Asia Pacific:Textile,Apparel &Footwear,When the going gets tough,Buy Shenzhou (CL),Yue Yuen

Three debates facing Greater China exporters

China is the largest exporter of apparel and footwear to the US, accounting for36% and 63% of US imports in 2015, respectively. In this report, we examinethe potential impact of possible changes to US trade policy on exporters inGreater China, under three potential scenarios: 1) Production move back tothe US: Textile and footwear are labor intensive industries, employing c.23mnin China. Average hourly wages in China are US$3-4 vs. US$19 in the US. Thismakes it difficult to move these jobs back to the US in a big way, in our view.2) Tariff increase: We estimate that the imposition of an additional tariff of45% on textile imports would increase US retail prices by 11% on a full passthroughbasis with most of the costs borne by retailers/brands. We estimateOEMs' earnings for China exports to the US would be cut 30-60% if they takeon 10-20% of the tax duty increase. 3) Future of TPP: If the US withdraws fromthe TPP, it could impact brands’ sourcing strategies in the near term. However,we believe Vietnam, a key production base for many Greater China exporters,still enjoys cost advantages and preferential duties through FTAs with the EU.

US exposure and production allocation to determine impact。

We do stress tests to analyze the potential impact on exporters andconclude that it largely depends on exporters’ end-market exposures andproduction base allocations. Shenzhou has the lowest US exposure (13% ofsales in 2015) but the biggest production base in China (82% of production)within our coverage. Makalot has high US market exposure (77%) but lowChina production (8%). Stella has relatively high US exposure (53%) as well ashigh China production (73%) and will likely be impacted the most if it needs toshare a part of potential additional duties on US imports from China.

Shenzhou added to CL (Buy), Yue Yuen up to Buy, Eclat to Neutral

With market concerns on global trade and demand uncertainties, werecommend investing in quality names with healthy earnings outlooks. Weadd Shenzhou to our Conviction List (Buy), on 1) low US exposure, 2)strong client mix and share gains, 3) integrated business model, 4) Vietnamcapacity ramp-up, and 5) margin upside from product mix and costmanagement. Yue Yuen up to Buy from Neutral on 1) stabilizedoperation/margin trend, 2) balanced market/client exposure, and 3) risingcontribution from Pou Sheng. Eclat down to Neutral from Buy as: 1) weforecast EPS recovery to be lower than what we had previously expected, and2) see uncertainties from US retail clients (26% of 2016E sales) on inventorycontrol/slower SSSG. We update estimates/target price across our coverage.