DR.WU Skincare 6523 TT

Transcription

1 Initiation DR.WU Skincare 6523 TT Great strides on China & ASEAN expansion

2 Initiation Taiwan: Pharmaceuticals 21 Feb, 2017 Action BUY (Initiation) TP upside (downside) 29.4% Close Feb 21, 2017 Price NT$ M Target NT$ Previous Target NT$N.A. TAIEX 9,763.9 Share price performance relative to TAIEX Market cap US$253.7 mn 6M avg. daily turnover US$0.4 mn Outstanding shares 45.8 mn Free float 37.5% FINI ownership 24.1% Major shareholders Wu I Ju, 27.3% Net debt/equity (48.6%) BVPS (2017F) NT$47.63 P/B (2017F) 3.57x Financial outlook (NT$ mn) Year to Dec 2015A 2016F 2017F 2018F Sales 865 1,151 1,476 1,741 Op. profit Net profit * EPS (NT$) EPS growth (%) (4.5) DPS (NT$) P/E (X) Div. yield (%) ROE (%) * Net profit attributable to the parent What s new? Initiate coverage with a BUY rating and our TP of NT$220, based on 25x 2017F EPS. DR.WU is Taiwan s cosmeceutical juggernaut, riding on China s cosmetic market s rising and unmet demand. We forecast 2016/17/18F EPS of NT$6.6/8.9/10.7, respectively. Company profile: Dr. Wu Skincare produces skincare treatments and related products. Primary Analyst: Peggy Lee Peggy.Lee@yuanta.com With significant contribution from: Eddie Liu eddie.liu@yuanta.com Bloomberg code: YUTA Our view DR.WU Skincare (6523 TT) Great strides on China & ASEAN expansion Initiate coverage with our BUY TP of NT$220: As the forerunner of cosmeceutical brands in Taiwan, DR.WU mainly targets skin solutions and has successfully made inroads into China s derma market with more ASEAN business expansion on the horizon. We believe it can ride on rising demand of cosmetic products in emerging markets. Thus we like DR.WU for 1) plans to expand into China Watsons retail channels of ~100 stores in 2017; 2) tapping into more ASEAN countries; 3) ongoing op leverage stories; and 4) exclusive formulation and continuous product innovation. Thus, we initiate coverage with our BUY TP of NT$220, derived from 25x 2017F EPS. Watsons channel another propeller for 2017 growth in China: In late 2014, DR.WU entered China, which in turn accounted for 20% of total sales in In addition to ongoing expansion of its EC business and other cosmetic stores (FIONA), DR.WU plans to cut into one hundred Watsons stores to gain market share, accelerate sales growth and reinforce brand image. We expect China sales to hit NT$373 mn, up 65% YoY in 2017F. More to expect from ASEAN countries: Aside from decent growth in Singapore and Malaysia, DR.WU expanded into the Myanmar market last June. For 2017, it targets overseas sales (6% of total sales) growth of at least 30% YoY and also expects to step into new markets. Taiwan (E-Commerce) EC business to catch investors eyes: Taiwan sales growth of 28% YoY in 2016 was mainly driven by B&M (brick & mortar) business (up 30% YoY, 60% of total sales). Its Taiwan EC business (14% of total sales) saw fair low-teens % growth YoY in However, mgmt expects a large change to Taiwan EC s trend, with growth of 30% YoY in 2017 due to YAHOO EC s reorganization last month. BUY for nice op leverage stories: DR.WU s M&S expenses jumped while entering China in late 2014, yet it has already reached breakeven in China since 2H15, bolstered by op leverage given an improving expense ratio and NM of 10-12% in 2016 (mgmt targets 15% in 2017). Expansion into China Watsons retail channels supports sales growth acceleration & market penetration; China is still the main 2017/18F growth driver; the effect of operating leverage continues. Cutting into more ASEAN countries a catalyst for overseas business growth. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE LOCATED IN APPENDIX A. Yuanta does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

3 Table of Contents Investment thesis 4 Financials & valuation 9 Company profile 13 Industry overview 17 Taiwan: Pharmaceuticals 21 Feb, 2017 Page 3 of 23

