Taiwan Consumer Staples 22 May 2023

TCI (8436 TT)

Target price: TWD180.00 (from TWD155.00)

Share price (22 May): TWD183.50 | Up/downside: -1.9%

2023 likely an improved year

Helen Chien
 1Q23 EPS missed our and consensus estimates by 21-27% (886) 2 8758 6254
helen.chien@daiwacm-cathay.com.tw
 Recovery in demand post COVID-19 from healthcare and beauty Jack Wang
(886) 2 8758 6256
 Maintaining our Hold (3) rating; raising 12-month TP to TWD180 jack.wang@daiwacm-cathay.com.tw

What's new: TCI held an investor conference on 22 May to discuss its Forecast revisions (%)
1Q23 results (posted on 8 May) and outlook. We believe the worst was Year to 31 Dec 23E 24E 25E
Revenue change (1.1) (3.1) n.a.
likely over in 2022, and TCI still aims for a better 2023 vs. 2022 despite Net profit change 2.8 0.3 n.a.
order visibility in China remaining unclear, as TCI sees some progress in Core EPS (FD) change 3.0 0.5 n.a.
expansion in the US and EU markets. We maintain our Hold (3) rating as Source: Daiwa forecasts
we view its valuation as fair.

What's the impact: 1Q23 results review. TCI posted 1Q23 revenue of
TWD1,873m (+0.5% QoQ, +13.0% YoY), slightly below our forecast and
the consensus estimate by 1-4%, which we attribute to slightly softer-than-
expected China revenue (42% of TCI’s standalone revenue, +3.1% YoY vs.
39% of revenue from the EU and US, +29.6% YoY). The gross margin
came in at 37.8%, below our (42.5%) and consensus (43.1%) forecasts,
due to one-off rush orders for COVID-19-protection powder sachets in
China, with a lower gross margin. Thus, operating profit of TWD192m
(-27.9% QoQ, +11.6% YoY) also missed our and consensus forecasts by 12-month range 104.00-232.50
Market cap (USDbn) 0.70
33-34%, resulting in an operating margin of 10.3%, below our (15.0%) and 3m avg daily turnover (USDm) 13.61
consensus (15.1%) forecasts. Considering an FX gain of TWD9.6m, its Shares outstanding (m) 117
1Q23 net profit of TWD164m (-45.2% QoQ and +5.7% YoY) missed our Major shareholder Dydo Group (7.1%)
and consensus estimates by 21-27%. Its 1Q23 basic EPS was TWD1.39.
Financial summary (TWD)
Year to 31 Dec 23E 24E 25E
Guides for 2023 top-line to grow YoY. TCI believes it should expand its Revenue (m) 7,880 8,523 9,229
top-line YoY in 2023, in light of the outlook for revenue growth in the US Operating profit (m) 1,214 1,466 1,606
and EU (c.3-month order visibility with rising demand from its US plant, Net profit (m) 942 1,114 1,228
though it has not met its annual revenue contribution target of TWD800m- Core EPS (fully-diluted) 7.976 9.435 10.401
EPS change (%) 32.2 18.3 10.2
1bn yet) and improving demand post COVID-19 in China (30-45 days’ lead- Daiwa vs Cons. EPS (%) (21.6) (12.6) n.a.
time; expanding sales channels to live streaming and e-commerce) from PER (x) 23.0 19.4 17.6
healthcare and beauty though macro uncertainty remains. TCI aims to Dividend yield (%) 2.2 2.6 2.8
DPS 4.0 4.7 5.2
deliver a flat or slightly improving gross margin YoY in 2023, despite a likely PBR (x) 2.5 2.3 2.2
higher opex YoY due to more aggressive marketing, R&D and sales team EV/EBITDA (x) 11.2 9.3 8.3
expansion. We raise our 2023-24E EPS by 1-3%, mainly from non-op gains ROE (%) 11.3 12.5 12.9
and we introduce our 2025 forecasts. Source: FactSet, Daiwa forecasts

What we recommend: We maintain our Hold (3) rating and raise our 12-
month TP to TWD180 (from TWD155), still based on a target PER of 20x
on our 1-year forward EPS, vs. its PER trading range of 9-34x over the past
5 years and considering its earnings CAGR of 14.2% over 2023-25E after
YoY declines in net profit over 2020-22. Key upside/downside risks:
stronger-/softer than-expected revenue growth.

