Pou Sheng International (3813 HK)

Rating Maintain BUY

Penetrate into sports marketing regime Target price HK$2.81 From HK$3.10

Current price HK$2.20 Upside.27.9%

3Q16 NP slight miss; GPM still near record high on healthy retail 23 December 2016 discounts and channel inventory; Higher SG&A on new store openings Hayman Chiu Pou Sheng’s (PS) 3Q16 net profit accounted for ~68% of our FY16E [email protected] estimates (vs. 70% in FY15) on higher than expected SG&A ratio, while (852) 2235 7677 GPM soared 300bps Yoy to 36.2% (vs. 36.3% in 2Q16), which is higher than our FY16E estimate (35% GPM). The GPM hike was mainly driven by healthy channel inventory (~4-5 months) and hence a better retail discount (~low 20% Trading Data off in 3Q16 vs. mid 20’s in FY15). However, 9M16 SG&A ratio rose 182bps to 52-Week Range (HK$) 2.84/1.11 ~30.2% of sales in 9M16, which is higher than our FY16E estimates at 29.4%, 3 Mth Avg Daily Vol (m) 5.90 driven by faster than expected new store openings in 3Q16 (net adds: 233 in No of Shares (m) 5,337.62 3Q16 vs 386 in 1H16). By end-Sept, Pou Sheng’s net openings reached 619 Market Cap (HK$m) 11,742.7 (low-end target of 600-800 in FY16E). We expect PS’s SG&A ratio to be slightly >30% sales in FY17E/18E (vs. avg at 29.4% in FY13-FY15) driven by Major Shareholders (%) Yue Yuen (61.27%) international ’ expansion plan in China. Auditors Deloitte Result Due 4Q16: Mar 2016 Nike and products’ demand still strong; New partnership continue to drive growth Company description Established in 1989 and listed in June 2008, Pou Nike and Adidas continue to account for ~80% of Pou Sheng’s revenue, and Sheng (PS) is one of the leading sportswear we expect both companies would continue deliver at least mid-teens growth in revenue in the medium term which will be driven by i) new store openings ; ii) distributors in China with ~25% market share. In revamp plan with distributors to enhance store operating efficiency, iii) addition to Nike and Adidas, the company adopts well-received response of leisure sportswear as well as functional sportswear. multi-brand strategy and distributes , Meanwhile, we continue to believe new brand partnerships with Sketchers, , Under Armour and PONY products etc. Under Armour (UA US) and GEOX etc would also help through their As of September 2016, Pou Sheng’s retail increasing presence in China. network comprises of 8,455 stores, in which ~62% are directly operated stores. Acquired PCG bros and to tap into China sports events and marketing regime Price Chart Pou Sheng announced in Nov 2016 the acquisition of Yue Yuen’s (551 HK) sports marketing and organisation of sports events business for US$9.23mn. PCG Bros was incorporated in 2015; the audited consolidated net loss after tax was US$1.1mn in 2015. With previous experience in Taiwan, Management targets business to ramp up in China in 1-2 years’ time. We expect more colours on China development roadmap from Management in FY16E results (due in March 2017)

Lower earnings estimates on higher SG&A, Maintain Buy to ride on international brands’ expansion in China and improving operating efficiency Sources: Bloomberg, CIRL

We revised down PS’s FY16E/17E EPS by 3.1% and 9.2% respectively on higher SG&A ratio as international brands continue their store expansion plan in China, which would facilitate Pou Sheng’s future growth, while GPM expansion partially offset the hike in SG&A ratio. With EPS expected to grow at 43.0% CAGR in FY15-17E, and share price down by 16% in past 3 month, its FY17E 11.2x P/E (~22.7% discount to international peers) still looks undemanding. We maintain Pou Sheng’s rating at BUY but lower PS’s TP from HK$3.10 to HK$2.89 based on 14.5x forward PE (par to international peers’ average) and FY17E EPS.

Page 1 / 6

Exhibit 1: Earnings Forecast Revision for FY16E & FY17E earnings Exhibit 1: FY16 (old) FY16 (new) Diff FY17 (old) FY17 (new) Diff

RevenuePork 2,530 2,530 0.0% 2,783 2,783 0.0%

products GP 898 908 1.1% 994 1,008 1.4% sold in supermark GPM 35.5% 35.9% 40bps 35.7% 36.2% 50bps et counters

Net Profit 122 118 -3.1% 144 131 -9.2%

EPS 0.023 0.022 -3.1% 0.028 0.025 -9.2%

Source: CIRL estimates

Exhibit 2:Pou Sheng’s SSSG outpaced Belle’s in last 4 quarters on currency neutral basis

Exhibit16.0 1: 18.0 14.0 16.0 Pork 14.0 15.3 12.0 14.0 14.4 12.4 products10.0 10.0 12.0 9.0 10.0 11.0 10.9 8.0 10.0 sold in 8.0 8.0 7.8 7.5 8.0 6.0 6.0 5.9 7.0 supermark5.0 5.0 6.0 6.5 6.0 6.2 6.0 4.0 5.0 5.0 5.3 5.5 3.0 4.0 4.5 4.6 et counters2.0 3.6 2.0 2.5 0.0 (1.0()1.0) 0.0

