Company Update

Date Industry Peak Sport (1968.HK) BUY 13 Feb 2015 4Q14 Operational Results Still Promising

China operation is still in good shape

Company Update Company Closing Price Target Price It was the 5th straight season that Peak Sport (“Peak” thereafter) had delivered mid-teens yoy growth in wholesale order value. As HK$2.18 HK$2.60 we had expected, strong sales of Peak’s professional gear such as Key Data and running shoes (see figure 6) again was the Outstanding Shares 2,098 mn boost to the latest sales fair performance. The retail channel re- mained efficient with retailers reporting SSSG for the 6th consec- Market Cap. HK$ 4,574 mn utive quarter. Meanwhile, 15+ distributors were added in 2014 to 3-mth Avg Daily Volume 1.4 mn further boost the efficiency of the distribution channel. 12-mth High / Low HK$2.45/ HK$1.52

14PE 13.2x Overseas expansion plan track PB 0.9x Peak is on track with the execution of its overseas expansion plan. Div. Yield 7.3% It sponsored 2014 FIBA Basketball World Cup which was held in ROE 6.0% Aug & Sep 2014, and its marketing activities during the tourna- ROA 4.7% ment were well received by target customer groups (see figure 7). Net Debt / Equity net cash Since 4Q14, the company has been selling its basketball shoes on Eastbay, Foot Locker’s largest digital direct-to-customers arm Major Shareholder which targets elite high school and club athletes in the US (see Xu’ s family 68.4% figure 8). On top of the promising sales results at Eastbay, Peak Source: Bloomberg, Emperor Securities Research soft launched its basketball shoes at footlocker.com in Jan 2015, in -line with the company’s strategy to enlarge its international op- eration (see figure 9). Share Price of Peak

HK$ 3 Maintain BUY We lower our estimated earnings growth for 2014 by 3 ppt on milder than expected expansion of Peak’s overseas operation in 2H14 though the overall overseas expansion scheme is still on 2 track. Trading at 13.3x 14PE and 7.3% dividend yield, Peak's valua- tion is still undemanding given the prospect for margin improve- ment and its stabilized operation. We maintain BUY on the 1 Jan 2014 Jul 2014 Jan 2015 stock with a TP of HK$2.60 which implies a 16x 14PE. Change (%) 1-mth 3-mth 6-mth 12-mth Financial Information YE: Dec 2011 2012 2013 2014E 2015E Peak 2.8 -1.8 -0.9 4.3 Revenue (RMB mn) 4,647 2,903 2,613 2,896 3,338

MSCI China Growth 9.4% -37.5% -10.0% 10.8% 15.3% -0.7 5.1 1.3 12.5 Index Net profit (RMB mn) 778 311 244 276 319 Source: Bloomberg Growth -5.4% -60.1% -21.3% 13.1% 15.6% EPS (RMB cents) 37.07 14.80 11.64 13.16 15.22 Emperor Securities Research DPS (HK$ cents) 14.00 10.00 16.00 9.23 10.67 Tel : (852) 2836 2763 PE (x) 4.7 11.9 15.1 13.3 11.5 Fax : (852) 2831 8089 Div. yield (%) 6.4 4.6 7.3 4.2 4.9 Email : [email protected] Source: Company data, Emperor Securities Research

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Peak Sport Products Co., Limited Emperor Securities Limited

Figure 1: Peak’s Sales Fair Results

Product season Sales fair date YoY order growth by value (unless stated otherwise)

1Q14 Jul 2013 na

2Q14 Nov 2013 high single-digit (vs Peak’s 2Q13 sales)

3Q14 Feb 2014 mid-teens Peak reported mid-teens yoy growth in wholesale order value for 5 consec- 4Q14 Apr 2014 mid-teens utive seasons. 1Q15 Jun 2014 mid-teens

2Q15 Sep 2014 mid-teens

3Q15 Dec 2014 mid-teens

Source: Company data

Figure 2: ASPs of Peak’s Products

Footwear Apparel Financial year / Event YoY growth YoY growth

4Q14 sales fair in Apr 2014 low single-digit mid single-digit

ASP changes in 3Q15 were driven by 1Q15 sales fair in Jun 2014 flat flat the seasonality factor. 2Q15 sales fair in Sep 2014 flat flat

