Hong Kong / Consumer Discretionary 8 January 2016 China

China sportswear sector

Mind the gap

 Strong 1H16 order book for the sector and fundamentals are intact; product-mix enhancements seen driving upward earnings revisions  Sector tailwinds likely to narrow valuation gap among players in 2016 Adrian Chan, CFA  We remain Positive on the sector; our top pick in this space is Xtep (852) 2848 4427 and we upgrade Li Ning to Outperform [2] [email protected] Anson Chan, CFA (852) 2532 4350 [email protected]

What's new: The 6 Hong Kong-listed domestic sportswear stocks Key stock calls performed well in 2015, collectively outperforming the HSI by 53%. With New Prev. 2016 now under way, we believe the sector’s fundamentals remain intact, XTEP International (1368 HK) Rating Buy Buy with robust order growth recorded for 1H16 and channel inventory Target 4.90 4.60 management looking healthy. Also, we expect market sentiment to be Upside p 16.7% buoyed by further positive news flow on policy support, with the Peak Sport Products (1968 HK) government keen to develop the country’s sports industry. We highlight the Rating Buy Buy following key themes for the sector in 2016: 1) margin expansion resulting Target 2.70 2.50 from an increased revenue contribution from functional and new products, Upside p 27.4% 2) upward earnings revisions, and 3) a narrowing valuation gap. Anta Sports Products (2020 HK) Rating Outperform Outperform

Target 23.50 23.50 What's the impact: Our earnings forecasts are largely unchanged with the Upside p 9.3% exception of Li Ning, for which we raise 2016-17E EPS by 9-15% as we Li Ning (2331 HK) factor in lower operating costs (relative to our prior assumptions). Given our Rating Outperform Underperform view that sentiment on the sector remains positive and the fundamentals Target 4.60 3.70 Upside p 7% are intact, we believe the stocks under coverage could see a rerating of their trading multiples in the coming months. Indeed, we believe a rerating Source: Daiwa forecasts would be warranted, since investors’ concerns that channel stuffing might re-emerge look to be easing amid signs of sustainable (if not accelerating) sell-through and better channel inventory management. We find the sector is trading at 14.5x 2016E PER, and we expect the valuation gap between the smaller players (~10-11x) and Anta (19x) to narrow in the coming year due to the former group’s more attractive risk/reward profiles.

What we recommend: We reiterate our suggested pecking order: 1. Xtep. We reaffirm our Buy (1) rating and raise our 12-month TP to HKD4.9 (from HKD4.6) on a 12.5x 2016E PER (previously 11.5x), as we believe the stock is undervalued given its PEG of 0.63x. 2. Peak. We reaffirm our Buy (1) rating and raise our 12-month TP to HKD2.7 (from HKD2.5) on a 12.5x 2016E PER (previously 11x), as we believe the stock is undervalued given its PEG of 0.69x. 3. Anta. We maintain our Outperform (2) rating and TP of HKD23.5. We like the company’s long-term outlook, but with the stock at 19x 2016E PER, valuations seem less attractive compared with the smaller players given a PEG of 0.96x. 4. Li Ning. We upgrade our rating to Outperform (2), from Underperform (4), given its operating leverage from cost-saving initiatives, as well as positive market sentiment. In turn, we lift our TP to HKD4.6 on a 21x 2016E PER (previously 18x), from HKD3.7.

How we differ: We are more positive than the market on margin-expansion potential driven by product-mix enhancement (more functional apparel/footwear).

See important disclosures, including any required research certifications, beginning on page 18

China sportswear sector: 8 January 2016

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Anta Sports Products 2020 HK 21.50 Outperform Outperform 23.50 23.50 0.0% 0.804 0.804 0.0% 0.960 0.960 0.0% Li Ning 2331 HK 4.30 Outperform Underperform 4.60 3.70 24.3% (0.007) 0.184 0.169 9.1% Peak Sport Products 1968 HK 2.12 Buy Buy 2.70 2.50 8.0% 0.163 0.163 0.0% 0.185 0.185 0.0% XTEP International 1368 HK 4.20 Buy Buy 4.90 4.60 6.5% 0.280 0.280 0.0% 0.328 0.328 0.0% Source: Bloomberg, Daiwa forecasts

China Sportswear Sector: trade fair results (1Q15-3Q16) China Sportswear Sector: SSSG (1Q14-3Q15) Anta Xtep Peak Li Ning 361 China DX (YoY%) Anta Xtep Peak Li Ning 361 China DX 1Q15 + low double + low single + mid-teens +mid-twenties 8% 1Q14 + mid single + low single + low single n/a 2% n/a 2Q15 + low double + low single + mid-teens + mid-teens 11% + low 2Q14 + low double + mid single + low single n/a 3% n/a 3Q15 + low double + low single + mid-teens + high-teens 16% double 3Q14 + high single + mid single + low single n/a 5% n/a 4Q15 + low double + low single + mid-teens +low-teens 18% 4Q14 + high single + mid single + low single +mid single 6% n/a 1Q16 + low double 10% + mid-teens + mid-teens 15% + low 1Q15 + high single + mid single +mid single +mid single 6% n/a 2Q16 + low double 10% + mid-teens + high-teens 15% double 2Q15 + high single + high single +mid single + low-teens 7% +21.5% 3Q16 TBA TBA + low-teens TBA + high single TBA 3Q15 + high single + high single + high single +mid single 8% n/a

Source: Company data Source: Company data

China Sportswear Sector: snapshot of assumptions 2010 2011 2012 2013 2014 2015E 2016E 2017E GPm Anta 42.8% 42.3% 38.0% 41.7% 45.1% 46.6% 47.3% 48.0% Peak 38.0% 39.4% 36.5% 35.5% 38.0% 38.3% 39.5% 39.8% Li Ning 47.3% 45.3% 37.7% 44.5% 44.6% 46.0% 47.0% 48.0% Xtep 40.7% 40.8% 40.9% 40.2% 40.8% 41.8% 42.8% 43.2%

OPm Anta 23.4% 22.6% 20.5% 21.5% 22.6% 24.5% 25.0% 25.9% Peak 23.3% 19.8% 13.4% 13.8% 15.9% 18.0% 18.7% 19.1% Li Ning 16.3% 7.1% -23.9% -2.9% -7.9% 3.8% 6.7% 9.2% Xtep 21.9% 22.0% 20.4% 20.6% 16.9% 17.8% 18.7% 19.4%

Inventory turnover days Anta 36 38 51 59 58 61 62 64 Peak 38 49 80 81 74 66 63 63 Li Ning 52 72 89 104 109 120 129 128 Xtep 50 63 70 79 71 70 70 71

Trade receivables turnover days Anta 19 26 34 38 35 33 33 34 Peak 63 66 127 135 114 100 93 80 Li Ning 52 76 98 89 71 64 67 65 Xtep 51 64 74 91 91 104 99 100

Trade payables turnover days Anta 36 37 47 65 54 41 42 43 Peak 46 48 48 45 41 18 16 16 Li Ning 71 93 112 104 84 88 93 89 Xtep 74 63 54 76 85 92 95 98