4 Investment thesis DR.WU, Taiwan s top domestic cosmeceutical brand, is actively expanding its business to new markets via multi channels Number one domestic cosmeceutical brand in Taiwan As the top skincare brand in Taiwan, DR.WU has a 31% market share of Taiwan s derma market in The company concentrates on cosmeceutical skincare products containing pharmaceutical-like ingredients to directly target skin problems. In Taiwan, DR.WU mainly sells its products in drug chain stores, through E-commerce in China and commercial agents in ASEAN countries. Comparing DR.WU s normal domestic B&M sales growth of 15-20% YoY to the Taiwan skin care industry s CAGR of 5-8% in the same period, it is clear DR.WU is gaining market share in Taiwan, in our view. DR.WU has also aggressively expanded its business via 1) deeper expansion from Taiwan to China, which began in late 2014 and will include more ASEAN countries; 2) Online to Offline in the China market, targeting to add 100 Watsons stores in 2017; and 3) diversification from skin-problem specific target users to a broader spectrum of consumers. Figure 1: DR.WU has a 31% share of the dermatology market in Taiwan Figure 2: DR.WU s sales growth outpaces that of Taiwan s skincare market Source: Company data, Yuanta Investment Consulting POYA will be the main sales driver of DR.WU s B&M business in 2017 POYA a growth driver for its Brick & Mortar (B&M) business in Taiwan Taiwan B&M sales have been the company s backbone, accounting for 60% of its total sales in 2016 with organic growth YoY of a high-teens %. Nevertheless, B&M business growth for DR.WU reached 30% YoY in 2016 due to its expansion into POYA channels from last April. For 2017, mgmt sees great sales potential as it continues to gain market share in POYA channels, and expects POYA sales to at least double YoY this year. We forecast B&M business to maintain growth of 15-20% YoY in 2017F despite the high base in Yahoo EC platform s reorganization will benefit DR.WU in 2017 Taiwan (E-Commerce) EC business to see the light at the end of the tunnel DR.WU established its EC business mainly on the Yahoo EC platform, accounting for 15% of its total sales in For 2017, mgmt looks forward to exceeding 30% YoY (vs. a fair 10-15% in the past few years) on the sales as it is positive on Yahoo EC s team reorganization at the beginning of this year and expects new marketing strategy proposals. Over the past few years, Yahoo shifted more focus to Yahoo Mall from Yahoo Buy & Bid, which jeopardized DR.WU s sales performance. In response, DR.WU has undergone a transformation, which we believe is mostly settled, leaving the company poised to harvest the rewards via its strong EC team. Taiwan: Pharmaceuticals 21 Feb, 2017 Page 4 of 23

5 Figure 3: DR.WU s strong distribution channel management China cosmeceutical market will enjoy a CAGR of 18.1% vs. the cosmetic market s 6.8% from Trend toward cosmeceutical products has swept through China China has seen unmet demand of cosmetic products and the market is still in the initial growth stage s pattern, implying potential upside is great over the next few years. China s cosmeceutical market size was around RMB40 bn in 2016, accounting for 20% of the total cosmetic market, and will enjoy a CAGR of 18.1% vs. the cosmetic market s 6.8% from , based on market research by Chinaidr and the ITIS database. Figure 4: China s cosmetic market size forecast Figure 5: China s cosmeceutical market size forecast Source: ITIS, Chinaidr, Yuanta Investment Consulting Source: ITIS, Chinaidr, Yuanta Investment Consulting Watsons channels will be its key strategic focus in China for 2017 China market to expand explosively Entering in late 2014 mainly with E-commerce platforms like Jumei and Tmall, DR.WU has successfully stepped into the China market with department stores and cosmetic retail store channels like Watsons, MYFACE and FIONA. It reported 2016 China sales of NT$225 mn, up 65% YoY, and mgmt indicates growth will be of a similar strength this year. In addition, China s sales proportion increased to 20% in 2016 vs. 16% in Taiwan: Pharmaceuticals 21 Feb, 2017 Page 5 of 23

6 Figure 6: Fast-growing China sales Figure 7: Increasing sales exposure to China Source: Company data, Yuanta Investment Consulting Source: Company data, Yuanta Investment Consulting DR.WU attributes the outstanding performance in China to its 1) focus on one start mandelic acid hero products, quickly catching customers attention; 2) rapid establishment of brand recognition and awareness through celebrity endorsements and operations with social media such as WeChat/Weibo/Baidu. Figure 8: DR.WU s hero products in China Figure 9: Best skincare brand of first-tier city university students DR.WU entered the China market in late 2014 and quickly reached breakeven in 2015 However, DR.WU encountered significant extra M&S expenses in China, eroding net profit by 4.5% YoY in 2015, with its expense ratio rocketing up to 37.7% vs. 30% in Yet, thanks to its good opex control, its operating leverage has paid off, enabling its China business to breakeven in Also, DR.WU s net profit margin hit 10-12% in 2016; mgmt targets a net profit margin of 15% this year. We believe DR.WU s overall business will see earnings growth of 35%/21% YoY in 2017/18F on the back of its China business growth. Figure 10: DR.WU s operating margin and expense ratio outlook Taiwan: Pharmaceuticals 21 Feb, 2017 Page 6 of 23

7 DR.WU s overseas sales still have a low base with great potential in the near future Penetrating into more ASEAN countries a catalyst for overseas business Aside from China, DR.WU sells its products in ASEAN countries like Myanmar, Singapore, Malaysia, and other overseas markets like Hong Kong, the US, Canada and New Zealand, mainly through local commercial agents. These overseas business sales accounted for 6% of its total sales with growth of 23% YoY in ASEAN skincare markets are currently worth NT$157 bn; DR.WU still only owns a tiny piece of the pie, and is looking for new potential markets. The company is most likely to start selling in Thailand, the Philippines, or Vietnam. Breaking into any one of these countries will help lift overseas business growth above 50% YoY in 2017F, according to mgmt. DR.WU targets Asian skin solutions and has abundant products lines and SKU From clinical to commercial The brand name DR.WU refers to its chairman Eric Wu s father Ying-Chin Wu, who is a dermatologist and manages a leading dermatological and aesthetic medical clinic in Taiwan. All the formulations Dr. Wu developed have the purpose of solving patients skin problems in a mild way. Being the cosmeceutical pioneer in Taiwan has helped DR.WU to become the market leader and gain more share than peers. The company continues to develop new products to fulfill customers demand and now has a total of 68 SKU and 12 key product lines. L Capital Asia, owned by The LVMH group, invested in DR.WU in 2014 and currently owns a 19.3% stake. Figure 11: Complete product lines with 12 key lines and 68 SKU DR.WU maintains a product renewal rate of 15% and has a habit of introducing new blockbuster products All new products, upgrades, and marketing strategies In order to gain market share and to compete in various regions in Asia, DR.WU maintains a 15% product replacement/renewal rate every year. Looking into 2017, besides capsule masks sweeping through markets in 2016, the company will introduce and focus on new products like the DD cushion & Earth resource mask. Also, DR.WU will introduce DR.WU Derma Academy ideas to give consumers ideas for branding innovation. Meanwhile, it has begun an Omni-Channel strategy to not only keep track of the transactions but also manage customer relationships through QR codes on products across any physical or digital channel interaction. Taiwan: Pharmaceuticals 21 Feb, 2017 Page 7 of 23