3Q15 sales fair in Dec 2014 low single-digit negative low single-digit

Source: Company data

Figure 3: Peak’s Distribution Channels in China

Date Number of retail outlets Number of exclusive distributors

30 Sep 2012 6,739 na

31 Dec 2012 6,483 59

Peak started to consolidate its domes- 31 Mar 2013 6,358 na tic distribution channels in 2012 by 30 Jun 2013 6,194 na closing down non-performing retail outlets. The consolidation is on track 30 Sep 2013 6,088 na

to meet the management’s target 31 Dec 2013 6,012 66 that the number of retail outlets would 31 Mar 2014 6,016 na maintain at 2013’s level. 30 Jun 2014 6,000 na

30 Sep 2014 5,999 na

31 Dec 2014 6,004 na

Source: Company data

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Peak Sport Products Co., Limited Emperor Securities Limited

Figure 4: Same Store Sales Growth of Peak’s Retailers

Period Growth

1Q13 0.0%

2Q13 0.0%

3Q13 low single-digit

Peak’s retailers saw same store sales 4Q13 low single-digit growth for 6 consecutive quarters. 1Q14 low single-digit

2Q14 low single-digit

3Q14 low single-digit

4Q14 low single-digit

Source: Company data

Figure 5: Peer Comparison

Security Net profit Revenue Div. 2014 P/B Net Market Code at Company growth growth yield P/E gearing cap. HKEx in 1H14 in 1H14 (%) (X) (x) (%) (HK$ mn)

1968.HK Peak 34.6% 10.1% 7.3 13.3 0.9 net cash 4,574

Peak outperformed its comparable 1361.HK 28.3% 4.6% 2.7 10.5 0.8 net cash 4,735 peers in 1H14 as shown by its top line and bottom line performances. Its 1368.HK -16.6% 1.8% 6.3 8.1 1.0 net cash 5,685 stocks offer the highest yield among peers as well. consecutive 2331.HK Li Ning 8.0% 0.0 na 1.3 11.3 5,673 loss

Average na na 6.1% 4.1 na 1.0 na 5,167

Source: Company data, Bloomberg, Emperor Securities Research

Risks

▇ Uncertain outlook for Europe’s economy

▇ Political instability in Southeast Asia and Africa

▇ Keen competition in China’s sportswear market

▇ China’s economic slowdown

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Peak Sport Products Co., Limited Emperor Securities Limited

Figure 6: Peak’s Basketball Series (Left) And E-running 2 (Right)

Source: Media, Emperor Securities Research

Figure 7: Peak’s Advertisement at 2014 FIBA Basketball World Cup

Source: FIBA

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Peak Sport Products Co., Limited Emperor Securities Limited

Figure 8: Peak’s Basketball Series at eastbay.com

Source: Eastbay

Figure 9: Peak’s Basketball Series at footlocker.com

Source: Foot Locker

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Peak Sport Products Co., Limited Emperor Securities Limited

Company Background

Peak designs, manufactures, and markets athletic footwear, apparel and accessory products under the “PEAK” brand. The group sells its products in China via 69 domestic distributors and exports the output to over 80 countries via 60 overseas wholesalers. It has 3 production facilities located in and Jiangxi with total annual production capacities of 13mn pieces of apparel products and 11mn pairs of footwear products. For the revenue mix of latest results, domestic / international segment accounted for 77%/ 23% respectively while footwear/ apparel/ accessories account- ed for 40%/ 58%/ 2% respectively.

Figure 10: Major Milestones of Peak

Year Milestone

1991 The “PEAK” brand was launched.

Peak became the official marketing partner of National Basketball Associa- 2007 tion (NBA) in China.

2008 Peak had an association with Fédération Internationale de Basketball (FIBA).

2009 Peak went public on HKEx.

2010 Peak had an association with Women’s Association (WTA).

2011 Peak opened its U.S. headquarters in Los Angeles.

Peak signed an endorsement agreement with four-time NBA All-Star Tony 2013 Parker.

Source: Company data

Figure 11: Peak’s Marketing Partners

NBA FIBA

Miami Heat San Antonio Spurs

Houston Rockets German Basketball Federation

Basketball Australia Basketball New Zealand

Basketball Federation of Montenegro Basketball Federation of Serbia

Icelandic Basketball Federation Cameroon Basketball Federation

Côte d’Ivoire Basketball Federation Lebanese Basketball Federation

Iran Basketball Federation Women’s Tennis Association

The National Olympic Committee of New Zealand The National Olympic Committee of Slovenia

The National Olympic Committee of Lebanon The National Olympic Committee of Jordan

China Central Television (CCTV) The US International University Sports Federation

Source: Company data

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Peak Sport Products Co., Limited Emperor Securities Limited

