90% 86% 81% 82% 81% 79% 79%

10% 14% 19% 20% 20% 20% 20%

-2% -2%

1% 2%

-20%

0%

20%

40%

60%

80%

100%

2014 2015 16E 17E 18E 19E 20E

Descente Fila Anta Brand (Adult, Kids, e-commerce)



Figure 105: DB expectations of the

upcoming orderbook data

+ve / -ve DB Consen. Previous

=ve +LSD~MSD +LSD~MSD +MSD

3Q17 Orderbook YoY

Source: Deutsche Bank estimates, company data *meaning previously conveyed target

+ve / -ve DB Consen. Previous*

-ve Guide dow n No change +MSD~HSD

2017 Orderbook YoY

21 February 2017

Consumer



Line of Thinking

Figure 110: Anta share price Figure 111: Anta consensus earnings revisions

10

12

14

16

18

20

22

24

26


Share price

Buy (1)

Buy (2)

Buy (3)

Buy (4)

D/G to

Hold

2,400

2,450

2,500

2,550

2,600

2,650

2,700

2,750

2,800

2,850

2,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17




Buy (2) & (3): growth concerns on Anta Adult are hedged by

management’s 2017 orderbook guidance of “up mid-to-high single-

digit YoY”. We believe Anta pushed some inventory into its channel to

achieve this target.

Buy (4): we argue that the multi-brand strategy is a major long-term

growth driver. The market has shifted its focus to Fila, Anta e-

commerce, and Anta Kids (from Anta Adult).

Latest view: we highlight the potentially weaker Anta Adult revenue in

2H17 due to a slightly rising inventory level. Multi-brand strength is

likely already in the price, so we downgrade Anta’s shares to Hold.


Figure 112: Earnings revisions: raising earnings on Anta’s multi-brand and multi-channel strength

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Revenue 13,779 15,998 18,539 13,276 15,176 17,749 3.8% 5.4% 4.4%

Gross profit 6,569 7,777 9,121 6,287 7,224 8,484 4.5% 7.6% 7.5%

EBIT 3,273 3,919 4,522 3,037 3,593 4,211 7.8% 9.0% 7.4%

Headline NP 2,468 2,981 3,462 2,307 2,763 3,237 7.0% 7.9% 7.0%

Profitability

Gross margin 47.7% 48.6% 49.2% 47.4% 47.6% 47.8% 0.3% 1.0% 1.4%

EBIT margin 23.8% 24.5% 24.4% 22.9% 23.7% 23.7% 0.9% 0.8% 0.7%

Net margin 17.9% 18.6% 18.7% 17.4% 18.2% 18.2% 0.5% 0.4% 0.4%

RMBm YE DecNew forecast Old forecast New vs. Old forecast


21 February 2017

Consumer



Figure 113: DBe vs. consensus: we are more positive on Anta’s multi-brand and multi-channel strategy but we fear

concerns on Anta Adult slowdown may hinder share price performance

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Revenue 13,779 15,998 18,539 13,347 15,456 17,742 3.2% 3.5% 4.5%

Gross profit 6,569 7,777 9,121 6,382 7,476 8,673 2.9% 4.0% 5.2%

EBIT 3,273 3,919 4,522 3,133 3,767 4,378 4.5% 4.0% 3.3%

Headline NP 2,468 2,981 3,462 2,386 2,821 3,278 3.4% 5.7% 5.6%

Profitability

Gross margin 47.7% 48.6% 49.2% 47.8% 48.4% 48.9% -0.1% 0.2% 0.3%

EBIT margin 23.8% 24.5% 24.4% 23.5% 24.4% 24.7% 0.3% 0.1% -0.3%

Net margin 17.9% 18.6% 18.7% 17.9% 18.3% 18.5% 0.0% 0.4% 0.2%

Market forecast New vs. market forecastRMBm YE Dec

New forecast



DCF-based target price increased to HKD26.5

The c.10% increase in the target price mainly reflects upward earnings

revisions. We value Anta using DCF methodology as we expect investors to

focus on the company’s long-term development. We use a cost of equity of

10.6%, based on a risk-free rate of 3.9% (Deutsche Bank assumption), equity

risk premium of 5.6% (Deutsche Bank assumption), and beta of 1.3. We

assume a perpetual growth rate of 2%, in line with the Hong Kong and China

consumer discretionary space’s growth rate of 1-2%.