8 Figure 12: Omni channel of brand innovation Taiwan: Pharmaceuticals 21 Feb, 2017 Page 8 of 23

9 Financials & valuation We believe DR.WU can still grow fast on the back of its market penetration strategy Financials DR.WU reported 2016 sales of NT$1.15 bn, up 33%, and we forecast net profit to grow at 32.4% due to China s improving operating leverage. We believe the China market will likely be DR.WU s main growth driver for the following two years and will provide solid growth momentum. Based on sustained growth, we forecast 2017F sales/earning growth of 28%/35% YoY and estimate 2016/17/18F EPS to be NT$6.6/8.9/10.7 respectively, based on the fully-diluted 45.8 mn outstanding shares. We forecast 2017/18F sales growth of 28%/18% YoY on the back of 1) gaining more market share via its newly-added China Watsons channels; 2) Taiwan POYA B&M sales to double with Taiwan EC business to grow 25% YoY vs. a low-teens % previously; and 3) penetrating into new ASEAN countries. Figure 13: Annual sales trend from F Figure 14: Annual net profit trend from F Source: Company data, Yuanta Investment Consulting Source: Company data, Yuanta Investment Consulting GM will have no surprising progress as cosmeceutical products GM has been around 68-70% in Taiwan on average. In China, although product costs are higher than Taiwan, ASP is also 50-70% higher, and net-net GM is around the same as Taiwan s. DR.WU has had good opex control in the past few years DR.WU s M&S, G&A expenses increased significantly after entering the China market in late 2014, dragging net profit growth down by 5% YoY in However, things have changed, and DR.WU has successfully reached effective operating leverage and breakeven in China in 2015, improving its operating margin for the years to follow. Figure 15: Annual GM/OPM/NPM trend from F Taiwan: Pharmaceuticals 21 Feb, 2017 Page 9 of 23

10 An upward trend of ROE is foreseeable in the next few years Moreover, DR.WU s net profit margin in China ranged between 10-12% in 2016, and the company targets a net profit margin of 15% in China in With accelerating sales/opm line growth trends, we believe DR.WU s bottom line will progress continuously. Therefore, we forecast net profit of NT$302/408/491 mn, with EPS of NT$6.6/8.9/10.7 in 2016/17/18F, implying a net profit CAGR of 29% from F. Overall, we expect net profit margin to expand from 26.3% in 2015 to 26.4%/27.6%/28.2% in 2016/17/18F, respectively. Additionally, a robust ROE upward trend is in sight for DR.WU, even though its ROE has been a bit sluggish due to the issuance of new shares when it made its initial public offering (IPO) in We estimate its ROE will be 15%/19%/21% in 2016/17/18F. Figure 16: ROE growth trend from F Our TP of NT$220 is derived from 25x 2017F EPS Valuation DR.WU is currently trading at 19x/16x 2017/18F EPS, implying a PEG of 0.6x/0.8x, and the stock has historically traded at a P/E of 15-40x. Also, for 2017/18F, peers are trading at 27x/23x P/E on average, implying a PEG of 4.9x/1.7x. Figure 17: Peer valuation comparison Company Ticker Rating Price Dr.Wu Skincare 6523 TT BUY Our TP of NT220 is derived from 25x 2017F EPS, implying a 0.7x PEG and is nearly the median of its historical P/E. We believe the 25x P/E is justified as DR.WU 1) has its own renowned brand, adding value to the stock; 2) enjoys rapid expansion of net profit growth at a CAGR of 29% from F; and 3) peers are trading at an average P/E of 27x. Thus, we believe it deserves a higher valuation based on its solid fundamental performance and plenty of near-term catalysts. Therefore, we initiate coverage of DR.WU with a BUY rating and a TP of NT$220, implying 30% upside. Mkt Cap (US$ mn) EPS PER (x) EPS growth (%) 2016F 2017F 2018F 2016F 2017F 2018F 2016F 2017F 2018F NT$ Global peers Kao 4452 JP NR 5, , Pola Orbis 4927 JP NR 10,930 5, Kose 4922 JP NR 9,190 4, Shiseido 4911 JP NR 2,870 10, Amorepacific KS NR 291,500 14, Shanghai Jahwa CH NR , Coty COTY US NR , Estee Lauder EL US NR , Procter & Gamble PG US NR , L occitane 973 HK NR , L oreal OR EU NR , Unilever UNA NA NR , Average Source: Company data, Yuanta Investment Consulting, Bloomberg Notes: EPS figures are denominated in local currency Taiwan: Pharmaceuticals 21 Feb, 2017 Page 10 of 23

