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Asia Pacific: Textile, Apparel & Footwear Summary

Core Content

This document is an equity research report by Goldman Sachs on the Asia Pacific textile, apparel, and footwear industry, with a focus on the performance and potential of three major companies: Makalot (1477.TW), Shenzhen International Group (2313.HK), and Eclat (1476.TW). The report emphasizes the transformation of traditional textile manufacturers into value-added design and technology firms, which are driving growth, margins, and returns in the industry. The key differentiator for these companies is their ability to be "FAT" (Fast, Affordable, and Technology-embedded), which allows them to secure contracts with top global brands and maintain competitive positions.

Main Points

The "FAT" Strategy

• Fast: Companies can respond quickly to replenishment orders due to early-stage client collaboration and efficient production allocation.
• Affordable: They cater to a wide range of price levels, from premium brands like Burberry and lululemon to mass-market brands like Uniqlo and Gap, while managing costs effectively.
• Technology-embedded: The industry is increasingly adopting technology to enhance product functionality (e.g., thermostatic, odor control, and sportswear features), leading to more efficient production and better margins.

Investment Recommendations

• Makalot (1477.TW): Initiated with a Buy rating, with a 12-month target price of NT$250, implying 22% upside potential.
• Shenzhen (2313.HK): Initiated with a Buy rating, with a 12-month target price of HK$36.5, implying 18% upside potential.
• Eclat (1476.TW): Initiated with a Neutral rating, with a 12-month target price of NT$410, implying 10% upside potential.

Key Factors Driving Growth

1. Solid macro trends: Increasing demand for sportswear and functional apparel, driven by health consciousness, millennial consumption habits, and rising women's participation in sports.
2. Market share gains: Companies are leveraging their evolution from outsourcers to ODMs, offering value-added services, and expanding their global client base.
3. Superior cost management: Through vertical integration, multi-national operations, and efficient production, companies are improving margins and reducing cost volatility.
4. Solid returns: Strong CROCI (Cash Return on Capital Invested) and ROE (Return on Equity) indicate healthy profitability and growth potential.

Key Information

Company Overview

Company	Ticker	Rating	Market Cap (US$mn)	12m Target Price	Potential Upside/Downside
Makalot	1477.TW	Buy*	1,239	NT$250	22%
Shenzhen	2313.HK	Buy	5,576	HK$36.5	18%
Eclat	1476.TW	Neutral	3,063	NT$410	10%

Financial Highlights (2013)

Company	Gross Margin	EBIT Margin	Dividend Yield (2013)
Makalot	19.9%	9.1%	57%
Shenzhen	28.3%	19.7%	37%
Eclat	28.2%	18.1%	37%

Key Clients

• Makalot: Kohl's, Target, GAP, Fast Retailing, Under Armour
• Shenzhen: Adidas, Nike, Puma, Fast Retailing
• Eclat: lululemon, Nike, Adidas, Under Armour

Growth Drivers

• Makalot: Diversified product lines, multi-national operations, and superior working capital management.
• Shenzhen: Vertical integration, economies of scale, and expansion into Vietnam.
• Eclat: Strong R&D in functional products, targeting high-growth segments like sportswear and outdoor apparel, and vertical integration.

Risks

• Makalot: Weak US consumption, higher costs, strikes, CSR issues, and NT$ appreciation against the US$.
• Shenzhen: Global apparel consumption slowdown, higher costs, strikes, CSR issues, slower ramp-up of new facilities, and RMB appreciation against the US$.
• Eclat: Changes in demand for functional/sportswear, cost fluctuations, strikes, CSR issues, production ramp-up speed, and forex movements.

Conclusion

The report highlights the growing importance of the "FAT" model in the textile and apparel industry, where companies that integrate fast production, affordability, and technology are outperforming traditional models. Makalot and Shenzhen are recommended for purchase due to their strong positions in these areas, while Eclat is given a neutral rating due to its already reflected growth potential in the market price. The analysis underscores the importance of macro trends, market share gains, cost management, and returns in evaluating the performance and future prospects of these firms.