(2.0)

12 12 12 13 13 13 15 15 15 16 16 16 16 17 17 17 12 13 15

(2.0) 14

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q (2.4) Q

(2.0) FY

1 2 4 1 2 4 1 2 4 1 2 3 4 1 2 3 3 3 (4.0) 3 (4.0) Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Belle's sportswear SSSG (Yoy%)

Source: Company data, CIRL

Exhibit 3: Pou Sheng’s GPM high stayed near historical high in 3Q16 on healthy etail discounts

Exhibit38.0 1:

36.3 Pork36.0 35.8 34.9 36.2 products34.0 33.4 33.2

sold32.0 in 31.1 30.5 30.8 30.3 30.9 30.3 29.8 30.0 29.6 29.5 29.7 supermark 29.7 28.9 29.4 29.1 29.0 28.0 28.3 et counters 27.4 26.0

24.0

22.0

20.0

Pou Sheng's GPM (%)

Source: Company data, CIRL

Page 2 / 6

Exhibit 4: Adidas and Nike’s revenue continue to deliver double-digit growth in China

Exhibit35.0 1: 40.0

30.0 35.0 36.0 Po30.rk0 30.0 34.0 26.0 30.0 products25.0 25.0 27.0 27.0 21.0 25.0 23.0 24.0 20.0 22.0 22.0 sold in 19.0 20.0 20.0 19.0 16.0 supermark15.0 13.0 13.0 15.0 15.0 13.0 13.0 12.0 10.0 11.0 9.0 11.0 11.0 10.0 et counters 8.0 6.0 6.0 5.0 6.0 5.0 6.0 5.0 2.0 3.0 2.0 0.0 0.0 1.0 0.0 (3.0) (5.0) (6.0()7.0) (10.0) Nike Adidas …

Sources: Company Data, CIRL

Exhibit 5: Direct operation currently accounts for ~62% of Pou Sheng’s store counts

Exhibit100% 1:

90% Pork 2,893 80% 2,276 2,263 2,689 3,204 products70% 60% sold in 50% supermark40% et30 counters% 3,659 3,665 4,263 4,943 5,251 20%

10%

0% FY12 FY13 FY14 FY15 9M16

Direct operation Franchised

Source: Company data, CIRL

Exhibit 6: Grand opening of the first GEOX brand concept store in Qingdao in end April 2016

Exhibit 1:

Pork

products

sold in

supermark et counters

Sources: Company Data

Page 3 / 6

Exhibit 7: Financial Summary IncomeExhibit statement 1: Cash flow Year to Mar (US$ Mn) FY13A FY14A FY15A FY16E FY17E Year to Mar (US$ Mn) FY13A FY14A FY15A FY16E FY17E Revenue 1,777 1,981 2,300 2,530 2,783 Pre-tax profit (31) 20 86 158 174 GrossPork profit (reported) 514 581 766 908 1,008 Taxes paid (9) (17) (14) (15) (18) EBITDA 30 63 125 198 217 Depreciation & amortization 42 32 31 32 34 Depreciationproducts 42 32 31 32 34 Associates & Others 69 54 41 39 43 EBIT (12) 31 93 166 183 CFO bef. WC change 72 89 144 214 234 Netsold interest in income (exp.) (12) (6) (6) (6) (7) Change in working cap (34) 21 53 (1) (39) Associates (6) (4) (1) (1) (1) Cashflow from operation 38 110 197 213 194 Exceptionals/otherssupermark 0 0 0 0 0 CAPEX (19) (28) (47) (50) (50) Profit before tax (31) 20 86 158 174 Free cash flow 19 81 150 163 144 Taxet expensescounters (8) (14) (24) (42) (45) Dividends 0 0 0 0 28 Minority interest 0 2 (2) (2) (2) Balance sheet adj. (24) (29) (23) (146) (186) Net profit (38) 5 64 118 131 Sharse issued 0 (1) 0 0 0 Dividends 0 0 0 0 28 Others 0 0 0 0 0 Diluted EPS (RMB) -0.01 0.00 0.01 0.02 0.03 Net cash flow (5) 51 127 16 (13) Net cash (debt) start (199) (204) (153) (26) (10) Balance sheet Net cash (debt) at year-end -204 -153 -26 -10 -23 Year to Mar (US$ Mn) FY13A FY14A FY15A FY16E FY17E Cash & equiv 64 44 44 63 49 Ratios Trade receivables 349 316 313 344 401 Year to Mar (US$ Mn) FY13A FY14A FY15A FY16E FY17E Other receivables 0 0 0 0 0 Growth rate (%) Inventories 632 597 595 616 657 Revenue -18.6% 11.4% 16.1% 10.0% 10.0% Other current assets 23 0 1 1 1 EBITDA -21.8% 109.5% 98.1% 58.8% 9.4% Fixed assets 96 94 107 125 143 EBIT -55.0% -350.6% 200.4% 77.7% 10.3% Intangible assets 201 196 183 176 168 Net profit -43.4% -112.1% 1287.4% 83.4% 10.9% Investment, associates etc 95 80 59 60 59 Fully diluted EPS -53.4% -112.2% 1298.1% 84.8% 11.8% Total assets 1,460 1,328 1,301 1386 1478 Margins (%) Gross margin (reported) 28.9% 29.3% 33.3% 35.9% 36.2% Account payables 222 207 309 308 337 EBITDA 1.7% 3.2% 5.4% 7.8% 7.8% Other payables 0 0 11 11 11 EBIT -0.7% 1.6% 4.1% 6.5% 6.6% Short-term debt 218 197 70 73 72 Net margin -2.2% 0.2% 2.8% 4.7% 4.7% Other current liabs 22 2 6 6 6 Other ratios Long-term debts 50 0 0 0 0 ROE (%) -4.2% 0.5% 7.4% 12.9% 13.2% Deferred tax and others 51 48 28 28 28 ROA (%) -2.6% 0.3% 4.9% 8.8% 9.2% Other long-term liabs 0 0 0 0 0 Net gearing (%) 22.7% 17.5% 3.0% 1.0% 2.2% Total liabilities 563 453 425 427 455 Interest coverage (x) 1.0 -4.9 -16.1 -26.0 -26.0 Receivables days 69.1 61.3 49.9 47.4 48.8 Share capital 7 7 7 7 7 Payables days 64.1 53.9 73.6 69.4 69.4 Reserves 874 854 862 946 1009 Inventory days 182.5 155.7 141.5 138.7 135.1 Shareholders' equity 881 861 869 953 1016 Effective tax rate (%) 25.6% -68.1% -27.6% -26.5% -26.0% Minorities 16 15 7 7 7 Total equity 897 875 876 959 1023 Net cash (debt) -204 -153 -26 -10 -23