Cash conversion cycle (days) Anta 19 27 38 32 39 53 54 55 Peak 55 67 159 171 147 148 140 127 Li Ning 33 55 75 89 96 96 104 103 Xtep 27 64 90 94 77 82 74 73

Source: Company data, Daiwa estimates

2

China sportswear sector: 8 January 2016

China Sportswear Sector: valuation comparison Company Ticker Rating Share Price Market cap P/E ratio (x) EPS Growth yoy (%) Div yield (%) (HKD) (USDm) CY14 CY15E CY16E CY17E CY15E CY16E CY17E CY15E CY16E CY17E China Sportswear Anta* 2020 HK Outperform 21.50 6,936 26.7 22.7 19.0 16.4 18.3 19.3 16.2 2.7 3.2 3.8 Xtep* 1368 HK Buy 4.20 1,189 16.2 12.8 10.9 9.5 28.6 17.1 14.6 4.0 4.6 5.3 Peak Sport* 1968 HK Buy 2.12 653 11.7 11.0 9.7 8.7 6.6 13.8 11.5 6.8 6.4 7.1 Li Ning* 2331 HK Outperform 4.30 1,046 n.a. 149.2 19.8 12.6 n.a. n.a. 57.9 n.a. n.a. n.a. 361 Degrees 1361 HK NR 2.87 765 12.5 10.0 8.2 7.0 25.1 21.3 17.6 4.3 5.3 6.1 China Dongxiang 3818 HK NR 1.78 1,271 7.5 19.2 19.4 19.9 (60.7) (1.3) (2.6) 4.5 3.9 4.0 China Sportswear Simple average 14.9 37.5 14.5 12.4 3.6 14.1 19.2 4.5 4.7 5.3 China Sportswear Weighted average 19.5 31.0 17.1 14.7 9.1 15.0 17.5 3.1 3.4 4.0

Source: Bloomberg, *Daiwa forecasts Note: Based on 7 January 2016

3

China Consumer Discretionary 8 January 2016

XTEP International (1368 HK) XTEP Internati onal

Target price: HKD4.90 (from HKD4.60) Share price (7 Jan): HKD4.20 | Up/downside: +16.6%

Narrowing the valuation gap Adrian Chan, CFA (852) 2848 4427  Fundamentals intact; risk/reward profile most attractive among peers [email protected]  Trading at ~11x 2016E PER, still a significant discount to Anta Anson Chan, CFA (852) 2532 4350  Target price raised to HKD4.90; reiterating Buy (1) rating [email protected]

What's new: We reaffirm our Buy (1) rating for Xtep, our top pick in this Forecast revisions (%) space, as we believe it has the most attractive risk/reward profile. We Year to 31 Dec 15E 16E 17E expect 2016 to be another strong year for the company, driven by: 1) sector Revenue change - - - Net profit change - - - tailwinds, 2) margin expansion on its functional product mix and e- Core EPS (FD) change - - - commerce contribution, and 3) its share of JV profits kicking in. Source: Daiwa forecasts

What's the impact: Sector tailwinds. We expect positive news flow from Share price performance policy support to continue to drive Xtep’s (and the sector’s) momentum in (HKD) (%) the near term, given the government’s intention to boost sports participation 4.8 170 and health awareness. Xtep has already recorded robust order book 4.1 145 growth for 1H16, at +10%, and its recent sell-through trends were in high- 3.4 120 single digit YoY growth territory for 2Q-3Q15, supported by improving 2.7 95 2.0 70 distributor confidence (and healthy channel inventory of 4-5 months), Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 alleviating concerns about retail demand slowing down. XTEP Inter (LHS) Relative to HSI (RHS)

Margin expansion. We expect 2016 to be a year of margin expansion for 12-month range 2.20-4.74 Xtep, and forecast its gross and operating margins increase by 1pp and Market cap (USDbn) 1.17 80bp YoY to 42.8% and 18.7%, respectively. We believe operating leverage 3m avg daily turnover (USDm) 3.54 will be driven by improvements in store efficiency and strong overall Shares outstanding (m) 2,177 Major shareholder Mr. Ding Shui Po (60.9%) demand for higher ASP functional/performance and value-for-money products. Financial summary (CNY) Year to 31 Dec 15E 16E 17E Wisdom JV. In 2016, we expect the JV with Wisdom (1661 HK, not rated), Revenue (m) 5,264 5,835 6,373 which is in the marathon operation business, to begin contributing to Xtep’s Operating profit (m) 939 1,089 1,237 Net profit (m) 615 720 825 bottom line. Although the details are still preliminary, management expects Core EPS (fully-diluted) 0.280 0.328 0.376 ~100 marathons to be held under the JV in 2016. Based on our sensitivity EPS change (%) 28.6 17.1 14.6 analysis on the JV, carrying over Wisdom’s gross margin of 50-70% for Daiwa vs Cons. EPS (%) 5.2 4.8 5.2 PER (x) 12.8 10.9 9.5 marathon event operations, we believe there could be 1-4% upside Dividend yield (%) 4.0 4.6 5.3 potential to our 2016E EPS. DPS 0.141 0.165 0.189 PBR (x) 1.5 1.4 1.3 EV/EBITDA (x) 5.8 4.8 4.0 What we recommend: We reiterate our Buy (1) rating and raise our 12- ROE (%) 12.6 13.7 14.5 month TP to HKD4.90, from HKD4.60, on a 12.5x 2016E PER (previously Source: FactSet, Daiwa forecasts 11.5x) as we do not think the valuation gap between Xtep and domestic market leader Anta (2020 HK, HKD21.50, Outperform [2]) is justified given Xtep’s attractive risk/reward profile (EPS CAGR of 20% in 2015-17E vs. Anta’s 18%). While our earnings forecasts are unchanged, we expect rerating by the market to narrow this valuation gap, as we believe its risk/reward profile is the most attractive in this space at an 11x 2016E PER (7.4x ex-net cash) and 4.4% cash yield. The key risk to our call is a channel inventory build-up on lower-than-expected demand at the retail level.

How we differ: We are more upbeat on the company’s rebranding strategy and its product-mix-driven margin expansion potential in 2016-17E.