11 Figure 18: Peer valuation comparison (continued) Company Ticker Rating Price Dr.Wu Skincare 6523 TT BUY Mkt Cap (US$ mn) ROE (%) EV/EBITDA PBR (x) 2016F 2017F 2018F 2016F 2017F 2018F 2016F 2017F 2018F NT$ Global peers Kao 4452 JP NR 5, , Pola Orbis 4927 JP NR 10,930 5, Kose 4922 JP NR 9,190 4, Shiseido 4911 JP NR 2,870 10, Amorepacific KS NR 291,500 14, Shanghai Jahwa CH NR , Coty COTY US NR , Estee Lauder EL US NR , Procter & Gamble PG US NR , L occitane 973 HK NR , L oreal OR EU NR , Unilever UNA NA NR , Average Source: Company data, Yuanta Investment Consulting, Bloomberg Figure 19: Quarterly highlights (consolidated basis) (NT$ mn) 1Q2016A 2Q2016A 3Q2016A 4Q2016F FY2016F 1Q2017A 2Q2017A 3Q2017A 4Q2017A FY2017F Sales , ,476 COGS (76) (83) (91) (116) (366) (92) (110) (124) (149) (475) Gross profit ,000 Opex (76) (99) (107) (131) (412) (98) (120) (130) (147) (494) Operating profit Non-operating profit (2) (1) (7) 2 (8) Pre-tax profit Income tax (13) (15) (14) (19) (62) (16) (23) (26) (33) (98) Net income attributable to the parent FD WA EPS ( ) Wtd. avg. no. of shares Margin analysis Gross margin 67.3% 69.4% 68.8% 67.2% 68.2% 66.6% 68.7% 67.7% 67.8% 67.8% Operating margin 34.9% 32.9% 32.3% 30.2% 32.3% 31.3% 34.7% 34.1% 35.9% 34.3% Pre-tax margin 34.1% 32.6% 29.8% 30.7% 31.6% 31.3% 34.7% 34.1% 35.9% 34.3% Effective tax rate 16.0% 17.2% 16.4% 17.8% 16.9% 18.0% 19.0% 20.0% 20.0% 19.4% Growth (% QoQ) Sales (18.1%) 16.1% 7.2% 21.2% 33.0% (21.8%) 27.7% 9.3% 19.7% 28.3% Operating profit (26.6%) 9.4% 5.2% 13.7% 40.3% (19.1%) 41.6% 7.3% 25.9% 36.0% Net income (26.7%) 9.7% (1.2%) 23.0% 32.4% (20.6%) 39.9% 6.0% 25.9% 34.8% EPS (26.73%) 9.67% (1.22%) 22.97% 32.41% (20.59%) 39.88% 6.02% 25.89% 34.78% Source: Company data, Yuanta Investment Consulting estimates Note: A * represents historical data reconciled by Yuanta. Fully diluted weighted average EPS is based on weighted average number of shares. Taiwan: Pharmaceuticals 21 Feb, 2017 Page 11 of 23

12 Figure 20: 12-month forward looking P/E band Source: Company data, Yuanta Investment Consulting Figure 21: 12-month forward looking P/B band Source: Company data, Yuanta Investment Consulting Taiwan: Pharmaceuticals 21 Feb, 2017 Page 12 of 23

13 Company profile DR.WU has the highest market share through different channels among domestic names in Taiwan Top cosmeceutical brand in Taiwan enjoys substantial growth from entering China Founded in 2003, DR.WU Skincare is a local cosmeceutical company operating with its own brand DR.WU, which has the highest market share among domestic names in Taiwan. The brand entered the local Taiwan cosmeceutical market in 2004 and was the first to sell products in drugstore chains such as Cosmed and Watsons. DR.WU also set up its own counters at Shin Kong Mitsukoshi Department Stores and Taipei 101 in Taiwan in The company entered the China market in late 2014, first selling products via on-line shopping platforms, and expanding to physical channels in 2016, including setting up counters in department stores in Shanghai and Beijing as well as entering 40 FIONA cosmetic stores in China. At the end of 2016, DR.WU also cut into China Watsons chain stores, and will continue penetrating into the China market. The company sells its products in Taiwan through drugstore chains, including Watsons (520 stores), Cosmed (400 stores) and Your Chance Drug Chain Store, as well as through other channels such as Ever Rich Duty Free Shop. It also sells through e-commerce platforms, including its official website (drwu.com), Yahoo Shopping, PChome and MomoShop. Its B&M business in the Taiwan market has been growing at a stable rate of 12-15%; however, it reported growth of 31% YoY in 2016 driven by POYA channel entry and products such as capsule mask series, as well as new market strategies in Watsons channels. Figure 22: Company history Year 1992 Dr. Ying-Chin, Wu first formulated topical medication and solutions for iontophoresis treatments Inception of the DR. WU Clinical Skincare brand and Tian Yu Biotech (the predecessor of DR. WU Skincare) Full launch in Cosmed chain drugstores 2006 Launched in cosmetics chain SASA, and drug chain stores Yourchance, Norbelbaby, etc 2007 Launched in overseas regions such as Hong Kong, US and New Zealand. Launched in Yahoo Shopping Launched in Watsons (Taiwan); expands business into Singapore; POS reaches 900. DR.WU is also the only local cosmeceutical brand in the top 20 global peers DR. WU brand becomes No.1 in the cosmeceutical sector in Taiwan in terms of total sales; a total of 100 products are now available under the brand. A DR. WU counter is set up at Shin Kong Mitsukoshi Department Store, making it the first cosmeceutical brand to enter a major department store Expands business into Malaysia; receives Beauty Awards from major magazines Expands business into Canada Number of sales points surpasses 1,200; Vitamin C+ Whitening System and UV Protect Suncare System are launched. Company renamed as DR. WU Skincare; received investment from L Capital Asia; set up its flagship store in Taipei Expands to China EC channel like Jumei/Tmall/JD and Shaghai Super Brand shopping Mall Expands to China EC channel, VIP.com and other retail cosmetic chain stores like Watsons/MYFACE/LILYSTAR In terms of market share, DR.WU was ranked 16th in Taiwan s skincare industry in 2013, with a 1.5% market share of the whole Taiwan skincare market. It was the only local cosmeceutical brand to make the top 20 list of global peers. Regarding the derma market in Taiwan, it owns the biggest slice of pie, with a dominating market share of 31% in Taiwan: Pharmaceuticals 21 Feb, 2017 Page 13 of 23

