Taiwan Consumer:UK/US marketing feedback

Time for idea hunting: We spent two weeks meeting several institutional investorsduring our Taiwan non-tech/consumer marketing trip in the UK and US. Severalinvestors noticed that among the 12 stocks we coverer, we forecast eight to report y-o-yearnings declines in 2017e (Table 1). Much of the earnings declines is attributable tounfavourable TWD/USD in 1H17, which has eroded top-line growth and affectedmargin performances. Off the lower 2017 base, many investors said that they believethe time is ripe to revisit companies that are poised for strong earnings recoveries goinginto 2018. In addition, EV-related ideas dominated some discussions as investors saidthey are seeking ways to profit from this massive and long-term trend given thetransition away from gasoline-fuelled vehicles. We highlighted UPE, Nien Made and St.

    Shine Optical as our top ideas. We also have Buy ratings on Hota and Eclat.

    Loss of Shanghai Starbucks joint venture not seen as an issue: Unlike investors inTaiwan, the UK/US investors did not seem to us to be overly concerned about the lossof the Shanghai Starbucks JV. Many investors agree that UPE/PCSC’s corebusinesses in convenience stores and food & beverages are still solid. However,concerns over wage pressure after the Taiwan government’s announcement toincrease the minimum hourly wage by 5% in 2018 has kept investors on the side-lineson PCSC. Investors also said that they are seeking more clarity on the company’sfuture strategic focus and the use of the disposal gains from management.

    Nien Made and St. Shine Optical are our two top ideas. There was not muchdispute on Nien Made’s excellent execution. However, the pushbacks were on thecompany’s high market concentration risk (the US accounts for 80% of sales) and itsreliance on the health of the US housing market. We explained that these risks shouldlower as Nien Made continued to expand its European sales and explores new marketssuch as Japan. We faced some resistance initially on St. Shine Optical as investorssaid they had had a bad experience investing in Ginko. However, we stressed that St.

    Shine’s ODM model is a lower risk and simpler way to gain exposure to the globaldisposable contact lens outsourcing trend. St. Shine’s strong cash generation ability isalso favoured vis-à-vis Ginko’s working capital intensive OBM model.

    Cautious on textile and bicycle sectors. Given the challenges in the industrylandscape and weak end-demand, many investors said that they believe it is stillearly for bottom fishing. However, for investors looking to revisit, we recommendEclat and Giant as our preferred picks in the sectors. We believe Eclat’s innovation inpremium stretchable fabric and Giant’s stronger brand name will allow them to betterwithstand the industry headwinds.