FILA Korea (081660 KS ) Total makeover

Textiles/Apparel 2H19 outlook: Revenue growth to stabilize at a lower level Initiation Report We estimate FILA Korea’s consolidated revenue growth at 8% YoY in 2H19, stabilizing at October 4, 2019 a lower level compared to in 1H19 (+22% YoY). FILA USA: Despite weakening momentum related to the Disruptor sneaker model and slowing US consumer spending, we expect revenue to grow 17.8% YoY in 2H19, supported by channel expansion. (Initiate) Buy FILA China: We expect the Chinese sportswear market to remain solid in 2H19. We forecast FILA’s China business to continue on a strong growth path, with revenue Target Price (12M, W) 77,200 expanding 55% YoY in 2H19. In addition to improv ing store efficiency, the strategic focus of Anta Sports (2020 HK/CP: HK$65)—FILA’s Chinese operational partner—on the Share Price (10/01/19, W) 56,100 children’s line (brand name: FILA Kids) should provide a boost to the business.

Expected Return 38% Given its past success with Anta Kids, we believe Anta Sports is well-positioned to successfully enhance FILA Kids from 2H19.

OP (19F, Wbn) 459 Rapid deleveraging to enhance shareholder returns Consensus OP (19F, Wbn) 468 With FILA Korea’s steadily growing brand power contributing to increased free cash flow, we project the company’s consolidated net borrowings to fall rapidly to W197.3bn EPS Growth (19F, %) 81.5 in 2021 from W834.9bn in 2018 (CAGR of -38%). Market EPS Growth (19F, %) -28.2 P/E (19F, x) 13.2 Aided by stronger cash flow and lower net debt, FILA Korea is likely to carry out more Market P/E (19F, x) 13.0 aggressive share buybacks/cancellations. By 2021, we expect FILA Korea’s DPS and KOSPI 2,049.93 dividend yield to increase to W1,700 and 3.0%, respectively, supported by an enhanced shareholder return policy. Market Cap (Wbn) 3,429 Shares Outstanding (mn) 61 Initiate coverage with Buy rating and TP of W77,200 Free Float (%) 79.7 Shares of FILA Korea have pulled back 36% from their June peak as a result of the Foreign Ownership (%) 44.1 uncertain growth outlook for 2H19. At a 2020 P/E of 12.2x, we believe the stock is Beta (12M) 0.19 currently undervalued on an absolute basis. 52-Week Low 39,550 52-Week High 85,800 We advise investors to take advantage of the stock’s recent cor rection as a buying opportunity, as: 1) we see strong growth potential in the Chinese sportswear market (%) 1M 6M 12M and are positive on Anta Sports’ agile marketing strategy and execution; 2) US earnings Absolute -2.4 -24.9 23.3 should grow steadily on the back of distribution channel expansion and FILA’s growing Relative -8.4 -21.4 41.7 brand power; and 3) the company is poised to deliver rapid balance sheet improvements and enhanced shareholder returns. 220 Fila Korea KOSPI We initiate our coverage on FILA Korea with a Buy rating and a target price of W77,200 , 170 which we derived using a sum-of-the-parts (SOTP) methodology.

120

70 9.18 1.19 5.19 9.19

Mirae Asset Daewoo Co., Ltd.

[ Global Consumer ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 967 2,530 2,955 3,396 3,570 3,711 Woochang Chung +822 -3774 -6753 OP (Wbn) 12 217 357 459 499 530 [email protected] OP Margin (%) 1.2 8.6 12.1 13.5 14.0 14.3

NP (Wbn) 323 62 144 261 282 307 EPS (W) 5,684 1,030 2,349 4,263 4,616 5,019 ROE (%) 48.4 7.5 10.5 15.5 13.8 12.8

P/E (x) 2.5 15.8 22.8 13.2 12.2 11.2 P/B (x) 0.9 1.2 3.3 2.8 2.3 2.0 Dividend Yield (%) 0.4 0.3 0.1 0.5 2.2 3.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

October 4, 2019 FILA Korea

C O N T E N T S

I. Earnings outlook 3 Decent growth ahead 3 Impact of new product mix changes 7 Acushnet: Chinese golf market growth, a key re-rating variable, may take time 7

II. China sportswear market outlook 11 China sportswear market: Accelerating growth 11 High pent-up demand in China 14 Favorable sports-related policies in China 15 Competitive analysis of China’s sportswear market 16

III. Rapid deleveraging 20 Likely to swing to a net cash position in 2021 20 Enhancements to shareholder return policy 21 Attractive EV/EBITDA story 21

IV. Our estimates vs. the consensus 22 Fairly conservative 2020F estimates 22

V. Valuation 23 Initiating coverage with Buy rating and TP of W77,200 23

Ⅵ. Company overview 24 FILA business structure details 25 Ownership structure 26 Competitiveness analysis 26

Mirae Asset Daewoo Research 2 October 4, 2019 FILA Korea

I. Earnings outlook

Decent growth ahead

We expect FILA Korea’s revenue to show decent growth in 2H19 (after peaking in 2Q19), with revenue growth to slow to 8% in 2H19 (from 22% in 1H19).

Table 1. Quarterly earnings outlook (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19F 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F

Revenue 677 790 726 762 835 953 797 811 881 1,010 832 847 FILA Korea 104 131 134 132 139 161 147 148 142 165 154 157 FILA USA 76 110 124 188 158 165 149 218 173 176 164 240 Royalties 11 14 16 17 19 20 17 18 20 21 19 21 FILA (other) 13 20 34 34 31 85 41 14 37 103 49 16 Acushnet 474 516 418 390 488 522 442 413 507 545 445 414 Operating profit 85 116 74 83 116 145 100 99 127 160 106 105 FILA Korea 8 19 15 15 24 31 22 21 26 34 25 24 FILA USA 1 7 10 19 10 15 14 24 12 17 16 28 Royalties 11 14 16 17 19 20 17 18 20 21 19 21 FILA (other) -3 6 4 9 4 8 4 1 4 12 6 2 Acushnet 67 70 29 23 59 71 42 35 65 76 39 31 Net profit (controlling interests) 38 66 40 -1 70 66 53 71 72 88 62 60 Pretax profit from FILA China 9 12 9 13 14 19 13 20 16 23 16 24 Management consulting fees 4 6 5 8 7 10 8 12 8 11 9 14 Equity-method gains 5 6 4 5 6 10 5 7 8 12 7 10 % of total pretax profit 15.2 11.1 13.6 N/A 14.5 22.2 18.7 20.8 16.8 19.7 19.3 29.8 YoY growth