See important disclosures, including any required research certifications, beginning on page 18

XTEP International (1368 HK): 8 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E A&P (% of sales) 11.7 11.3 11.4 11.2 13.1 13.5 13.2 12.9 Staff cost (% of sales) 4.8 5.0 7.3 9.5 9.5 9.0 9.0 9.0 Footwear sales revenue (YoY %) n.a. 27 8 (17) 35 10 12 10 Apparel sales revenue (YoY %) n.a. 22 (7) (27) (16) 8 8 8

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Footwear 1,956 2,490 2,700 2,247 3,043 3,347 3,749 4,124 Apparel 2,421 2,950 2,746 2,012 1,688 1,823 1,968 2,126 Other Revenue 80 100 104 84 47 94 118 124 Total Revenue 4,457 5,540 5,550 4,343 4,778 5,264 5,835 6,373 Other income 15 16 68 158 149 100 75 75 COGS (2,645) (3,282) (3,293) (2,596) (2,831) (3,063) (3,337) (3,623) SG&A (849) (1,055) (1,194) (1,010) (1,287) (1,362) (1,484) (1,589) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 978 1,219 1,131 895 809 939 1,089 1,237 Net-interest inc./(exp.) 0 (8) (25) (32) (38) (47) (44) (41) Assoc/forex/extraord./others 0 0 0 0 0 0 0 0 Pre-tax profit 978 1,211 1,106 863 770 891 1,044 1,196 Tax (165) (246) (299) (260) (284) (267) (313) (359) Min. int./pref. div./others 0 1 3 3 (8) (9) (11) (12) Net profit (reported) 814 966 810 606 478 615 720 825 Net profit (adjusted) 814 966 810 606 478 615 720 825 EPS (reported)(CNY) 0.374 0.444 0.372 0.278 0.220 0.282 0.331 0.379 EPS (adjusted)(CNY) 0.374 0.444 0.372 0.278 0.220 0.282 0.331 0.379 EPS (adjusted fully-diluted)(CNY) 0.373 0.443 0.372 0.276 0.218 0.280 0.328 0.376 DPS (CNY) 0.165 0.187 0.189 0.143 0.108 0.141 0.165 0.189 EBIT 978 1,219 1,131 895 809 939 1,089 1,237 EBITDA 999 1,248 1,170 944 854 988 1,143 1,295

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 978 1,211 1,106 863 770 891 1,044 1,196 Depreciation and amortisation 21 29 39 49 45 50 54 58 Tax paid (88) (124) (276) (308) (332) (267) (313) (359) Change in working capital (466) (955) 329 75 (417) 40 (125) (115) Other operational CF items 10 43 132 (21) 28 0 0 (0) Cash flow from operations 456 204 1,330 658 95 714 660 781 Capex (15) (85) (176) (229) (106) (100) (100) (100) Net (acquisitions)/disposals 0 0 0 4 0 0 0 0 Other investing CF items (39) (542) (169) (69) (432) (8) 0 0 Cash flow from investing (54) (627) (345) (294) (538) (108) (100) (100) Change in debt 0 492 556 503 301 0 0 0 Net share issues/(repurchases) 7 1 0 1 2 0 0 0 Dividends paid (471) (450) (490) (428) (288) (263) (328) (381) Other financing CF items 0 5 3 3 2 0 0 0 Cash flow from financing (465) 48 69 78 17 (263) (328) (381) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (63) (375) 1,055 442 (426) 343 231 300 Free cash flow 441 119 1,154 429 (12) 614 560 681 Source: FactSet, Daiwa forecasts

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XTEP International (1368 HK): 8 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 2,444 2,068 3,223 3,563 3,587 3,930 4,161 4,461 Inventory 463 672 583 537 569 605 671 733 Accounts receivable 727 1,205 1,036 1,151 1,490 1,500 1,663 1,816 Other current assets 343 1,055 995 1,101 1,301 1,301 1,301 1,301 Total current assets 3,977 5,000 5,836 6,352 6,947 7,337 7,796 8,311 Fixed assets 197 257 387 545 585 636 682 724 Goodwill & intangibles 1 1 1 1 2 2 2 2 Other non-current assets 110 237 276 409 330 330 330 330 Total assets 4,284 5,495 6,499 7,307 7,864 8,304 8,810 9,367 Short-term debt 0 492 511 1,351 1,222 1,222 1,222 1,222 Accounts payable 639 499 483 601 729 816 919 1,020 Other current liabilities 253 409 443 404 400 400 400 400 Total current liabilities 892 1,400 1,437 2,356 2,350 2,437 2,540 2,641 Long-term debt 0 0 535 175 617 617 617 617 Other non-current liabilities 40 184 248 268 186 186 186 186 Total liabilities 932 1,584 2,220 2,799 3,154 3,241 3,344 3,445 Share capital 19 19 19 19 19 19 19 19 Reserves/R.E./others 3,333 3,888 4,255 4,487 4,681 5,034 5,436 5,893 Shareholders' equity 3,352 3,907 4,274 4,506 4,700 5,053 5,456 5,912 Minority interests 0 4 5 2 10 10 10 10 Total equity & liabilities 4,284 5,495 6,499 7,307 7,864 8,304 8,810 9,367 EV 5,332 6,204 5,604 5,740 6,038 5,695 5,464 5,164 Net debt/(cash) (2,444) (1,576) (2,177) (2,038) (1,748) (2,091) (2,322) (2,622) BVPS (CNY) 1.542 1.796 1.964 2.070 2.159 2.321 2.506 2.715

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. 24.3 0.2 (21.7) 10.0 10.2 10.8 9.2 EBITDA (YoY) n.a. 24.8 (6.2) (19.3) (9.5) 15.7 15.6 13.3 Operating profit (YoY) n.a. 24.7 (7.2) (20.9) (9.7) 16.1 16.0 13.6 Net profit (YoY) n.a. 18.8 (16.2) (25.2) (21.1) 28.6 17.1 14.6 Core EPS (fully-diluted) (YoY) n.a. 18.8 (16.2) (25.7) (21.1) 28.6 17.1 14.6 Gross-profit margin 40.6 40.8 40.7 40.2 40.8 41.8 42.8 43.2 EBITDA margin 22.4 22.5 21.1 21.7 17.9 18.8 19.6 20.3 Operating-profit margin 21.9 22.0 20.4 20.6 16.9 17.8 18.7 19.4 Net profit margin 18.3 17.4 14.6 14.0 10.0 11.7 12.3 12.9 ROAE 48.5 26.6 19.8 13.8 10.4 12.6 13.7 14.5 ROAA 38.0 19.8 13.5 8.8 6.3 7.6 8.4 9.1 ROCE 58.3 31.4 23.3 15.8 12.9 14.0 15.3 16.4 ROIC 89.5 59.9 37.2 27.4 18.8 22.1 24.9 26.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 16.8 20.3 27.0 30.1 36.9 30.0 30.0 30.0 Accounts receivable (days) 29.8 63.7 73.7 91.9 100.9 103.7 98.9 99.6 Current ratio (x) 4.5 3.6 4.1 2.7 3.0 3.0 3.1 3.1 Net interest cover (x) n.a. 153.6 44.5 27.6 21.1 19.9 24.5 30.3 Net dividend payout 44.2 42.2 50.8 51.5 49.3 50.0 50.0 50.0 Free cash flow yield 5.7 1.5 14.8 5.5 n.a. 7.9 7.2 8.8 Source: FactSet, Daiwa forecasts

Company profile

XTEP was established in 2002 and is a leading fashion sportswear brand in the PRC operating over 7,000 stores nationwide. The group engages in the design, development, manufacturing, sales and marketing and brand management of sports footwear, apparel and accessories. The company was listed on the Hong Kong Stock Exchange on 3 June 2008.