14 The largest shareholder is the founder Eric Wu and his family. L Capital Asia, owned by The LVMH group, acquired a stake of the company in early 2014, and currently holds a stake of around 19.3%. Figure 23: DR.WU s key shareholders Family holdings % Others % Wu I Ju 27.3% L Capital Taiwan Beauty 19.3% DEF Investment Holding 16.8% Grandeur Peak Global Fund 2.4% Donglin Biomedical 7.4% Fidelity Funds 2.1% Wclinic Biotechnology 7.4% F&F/Employee 4.9% Hsieh Pei Lin 3.6% Public Float 8.9% Total 62.5% Total 37.5% DR.WU, with its expertise in dermatology, provides different solutions for customers With a dermatologist background, DR.WU is in the skin-problem solving business DR.WU was founded by Eric Wu and the brand name refers to Eric Wu s father, Dr. Wu Ying-Chin, a clinical professor & practitioner at the Department of Dermatology of National Taiwan University s College of Medicine. Aiming at addressing skin problems, his research led to a series of skin solutions. The major product systems are as follows: 1) Hyalucomplex Hydrating System; 2) Vitamin C+ Whitening System; 3) Ageversal Repairing System; 4) Acnecur Anti-Acne System; 5) Mandelic Renewal System; 6) Basic care System; and 7) Skincare for Men. The brand offers over 60 products, with an average retail price of around US$ The company positions itself as a mid-range priced professional skincare brand. Figure 24: DR.WU s major products Taiwan: Pharmaceuticals 21 Feb, 2017 Page 14 of 23

15 DR.WU owns large patented formulas, which it outsources to other CMO companies DR.WU uses over 100 patented active ingredients, which are sourced from major pharmaceutical companies across the globe, such as DSM, Merck, Roche, DOW and Mitsubishi and out-sources manufacturing to top (Contract Manufacturing Organization) CMO companies in Taiwan. DR.WU owns all its patented formulas and every product has to pass 23 quality checks and 300 non-additive checks. All quality checks are managed and monitored by the company s unique DR.WU Safety Management System (DSMS). Currently, DR.WU is the No.1 local cosmeceutical brand in Taiwan, with 2016 sales of NT$1.15 bn, up 33% YoY. Figure 25 shows the company s five bestselling products. Figure 25: DR.WU s five best-selling products Intensive Microinject Intensive Renewal Hydrating Serum Hydrating Mask Serum with With Hyaluronic with Hyaluronic Mandelic Acid Acid Acid Intensive Repair Serum with Squalane Whitening Spot Treatment with Vitamin C+ The company expanded into department stores in Taiwan in 2010 From drugs to department stores; aiming to compete with Korean peers The DR.WU brand positioned itself as a professional cosmeceutical brand when it first entered the market. Its major distribution channels included cosmetic medical and dermatological clinics, and drugstore chains such as Watsons and Cosmed. Backed by its high market share and popularity, the company expanded into department stores in 2010 in Taiwan. To compete with Korean peers, DR.WU introduced a new brand image, focusing on the mindset of being bright, professional, young, and creative. Figure 26: DR.WU in drug stores and duty-free shops Taiwan: Pharmaceuticals 21 Feb, 2017 Page 15 of 23