Revenue 3.6 14.0 27.5 24.0 23.3 20.6 9.8 6.5 5.6 5.9 4.4 4.4 FILA Korea 56.4 36.9 69.0 29.8 34.3 23.1 10.0 12.1 2.4 2.4 4.8 5.8 FILA USA 8.6 15.0 62.6 83.0 108.5 49.6 20.7 15.9 10.0 6.6 10.0 10.0 Royalties 12.5 37.6 52.7 70.1 63.4 43.3 8.4 3.9 9.0 8.2 11.2 16.0 FILA (other) 93.2 158.3 223.0 220.7 148.2 329.5 20.0 -60.2 20.0 20.0 20.0 20.0 Acushnet -5.5 6.6 6.4 0.2 3.0 1.3 5.7 6.0 4.0 4.4 0.7 0.0 Operating profit 73.7 41.8 107.8 60.6 36.4 25.3 35.3 19.5 9.9 10.6 5.9 6.7 FILA Korea N/A 255.0 N/A N/A 194.1 68.2 49.2 39.1 8.9 8.2 12.4 15.0 FILA USA N/A 69.1 N/A N/A 630.7 107.1 43.1 24.5 13.4 12.3 12.3 18.3 Royalties 12.5 37.6 52.7 70.1 63.4 43.3 8.4 3.9 9.0 8.2 11.2 16.0 FILA (other) N/A N/A N/A N/A N/A 17.2 19.6 -84.8 14.0 63.7 35.8 48.2 Acushnet -9.5 5.9 36.2 -22.7 -12.0 2.4 42.3 53.8 9.8 6.4 -5.3 -12.3 Net profit (controlling interests) 323.0 125.1 176.9 -107.4 84.4 0.1 31.4 N/A 2.9 34.0 16.3 -16.2 OP margin (%) Total 12.5 14.6 10.2 10.8 13.9 15.2 12.6 12.2 14.5 15.9 12.7 12.4 FILA Korea 7.9 14.2 11.2 11.2 17.4 19.4 15.2 13.9 18.5 20.5 16.3 15.1 FILA USA 1.9 6.7 8.1 10.2 6.5 9.2 9.6 11.0 6.7 9.7 9.8 11.8 Royalties 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 FILA (other) -23.4 32.2 10.6 25.4 12.6 8.8 10.6 9.7 12.0 12.0 12.0 12.0 Acushnet 14.1 13.5 7.0 5.9 12.0 13.7 9.4 8.5 12.7 13.9 8.8 7.5 Source : Company data , Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 October 4, 2019 FILA Korea

Table 2. Annual earnings outlook (Wbn, %) 2017 2018 2019F 2020F

Revenue 2,530 2,955 3,396 3,570 FILA Korea 342 500 595 618 FILA USA 345 498 690 754 Royalties 41 58 74 82 FILA (other) 35 101 171 206 Acushnet 1,767 1,798 1,866 1,911 Operating profit 217 357 459 499 FILA Korea 1 56 98 109 FILA USA 11 38 64 73 Royalties 41 58 74 82 FILA (other) -26 16 17 25 Acushnet 191 188 207 211 Net profit (controlling interests) 62 144 261 282 Pretax profit from FILA China 25 43 66 79 Management consulting fees 12 23 37 43 Equity-method gains 12 20 29 36 % of total pretax profit 23.5 18.7 19.0 21.0 YoY growth Revenue 16.8 14.9 5.1

FILA Korea 46.0 19.0 3.8 FILA USA 44.5 38.6 9.2

Royalties 43.2 26.1 11.0

FILA (other) 184.4 70.0 20.0

Acushnet 1.7 3.8 2.4 Operating profit 64.2 28.7 8.6

FILA Korea N/A 73.9 10.7 FILA USA N/A 67.7 14.7

Royalties 43.2 26.1 11.0

FILA (other) N/A 8.6 44.0

Acushnet -1.1 9.7 1.8 Net profit (controlling interests) 130.1 81.5 8.3 OP margin (%) Total 8.6 12.1 13.5 14.0 FILA Korea 0.4 11.3 16.5 17.6 FILA USA 3.1 7.6 9.2 9.7 Royalties 100.0 100.0 100.0 100.0 FILA (other) -72.9 15.7 10.0 12.0 Acushnet 10.8 10.5 11.1 11.0 Source : Company data , Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 October 4, 2019 FILA Korea

FILA Korea (33.1% of consolidated net profit): For FILA’s key products (footwear and apparel), we forecast domestic sales growth to slow to 8.7% YoY in 2H19 from 26.3% YoY in 1H19, as a result of: 1) a high base in 2H18; 2) the declining popularity of “ugly” sneakers; and 3) the slowdown in consumer spending.

However, we forecast FILA Korea’s overall revenue to increase 11% YoY to W295.1bn in 2H19, supported by a 55% YoY increase in advisory (royalty) fees (6.3% of FILA Korea’s revenue) from Full Prospect (the joint venture between FILA Korea and Anta Sports that operates the FILA brand in China).

FILA USA (19% of consolidated net profit): Despite weakening momentum related to the Disruptor sneaker model and slowing US consumer spending, we expect revenue to grow 17.8% YoY to W367.5bn in 2H19, supported by channel expansion.

We believe the footwear division has more room for growth in the US. Notably, while FILA’s shoes (priced at around US$25-30 per pair) have primarily been sold at low-tier retailers such as Costco (COST US/CP: US$285.1) and The TJX Companies (TJX US/CP: US$54.0), they have been generating meaningful revenue at mid-tier retailers such as Foot Locker (FL US/CP: US$41.5) and DSW with higher pricing points of US$50-60 since 2018, which we attribute to FILA’s increased brand power. We think this channel expansion should continue in 2020, leading to margin improvement.

Given that FILA has already secured a meaningful presence in the footwear market, where entry barriers are relatively high, we expect the company to strategically expand into the apparel market going forward.