How we differ: Our 2023-24E EPS are 13-22% below the consensus,
likely as we are more conservative on TCI’s revenue and margin
expansion.

See important disclosures, including any required research certifications, beginning on page 6
 TCI (8436 TT): 22 May 2023

TCI: revisions to revenue and earnings forecasts

2023E 2024E 2025E
(TWDm) New Previous Diff New Previous Diff New Previous Diff
Sales 7,880 7,971 -1.1% 8,523 8,794 -3.1% 9,229 n.a n.a
Gross profit 3,341 3,428 -2.5% 3,682 3,799 -3.1% 4,005 n.a n.a
Gross-profit margin 42.4% 43.0% -0.6pp 43.2% 43.2% 0.0pp 43.4% n.a n.a
Operating profit 1,214 1,275 -4.8% 1,466 1,513 -3.1% 1,606 n.a n.a
Operating-profit margin 15.4% 16.0% -0.6pp 17.2% 17.2% 0.0pp 17.4% n.a n.a
Net profit 942 916 2.8% 1,114 1,110 0.3% 1,228 n.a n.a
Net-profit margin 12.0% 11.5% 0.5pp 13.1% 12.6% 0.4pp 13.3% n.a n.a
Diluted EPS (TWD) 7.98 7.74 3.0% 9.44 9.39 0.5% 10.40 n.a n.a
Source: Daiwa forecasts
TCI: 1Q23 results vs. Daiwa and consensus forecasts
(TWDm) TCI’s 1Q23 results Daiwa forecasts Diff. Consensus Differ
Revenue 1,873 1,950 -4.0% 1,893 -1.1%
Gross profit 708 829 -14.5% 815 -13.1%
Operating profit 192 293 -34.4% 286 -32.9%
Pre-tax profit 220 299 -26.5% 311 -29.2%
Net profit 164 208 -21.3% 226 -27.4%
Basic EPS (TWD) 1.39 1.77 -21.2% 1.91 -27.2%

Margin
Gross margin 37.8% 42.5% -4.7pp 43.1% -5.3pp
Operating margin 10.3% 15.0% -4.7pp 15.1% -4.9pp
Pre-tax profit 11.8% 15.4% -3.6pp 16.4% -4.7pp
Net margin 8.7% 10.7% -1.9pp 11.9% -3.2pp
Sources: Company, Daiwa forecasts, Bloomberg

TCI: quarterly P&L

2023E 2024E 2023E 2024E 2025E
(TWDm) 1Q23 2Q23E 3Q23E 4Q23E 1Q24E 2Q24E 3Q24E 4Q24E
Revenue 1,873 1,913 2,040 2,054 2,010 2,060 2,220 2,233 7,880 8,523 9,229
Gross profit 708 823 898 913 854 886 961 980 3,341 3,682 4,005
Operating profit 192 297 357 368 322 340 395 409 1,214 1,466 1,606
Pre-tax profit 220 305 366 377 326 344 400 414 1,268 1,483 1,626
Net profit 164 224 273 281 243 257 301 313 942 1,114 1,228
Basic EPS (TWD) 1.39 1.90 2.32 2.39 2.06 2.19 2.56 2.66 8.00 9.46 10.43
Margin
Gross margin 37.8% 43.0% 44.0% 44.4% 42.5% 43.0% 43.3% 43.9% 43.0% 43.2% 43.2%
Operating margin 10.3% 15.5% 17.5% 17.9% 16.0% 16.5% 17.8% 18.3% 16.0% 17.2% 17.2%
Pre-tax margin 11.8% 16.0% 17.9% 18.3% 16.2% 16.7% 18.0% 18.5% 17.5% 17.4% 17.4%
Net margin 8.7% 11.7% 13.4% 13.7% 12.1% 12.5% 13.6% 14.0% 12.6% 12.7% 12.9%
YoY
Revenue 13.0% 3.4% -1.0% 10.2% 7.3% 7.7% 8.8% 8.7% 6.9% 12.4% 12.7%
Gross profit 5.9% 16.1% -0.9% 7.1% 20.6% 7.7% 7.1% 7.4% 8.9% 12.9% 12.7%
Operating profit 11.6% 45.3% -7.0% 38.2% 67.5% 14.6% 10.7% 11.2% 23.9% 20.8% 12.7%
Pre-tax profit -6.5% 22.3% -26.0% 21.4% 48.0% 12.8% 9.2% 9.8% 7.6% 12.0% 12.7%
Net profit 5.7% -354.2% -21.6% -5.9% 48.2% 14.7% 10.6% 11.2% 40.5% 13.2% 13.9%
QoQ
Revenue 0.5% 2.2% 6.6% 0.7% -2.1% 2.5% 7.8% 0.6%
Gross profit -16.9% 16.1% 9.1% 1.7% -6.4% 3.7% 8.5% 2.0%
Operating profit -27.9% 54.5% 20.4% 3.1% -12.6% 5.7% 16.3% 3.6%
Pre-tax profit -29.1% 38.6% 19.8% 3.0% -13.5% 5.6% 16.1% 3.5%
Net profit -45.2% 37.0% 21.6% 3.2% -13.7% 6.0% 17.2% 3.7%
Source: Company, Daiwa forecasts