6

China Consumer Discretionary 8 January 2016

Peak Sport Products (1968 HK) Peak Sport Pr oducts

Target price: HKD2.70 (from HKD2.50) Share price (7 Jan): HKD2.12 | Up/downside: +27.3%

A slam dunk Adrian Chan, CFA (852) 2848 4427  Fundamentals intact with double-digit top-line and bottom-line growth [email protected]  Compelling valuation at 10x 2016E PER (3x ex-net cash) and 6% yield Anson Chan, CFA (852) 2532 4350  12-month target price lifted to HKD2.70; reiterating Buy (1) rating [email protected]

What's new: We reiterate our Buy (1) rating on Peak as we see its Forecast revisions (%) valuation as undemanding with an attractive cash yield. We believe 2016 Year to 31 Dec 15E 16E 17E will be another solid year for the company, with double-digit top- and Revenue change - - - Net profit change - - - bottom-line YoY growth driven by: 1) sector tailwinds, 2) overseas Core EPS (FD) change - - - operations regaining momentum, and 3) operating leverage. Source: Daiwa forecasts

What's the impact: Sector tailwinds. We expect positive news flow from Share price performance policy support to continue to drive Peak’s (and the sector’s) momentum in (HKD) (%) the near term, given the government’s intention to boost sports participation 3.0 130 and health awareness. Peak has already seen robust low-teen YoY order 2.6 115 book growth for 3Q16 and mid-teen YoY growth for 1H16, as well as an 2.2 100 accelerating high-single digit YoY SSSG growth trend for 3Q15 (vs. mid- 1.8 85 1.4 70 single digit in 2Q15). Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Peak Sport (LHS) Relative to HSI (RHS) Overseas operations to regain momentum. Having seen 23% and 37%

YoY growth in its overseas sales for 2013 and 2014, respectively, growth 12-month range 1.55-2.93 slowed in 1H15 to -10% YoY on the back of the EUR depreciation (the EU Market cap (USDbn) 0.65 accounted for 6% of group revenue in 1H15 vs. 10% in 2014). In 2016, we 3m avg daily turnover (USDm) 1.04 believe the stabilisation of the EUR and depreciation of the CNY should Shares outstanding (m) 2,389 Major shareholder Mr. Xu Jingnan and family (60.4%) help revive revenue growth for Peak’s overseas businesses. Financial summary (CNY) Operating leverage. We believe a key theme for Peak in 2016 continues Year to 31 Dec 15E 16E 17E to be operating leverage. With the loss of the NBA partnership in 2014, Revenue (m) 3,081 3,400 3,752 Peak now has a significantly higher A&P budget that has largely not been Operating profit (m) 556 636 715 Net profit (m) 389 442 493 incrementally spent (with the exception of the new NBA player sponsorship Core EPS (fully-diluted) 0.163 0.185 0.207 of Dwight Howard in September 2015). While we forecast Peak to see a EPS change (%) 6.6 13.8 11.5 2.1pp YoY improvement in its operating margin for 2015, we expect another Daiwa vs Cons. EPS (%) 0.0 1.2 1.3 PER (x) 11.1 9.7 8.7 leg up in 2016 (improving by 70bp YoY to 18.7%) on the back of 10% top- Dividend yield (%) 6.8 6.4 7.1 line growth and stabilisation of the operating cost base. DPS 0.122 0.115 0.128 PBR (x) 0.9 0.8 0.8 EV/EBITDA (x) 1.3 0.9 0.6 What we recommend: We reaffirm our Buy (1) rating on the stock and ROE (%) 8.4 8.7 9.2 raise our 12-month TP to HKD2.70, from HKD2.50, based on a 12.5x Source: FactSet, Daiwa forecasts 2016E PER (previously 11x) as we believe the valuation gap of ~30% between Peak and its domestic peers is too wide. At current valuations of 10x 2016E PER (3x ex-net cash) and a dividend yield of 6%, the stock looks undervalued, considering our 15% EPS CAGR forecast for 2015-17E and its PEG of 0.68. The key risks to our call are a channel inventory build- up amid soft retail demand, as well as deteriorating retail sentiment in France following the terrorist attacks.

How we differ: We are more upbeat than our peers on the operating leverage for 2015-17E, as we think the loss of the NBA partnership leaves Peak with a bigger A&P budget that has largely not been spent.

See important disclosures, including any required research certifications, beginning on page 18

Peak Sport Products (1968 HK): 8 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E A&P (as % of sales) 10.8 14.2 14.0 10.7 10.6 10.0 10.5 10.5 GPm - Footwear (%) 38.0 38.9 36.0 35.2 36.5 37.5 38.5 39.0 GPm - Apparel (%) 38.1 40.0 37.1 35.6 39.0 39.0 40.3 40.5

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Footwear 1,814 2,041 1,348 1,044 1,150 1,248 1,380 1,526 Apparel 2,318 2,487 1,481 1,509 1,633 1,773 1,960 2,167 Other Revenue 118 119 74 60 58 60 60 60 Total Revenue 4,249 4,647 2,903 2,613 2,841 3,081 3,400 3,752 Other income 3 15 21 19 23 23 25 28 COGS (2,633) (2,814) (1,845) (1,686) (1,762) (1,901) (2,058) (2,257) SG&A (632) (926) (689) (585) (651) (647) (731) (807) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 988 922 390 360 451 556 636 715 Net-interest inc./(exp.) 10 15 16 30 37 37 39 37 Assoc/forex/extraord./others 0 0 0 0 0 0 0 0 Pre-tax profit 998 937 406 390 489 593 674 752 Tax (176) (159) (95) (146) (168) (204) (232) (259) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 822 778 311 244 321 389 442 493 Net profit (adjusted) 822 778 311 244 321 389 442 493 EPS (reported)(CNY) 0.392 0.371 0.148 0.116 0.153 0.163 0.185 0.207 EPS (adjusted)(CNY) 0.392 0.371 0.148 0.116 0.153 0.163 0.185 0.207 EPS (adjusted fully-diluted)(CNY) 0.392 0.371 0.148 0.116 0.153 0.163 0.185 0.207 DPS (CNY) 0.146 0.114 0.081 0.127 0.095 0.122 0.115 0.128 EBIT 988 922 390 360 451 556 636 715 EBITDA 1,010 953 428 403 496 603 681 758

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 998 937 406 390 489 593 674 752 Depreciation and amortisation 22 32 40 47 50 47 45 43 Tax paid (130) (178) (116) (85) (176) (168) (204) (232) Change in working capital 265 (472) (158) 167 55 26 (96) (135) Other operational CF items 6 (8) 8 (12) (34) (37) (39) (37) Cash flow from operations 1,160 311 180 507 384 461 381 391 Capex (122) (119) (109) (37) (21) (1) (4) (5) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 470 (192) (387) (818) (512) 17 (105) (131) Cash flow from investing 348 (311) (496) (855) (534) 16 (108) (137) Change in debt 0 161 335 270 286 0 0 0 Net share issues/(repurchases) 0 1 0 0 1 544 0 0 Dividends paid (349) (227) (272) (217) (200) (279) (283) (290) Other financing CF items 0 (2) (7) (14) (20) (21) (21) (21) Cash flow from financing (349) (67) 56 38 67 244 (304) (311) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,159 (68) (260) (310) (83) 722 (31) (57) Free cash flow 1,038 191 71 470 363 460 378 386 Source: FactSet, Daiwa forecasts