FILA looks well-positioned to achieve growth and margin improvement in apparel on the back of strengthening online sales and a forthcoming app (currently in the demo stage).

Figure 1. Tracer product page on DSW website Figure 2. Disruptor product page on Foot Locker website

Source: DSW, Mirae Asset Daewoo Research Source: Foot Locker, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 October 4, 2019 FILA Korea

Figure 3. FILA Korea T-shirts Figure 4. FILA Korea’s multi-color logo T-shirt

Source: Company materials, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research

FILA China (19% of consolidated net profit): We expect the Chinese sportswear market to remain solid in 2H19. We forecast FILA’s China business to continue on a strong growth path, with revenue expanding 55% YoY in 2H19. In addition to improving store efficiency, the strategic focus of Anta Sports—FILA’s Chinese operational partner—on the children’s line (brand name: FILA Kids) should provide a boost to the business.

Given its past success with Anta Kids, we believe Anta Sports is well-positioned to successfully enhance FILA Kids from 2H19.

The children’s apparel market has been growing rapidly in China. Of note, the contribution of the children’s line to Anta Sports’ total revenue nearly tripled from 2013 (7.2%) to 2018 (20.9%), with children’s line revenue displaying a five-year CAGR of 33% (vs. 8.4% for the Anta brand).

Figure 5. Anta Sports: Offline sales mix Figure 6. Anta Sports: Offline revenue growth

(%) Anta Kids Wholesale (%) 100 60 Wholesale Anta Kids 90 50 80

70 40 60 50 30 40 20 30

20 10 10 0 0 13 14 15 16 17 18 19 14 15 16 17 18 19 Source: Anta Sports, Mirae Asset Daewoo Research Source: Anta Sports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 October 4, 2019 FILA Korea

Impact of new product mix changes

Meanwhile, based on our channel checks, FILA stores in China are showing signs of shelf space changes. Disruptor models occupied a high share of the shelf space during 2018 and 1Q19, but since then they have begun to give way to new models, such as the Ray and Jagger.

The new models are selling for RMB900-1,000, approximately 17-25% lower than the average price of Disruptor models (RMB1,200). Accordingly, the product mix changes resulting from FILA China’s new models are unfavorable to the footwear division’s ASP.

According to our sensitivity analysis, based on the footwear division’s current contribution to FILA China’s total revenue (40%), the impact of these sales mix changes on total revenue growth is estimated at 5-10%.

Despite the negative effects of product mix changes, we expect FILA China’s revenue to grow 55% YoY in 2H19, helped by the full-fledged expansion of the children’s line in 2H19 and improved store operating efficiency.

Figure 7. Disruptor model in China (FILA store in Shenzhen) Figure 8. New products in 2H19 (FILA store in Hangzhou)

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Acushnet: Chinese golf market growth, a key re-rating variable, may take time

We expect Acushnet (GOLF US/CP: US$26.3) to account for 54.9% and 28.8% of FILA Korea’s consolidated revenue and net profit, respectively, in 2019.

Acushnet is the parent company of Titleist (the world’s largest golf equipment company) and FootJoy (a golf apparel brand).

Acushnet’s revenue consists of Titleist golf balls, clubs, and gear, as well as FootJoy. In general, golf balls are the biggest contributor to revenue (32% in 2018) and have high OP margins (more than 15%).

The firm relies heavily on the US golf market, which accounted for more than 50% of its total revenue in 2018.

Mirae Asset Daewoo Research 7 October 4, 2019 FILA Korea

Figure 9. Annual revenue growth by category Figure 10. Quarterly revenue growth by category

(%) (%) 15 Titleist golf balls Titleist golf clubs 40 Titleist golf balls Titleist golf clubs Titleist golf gear FootJoy golf wear Titleist golf gear FootJoy golf wear 30 10 20

5 10

0 0

-10 -5 -20

-10 -30 2013 2014 2015 2016 2017 2018 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

Source: Acushnet, Mirae Asset Daewoo Research Source: Acushnet, Mirae Asset Daewoo Research

Figure 11. OP by category Figure 12. OP margin by category

(%) Titleist golf balls Titleist golf clubs (%) Titleist golf balls Titleist golf clubs Titleist golf gear FootJoy golf wear 20 Titleist golf gear FootJoy golf wear 100 Total 18 90 80 16 70 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Source: Acushnet, Mirae Asset Daewoo Research Source: Acushnet, Mirae Asset Daewoo Research

Acushnet’s revenue and margins tend to be volatile, affected by weather conditions and the release of new products. Revenue growth has been slow (five-year CAGR of 1.5%), as the golf markets of the US, Japan, and Korea have already matured.

Management maintained its 2019 revenue growth guidance at 2.8-4.7%. While revenue growth was flattish YoY in 1H19, management expects growth to accelerate in 2H19, driven by the release of new golf irons in 3Q19.

Table 3. Acushnet’s quarterly earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19F 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F

Revenue 473.7 515.6 418.3 389.9 487.9 522.3 442.0 413.4 507.5 545.3 444.9 413.5 %, YoY -5.5 6.6 6.4 0.2 3.0 1.3 5.7 6.0 4.0 4.4 0.7 0.0 Operating profit 66.8 69.6 29.2 22.9 58.8 71.3 41.5 35.2 64.5 75.8 39.3 30.9 %, YoY -9.5 5.9 36.2 -22.7 -12.0 2.4 42.3 53.8 9.8 6.4 -5.3 -12.3 Net profit 46.6 65.8 11.3 13.2 52.9 43.5 24.5 20.9 42.3 49.3 23.8 18.0 %, YoY 4.2 207.5 44.2 -15.1 13.4 -33.9 117.5 58.0 -20.1 13.2 -2.7 -13.8 Margins (%) OP margin 14.1 13.5 7.0 5.9 12.0 13.7 9.4 8.5 12.7 13.9 8.8 7.5 Net margin 9.8 12.8 2.7 3.4 10.8 8.3 5.5 5.0 8.3 9.0 5.4 4.3 Sour ce: Acushnet, Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 October 4, 2019 FILA Korea

Figure 13. Golf balls: Quarterly OP margin Figure 14. Golf clubs: Quarterly OP margin

(%) (%) 30 20

15 25

10 20 5 15 0 10 -5

5 -10

0 -15 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

Source: Acushnet, Mirae Asset Daewoo Research Source: Acushnet, Mirae Asset Daewoo Research

Figure 15. Other golf equipment: Quarterly OP margin Figure 16. FootJoy golf apparel: Quarterly OP margin

(%) (%) 25 20

20 15 15

10 10

5 5 0

-5 0

-10 -5 -15

-20 -10 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

Source: Acushnet, Mirae Asset Daewoo Research Source: Acushnet, Mirae Asset Daewoo Research

Chinese golf market calls for a long-term approach

We believe a re-rating of Acushnet’s stock hinges on the growth of the Chinese golf market. Acushnet management underlined the need for a long-term approach to capitalize on the market’s growth.