TCI: revenue breakdown by region TCI: 1-year forward PER

10 0% (TWD)
19% 600
23% 31%
80 % 34% 36% 35% 39% 500
18% 8%
60% 10% 9% 11% 400
7% 8% 9% 8%
9% 8% 7% 9% 10% 300
40%
200
55% 56% 49%
20% 46% 46% 45% 42% 100
0
0% May-17 May-18 May-19 May-20 May-21 May-22 May-23
3Q 2021 4Q 2021 1Q 2022 2Q 2022 3Q 2022 4Q 2022 1Q 2023
Share Price 8x 14x
China Asia Taiwan North America & Europe Othe rs 20x 26x 32x

Source: Company Source: Bloomberg, Daiwa forecasts

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 TCI (8436 TT): 22 May 2023

Financial summary
Key assumptions
Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Functional drink revenue growth (%) 151.3 34.2 (28.1) 8.4 (12.6) 25.0 10.0 10.0
Powder sachet revenue growth (%) 126.7 (29.5) 6.2 (15.5) (26.1) 35.0 10.0 10.0
Facial mask growth (%) (11.4) 21.2 (14.0) (8.7) (14.3) 10.0 0.0 0.0

Profit and loss (TWDm)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Functional drink 4,349 5,835 4,194 4,547 3,974 4,968 5,464 6,011
Powder sachet 2,308 1,626 1,727 1,459 1,078 1,456 1,601 1,761
Other Revenue 1,442 2,105 2,303 2,574 2,380 1,457 1,457 1,457
Total Revenue 8,098 9,566 8,224 8,580 7,433 7,880 8,523 9,229
Other income 0 0 0 0 0 0 0 0
COGS (4,581) (5,551) (4,634) (4,855) (4,297) (4,539) (4,841) (5,224)
SG&A (1,042) (1,302) (1,075) (1,423) (1,439) (1,497) (1,534) (1,661)
Other op.expenses (438) (511) (497) (572) (670) (630) (682) (738)
Operating profit 2,037 2,202 2,018 1,730 1,026 1,214 1,466 1,606
Net-interest inc./(exp.) 22 55 61 56 32 35 17 20
Assoc/forex/extraord./others 148 148 119 223 231 20 0 0
Pre-tax profit 2,207 2,405 2,198 2,009 1,290 1,268 1,483 1,626
Tax (399) (367) (345) (393) (469) (254) (297) (325)
Min. int./pref. div./others (12) (22) (14) (70) (107) (73) (73) (73)
Net profit (reported) 1,795 2,016 1,839 1,546 713 942 1,114 1,228
Net profit (adjusted) 1,795 2,016 1,839 1,546 713 942 1,114 1,228
EPS (reported)(TWD) 15.154 17.022 15.686 13.170 6.061 8.000 9.464 10.433
EPS (adjusted)(TWD) 15.154 17.022 15.686 13.170 6.061 8.000 9.464 10.433
EPS (adjusted fully-diluted)(TWD) 14.782 16.604 15.361 13.089 6.031 7.976 9.435 10.401
DPS (TWD) 6.064 8.786 8.878 8.946 4.117 4.000 4.732 5.217
EBIT 2,037 2,202 2,018 1,730 1,026 1,214 1,466 1,606
EBITDA 2,211 2,472 2,355 2,193 1,654 1,770 2,084 2,286