8

Peak Sport Products (1968 HK): 8 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 2,663 2,697 2,763 3,281 3,752 4,574 4,750 4,922 Inventory 335 421 386 366 346 341 370 408 Accounts receivable 765 1,089 1,093 978 987 946 1,022 863 Other current assets 0 0 0 0 0 0 0 0 Total current assets 3,762 4,208 4,242 4,624 5,084 5,861 6,142 6,193 Fixed assets 396 482 543 533 506 507 511 516 Goodwill & intangibles 14 16 20 23 25 25 26 26 Other non-current assets 28 174 244 268 259 198 155 115 Total assets 4,200 4,880 5,049 5,448 5,874 6,592 6,833 6,851 Short-term debt 0 161 496 530 702 702 702 702 Accounts payable 608 562 373 415 419 400 409 153 Other current liabilities 63 55 30 65 68 68 68 68 Total current liabilities 671 777 899 1,010 1,190 1,171 1,180 924 Long-term debt 0 0 0 237 350 350 350 350 Other non-current liabilities 47 59 67 80 87 87 87 87 Total liabilities 718 836 965 1,327 1,628 1,608 1,617 1,361 Share capital 18 18 18 18 18 21 21 21 Reserves/R.E./others 3,463 4,025 4,065 4,103 4,228 4,963 5,196 5,468 Shareholders' equity 3,482 4,044 4,083 4,122 4,247 4,984 5,216 5,489 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 4,200 4,880 5,049 5,448 5,874 6,592 6,833 6,851 EV 1,644 1,771 2,040 1,792 1,607 785 609 437 Net debt/(cash) (2,663) (2,536) (2,266) (2,514) (2,699) (3,521) (3,697) (3,870) BVPS (CNY) 1.660 1.927 1.946 1.965 2.024 2.086 2.183 2.298

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 37.3 9.4 (37.5) (10.0) 8.7 8.4 10.3 10.4 EBITDA (YoY) 38.7 (5.6) (55.1) (5.8) 23.0 21.6 12.8 11.4 Operating profit (YoY) 38.6 (6.7) (57.7) (7.6) 25.4 23.2 14.3 12.5 Net profit (YoY) 30.9 (5.4) (60.1) (21.3) 31.3 21.3 13.8 11.5 Core EPS (fully-diluted) (YoY) 8.5 (5.4) (60.1) (21.3) 31.1 6.6 13.8 11.5 Gross-profit margin 38.0 39.4 36.5 35.5 38.0 38.3 39.5 39.8 EBITDA margin 23.8 20.5 14.8 15.4 17.5 19.6 20.0 20.2 Operating-profit margin 23.3 19.8 13.4 13.8 15.9 18.0 18.7 19.1 Net profit margin 19.4 16.7 10.7 9.3 11.3 12.6 13.0 13.2 ROAE 25.4 20.7 7.6 6.0 7.7 8.4 8.7 9.2 ROAA 21.6 17.1 6.3 4.7 5.7 6.2 6.6 7.2 ROCE 30.5 24.0 8.9 7.6 8.9 9.8 10.3 11.2 ROIC 88.8 65.8 18.0 13.2 18.8 24.2 28.0 29.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 17.6 17.0 23.4 37.4 34.4 34.4 34.4 34.4 Accounts receivable (days) 69.9 72.8 137.2 144.6 126.2 114.5 105.6 91.7 Current ratio (x) 5.6 5.4 4.7 4.6 4.3 5.0 5.2 6.7 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 37.1 30.7 55.0 108.8 62.2 75.0 62.0 62.0 Free cash flow yield 24.1 4.4 1.7 10.9 8.4 10.7 8.8 9.0 Source: FactSet, Daiwa forecasts

Company profile

Peak Sports is a Chinese sportswear company founded in 1989 in Fujian, China. It is one of the largest sportswear companies in mainland China that designs and manufactures sportswear products, including athletic footwear, apparel and accessories.

9

China Consumer Discretionary 8 January 2016

Anta Sports Products (2020 HK) Anta Sports Pr oducts

Target price: HKD23.50 (from HKD23.50) Share price (7 Jan): HKD21.50 | Up/downside: +9.3%

What next? Adrian Chan, CFA (852) 2848 4427  Solid execution and organic growth; M&A to add value [email protected]  18x 2016E PER looks stretched, but we are long-term positive Anson Chan, CFA (852) 2532 4350  Reaffirming Outperform (2) rating and target price of HKD23.50 [email protected]

What's new: We reaffirm our Outperform (2) rating for Anta as we believe it Forecast revisions (%) has the most solid execution among its domestic peers, a leading industry Year to 31 Dec 15E 16E 17E position, and resilient earnings growth, albeit with a stretched-looking Revenue change - - - Net profit change - - - valuation. That said, we believe 2016 could be an interesting year for Anta Core EPS (FD) change - - - if, as we expect, M&A moves materialise. Source: Daiwa forecasts

What's the impact: Long-term buyers. We remain positive on Anta and Share price performance would be long-term buyers, as we see a compelling growth story driven by (HKD) (%) both organic and inorganic growth. Organically, we believe its fundamentals 25 190 are intact, with channel inventory at a healthy 4-5 months, the 1H16 order- 21 165 book up by a low-double-digit YoY (the highest among its domestic peers), 18 140 and a market share in China of ~9%, trailing only Nike and Adidas. The 15 115 12 90 margin expansion story still holds, and we forecast the contribution from Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 higher-ASP functional products to contribute to a 70bp YoY rise in the gross Anta Sport (LHS) Relative to HSI (RHS) margin to 47.3% in 2016. We also expect operating leverage to be a key theme in 2016, with 17% top-line YoY growth and a 50bp YoY increase in 12-month range 12.94-24.05 the operating margin to 25% (the highest among domestic peers). Our Market cap (USDbn) 6.92 2015-17E earnings forecasts, which are 2-5% higher than the Bloomberg 3m avg daily turnover (USDm) 13.23 consensus numbers, are unchanged. Shares outstanding (m) 2,496 Major shareholder Mr. Ding Shizhong (55.3%)

M&A. We expect M&A to materialise in 2016, as management indicated at Financial summary (CNY) the Daiwa Investment Conference in Hong Kong (see link, 10 November Year to 31 Dec 15E 16E 17E 2015) that it had been in active discussions with certain brands, particularly Revenue (m) 10,851 12,703 14,305 international ones with a sportswear “DNA”. We believe that such Operating profit (m) 2,659 3,182 3,700 Net profit (m) 2,012 2,401 2,790 discussions are at an advanced stage and a number of deals could be Core EPS (fully-diluted) 0.804 0.960 1.116 announced as early as 2016. Further, it is likely, in our view, that any such EPS change (%) 18.3 19.3 16.2 moves would take the form of a JV, whereby (as with Fila) Anta would Daiwa vs Cons. EPS (%) 0.7 2.1 4.5 PER (x) 22.7 19.0 16.4 acquire the brand rights for the China market. Dividend yield (%) 2.7 3.2 3.8 DPS 0.497 0.593 0.689 What we recommend: We reiterate our Outperform (2) rating and 12- PBR (x) 5.4 4.7 4.2 EV/EBITDA (x) 14.3 11.8 10.0 month TP of HKD23.5 (on an unchanged 20x 2016E PER). While we ROE (%) 24.7 26.5 27.1 believe the stock’s current valuation is reasonable, an M&A deal in 2016 Source: FactSet, Daiwa forecasts with a brand that could further broaden Anta’s product portfolio and provide synergies could argue for a narrowing of its valuation gap with global peers (~27x FY16E PER). The key risks to our call are slower sell-through and channel inventory build-up on weaker-than-expected retail demand.