Generally speaking, golf participation and related market growth have accelerated rapidly in advanced markets such as Korea, in line with growth in disposable income and the expansion of the luxury goods market.

This has not been the case in China so far, however. Since 2010, the Chinese luxury market has expanded at a CAGR of 10-15%, but the golf segment—a key luxury category—has been growing more slowly than expected.

The Chinese government’s anti-corruption policies and related regulations on golf are often mentioned as an obstacle to the development of the Chinese golf market, and we share this view. However, we believe the root cause of the market’s slow growth is the low share of women golfers (compared to in Korea) and the unpopularity of golf with the X and Z generations, who are big spenders (accounting for 60-70% of China’s luxury shopping).

Mirae Asset Daewoo Research 9 October 4, 2019 FILA Korea

Golf market’s high sensitivity to business cycles

The golf market is very sensitive to business cycles. Taking Callaway (ELY US/CP: US$19.1), the oldest listed company in the golf market, as an example due to its more than 50% revenue exposure to the US, we found a meaningful correlation between the company’s revenue growth and US per-capita GDP growth. Meanwhile, the US golfing population has been steadily declining.

Figure 18. Callaway’s revenue growth and US per-capita GDP Figure 17. US golfing population growth

(imn) (%) (%) 35 70 Callaway's revenue growth (L) 8 60 US per-capita GDP growth (R) 30 6 50 25 40 4 30 20 2 20 15 0 10

10 0 -2 -10 5 -4 -20 0 -30 -6 06 07 08 09 10 11 12 13 14 15 16 17 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Source: Statista, Mirae Asset Daewoo Research Source: World Bank, Bloomberg, Callaway, Mirae Asset Daewoo Research

Acushnet stake sale possibility is low

FILA Korea first acquired a stake in Acushnet in 2011 and has since expanded its holdings to 53%. We estimate that Acushnet’s current market cap is roughly 15% higher than the value of FILA Korea’s aggregated investment in Acushnet.

We believe management has no plans to divest its Acushnet stake anytime soon, considering: 1) management’s belief in the future growth potential of China’s golf equipment market; and 2) potential synergies with FILA Korea in the event Acushnet expands into the Asian golf apparel market.

Mirae Asset Daewoo Research 10 October 4, 2019 FILA Korea

II. China sportswear market outlook

China sportswear market: Accelerating growth

Over the past five years, China’s sportswear market (+14.5% CAGR) has grown at a faster pace than the broader consumer market (+10.3%) fueled by: 1) the rising income levels of consumers; 2) increased health awareness among the public; and 3) a government-backed exercise boom.

While China’s overall consumption and retail market growth have lost steam in recent years, the growth of China’s sportswear market has been accelerating.

Figure 19. China sportswear market growth

(RMBbn) (%) 300 China sportswear market (L) 25 Growth (R) 250 20

200 15 150 10 100

5 50

0 0 13 14 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research

China’s sportswear market breaks down to 56.1% for footwear and 43.9% for apparel. The share of footwear (56.1%) is much higher in China’s market than in the US market (31.5%), which we attribute to the greater diversity of sports apparel in the US compared to China.

Over the past five years, China’s sports footwear market (+19.1% CAGR) has exhibited much faster growth than the sports apparel market (+9.8%), while both segments have been outpacing the broader consumer retail market.

Figure 21. Growth of China’s sports apparel and footwear Figure 20. China sportswear market breakdown markets

(%) Footwear Apparel (%) 100 25 Apparel Footwear 90 China retail sales 80 20 70 60 15 50 40 10 30 20 5 10 0 0 13 14 15 16 17 18 14 15 16 17 18

Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 October 4, 2019 FILA Korea

Functional and athleisure apparel are estimated to represent 33.8% and 49.1%, respectively, of China’s sports apparel market (43.9% of the country’s sportswear market in 2018). The share of athleisure apparel (49.1%) is notably higher in China than in the US market (36.4%).

Over the past five years, China’s functional and athleisure apparel markets have expanded at 11.3% and 8.3% CAGRs, respectively. China’s outdoor apparel market (accounting for 17.3% of the sports apparel market) has also been displaying relatively robust growth, unlike the outdoor apparel market in the US.

Figure 22. China sports apparel market growth

(RMBbn) (%) 140 China sports apparel market (L) 18 Growth (R) 16 120 14 100 12

80 10

60 8 6 40 4 20 2

0 0 13 14 15 16 17 18

Source: Industry data, Mirae Asset Daewoo Research

Figure 23. China sports apparel market breakdown Figure 24. China sports apparel market growth

(%) Athleisure Outdoor Functional (%) 100 20 Functional Outdoor 90 18 Athleisure 80 16 China retail sales 70 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 13 14 15 16 17 18 14 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 October 4, 2019 FILA Korea

China’s sports footwear market can be divided into three segments: functional, outdoor, and athletic running shoes. Among them, functional running shoes have seen the fastest growth.

Figure 25. China sports footwear market growth

(RMBbn) (%) 160 China sports footwear market (L) 25 Growth (R) 140 20 120

100 15 80

60 10

40 5 20

0 0 13 14 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research

Figure 26. China sports footwear market breakdown Figure 27. China sports footwear market growth by category

(%) Athleisure Outdoor Functional (%) 100 30 Functional Outdoor 90 Athleisure 25 80 China retail sales 70 20 60 50 15 40 10 30

20 5 10 0 0 13 14 15 16 17 18 14 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 13 October 4, 2019 FILA Korea

High pent-up demand in China

We see strong growth potential in China’s sportswear market over the long term, as rising incomes should naturally lead to increased public interest in health and wellness.

