2Q17 results preview: Eclat is scheduled to announce its 2Q17 results and host itsanalyst meeting on 8 August 2017. With 2Q17 sales of TWD5,942m, up 1.9% y-o-yand 15.5% q-o-q, already reported, we expect investors to focus on Eclat’s marginperformance, which we anticipate to improve to 27.4% from 1Q17’s 26.8%, due tobetter product mix and capacity utilization rate. The strong TWD/USD was a majorheadwind for Eclat in 1Q17 as the company posted a FX loss of TWD450m, whichwas responsible for sending its EPS to its lowest level in six years. With FXremaining unfavourable in 2Q17 (1Q17 TWD31.1 vs. 2Q17’s TWD30.3), we forecastEclat to book a FX loss of TWD100m. Net-net, we forecast 2Q17 EPS of TWD2.83,down 5% y-o-y but up 180% q-o-q. Our forecast is 12.5% below consensus,representing our more conservative assumption on margins. For 1H17, EPS shouldtotal TWD3.84, respresenting 30% of HSBCe FY17 forecast.    Sales growth to be 2H-loaded. During its last analyst meeting, Eclat guided itsgarment volume to grow by 5% and ASP to increase by 7-8%, while its fabric volumeshould grow by 2% and ASP increase by 8-10%. This, based on our estimate, shouldtranslate into top-line growth of 9.2% y-o-y to TWD26,774m. With 1H17 sales down2.9% y-o-y, Eclat would need to grow +19.7% y-o-y in 2H17 in order to meet ourexpectation for full-year growth of +9.2% y-o-y.    Issues that we will be focusing on during the analyst meeting: 1) Contributionfrom new clients. Eclat has added 5 new customers since 2016. Sales contributionreached 5% in 2016 and is expected to reach 8% in 2017. We believe success withthese new clients would be key to drive Eclat’s top-line momentum. 2) New productcontribution. The computer-based jacquard fabrics only represented 1% of sales in2016 and 1.5% in 1Q17. As per management, contribution is expected to reach 2.5%in 2Q17 and 4% by 3Q17. As a leading functional fabric vendor, Eclat’s profitabilityhinges on the innovation and new product launches of its customers. We look formanagement to shed more light on any new product pipeline beyond 2017. 3) Inhousefabric sourcing ratio. Eclat expects it to increase to 38-40% in 2017, up from32-35% in 2016. A higher ratio shows that Eclat has locked up more customers for itsone-stop shopping service which typically generates higher margin.    Retain Reduce with TP rounded to TWD235 (from TWD235.29 – adjusted fromTWD240 after stock dividend dilution), based on unchanged 16x forward PE and2Q17e-1Q18e EPS. Our TP implies 33.8% downside and we rate the stock Reduce.

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