How we differ: We are more optimistic than our peers on the margin expansion story for Anta driven by: 1) its increasing higher-ASP functional mix, and 2) robust growth in the high-margin Fila and e-commerce segments.

See important disclosures, including any required research certifications, beginning on page 18

Anta Sports Products (2020 HK): 8 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E A&P (% of sales) 13.6 13.7 10.5 11.1 12.0 12.0 12.0 12.0 Anta Core brand stores 7,549 8,665 8,075 7,757 7,622 7,250 7,250 7,250 Anta Core brand (% of sales) 91 89 89 80 73 72 68 65

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Core brand 6,767 7,886 6,808 5,823 6,826 7,816 8,597 9,242 Others 641 1,019 815 1,458 2,097 3,035 4,106 5,063 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 7,408 8,905 7,623 7,281 8,923 10,851 12,703 14,305 Other income 44 74 128 102 86 150 125 125 COGS (4,238) (5,142) (4,730) (4,242) (4,896) (5,797) (6,693) (7,440) SG&A (1,477) (1,825) (1,458) (1,576) (2,094) (2,545) (2,954) (3,290) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 1,737 2,011 1,563 1,566 2,019 2,659 3,182 3,700 Net-interest inc./(exp.) 106 149 166 187 224 152 173 199 Assoc/forex/extraord./others 0 0 0 0 0 0 0 0 Pre-tax profit 1,843 2,160 1,730 1,753 2,243 2,812 3,355 3,899 Tax (297) (436) (374) (423) (510) (759) (906) (1,053) Min. int./pref. div./others 5 6 3 (15) (32) (40) (48) (56) Net profit (reported) 1,551 1,730 1,359 1,315 1,700 2,012 2,401 2,790 Net profit (adjusted) 1,551 1,730 1,359 1,315 1,700 2,012 2,401 2,790 EPS (reported)(CNY) 0.622 0.694 0.545 0.527 0.681 0.806 0.962 1.118 EPS (adjusted)(CNY) 0.622 0.694 0.545 0.527 0.681 0.806 0.962 1.118 EPS (adjusted fully-diluted)(CNY) 0.620 0.692 0.544 0.526 0.680 0.804 0.960 1.116 DPS (CNY) 0.386 0.424 0.390 0.378 0.483 0.497 0.593 0.689 EBIT 1,737 2,011 1,563 1,566 2,019 2,659 3,182 3,700 EBITDA 1,821 2,101 1,673 1,696 2,178 2,845 3,390 3,928

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 1,843 2,160 1,730 1,753 2,243 2,812 3,355 3,899 Depreciation and amortisation 84 90 110 130 159 185 208 228 Tax paid (224) (387) (446) (367) (522) (759) (906) (1,053) Change in working capital (295) (454) 430 (421) (68) (251) (241) (208) Other operational CF items 25 38 142 32 (125) 40 40 40 Cash flow from operations 1,433 1,448 1,965 1,128 1,686 2,027 2,456 2,906 Capex (103) (179) (206) (168) (250) (435) (435) (435) Net (acquisitions)/disposals 0 0 (136) (15) 0 0 0 0 Other investing CF items 599 (559) (633) 803 (615) (9) (15) (31) Cash flow from investing 496 (738) (976) 620 (865) (444) (450) (466) Change in debt 0 0 997 (528) 849 0 0 0 Net share issues/(repurchases) 6 1 0 4 6 0 0 0 Dividends paid (940) (1,055) (996) (878) (1,072) (1,206) (1,337) (1,577) Other financing CF items (5) (5) (4) (5) (4) 0 0 0 Cash flow from financing (939) (1,059) (3) (1,408) (220) (1,206) (1,337) (1,577) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 990 (350) 986 341 601 377 669 863 Free cash flow 1,330 1,269 1,759 960 1,436 1,592 2,021 2,471 Source: FactSet, Daiwa forecasts

11

Anta Sports Products (2020 HK): 8 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 4,291 4,428 4,988 4,839 6,034 6,411 7,086 7,972 Inventory 454 618 687 689 867 1,055 1,235 1,390 Accounts receivable 990 1,709 1,373 1,933 1,701 1,890 2,072 2,229 Other current assets 10 15 1,055 725 745 745 745 745 Total current assets 5,745 6,770 8,102 8,187 9,347 10,101 11,138 12,336 Fixed assets 653 680 918 935 1,068 1,331 1,565 1,774 Goodwill & intangibles 531 541 529 507 489 473 457 442 Other non-current assets 125 204 487 489 480 316 316 316 Total assets 7,054 8,194 10,036 10,118 11,384 12,221 13,476 14,868 Short-term debt 0 0 997 490 1,348 1,348 1,348 1,348 Accounts payable 1,071 1,471 1,774 1,889 1,654 1,780 1,901 2,005 Other current liabilities 93 133 127 194 182 182 182 182 Total current liabilities 1,163 1,604 2,898 2,574 3,185 3,310 3,431 3,536 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 160 171 205 195 194 194 194 194 Total liabilities 1,324 1,776 3,103 2,769 3,379 3,505 3,626 3,730 Share capital 242 242 242 242 242 242 242 242 Reserves/R.E./others 5,436 6,130 6,510 6,912 7,553 8,264 9,399 10,687 Shareholders' equity 5,678 6,372 6,752 7,154 7,795 8,506 9,641 10,929 Minority interests 53 47 180 195 209 209 209 209 Total equity & liabilities 7,054 8,194 10,036 10,118 11,384 12,221 13,476 14,868 EV 41,392 41,249 41,820 41,477 41,155 40,777 40,102 39,217 Net debt/(cash) (4,291) (4,428) (3,991) (4,349) (4,685) (5,063) (5,738) (6,623) BVPS (CNY) 2.277 2.555 2.707 2.868 3.123 3.408 3.863 4.378