According to industry data, the number of Chinese households with US$50,000 or more in annual income is growing at an annual rate of over 20% (23% CAGR in 2013-17). The proportion of such households remains negligible, however, at just 2%.

China’s proportion of high-income households is particularly low when contrasted with Taiwan, Hong Kong, and Japan, where households earning US$50,000 or more account for 36-54% of total households. Going forward, we expect the growing number of high-income households to provide a boost to China’s sportswear market growth.

Figure 28. No. of Chinese households with annual income of Figure 29. % of Chinese households with annual income of at at least US$50,000 least US$50,000

('0000) No. of households (L) (%, YoY) (%) 12,000 Chg. (R) 45 3

40 10,000 35

8,000 30 2

25 6,000 20

4,000 15 1

10 2,000 5

0 0 0 11 12 13 14 15 16 17 18F 19F 20F 11 12 13 14 15 16 17 18F 19F 20F Source: Economist Intelligence Unit, PWC, Mirae Asset Daewoo Research Source: Economist Intelligence Unit, PWC, Mirae Asset Daewoo Research

Figure 30. % of households with annual income of at least Figure 31. Growth of households with annual income of at

US$50,000 by country least US$50,000 by country (2012-17)

(%) (%, YoY) 60 25

50 20

15 40 10 30 5 20 0

10 -5

0 -10 China Hong Kong Japan Taiwan China Hong Kong Japan Taiwan

Source: Economist Intelligence Unit, PwC, Mirae Asset Daewoo Research Source: Economist Intelligence Unit, PwC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 14 October 4, 2019 FILA Korea

Favorable sports-related policies in China

The Chinese government has encouraged participation in sports/leisure activities as a way to respond to demographic changes and improve people’s health and quality of life.

As of 2015, sports accounted for a mere 0.7% of China’s GDP, far lower than the levels seen in developed countries.

However, the government is pursuing various measures to boost the sports industry, with the goal of expanding it to RMB5tr (W850tr) by 2025 (from RMB2.3tr in 2015).

Indeed, nurturing the Chinese sports industry was among the plans outlined in 2015 as part of China’s 13 th five-year economic development plan. The following year, the General Administration of Sport revealed detailed plans to boost fitness, outdoor, cycling, fencing, and marathon activities.

Figure 32. GDP contribution of sports by country

(%) 3.5

3

2.5

2

1.5

1

0.5

0 US France China Korea

Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 15 October 4, 2019 FILA Korea

Competitive analysis of China’s sportswear market

The Chinese sportswear market is broadly divided into high-end (foreign brands), mid-end (major local brands), and low-end (second-tier local players with weak brand awareness) segments.

As of 2018, Adidas (ADS GR/CP: EU274.1) was the market’s no. 1 player with a 17.8% share thanks to its popular running shoes, followed closely by Nike (NKE US/CP: US$86.7) with a 17.5% share.

Among local brands, Anta Sports, Li-Ning (2331 HK/CP: HK$22.1), and Xtep (1368 HK/CP: HK$4.6) controlled 9.1%, 5.8%, and 4.6% of the market in 2018, respectively. Meanwhile, the FILA brand, which has secured a place in the high-end segment (with many Chinese consumers recognizing it as an Italian brand), claimed a 3.7% share.

Figure 33. China’s sportswear M/S breakdown by brand (2018) Figure 34. China’s sportswear M/S trends

(%) (%) Adidas Nike Anta Sports 20 Adidas Li-Ning Skechers Xtep FILA 361° New Balance Other 17.8 18 27.7 Converse 16 14 12 Nike 10 Converse 17.5 2.1 8 New Balance 2.6 6 361 ° 3.4 4 FILA Anta Sports Xtep 2 Li-Ning 9.1 4.6 0 Skechers 5.8 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Notably, foreign brands, which have dominated the high-end market, have enjoyed continued market share gains thanks to Chinese consumers’ disposable income growth and trading-up tendencies. Foreign brands’ combined market share climbed from 38.9% in 2015 to 49.4% in 2018.

According to Tmall, a major Chinese online shopping mall, the running shoes of foreign sportswear brands sell for RMB400-500 (W68,000-85,000), while those of local brands sell for RMB150-200 (W25,000-34,000). It is notable that foreign brands’ market shares have continued to climb steadily despite their 50-60% premium.

Figure 35. M/S trends by foreign brand Figure 36. Combined M/S of foreign brands

(%) Adidas Nike (%) 20 Skechers FILA 60 New Balance Converse 18 50 16

14 40 12 10 30 8 20 6 4 10 2 0 0 15 16 17 18 15 16 17 18 Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 16 October 4, 2019 FILA Korea

Figure 37. Tmall: Nike Air Monarch Figure 38. Tmall: Nike React Element

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Figure 39. Tmall: Adidas NEO Figure 40. Tmall: Adidas

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Figure 41. Tmall: FILA Jagger Figure 42. Tmall: FILA Bobby Assos

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 17 October 4, 2019 FILA Korea

Figure 43. Tmall: Anta Sports Figure 44. Tmall: Anta Sports

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Figure 45. Tmall: Li-Ning Figure 46. Tmall: Li-Ning

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Figure 47. Tmall: Xtep Figure 48. Tmall: Xtep

Source: Tmall, Mirae Asset Daewoo Research Source: Tmall, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 18 October 4, 2019 FILA Korea

Meanwhile, the combined market share of the four largest local brands (Anta Sports, Li-Ning, Xtep, and 361 °) fell from 25.4% in 2015 to 22.6% in 2017, before inching up to 22.9% in 2018.

We believe major local brands have recently grabbed share from second-tier local brands, allowing them to achieve modest gains even amid the steady market share gains of foreign brands.

Figure 50. Combined M/S of the four major local brands (Anta Figure 49. M/S trends by local brand Sports, Li-Ning, Xtep, and 361 °°°)

(%) (%) 10 Anta Sports Li-Ning Xtep 361° 26 9 8 25 7 6 24 5 4 23 3 2 22 1 0 21 15 16 17 18 15 16 17 18

Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Figure 51. FILA’s M/S trend in China

(%) 4

3

2

1

0 15 16 17 18

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 19 October 4, 2019 FILA Korea

III. Rapid deleveraging

Likely to swing to a net cash position in 2021

FILA Korea’s consolidated net borrowings soared from W268.5bn in 2015 to W1.01tr in 2017 (net debt-to-equity ratio of 55%), as a result of: 1) restructuring of the domestic sports apparel/footwear business; and 2) equity investments in Acushnet.