Figure 114: DCF sensitivity for Anta

DCF Sensit iv ity Analys is (HK$) DCF Sensit iv ity Analys is on FY17E PE (x)

WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%

8.6% 29.5 31.6 34.4 38.1 43.5 8.6% 23.0 24.7 26.8 29.7 33.9

9.6% 26.4 28.0 29.9 32.5 36.0 9.6% 20.6 21.8 23.3 25.3 28.0

10.6% 23.9 25.1 26.5 28.3 30.7 10.6% 18.6 19.5 20.7 22.1 23.9

11.6% 21.8 22.7 23.8 25.2 26.9 11.6% 17.0 17.7 18.6 19.6 20.9

12.6% 20.1 20.8 21.7 22.7 23.9 12.6% 15.7 16.2 16.9 17.7 18.6

Long run growth Long run growth


Downside risks to our view Intense competition and increase in discounts: if industry conditions

worsen, Anta may need to increase discounts or engage in inventory

clearance, which would hurt the company’s profitability.

Weaker-than-expected macro conditions would dampen demand.

Higher-than-expected channel inventory would disincentivize

distributors from ordering new products and may hurt distributors’

financial health.

Upside risks to our view Stronger performance by Anta Adult: earlier-than-expected channel

inventory clearance would lead to better revenue growth.

Stronger performance by Descente: earlier-than-expected breakeven

of the new brand would lead to better profit.

21 February 2017

Consumer



Figure 115: Anta financial summary


1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Net Sa les 6,143 7,637 7,153 8,845 11,126 13,779 15,998 18,539

Anta brand-sales 3,784 4,268 3,827 4,141 7,541 8,052 7,968 7,704

Anta brand-store 7,000 7,000 7,050 7,100 7,031 7,000 7,100 7,100

Other brands-sales 2,359 3,368 3,326 4,703 3,585 5,727 8,029 10,835

Costs 3,202 4,009 3,684 4,537 5,940 7,211 8,221 9,418

Gross prof it 2,941 3,627 3,469 4,307 5,185 6,569 7,777 9,121

Operating expenses 1,453 1,837 1,740 2,098 2,528 3,290 3,837 4,541

Operating prof it 1,488 1,785 1,707 2,212 2,697 3,273 3,919 4,522

Tota l non-operating income 88 72 100 100 133 161 200 228

Pretax prof it 1,577 1,857 1,807 2,311 2,829 3,434 4,118 4,750

Taxes (negative for credit) 415 488 479 589 741 903 1,068 1,211

Minority 33 30 36 33 48 63 69 76

Net Income 1,129 1,339 1,292 1,689 2,041 2,468 2,981 3,462

Prof itab il ity 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Gross margin 47.9% 47.5% 48.5% 48.7% 46.6% 47.7% 48.6% 49.2%

Operating margin 24.2% 23.4% 23.9% 25.0% 24.2% 23.8% 24.5% 24.4%

OPEX to sales 23.7% 24.1% 24.3% 23.7% 22.7% 23.9% 24.0% 24.5%

Pretax margin 25.7% 24.3% 25.3% 26.1% 25.4% 24.9% 25.7% 25.6%

Net Margin 18.4% 17.5% 18.1% 19.1% 18.3% 17.9% 18.6% 18.7%

Growth 1H16A 2H16E 1H17E 2H17E 2015A 2016E 2017E 2018E

Revenue- YoY 20% 27% 16% 16% 25% 24% 16% 16% Source: Deutsche Bank estimates, company data

21 February 2017

Consumer




Running the numbers

Asia

China

Textiles & Apparel

Anta Reuters: 2020.HK Bloomberg: 2020 HK

Hold Price (20 Feb 17) HKD 25.00


52 Week range HKD 14.24 - 25.15


USDm 8,056

Company Profile

Anta Sports Products Limited designs, develops, manufactures, and markets sportswear, including sports footwear and apparel for professionals and the general public.

Price Performance

8

12

16

20

24

28


Anta HANG SENG INDEX (Rebased)