Income Statement Cash Flow Statement YE: Dec (RMB mn) 2011 2012 2013 2014E 2015E YE: Dec (RMB mn) 2011 2012 2013 2014E 2015E Revenue 4,647 2,903 2,613 2,896 3,338 PBT 937 406 390 432 500 Cost of sales (2,814) (1,845) (1,686) (1,795) (2,053) Depreciation 31 39 43 43 43 Gross profit 1,833 1,058 927 1,101 1,285 Change in w orking cap. (472) (158) 167 (42) (115) Other income 31 45 62 84 99 Taxation and others (186) (106) (93) (190) (229) Distribution expenses (713) (461) (334) (382) (457) Operating cashflow 311 181 507 243 199 Administrative expenses (213) (228) (252) (352) (405) Capex (229) (183) (75) (56) (56) EBIT 938 414 403 451 522 M&A/ disposals 0 0 0 0 0 Finance expenses (2) (8) (13) (19) (22) Bank deposits and others (83) (313) (780) 42 42 Profit before tax 937 406 390 432 500 Investing cashflow (312) (496) (855) (15) (15) Taxation (159) (95) (146) (156) (180) Change in debt 161 335 270 204 150 Net profit 778 311 244 276 319 New share issues 1 0 0 0 0 EPS (RMB cents) 37.07 14.80 11.64 13.16 15.22 Dividend paid (227) (272) (217) (152) (176) DPS (HK$ cents) 14.00 10.00 16.00 9.23 10.67 Others (1) (7) (14) (19) (22) Source: Company data, Emperor Securities Research Financing cashflow (66) 56 38 33 (48) Change in cash (67) (260) (310) 261 137 Forex effect 5 (6) 6 6 6 Beginning cash 2,566 2,503 2,237 1,933 2,200 Ending cash 2,504 2,237 1,933 2,200 2,343 Source: Company data, Emperor Securities Research

Balance Sheet Financial Ratios YE: Dec (RMB mn) 2011 2012 2013 2014E 2015E YE: Dec 2011 2012 2013 2014E 2015E Cash & CE 2,503 2,237 1,933 2,200 2,343 Profitability (%) Trade & other rec. 1,089 1,093 978 997 1,149 Gross margin 39.4% 36.5% 35.5% 38.0% 38.5% Inventories 421 386 366 371 404 EBITDA margin 20.9% 15.6% 17.1% 17.1% 16.9% Other current assets 194 526 1,348 1,410 1,410 EBIT margin 20.2% 14.3% 15.4% 15.6% 15.6% Current assets 4,208 4,242 4,624 4,978 5,306 Net profit margin 16.7% 10.7% 9.3% 9.5% 9.6% PPE 439 495 480 472 465 Grow th (%) Other non-current assets 233 312 345 374 417 Revenue 9.4% -37.5% -10.0% 10.8% 15.3% Total assets 4,880 5,049 5,448 5,825 6,189 EBITDA -4.9% -53.3% -1.3% 10.7% 14.3% Short-term debts 161 496 530 558 558 EBIT 30.7% -55.9% -2.6% 11.9% 15.6% Trade & other pay. 562 373 415 460 531 Net profit -5.4% -60.1% -21.3% 13.1% 15.6% Other current liabilities 55 29 65 65 65 EPS -90.5% -60.1% -21.3% 13.1% 15.6% Current liabilities 777 898 1,010 1,083 1,154 Other Key Ratios Long-term debts 0 0 237 412 562 Current ratio (x) 5.4 4.7 4.6 4.6 4.6 Other non-current liabilities 59 67 80 83 83 Debt/ total asset (%) 3.3% 9.8% 14.1% 16.6% 18.1% Non-current liabilities 59 67 317 495 645 Net debt/ equity (%) net cash net cash net cash net cash net cash Total Liability 836 964 1,327 1,579 1,799 Dividend payout (%) 29.6% 53.0% 107.8% 55.0% 55.0% Owners' Equity 4,043 4,084 4,122 4,246 4,390 ROA (%) 17.1% 6.3% 4.7% 4.9% 5.3% Source: Company data, Emperor Securities Research ROE (%) 20.7% 7.6% 6.0% 6.6% 7.4% BV per share (HK$) 2.5 2.5 2.5 2.6 2.7 Source: Company data, Emperor Securities Research

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Peak Sport Products Co., Limited Emperor Securities Limited

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Emperor Securities Research

Stanley Chan David Yuen Associate Director Senior Research Analyst Tel : (852) 2836 2733 Tel : (852) 2836 2797 Email : [email protected] Email : [email protected]

Frankie Chan Ian Lam Research Analyst Research Analyst Tel : (852) 2836 2566 Tel : (852) 2836 2763 Email : [email protected] Email : [email protected]

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Peak Sport Products Co., Limited Emperor Securities Limited

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