With the subsequent turnaround of the domestic/US/China sports apparel/footwear businesses, free cash flow improved and net borrowings declined to W834.9bn by end-2018.

Looking ahead, we expect the company’s consolidated net borrowings to drop sharply to W197.3bn by 2021 (CAGR of -38%), aided by stable business growth and resulting improvement in free cash flow.

Table 4. FILA Korea's free cash flow (Wbn) 2015 2016 2017 2018 2019F 2020F

Gross cash flow 133 -44 246 330 399 435 Net profit -133 311 108 210 352 381 Depreciation and amortization 10 20 66 65 67 73 Other 257 -375 71 54 -19 -19 Working capital change -106 41 -216 -55 -101 -104 Operating cash flow 27 -4 30 275 298 331 Net capex (-) -13 -23 -39 -85 -85 -90 Free cash flow 14 -27 -9 190 213 241 Source: Company data , Mirae Asset Daewoo Research

Table 5. Acushnet's free cash flow (US$mn) 2013 2014 2015 2016 2017 2018 2019F 2020F

Gross cash flow 56.7 64.6 91.1 124.0 178.8 180.0 Net profit 24.3 25.4 4.2 49.5 96.6 99.9

Other non-cash adjustments 32.4 39.3 86.9 74.5 82.2 80.1

Working capital change 22.0 -10.5 0.8 -19.7 -205.9 -16.2

Operating cash flow 78.7 54.1 91.8 104.3 -27.0 163.7

Net capex (-) -46.5 -23.5 -23.2 -19.2 -18.8 -32.8

Free cash flow 32.2 30.6 68.6 85.1 -45.9 130.9 133.7 139.4 Source: Acushnet, Mirae Asset Daewoo Research

Figure 52. Net debt trend Figure 53. Interest expense trend

(Wbn) (%) (Wbn) (%) 1,200 Net debt (L) 90 60 Interest expenses (L) 30 % of OP (R) Net debt-to-equity ratio (R) 80 1,000 50 25 70

800 60 40 20

50 600 30 15 40

400 30 20 10 20 200 10 5 10

0 0 0 0 13 14 15 16 17 18 19F 20F 21F 13 14 15 17 18 19F 20F 21F

Source: Company data, Mirae Asset Daewoo Source: Company data, Mirae Asset Daewoo

Mirae Asset Daewoo Research 20 October 4, 2019 FILA Korea

Enhancements to shareholder return policy

In August, FILA Korea announced a plan to buy back and retire W20bn worth of treasury shares (0.5% of outstanding shares). Although the planned buyback is small in scale, it represents the first decision of its kind for the company, and we expect more to follow as free cash flow improves further.

Moreover, in line with the company’s push to enhance shareholder returns, we forecast DPS to increase sharply from W50 in 2018 to W1,700 in 2021, with dividend yield (based on current share prices) rising to 3.0%.

Figure 54. DPS and payout ratio trends

(Wbn) (%) 1,800 DPS (L) 30 1,600 Dividend payout ratio (R) 25 1,400

1,200 20

1,000 15 800

600 10

400 5 200

0 0 13 14 15 17 18 19F 20F 21F Source: Company data, Mirae Asset Daewoo

Attractive EV/EBITDA story

Based on FILA Korea’s current share price, the company’s enterprise value stands at W4.1tr, including W3.4tr in shareholder value and W625bn in net debt (end-2019 estimate).

Assuming that the firm’s enterprise value remains unchanged, shareholder value should rise to W3.86tr (W63,100/share; 12% upside from the current share price) by 2021 in line with the rapid decline in net debt.

Figure 55. FILA Korea’s enterprise value breakdown

(Wbn) 4,500 Net debt (Wbn) 4,000 Market cap (Wbn)

3,500 3,000

2,500

2,000

1,500 1,000

500

0 17 18 19F 20F 21F

Source: Company data, Mirae Asset Daewoo

Mirae Asset Daewoo Research 21 October 4, 2019 FILA Korea

IV. Our estimates vs. the consensus

Fairly conservative 2020F estimates

For 2020, we expect FILA Korea’s revenue and net profit to fall slightly short of market expectations.

For our earnings projections, we assumed that: 1) FILA Korea’s domestic apparel and footwear revenue will grow 3% (similar to inflation); 2) FILA USA’s revenue will expand 9.2%, slightly higher than the five-year CAGR of the US sportswear market; and 3) the China business will expand 15% (similar to the five-year CAGR of the Chinese sportswear market).

Given FILA Korea’s improved brand management and execution capabilities following restructuring, we believe our revenue and earnings estimates are conservative.

Table 6. Our estimates vs. the consensus (K-IFRS consolidated) (Wbn, %, %p) Mirae Asset Daewoo Consensus Diff. (%) 2019F 2020F 2019F 2020F 2019F 2020F Revenue 3,396 3,570 3,493 3,802 -2.8 -6.1 Operating profit 459 499 472 525 -2.6 -5.0 Net profit (controlling interests) 261 282 260 300 0.1 -5.8 OP margin (%) 13.5 14.0 13.5 13.8 0.0 0.2 Net margin (%) 7.7 7.9 7.5 7.9 0.2 0.0 Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 22 October 4, 2019 FILA Korea

V. Valuation

Initiating coverage with Buy rating and TP of W77,200

We initiate our coverage of FILA Korea with a Buy rating and target price of W77,200.

After peaking at W87,900 in June, the stock dropped 36% (vs. -1% for the KOSPI over the same period) as a result of uncertainties surrounding the company’s revenue and earnings growth prospects. Now trading at a 2020 P/E of 12.2x, the stock appears significantly undervalued.

To derive our target price, we used an SOTP method, dividing the company’s business into: 1) key domestic operations; 2) US operations; 3) the China business; and 4) Acushnet.