16 Figure 27: DR.WU 2.0 concept stores Taiwan: Pharmaceuticals 21 Feb, 2017 Page 16 of 23

17 Industry overview Cosmeceutical is a new term derived from cosmetics and pharmaceuticals Cosmeceutical products emphasize medical ingredients and efficacy Cosmeceutical is a new term derived from cosmetics and pharmaceuticals, referring to cosmetics products that contain a low dosage of medicinal ingredients for treating specific dermatological problems. Cosmeceuticals were first conceptualized in France with products boasting clean, natural mineral water and low-allergy ingredients to help in preventing or treating skin problems. The major brands are Avene, Viche and La Roche-Posay, followed by later entrants such as NeoStrata, C-Skin and Cellex-C, which primarily provide products with AHA, vitamin A acid, and hyaluronic acid. Customers have labeled ingredients and proven clinical efficacy As these products have detailed labeling of ingredients and have been clinically tested with proven efficacy, we have seen more consumers willing to purchase cosmeceutical products, leading to rapid market growth. The most popular pharmaceutical ingredients used for skincare is Hyaluronic Acid (HA), which helps moisturizing. Other areas for cosmeceutical products include whitening, anti-aging and anti-acne. In the following table, we show popular ingredients used in cosmeceutical products. Figure 28: Popular ingredients and functions of cosmeceutical products Function Ingredient How it works Moisturizing/ repairing Whitening / anti-oxydation Exfoliation Hyaluronic Acid Collagen Peptide Squalane L-Ascorbic Acid Arbutin Grape seeds (Oligomeric Proantho Cyanidins) Alpha Hydroxy Acid (AHA) Vitamin A Acid Hyaluronic acid is a colorless jelly substance that can instantly provide in-depth moisturizing and restore the oil-water balance to allow better skin elasticity and tension. Collagen can provide solid support from the dermal layer to allow firmer skin. Squalane can help repair the epidermis by forming a protective layer on the skin to restore healthy sebum secretion. L-Ascorbic acid can facilitate collagen synthesis within the dermis and provide functions including wrinkle smoothing, whitening, spot correcting, firming and anti-ageing for the skin. Arbutin can block the production of melamin and whiten the skin. It is also used in spot corrector serums. A grape seed contains Oligomeric Proantho Cyanidins (OPC), which the human body cannot synthesize automatically. OPC can remove excessive free radicals in human body. Alpha hydroxy acid can break down dead cell bonds and facilitate exfoliation of the stratum corneum, while stimulating new cell generation at the same time. Vitamin acid can delay the ageing of skin cells and stimulate skin cell regeneration to allow more even skin color and smoothen fine lines and wrinkles at the same time. Wrinkle smoothing Co-enzyme Q10 Kinetin Source: Yuanta Investment Consulting Q-10 can offset the free radicals that are harmful to human skin and thus enhance firmness of the skin. Kinetin can penetrate the epidermis and stimulate fibroblasts at the dermal layer of the skin to delay and moderate the natural cellular ageing process. Taiwan: Pharmaceuticals 21 Feb, 2017 Page 17 of 23

18 Many brands are emerging in the Taiwan market through drugstores and medical institutions In Europe and the US, many high-priced cosmeceutical products target medical institutions as their major distribution channel. Some even use the names of doctors in their brands to attract consumers attention, such as PeterThomasPoth, Perricone MD, Dr. Jart, Dr. Brandt and DDF. We have seen many brands emerging in Taiwan in recent years, including Beloved One, Naruko, Neogence, St. Claire and Funcare. Cosmeceutical brands mainly distribute their products through drug stores and medical institutions. DR.WU was the first local cosmeceutical brand to launch in Taiwan in 2004, and to build its brand image with the founder Dr. Wu, a dermatologist, to increase product differentiation. The global cosmeceutical market is growing at a CAGR of 8% vs. 4.6% for regular cosmetics products Cosmeceuticals are more attractive vs other skincare products The fastest growing segment among the cosmetics and skincare product industry is the cosmeceuticals market because many people are looking for a quick and safe way to retain the radiant glow of youth. Cosmeceutical skincare products are described as skincare or cosmetic products with pharmaceutical-like ingredients that directly improve skin health. The cosmeceutical market is growing at a significant rate as RNCOS Business Consultancy Service estimated that the global cosmeceutical market was worth US$37 bn in 2014, accounting for 14.5% of the overall skincare market, and is expected to expand at an 8% CAGR to US$47 bn by 2017F, according to market research RNCOs. The growth pace of cosmeceuticals will likely outpace the 4.6% CAGR of the overall skincare market. Figure 29: Global cosmetics market Figure 30: Global cosmeceuticals market Source: RNCOs, Yuanta Investment Consulting Source: RNCOs, Yuanta Investment Consulting Taiwan: Pharmaceuticals 21 Feb, 2017 Page 18 of 23

19 China's cosmeceutical market to grow at an 18% CAGR in In 1998, Vichy was the first global cosmeceutical brand to enter China, followed by some other US/Europe brands, including La Roche Posay, Avene and Biotherm. China s cosmeceutical market is growing rapidly at a CAGR of 18% in F vs. cosmetic products 6.8% In recent years, some Chinese companies that focus on traditional Chinese medicine (TCM) research and marketing have been entering the cosmeceutical market with TCM ingredients, differentiating from foreign brands and enjoying strong growth. More than 170 enterprises have tapped into China s cosmeceuticals market, and many of these players are renowned pharmaceutical companies in China, such as Tongrentang and Yunnan Baiyao. However, global brands still account for a 50-60% share of China's overall cosmeceutical market. China has great sales potential on the back of strong demand for cosmeceutical products, as the market has recently developed and is now in the initial fast-growing stage coupled with expanding disposable income and rising awareness regarding the advantage of cosmeceuticals. According to Chinaidr, China s cosmeceutical market was worth RMB35 bn, accounting for 20% of the overall cosmetics market, and will enjoy a F CAGR of 18% vs. the cosmetic market s 6.8%. Figure 31: China cosmetic market size forecast Figure 32: China cosmeceutical market size forecast Source: ITIS, Chinaidr, Yuanta Investment Consulting Source: ITIS, Chinaidr, Yuanta Investment Consulting Taiwan: Pharmaceuticals 21 Feb, 2017 Page 19 of 23