Margin Trends

21.022.023.024.025.026.027.0

13 14 15 16E 17E 18E



05101520253035

-10-505

1015202530

13 14 15 16E 17E 18E


Solvency

-75

-70

-65

-60

-55

13 14 15 16E 17E 18E


John Chou



Financial Summary

DB EPS (CNY) 0.53 0.68 0.81 0.99 1.19 1.39

Reported EPS (CNY) 0.53 0.68 0.81 0.99 1.19 1.39

DPS (CNY) 0.38 0.48 0.57 0.64 0.78 0.90

BVPS (CNY) 2.9 3.1 3.4 3.8 4.2 4.7





P/E (Reported) (x) 12.8 15.3 18.2 22.4 18.5 15.9

P/BV (x) 2.65 3.49 5.03 5.86 5.28 4.73

FCF Yield (%) 5.3 5.5 4.8 5.1 5.1 5.8

Dividend Yield (%) 5.6 4.6 3.9 2.9 3.5 4.1

EV/Sales (x) 1.6 2.3 2.8 3.5 3.0 2.5

EV/EBITDA (x) 7.0 9.4 10.9 13.8 11.3 9.6

EV/EBIT (x) 7.5 10.2 11.6 14.8 12.1 10.3


Sales revenue 7,281 8,923 11,126 13,779 15,998 18,539

Gross profit 3,039 4,027 5,185 6,569 7,777 9,121

EBITDA 1,696 2,178 2,885 3,516 4,204 4,855

Depreciation 130 159 188 242 286 333


EBIT 1,566 2,019 2,697 3,273 3,919 4,522

Net interest income(expense) 187 224 133 161 200 228





Income tax expense 423 510 741 903 1,068 1,211

Minorities 15 32 48 63 69 76


Net profit 1,315 1,700 2,041 2,468 2,981 3,462


DB Net profit 1,315 1,700 2,041 2,468 2,981 3,462

Cash Flow (CNYm)


Net Capex -196 -196 -463 -573 -665 -771

Free cash flow 900 1,419 1,766 2,811 2,797 3,192


Dividends paid -878 -878 -1,428 -1,444 -1,904 -2,219

Net inc/(dec) in borrowings -506 858 -18 -500 0 0

Other investing/financing cash flows 7 -184 -166 0 0 0

Net cash flow -478 1,214 154 868 893 972

Change in working capital -421 -421 -106 -57 -39 -52






Other assets 2,771 2,717 3,355 3,898 4,344 4,861

Total assets 10,118 11,384 12,502 14,244 15,961 17,889

Interest bearing debt 490 1,348 1,330 830 830 830




Minorities 195 209 235 298 367 443


Net debt -5,074 -5,431 -5,603 -6,971 -7,864 -8,836

Key Company Metrics

Sales growth (%) -4.5 22.5 24.7 23.8 16.1 15.9

DB EPS growth (%) -3.2 29.3 19.5 21.1 21.2 16.2

EBITDA Margin (%) 23.3 24.4 25.9 25.5 26.3 26.2

EBIT Margin (%) 21.5 22.6 24.2 23.8 24.5 24.4

Payout ratio (%) 72.4 71.0 70.1 65.0 65.0 65.0

ROE (%) 18.9 22.7 24.9 27.4 29.9 31.2

Capex/sales (%) 2.7 2.2 4.2 4.2 4.2 4.2


Net debt/equity (%) -69.0 -67.8 -63.6 -71.6 -72.5 -72.8

Net interest cover (x) nm nm nm nm nm nm


21 February 2017

Consumer



The author of this report wishes to acknowledge the contributions made by Julia

Xu, employee of Evalueserve, a third-party provider to Deutsche Bank of

offshore research support services.

21 February 2017

Consumer



Appendix 1 Important Disclosures

*Other information available upon request Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. John Chou

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

53 %

37 %

10 %18 % 17 % 19 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

21 February 2017

Consumer



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losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories

of investment advice, products and services. Recommended investment strategies, products and services carry the risk

of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in

market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the

relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in

this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the

name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank

Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are

not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's

equity analysts are based on a 12-month forecast period.

Korea: Distributed by Deutsche Securities Korea Co.

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register

Number in South Africa: 1998/003298/10).

Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles

Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters

arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who

is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and

regulations), they accept legal responsibility to such person for its contents.

Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should

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research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without

written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and

is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited,

Taipei Branch may not execute transactions for clients in these securities/instruments.

Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre

Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall

within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower,

West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related

financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre

Regulatory Authority.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute,

any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the

Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall

within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya

District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

21 February 2017

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by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services

activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai

International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been

distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as

defined by the Dubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product

referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please

refer to Australian specific research disclosures and related information at

https://australia.db.com/australia/content/research-information.html

Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian

Corporations Act and New Zealand Financial Advisors Act respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon

request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2017 Deutsche Bank AG

GRCM2017PROD036391

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Stuart Kirk Head of Thematic Research

International locations

Deutsche Bank AG

Deutsche Bank Place

Level 16

Corner of Hunter & Phillip Streets

Sydney, NSW 2000

Australia

Tel: (61) 2 8258 1234

Deutsche Bank AG

Große Gallusstraße 10-14

60272 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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