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 26.1 20.2 (14.4) (4.5) 22.5 21.6 17.1 12.6 EBITDA (YoY) 24.9 15.4 (20.4) 1.4 28.4 30.6 19.2 15.9 Operating profit (YoY) 24.5 15.8 (22.3) 0.1 29.0 31.7 19.7 16.3 Net profit (YoY) 24.0 11.5 (21.5) (3.2) 29.3 18.3 19.3 16.2 Core EPS (fully-diluted) (YoY) 23.9 11.5 (21.4) (3.3) 29.2 18.3 19.3 16.2 Gross-profit margin 42.8 42.3 38.0 41.7 45.1 46.6 47.3 48.0 EBITDA margin 24.6 23.6 21.9 23.3 24.4 26.2 26.7 27.5 Operating-profit margin 23.4 22.6 20.5 21.5 22.6 24.5 25.0 25.9 Net profit margin 20.9 19.4 17.8 18.1 19.1 18.5 18.9 19.5 ROAE 28.8 28.7 20.7 18.9 22.7 24.7 26.5 27.1 ROAA 23.6 22.7 14.9 13.0 15.8 17.0 18.7 19.7 ROCE 32.0 33.1 21.8 19.9 23.5 27.4 29.9 31.2 ROIC 113.0 93.6 49.7 40.0 49.4 55.7 59.8 62.6 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 16.1 20.2 21.6 24.1 22.7 27.0 27.0 27.0 Accounts receivable (days) 37.4 55.3 73.8 82.9 74.3 60.4 56.9 54.9 Current ratio (x) 4.9 4.2 2.8 3.2 2.9 3.1 3.2 3.5 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 62.1 61.1 71.7 71.7 71.0 61.7 61.7 61.7 Free cash flow yield 2.9 2.8 3.9 2.1 3.1 3.5 4.4 5.4 Source: FactSet, Daiwa forecasts

Company profile

ANTA Sports Products Limited is a professional sportswear company established in 1994, in Jinjiang, Fujian. It is involved in the innovation, design, research, development, manufacturing and retail of sports equipment. The company listed on the Hong Kong Stock Exchange in 2007.

12

China Consumer Discretionary 8 January 2016

Li Ning (2331 HK)

Li Ning

Target price: HKD4.60 (from HKD3.70) Share price (7 Jan): HKD4.30 | Up/downside: +6.9%

Turning incrementally positive Adrian Chan, CFA (852) 2848 4427  Sector tailwinds and cost-cutting initiatives to drive operating leverage [email protected]  Risk/reward profile looks attractive despite potential execution risks Anson Chan, CFA (852) 2532 4350  Upgrading to Outperform (2), with revised TP of HKD4.6 [email protected]

What's new: We upgrade Li Ning to Outperform (2) as we now believe its Forecast revisions (%) risk/reward profile looks fair after management has made substantial Year to 31 Dec 15E 16E 17E progress in cutting unnecessary operating costs, particularly in staff and Revenue change (1.3) (10.8) (11.3) Net profit change n.a. 9.1 15.2 A&P. We also expect Li Ning to benefit from the sector-wide structural Core EPS (FD) change n.a. 9.1 15.2 growth and positive sentiment driven by policy support encouraging sports Source: Daiwa forecasts participation and the development of sports infrastructure in China. Share price performance

What's the impact: Margin expansion in sight. With increasing sports (HKD) (%) participation in China, we believe our mid-teens YoY revenue growth forecast 5.0 150 for its core brand remains achievable. We forecast GPM expansion of 1pp to 4.4 133 47% for 2016 and 1pp YoY to 48% for 2017, driven by the new product mix 3.8 115 3.1 98 and stabilisation of retail discounts. Since the introduction of the Xiaomi- 2.5 80 collaboration smart shoes (at CNY199/399) in July 2015, we estimate 200- Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

300k pairs have been sold. We believe Li Ning will introduce more smart shoes Li Ning (LHS) Relative to HSI (RHS) in 2016, which would help buoy the new product sales mix and gross margins given the product’s online-exclusivity. Alongside management’s stringent cost- 12-month range 2.80-4.99 control measures, with expected savings of CNY130-150m in 2015-16 vs. Market cap (USDbn) 0.86 2014 (~CNY60m in 2015), it aims to keep operating costs stable with only a 3m avg daily turnover (USDm) 3.76 low-single digit YoY increase attributable to new store openings. Factoring in Shares outstanding (m) 1,564 Major shareholder Mr. Li Ning (29.5%) our new assumptions, we now forecast the OPM improve from ~4% in 1H15 to

6.7% and 9.2% in 2016/17 (previously 5.2% and 6.6%), respectively, and so, Financial summary (CNY) raise our 2016-17E EPS by 9-15%. Year to 31 Dec 15E 16E 17E Revenue (m) 7,827 8,140 9,072 Muted 4Q. According to management, there was no sequential Operating profit (m) 294 545 834 acceleration in SSSG in 4Q15 (vs. 3Q15’s +mid-single digit YoY growth) as Net profit (m) 50 374 591 Core EPS (fully-diluted) 0.025 0.184 0.291 seasonality dampened sales of winter products, but this could translate into EPS change (%) n.a. 651.9 57.9 delayed demand to 1Q16. Our view that the company broke even (at the Daiwa vs Cons. EPS (%) (18.3) 2.9 5.0 core-earnings level) in 2015 remains unchanged, while we expect the PER (x) 149.2 19.8 12.6 Dividend yield (%) 0.0 0.0 0.0 disposal and revaluation of subsidiary Double Happiness (see DPS 0.000 0.000 0.000 Deconsolidation of Double Happiness, 26 October 2015) to provide a PBR (x) 1.6 1.4 1.2 gain of CNY260m for 2015. We also fine-tune our revenue and profit EV/EBITDA (x) 10.5 6.4 4.3 forecasts to account for the seasonality impact and deconsolidation of ROE (%) 1.8 9.9 13.8 Double Happiness in 2016-17E. Source: FactSet, Daiwa forecasts

What we recommend: We raise our 12-month TP to HKD4.6, now based on a 21x 2016E PER (equivalent to 1x 2016E P/S) from 18x previously, on higher EPS growth. Accordingly, we upgrade our rating to Outperform (2) from Underperform (4). The key risks to our call are worse-than-expected demand and TPG unwinding its stake.

How we differ: We are more cautious than our peers on Li Ning’s direct- retail business and sports-life segment, but believe cost-savings achieved should outweigh these 2 segments’ near-term downside.

See important disclosures, including any required research certifications, beginning on page 18

Li Ning (2331 HK): 8 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Li Ning brand retail sales (YoY%) 35.5 20.6 (16.4) 27.1 28.2 25.0 20.0 17.5 Li Ning brand wholesale sales (YoY%) 9.9 (11.9) (30.5) (26.6) 10.4 12.5 12.0 7.5 Li Ning brand GPm (%) 48.0 46.1 38.7 45.3 45.0 46.4 47.1 48.1