20 Balance Sheet Year as of Dec (NT$ mn) 2014A 2015A 2016F 2017F 2018F Cash & ST investment ,060 1,113 Inventories Accounts receivable Others Current assets 1,002 1,028 2,205 2,376 2,558 LT investments Net fixed assets Others Other assets Total assets 1,024 1,061 2,254 2,430 2,616 Accounts payable ST borrowings Others Current liabilities Long-term debts Others Long-term liabilities Total liabilities Paid-in capital Capital surplus ,183 1,183 1,183 Retained earnings Others Shareholders' equity ,043 2,182 2,308 Minority Interest Total Equity ,043 2,182 2,308 Source: Company data, Yuanta Investment Consulting Cash Flow Year as of Dec (NT$ mn) 2014A 2015A 2016F 2017F 2018F Net profit Depr & amortization Change in working (560) (650) (455) (45) (69) cap. Others (1) 0 Operating cash flow (15) Capex (8) (3) (13) (8) (8) Change in LT inv Change in other (266) (1) (101) 0 0 assets Investment cash flow (273) (4) (114) (8) (8) Change in share capital Net change in debt Other adjustments 183 (169) 788 (267) (366) Financing cash flow 183 (169) 788 (267) (366) Impact from changes in FX rate 3 (1) (1) 0 0 Net cash flow 89 (8) Free cash flow (28) Source: Company data, Yuanta Investment Consulting Profit and Loss Year as of Dec (NT$ mn) 2014A 2015A 2016F 2017F 2018F Sales ,151 1,476 1,741 Cost of goods sold (216) (274) (366) (475) (559) Gross profit ,000 1,183 Operating expenses (198) (326) (412) (494) (568) Operating profit Interest income Interest expense Net interest Net Invst.Inc/(loss) Net oth non-op.inc/(loss) 41 7 (12) 0 0 Net extraordinaries Pretax income Income taxes (54) (45) (62) (98) (123) Net profit Minority interest Net profit attributable to the parent EBITDA EPS (NT$) EPS (NT$) Bonus Adj Source: Company data, Yuanta Investment Consulting Key Ratios Year to Dec 2014A 2015A 2016F 2017F 2018F Growth (% YoY) Sales Op profit EBITDA Net profit 26.8 (4.5) EPS (4.54) Profitability (%) Gross margin Operating margin EBITDA margin Net profit margin ROA ROE Stability Gross debt/equity (%) Net cash (debt)/equity (%) Int. coverage (X) N.A. N.A. N.A. N.A. N.A. Int. & ST debt cover (X) N.A. N.A. N.A. N.A. N.A. Cash flow int. cover (X) N.A. N.A. N.A. N.A. N.A. Cash flow/int. & ST debt (X) N.A. N.A. N.A. N.A. N.A. Current ratio (X) Quick ratio (X) Net debt (NT$ mn) (317) (312) (970) (1,060) (1,113) BVPS (NT$) Valuation Metrics (x) P/E P/FCF (281.4) P/B P/EBITDA P/S Source: Company data, Yuanta Investment Consulting Taiwan: Pharmaceuticals 21 Feb, 2017 Page 20 of 23

21 Appendix A: Important Disclosures Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Dr.Wu Skincare (6523 TT) Three-year recommendation and target price history Source: Bloomberg, Yuanta Investment Consulting Notes: A = price adjusted for stock & cash dividends; B = unadjusted target price; C = target price adjusted for stock & cash dividends. Employee bonus dilution is not reflected in A, B or C. Current distribution of Yuanta ratings Rating # of stocks % Buy % HOLD-OPF % HOLD-UPF 38 8% Sell 6 1% Under Review % Restricted 4 1% Total: % Source: Yuanta Investment Consulting August 18, 2014 Ratings Definitions BUY: We have a positive outlook on the stock based on our expected absolute or relative return over the investment period. Our thesis is based on our analysis of the company s outlook, financial performance, catalysts, valuation and risk profile. We recommend investors add to their position. HOLD-Outperform: In our view, the stock s fundamentals are relatively more attractive than peers at the current price. Our thesis is based on our analysis of the company s outlook, financial performance, catalysts, valuation and risk profile. HOLD-Underperform: In our view, the stock s fundamentals are relatively less attractive than peers at the current price. Our thesis is based on our analysis of the company s outlook, financial performance, catalysts, valuation and risk profile. SELL: We have a negative outlook on the stock based on our expected absolute or relative return over the investment period. Our thesis is based on our analysis of the company s outlook, financial performance, catalysts, valuation and risk profile. We recommend investors reduce their position. Under Review: We actively follow the company, although our estimates, rating and target price are under review. Restricted: The rating and target price have been suspended temporarily to comply with applicable regulations and/or Yuanta policies. Note: Yuanta research coverage with a Target Price is based on an investment period of 12 months. Greater China Discovery Series coverage does not have a formal 12 month Target Price and the recommendation is based on an investment period specified by the analyst in the report. Taiwan: Pharmaceuticals 21 Feb, 2017 Page 21 of 23