Cash flow (TWDm)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Profit before tax 2,207 2,405 2,198 2,009 1,290 1,268 1,483 1,626
Depreciation and amortisation 175 269 337 463 627 557 618 680
Tax paid (399) (367) (345) (393) (469) (254) (297) (325)
Change in working capital 1,477 (1,003) 507 (464) (483) 224 (41) (47)
Other operational CF items 51 161 (0) (35) (9) 0 0 (0)
Cash flow from operations 3,510 1,466 2,697 1,580 956 1,795 1,764 1,934
Capex (1,173) (1,625) (817) (693) (393) (800) (800) (800)
Net (acquisitions)/disposals 115 4 (1) 10 18 (8) (8) (8)
Other investing CF items (267) 198 (126) (1,304) 864 0 0 0
Cash flow from investing (1,326) (1,424) (944) (1,987) 489 (808) (808) (808)
Change in debt 1,073 188 872 372 (302) 650 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (235) (718) (1,041) (1,041) (1,050) (591) (471) (557)
Other financing CF items 11 6 (664) 906 519 0 0 0
Cash flow from financing 850 (524) (833) 237 (833) 59 (471) (557)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 3,034 (482) 920 (170) 612 1,046 485 569
Free cash flow 2,337 (160) 1,880 887 562 995 964 1,134
Source: FactSet, Daiwa forecasts

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 TCI (8436 TT): 22 May 2023

Financial summary continued …

Balance sheet (TWDm)
Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Cash & short-term investment 4,418 3,848 4,856 4,704 5,403 6,449 6,933 7,502
Inventory 1,309 1,084 649 886 1,169 908 968 1,045
Accounts receivable 583 628 695 1,062 1,065 433 469 508
Other current assets 918 740 744 1,165 434 434 434 434
Total current assets 7,228 6,300 6,945 7,817 8,071 8,224 8,804 9,488
Fixed assets 1,925 2,488 3,714 4,611 4,867 5,132 5,313 5,433
Goodwill & intangibles 25 31 22 449 741 741 741 741
Other non-current assets 1,108 2,009 1,284 1,834 1,428 1,428 1,428 1,428
Total assets 10,287 10,829 11,965 14,711 15,108 15,525 16,287 17,092
Short-term debt 12 200 1,511 1,448 1,796 2,446 2,446 2,446
Accounts payable 2,412 2,036 1,629 1,912 1,486 817 871 940
Other current liabilities 1,585 894 1,166 1,086 1,209 1,209 1,209 1,209
Total current liabilities 4,009 3,130 4,305 4,447 4,491 4,472 4,526 4,595
Long-term debt 494 431 4 968 318 318 318 318
Other non-current liabilities 15 60 67 55 220 109 109 109
Total liabilities 4,518 3,621 4,376 5,469 5,029 4,899 4,953 5,022
Share capital 1,022 1,196 1,182 1,182 1,183 1,183 1,183 1,183
Reserves/R.E./others 4,702 5,937 6,318 6,934 6,926 7,401 8,036 8,699
Shareholders' equity 5,724 7,133 7,500 8,116 8,109 8,584 9,219 9,882
Minority interests 45 74 88 1,126 1,970 2,043 2,116 2,188
Total equity & liabilities 10,287 10,829 11,965 14,711 15,108 15,525 16,287 17,092
EV 17,672 18,396 18,285 20,375 20,220 19,896 19,484 18,988
Net debt/(cash) (3,911) (3,217) (3,342) (2,289) (3,289) (3,685) (4,169) (4,738)
BVPS (TWD) 48.327 60.225 63.979 69.150 68.884 72.920 78.315 83.946