For key domestic operations, we applied a P/E of 10x, which represents a 10% premium to the average P/E of major non-sportswear apparel companies, which operate in a more competitive but lower-growth environment than sportswear brands. (We did not use the P/E of sportswear brands due to a lack of listed comparables.) We believe our premium is justified, given that FILA Korea’s apparel/footwear unit represents a mix of sportswear and general non-sportswear apparel.

For US operations, we applied a 20% discount to the average P/E of major sportswear and general non-sportswear apparel brands listed in the US. The discount reflects FILA’s lower brand awareness compared to Nike, Lululemon (LULU US/CP: US$189.3), Under Armour (UAA US/CP: US$19.7), etc.

For the China business, we applied a P/E of 27x, on par with the average P/E of major Chinese sportswear brands Li-Ning and Anta Sports. Thanks to its high-end brand positioning, FILA enjoys less competition and higher earnings growth than local rivals in China. For that reason, our valuation of FILA’s China operation looks fairly conservative.

For Acushnet, in which FILA Korea holds a 53% stake, we used the company’s current market cap.

Mirae Asset Daewoo Research 23 October 4, 2019 FILA Korea

Ⅵ. Company overview

FILA Korea is a sporting goods manufacturer that sells footwear, apparel, underwear, etc. FILA, founded in Milan, Italy in 1911, was sold to FILA Korea—an independent firm established in 1997 that owned the license to sell FILA products in Korea—in 2005 through a management buyout. In 2007, FILA Korea acquired the global FILA brand and all of its international subsidiaries.

After acquiring the global golf equipment maker Acushnet in 2011, FILA Korea listed the company on the NYSE in 2016.

FILA Korea generates most of its revenue from FILA Korea (estimated net profit share in 2019: 33.1%), FILA USA (19.0%), FILA China (19.0%), and Acushnet (28.8%).

Figure 56. Company history

Source: Company data, Mirae Asset Daewoo Research

Figure 57. Net profit composition

(%) Acushnet China US Korea 100

80

60

40

20

0

-20 2016 2017 2018 2019F 2020F

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 24 October 4, 2019 FILA Korea

FILA business structure details

FILA Korea’s business can broadly be divided into direct (Korea and the US) and indirect operations.

FILA Korea engages in the distribution of athleisure apparel and sports footwear (retail and wholesale), and also provides products under the brand names of FILA Intimo (underwear) and FILA Kids.

As of end-2018, the company operates approximately 570 stores in Korea. FILA USA is in charge of all US operations, with footwear being the largest product category.

Indirect operations include the royalty business, Acushnet, and Full Prospect. The brand has over 40 licensees around the globe, who pay royalties based on their wholesale revenues (minimum royalties are guaranteed based on revenue projections).

Full Prospect is a joint venture between FILA Korea (15% ownership) and Anta Sports of China. The brand distributes premium sportswear in China and pays FILA Korea 3% of its wholesale revenue in the form of design advisory fees (royalties).

Figure 58. Corporate governance of FILA Korea Figure 59. Royalty business

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Converting to holding company structure

On October 2nd , FILA Korea announced that it would: 1) spin off its Korean footwear/apparel business as a separate entity; and 2) transform the existing entity into a holding company, in order to enhance operational efficiency and corporate governance transparency.

Under the current business structure, FILA Korea not only operates its core domestic footwear/apparel business, but also handles global FILA brand management. However, after the spin-off, the holding company, FILA Holdings, will look after all global operations, whereas FILA Korea will focus on its core domestic footwear/apparel business.

The spin-off is scheduled for completion on January 1, 2020. As the newly spun-off Korean affiliate is likely to remain unlisted (100%-owned by the existing listed entity), the overall shareholder structure of the existing entity should remain unchanged.

Mirae Asset Daewoo Research 25 October 4, 2019 FILA Korea

Ownership structure

FILA Korea’s ownership structure as of August 2019 is as follows:

Chairman Yoon Yoon-su owns 20.09% of FILA Korea through FILA Holdings, in which the chairman has a 75.18% stake. FILA Holdings, the largest shareholder, and related parties collectively own 20.11% of shares, a relatively low portion. The National Pension Service (NPS) owns 10.2%, and foreign investors hold 45.35%.

Figure 60. FILA Korea’s shareholder structure

(%) FILA Holdings and affiliates Other 20 25

NPS 10

Foreign investors 45

Source: Company data, Mirae Asset Daewoo Research

Competitiveness analysis

When FILA entered the Korean market in the early 1990s, it was widely perceived as a young, premium brand. Twenty years later, however, the aging of its target customers and intensifying competition in the outdoor market began to weigh on the brand. For two consecutive years in 2015-16, the company’s domestic revenues sustained negative growth.

Shift from retail to wholesale-centric distribution

FILA Korea adopted a series of strategies to overcome the crisis, changing its target customers and renewing its brands. The company narrowed its target age group to teenagers and people in their 20s and took steps to better appeal to young customers, such as 1) hiring young, popular celebrities as brand models and 2) adopting a more wholesale- centric distribution model, shifting from department stores to multi-brand shops such as ABC Mart and Folder.

Wholesale distribution has helped boost FILA Korea’s cost competitiveness thanks to more efficient inventory management (with only the amount ordered by retailers being produced). The focus on wholesale has also allowed the company to better cope with the online conversion of the retail business and ever-changing consumer needs.

In-house sourcing center: Competitive costs and nimble response to changing trends

FILA’s unique production process is also noteworthy. Generally, footwear manufacturing involves: 1) planning; 2) outsourcing of sample manufacturing; 3) sample confirmation; and 4) outsourcing of manufacturing (to the sample maker).

While this process eschews the fixed-cost burden of operating production facilities/workforce, outsourcing production to the sample maker reduces a brand’s pricing power.

FILA Korea makes samples at its own sample production facilities (in mainland China and Hong Kong) and then invites bids from multiple factories based on those samples. In this way, FILA secures more competitive prices as well as the ability to respond in a more agile manner to changing market trends.

Mirae Asset Daewoo Research 26 October 4, 2019 FILA Korea

With this innovative process, FILA Korea has been able to reduce its footwear prices to W60- 70,000 (from over W100,000) and better appeal to young consumers. (The retro trend in fashion has also helped the brand’s image with young consumers.)