22 Global Disclaimer 2017 Yuanta. All rights reserved. The information in this report has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report provides general information only. Neither the information nor any opinion expressed herein constitutes an offer or invitation to make an offer to buy or sell securities or other investments. This material is prepared for general circulation to clients and is not intended to provide tailored investment advice and does not take into account the individual financial situation and objectives of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, investments or investment strategies discussed or recommended in this report. The information contained in this report has been compiled from sources believed to be reliable but no representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is not (and should not be construed as) a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on such business in that jurisdiction. Yuanta research is distributed in the United States only to Major U.S. Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended and SEC staff interpretations thereof). All transactions by a US person in the securities mentioned in this report must be effected through a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, as amended. Yuanta research is distributed in Taiwan by Yuanta Securities Investment Consulting. Yuanta research is distributed in Hong Kong by Yuanta Securities (Hong Kong) Co. Limited, which is licensed in Hong Kong by the Securities and Futures Commission for regulated activities, including Type 4 regulated activity (advising on securities). In Hong Kong, this research report may not be redistributed, retransmitted or disclosed, in whole or in part or and any form or manner, without the express written consent of Yuanta Securities (Hong Kong) Co. Limited. Taiwan persons wishing to obtain further information on any of the securities mentioned in this publication should contact: Attn: Research Yuanta Securities Investment Consulting 4F, 225, Section 3 Nanking East Road, Taipei 104 Taiwan Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact: Attn: Research Yuanta Securities (Hong Kong) Co. Ltd 23/F, Tower 1, Admiralty Centre 18 Harcourt Road, Hong Kong Taiwan: Pharmaceuticals 21 Feb, 2017 Page 22 of 23

23 Yuanta Greater China Equities Research - Taiwan Vincent Chen Head of Regional Research vincent.chen@yuanta.com George Chang, CFA Head of Taiwan Research george.chang@yuanta.com DC Wang Deputy Head of Taiwan Research dc.wang@yuanta.com Steve Huang, CFA Semiconductors & Display steve.huang@yuanta.com Jeff Pu, CFA Handsets jeff.pu@yuanta.com Calvin Wei PC/NB, Passive Components, IPC calvin.wei@yuanta.com Chuanchuan Chen IC Design chuanchuan.chen@yuanta.com Peggy Shih Taiwan Financials, Environmental Eng peggy.shih@yuanta.com Peggy Lee Pharmaceuticals peggy.lee@yuanta.com Juliette Liu China Consumer & Transportation juliette.liu@yuanta.com Livia Wu Telecoms, Internet, Transportation livia.wu@yuanta.com Leo Lee Non-tech leo.kc.lee@yuanta.com Kenny Chen RA Automotive kenny.c.chen@yuanta.com Hannah Cheng RA Property hannah.cheng@yuanta.com Grant Chi RA Financials grant.chi@yuanta.com Shelly Chou RA Downstream Tech shelly.chou@yuanta.com Shasta Peng RA Downstream Tech shasta.peng@yuanta.com Josh Hsu RA Financials josh.c.hsu@yuanta.com Ray Hsieh RA Upstream Tech ray.m.hsieh@yuanta.com Sam Kao RA Upstream Tech sam.kao@yuanta.com Harvey Kao RA Tech harvey.kao@yuanta.com Eddie Liu RA - Pharmaceuticals eddie.liu@yuanta.com Tim Tsai RA Non-tech tim.y.tsai@yuanta.com Ray Wu RA Upstream Tech Ray.Wu@yuanta.com Amber Wu RA - Telecoms, Internet Amber.yj.wu@yuanta.com Lily Yao RA Downstream Tech lily.yao@yuanta.com Derek Tu RA Non-tech derek.tu@yuanta.com Carol Juan RA Downstream Tech carol.juan@yuanta.com Flora Lo RA Upstream Tech flora.lo@yuanta.com Research - Macroeconomics Woods Chen Head of Macroeconomics woods.chen@yuanta.com Cindy Chiang Global Investment Strategy cindy.chiang@yuanta.com Research - Hong Kong/Shanghai Edward Fung Head of HK Research edward.kw.fung@yuanta.com Sales and Trading Jason Lin Head of Taiwan Cash Equities jason.lin@yuanta.com Peter Chu, CFA Consumer Discretionary peter.kk.chu@yuanta.com Duncan Wun Head of HK Cash Equities duncan.wun@yuanta.com Matt Chen Researcher SEA & Oceania matt.chen@yuanta.com Kevin Yim Industrial kevin.cw.yim@yuanta.com Jason Wang Head of Taiwan Sales Trading jason@yuanta.com Peter Chuang Researcher LATAM & Commodities peter.hc.chuang@yuanta.com Samuel Lee, CFA New Energy/Environmental samuel.sw.lee@yuanta.com Jenny Lo Head of HK Sales Trading jenny.lo@yuanta.com Meng Lee Researcher North America leemengjou@yuanta.com Claire Su - Sales claire.su@yuanta.com Kerry Chen - Sales kerrychen@yuanta.com Carlos Ng Sales Trading carlos.ng@yuanta.com Edwin Tsai Sales Trading edwin.tsai@yuanta.com Kate Jackson Sales Trading kate.jackson@yuanta.com Micha Bailey Sales micha.bailey@yuanta.com Randy Wu Sales Trading randy.wu@yuanta.com Sales of Non-Taiwan Equities Apollo Chiu Head of Foreign Equity Department apollochiu@yuanta.com Lunghui Chen Co-Head of Sales, Foreign Equity Department lunghuichen@yuanta.com Oscar Yang Co-Head of Sales, Foreign Equity Department oscaryang@yuanta.com