Key ratios (%)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Sales (YoY) 98.9 18.1 (14.0) 4.3 (13.4) 6.0 8.2 8.3
EBITDA (YoY) 122.4 11.8 (4.7) (6.9) (24.6) 7.1 17.7 9.7
Operating profit (YoY) 131.6 8.1 (8.4) (14.3) (40.7) 18.3 20.8 9.5
Net profit (YoY) 152.0 12.3 (8.8) (15.9) (53.8) 32.0 18.3 10.2
Core EPS (fully-diluted) (YoY) 152.0 12.3 (7.5) (14.8) (53.9) 32.2 18.3 10.2
Gross-profit margin 43.4 42.0 43.7 43.4 42.2 42.4 43.2 43.4
EBITDA margin 27.3 25.8 28.6 25.6 22.2 22.5 24.5 24.8
Operating-profit margin 25.2 23.0 24.5 20.2 13.8 15.4 17.2 17.4
Net profit margin 22.2 21.1 22.4 18.0 9.6 12.0 13.1 13.3
ROAE 39.4 31.4 25.1 19.8 8.8 11.3 12.5 12.9
ROAA 23.7 19.1 16.1 11.6 4.8 6.1 7.0 7.4
ROCE 41.4 31.2 23.8 16.7 8.6 9.5 10.7 11.1
ROIC 83.0 63.8 41.3 24.8 9.5 14.1 16.6 17.7
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 18.1 15.3 15.7 19.6 36.4 20.0 20.0 20.0
Accounts receivable (days) 23.5 23.1 29.3 37.4 52.2 34.7 19.3 19.3
Current ratio (x) 1.8 2.0 1.6 1.8 1.8 1.8 1.9 2.1
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 40.0 51.6 56.6 67.9 67.9 50.0 50.0 50.0
Free cash flow yield 10.8 n.a. 8.7 4.1 2.6 4.6 4.5 5.3
Source: FactSet, Daiwa forecasts

Company profile

Founded in 1980 and listed in 2013 on Taiwan’s OTC board, TCI is an ODM provider that develops and
produces health food products, functional beverages and skin-care products. Its client exposure
includes direct sales, e-commerce (shopping sites and weishang, online micro-shops), retailers and
brands, and others (TV and telephone).

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 TCI (8436 TT): 22 May 2023

ESG analysis
ESG risks
Risks Management Analyst comments
The CEO and Chairman of TCI are the same individual. The CEO and vice CEO both have an
Executive/board
2 agricultural background, which we consider as positive as it should help TCI capture industrial
quality
trends and focus on R&D.
TCI's dividend payout ratio dropped from 60-70% during 2011-15 to c.50-68% in the past six
years. We believe TCI has shifted to a capital management strategy that focuses on more
G Capital management 1 acquisitions to gain technical expertise and network expansion (ie, production capacity
expansion overseas). In March 2021, TCI annouced its successful public tender offer for
Maxigen (1783 TT), indicating a good start for its strategic partnership, in our view.
Revenue from related-party transactions dropped from 76% of total revenue in 2019 to 73% in
Related party &
2 2020 and 2021, which we attribute to its weak China revenue, which accounted for most of its
transaction
related-party transactions. We see no evidence of suspicious activity.
All of TCI's products have passed inspection standards, including ISO9001, ISO22000 and
HACCP, with its R&D lab also passing the ISO17025 and TAF certifications. Besides, to ensure
Product design & a higher competitive advantage, TCI has established standardised production lines and strictly
S 1
lifecycle management monitors quality control in its production bases. With a constructive and comprehensive SOP
setup, we believe TCI's product quality and safety will not pose a significant threat to its
operations.
TCI stated that it has internal regulations that guide relevant supplier management procedures,
including lead time, quality control and pricing, which ensure long-lasting partnerships. It
Supply chain conducts periodic evaluations to ensure its suppliers are following its CSR policy with potential
S 2
management for contract termination. We also see TCI increasing the usage of integrated bioscience design
(IBD) materials, which TCI has itself developed and may lower its supply-chain risks going
forward, in our view.
Note: Management score represents a company's ability to manage/benefit from certain ESG topics. The scores range from 1 to 3, with 1 being the strongest.
Source: Daiwa

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 TCI (8436 TT): 22 May 2023

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There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
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Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings

Rating Percentage of total
Buy* 78.27%
Hold** 17.72%
Sell*** 4.01%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2023.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along wi th this document, we ask you to pay close attention to the following
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purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
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*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
each transaction etc.

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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding
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