Focused customer segmentation

As one of its key marketing strategies, FILA Korea engages in co-branding, or brand collaborations. Its frequent co-branding work has even earned the nickname “FILAboration.” The collaboration with Melona (a popular melon-flavored ice cream brand) was particularly popular among students.

Recently, the company extended its reach to the game industry (PlayerUnknown's Battlegrounds and Woowakgood, a popular Korean game streamer). In the US, it partnered with World Wrestling Entertainment (WWE).

Figure 62. Customers lined up outside Foot Locker to buy FILA Figure 61. Brand collaborations x WWE products

Source: Company materials, Mirae Asset Daewoo Research Source: Press materials, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 27 October 4, 2019 FILA Korea

FILA Korea (081660 KS/Buy/TP: W77,200)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 2,955 3,396 3,570 3,711 Current Assets 1,338 1,674 1,805 1,801 Cost of Sales 1,487 1,689 1,768 1,835 Cash and Cash Equivalents 149 289 313 216 Gross Profit 1,468 1,707 1,802 1,876 AR & Other Receivables 474 551 598 636 SG&A Expenses 1,110 1,248 1,303 1,346 Inventories 632 727 782 831 Operating Profit (Adj) 357 459 499 530 Other Current Assets 83 107 112 118 Operating Profit 357 459 499 530 Non-Current Assets 1,966 2,004 2,041 2,076 Non-Operating Profit -20 10 9 23 Investments in Associates 44 0 0 0 Net Financial Income -52 -45 -31 -18 Property, Plant and Equipment 311 352 393 432 Net Gain from Inv in Associates 20 20 20 20 Intangible Assets 1,492 1,468 1,445 1,421 Pretax Profit 337 469 508 553 Total Assets 3,304 3,679 3,846 3,877 Income Tax 127 117 127 138 Current Liabilities 672 772 866 851 Profit from Continuing Operations 210 352 381 414 AP & Other Payables 249 287 301 313 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 176 200 300 300 Net Profit 210 352 381 414 Other Current Liabilities 247 285 265 238 Controlling Interests 144 261 282 307 Non-Current Liabilities 1,126 1,051 761 469 Non-Controlling Interests 67 92 99 108 Long-Term Financial Liabilities 810 714 414 114 Total Comprehensive Profit 280 352 381 414 Other Non-Current Liabilities 316 337 347 355 Controlling Interests 192 261 282 307 Total Liabilities 1,798 1,823 1,627 1,320 Non-Controlling Interests 88 92 99 108 Controlling Interests 991 1,222 1,461 1,683 EBITDA 423 526 572 610 Capital Stock 61 61 61 61 FCF (Free Cash Flow) 190 213 241 280 Capital Surplus 118 118 118 118 EBITDA Margin (%) 14.3 15.5 16.0 16.4 Retained Earnings 822 1,171 1,535 1,873 Operating Profit Margin (%) 12.1 13.5 14.0 14.3 Non-Controlling Interests 515 634 758 874 Net Profit Margin (%) 4.9 7.7 7.9 8.3 Stockholders' Equity 1,506 1,856 2,219 2,557

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 275 298 331 375 P/E (x) 22.8 13.2 12.2 11.2 Net Profit 210 352 381 414 P/CF (x) 9.9 6.6 6.1 5.6 Non-Cash Income and Expense 120 165 181 198 P/B (x) 3.3 2.8 2.3 2.0 Depreciation 42 43 49 56 EV/EBITDA (x) 10.9 9.8 9.3 8.9 Amortization 24 24 24 24 EPS (W) 2,349 4,263 4,616 5,019 Others 54 98 108 118 CFPS (W) 5,397 8,456 9,196 10,023 Chg in Working Capital -107 -101 -104 -100 BPS (W) 16,226 19,986 23,902 27,545 Chg in AR & Other Receivables -91 -76 -46 -38 DPS (W) 50 288 1,247 1,696 Chg in Inventories -43 -94 -55 -50 Payout ratio (%) 1.5 5.0 20.0 25.0 Chg in AP & Other Payables 61 33 13 11 Dividend Yield (%) 0.1 0.5 2.2 3.0 Income Tax Paid -29 -117 -127 -138 Revenue Growth (%) 16.8 14.9 5.1 3.9 Cash Flows from Inv Activities -25 -85 -90 -95 EBITDA Growth (%) 48.9 24.3 8.7 6.6 Chg in PP&E -18 -85 -90 -95 Operating Profit Growth (%) 64.5 28.6 8.7 6.2 Chg in Intangible Assets -2 0 0 0 EPS Growth (%) 128.1 81.5 8.3 8.7 Chg in Financial Assets 20 0 0 0 Accounts Receivable Turnover (x) 7.1 6.8 6.4 6.2 Others -25 0 0 0 Inventory Turnover (x) 4.9 5.0 4.7 4.6 Cash Flows from Fin Activities -214 -77 -218 -376 Accounts Payable Turnover (x) 7.8 7.1 6.8 6.7 Chg in Financial Liabilities -168 -74 -200 -300 ROA (%) 6.6 10.1 10.1 10.7 Chg in Equity 0 0 0 0 ROE (%) 10.5 15.5 13.8 12.8 Dividends Paid -24 -3 -18 -76 ROIC (%) 9.0 13.3 13.6 13.9 Others -22 0 0 0 Liability to Equity Ratio (%) 119.3 98.2 73.3 51.6 Increase (Decrease) in Cash 41 136 24 -96 Current Ratio (%) 199.0 216.8 208.4 211.6 Beginning Balance 108 153 289 313 Net Debt to Equity Ratio (%) 54.2 59.6 49.7 43.0 Ending Balance 149 289 313 216 Interest Coverage Ratio (x) 6.6 9.5 14.3 24.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 28 October 4, 2019 FILA Korea

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Fila Korea FILA Korea (081660) 10/04/2019 Buy 77,200 100,000 12/03/2018 No Coverage 80,000 06/11/2018 Buy 42,000 04/30/2018 Buy 32,000 60,000

40,000

20,000

0 Oct 17 Oct 18 Oct 19

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 84.57% 9.88% 5.55% 0.00% Investment Banking Services 82.76% 6.90% 10.34% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2019)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 29 October 4, 2019 FILA Korea

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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