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Li Ning brand retail sales 1,293 1,559 1,304 1,657 2,124 2,655 3,186 3,743 Li Ning brand wholesale sales 7,319 6,450 4,480 3,289 3,630 4,084 4,574 4,917 Other Revenue 867 919 893 879 973 1,089 380 411 Total Revenue 9,479 8,929 6,676 5,824 6,728 7,827 8,140 9,072 Other income 195 143 169 147 34 35 35 35 COGS (4,997) (4,886) (4,162) (3,230) (3,724) (4,227) (4,313) (4,717) SG&A (3,129) (3,555) (4,282) (2,910) (3,567) (3,342) (3,317) (3,556) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 1,547 631 (1,599) (169) (529) 294 545 834 Net-interest inc./(exp.) (37) (82) (202) (150) (143) (95) (54) (54) Assoc/forex/extraord./others 0 (2) (5) 2 7 266 71 74 Pre-tax profit 1,510 547 (1,806) (317) (665) 465 562 855 Tax (377) (136) (149) (42) (79) (113) (141) (214) Min. int./pref. div./others (24) (25) (24) (32) (38) (42) (48) (50) Net profit (reported) 1,108 386 (1,979) (392) (781) 310 374 591 Net profit (adjusted) 1,108 386 (1,979) (392) (781) 50 374 591 EPS (reported)(CNY) 1.058 0.367 (1.726) (0.269) (0.500) 0.198 0.239 0.378 EPS (adjusted)(CNY) 1.058 0.367 (1.726) (0.269) (0.500) 0.032 0.239 0.378 EPS (adjusted fully-diluted)(CNY) 1.044 0.366 (1.726) (0.269) (0.500) 0.025 0.184 0.291 DPS (CNY) 0.418 0.110 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 1,547 631 (1,599) (169) (529) 294 545 834 EBITDA 1,759 892 (1,372) 24 (330) 499 734 1,039

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 1,510 547 (1,806) (317) (665) 465 562 855 Depreciation and amortisation 211 260 225 192 197 205 188 205 Tax paid (484) (412) (136) 4 (46) (79) (113) (141) Change in working capital (384) (585) (832) 566 (1) (288) (96) (250) Other operational CF items 138 205 1,617 (459) 119 89 (17) (21) Cash flow from operations 991 16 (932) (14) (394) 392 524 649 Capex (185) (296) (121) (104) (241) (221) (5) (221) Net (acquisitions)/disposals (15) (11) (7) 0 5 51 7 7 Other investing CF items (123) (94) (86) (111) (93) (130) (9) (109) Cash flow from investing (323) (400) (214) (215) (329) (300) (7) (323) Change in debt 55 529 1,352 (1,045) 602 (351) 0 0 Net share issues/(repurchases) 36 12 2 1,482 3 1,295 0 0 Dividends paid (497) (348) (23) 0 0 0 0 0 Other financing CF items (49) (73) (153) (122) (102) (150) (114) (120) Cash flow from financing (454) 120 1,178 316 503 793 (114) (120) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 213 (265) 32 87 (221) 886 403 206 Free cash flow 806 (280) (1,053) (117) (635) 171 519 428 Source: FactSet, Daiwa forecasts

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Li Ning (2331 HK): 8 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 1,472 1,210 1,255 1,283 1,034 1,759 2,155 2,354 Inventory 806 1,133 901 942 1,289 1,500 1,560 1,739 Accounts receivable 1,916 2,439 1,713 1,734 1,639 1,845 1,904 2,079 Other current assets 0 0 36 3 0 0 0 0 Total current assets 4,194 4,782 3,906 3,962 3,963 5,105 5,619 6,172 Fixed assets 721 832 857 791 861 922 789 860 Goodwill & intangibles 814 752 423 381 446 506 560 610 Other non-current assets 834 964 834 883 770 790 835 835 Total assets 6,562 7,329 6,020 6,017 6,040 7,323 7,803 8,476 Short-term debt 312 838 1,447 200 551 200 200 200 Accounts payable 1,837 2,125 1,693 1,751 2,058 2,187 2,209 2,312 Other current liabilities 222 100 124 67 70 70 70 70 Total current liabilities 2,372 3,063 3,264 2,018 2,679 2,457 2,479 2,583 Long-term debt 0 0 652 846 975 876 876 876 Other non-current liabilities 631 601 292 262 217 217 217 217 Total liabilities 3,002 3,664 4,207 3,125 3,870 3,550 3,572 3,676 Share capital 111 112 112 137 142 142 142 142 Reserves/R.E./others 3,258 3,360 1,502 2,548 1,810 3,414 3,872 4,441 Shareholders' equity 3,369 3,472 1,614 2,684 1,952 3,556 4,013 4,582 Minority interests 190 193 199 208 218 218 218 218 Total equity & liabilities 6,562 7,329 6,020 6,017 6,040 7,323 7,803 8,476 EV 4,748 5,528 6,748 5,675 6,406 5,232 4,692 4,492 Net debt/(cash) (1,160) (372) 844 (237) 491 (683) (1,079) (1,278) BVPS (CNY) 3.217 3.303 1.407 1.845 1.248 2.274 2.566 2.930

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 13.0 (5.8) (25.2) (12.8) 15.5 16.3 4.0 11.4 EBITDA (YoY) 15.4 (49.3) n.a. n.a. n.a. n.a. 46.9 41.6 Operating profit (YoY) 15.3 (59.2) n.a. n.a. n.a. n.a. 85.5 52.9 Net profit (YoY) 17.4 (65.2) n.a. n.a. n.a. n.a. 651.9 57.9 Core EPS (fully-diluted) (YoY) 16.5 (65.0) n.a. n.a. n.a. n.a. 651.9 57.9 Gross-profit margin 47.3 45.3 37.7 44.5 44.6 46.0 47.0 48.0 EBITDA margin 18.6 10.0 n.a. 0.4 n.a. 6.4 9.0 11.5 Operating-profit margin 16.3 7.1 n.a. n.a. n.a. 3.8 6.7 9.2 Net profit margin 11.7 4.3 (29.6) (6.7) (11.6) 0.6 4.6 6.5 ROAE 36.7 11.3 n.a. n.a. n.a. 1.8 9.9 13.8 ROAA 18.6 5.6 n.a. n.a. n.a. 0.7 4.9 7.3 ROCE 44.2 15.1 n.a. n.a. n.a. 6.9 10.7 14.9 ROIC 54.5 16.6 (53.8) (6.4) (19.9) 7.7 13.1 18.7 Net debt to equity n.a. n.a. 52.3 n.a. 25.2 n.a. n.a. n.a. Effective tax rate 25.0 24.9 n.a. n.a. n.a. 24.3 25.0 25.0 Accounts receivable (days) 61.2 89.0 113.5 108.0 91.5 81.2 84.1 80.1 Current ratio (x) 1.8 1.6 1.2 2.0 1.5 2.1 2.3 2.4 Net interest cover (x) 41.5 7.7 n.a. n.a. n.a. 3.1 10.1 15.5 Net dividend payout 39.5 30.1 n.a. n.a. n.a. 0.0 0.0 0.0 Free cash flow yield 14.1 n.a. n.a. n.a. n.a. 3.0 9.1 7.5 Source: FactSet, Daiwa forecasts

Company profile

Li Ning is a major domestic sportswear company in China, founded in 1990 by former Chinese Olympic Gymnast Mr. Li Ning.

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China sportswear sector: 8 January 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Brian LAM (852) 2532 4341 [email protected] INDIA Transportation – Railway; Construction and Engineering (China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Head of Custom Products Group Saurabh MEHTA (91) 22 6622 1009 [email protected] Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities Custom Products Group

SINGAPORE PHILIPPINES Ramakrishna MARUVADA (65) 6499 6543 [email protected] Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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China sportswear sector: 8 January 2016

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China sportswear sector: 8 January 2016

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China sportswear sector: 8 January 2016

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Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

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* 63.9% Hold** 21.3% Sell*** 14.8% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * 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 with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *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.

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 the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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