Sources: Company Data, CIRL estimates

Page 4 / 6

Exhibit 8: Peers comparison Exhibit 1: bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code (HKD mn) (HKD) 3M YTD FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E

PRCPork - Sportswear peers LI NING CO LTD 2331 HK 9,539 4.91 52.0 16.9 -0.3 -0.6 454.4 19.9 14.6 0.0% 0.0% 0.0% 0.0% 0.0% ANTAproducts SPORTS PROD 2020 HK 49,926 19.96 19.2 (5.9) 32.5 26.0 23.0 21.2 18.1 2.0% 2.7% 3.1% 3.4% 8.2% INTL 1368 HK 9,345 4.22 4.5 3.0 9.8 12.2 9.6 9.5 8.6 5.6% 5.0% 6.2% 6.5% 7.5% 1361 HK 5,169 2.50 (2.3) (14.4) 23.2 12.1 9.8 9.6 8.0 1.8% 3.4% 4.1% 4.3% 5.0% FLYKEsold INTERNATIO in 1998 HK 309 0.38 0.0 0.0 - - - - - 2.6% 2.6% 0.0% 0.0% 0.0% HOSA INTL LTD 2200 HK 4,135 2.48 (8.1) (9.1) 9.5 12.6 - - - 4.1% 3.4% 0.0% 0.0% 0.0% HONMAsupermark GOLF LTD 6858 HK 5,421 8.90 N/A N/A - - - 15.7 15.7 0.0% 0.0% 0.0% 3.6% 1.7% YUE YUEN IND 551 HK 46,252 28.05 (12.9) 6.5 14.2 15.4 14.4 12.5 12.5 4.3% 4.3% 4.1% 4.7% 4.9% etAverage counters 16,262 7.5 (0.4) 17.8 15.7 14.2 14.7 12.9 3.4% 3.6% 4.4% 4.5% 5.5% POU SHENG INTL 3813 HK 11,796 2.21 (16.3) 18.8 -39.8 327.3 23.4 12.3 10.3 0.0% 0.0% 0.0% 2.0% 2.3%

International - Sportswear peers NIKE INC -CL B NKE US 674,115 404.77 (5.5) (16.6) 39.0 35.2 29.4 24.2 22.2 0.8% 0.9% 1.0% 1.2% 1.3% ADIDAS AG ADS GR 245,264 1,172.31 (6.5) 60.9 27.4 43.6 37.9 29.6 25.7 1.4% 1.0% 1.2% 1.4% 1.6% UNDER ARMO-C UA US 92,768 197.81 (25.7) N/A - - - 42.9 37.8 0.0% 0.0% 0.0% 0.0% 0.0% LULULEMON ATH LULU US 68,724 501.34 (0.9) 23.1 35.3 34.3 35.5 35.4 29.8 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR 30,101 1,995.79 0.7 24.0 20.7 46.4 90.1 60.9 38.9 0.3% 0.2% 0.2% 0.3% 0.4% ASICS CORP 7936 JP 31,488 157.47 13.5 (5.6) 28.2 24.3 47.4 32.4 23.9 0.6% 0.7% 0.9% 1.0% 1.1% MIZUNO CORP 8022 JP 5,041 37.93 7.3 (0.7) 23.0 27.3 23.0 27.2 29.4 2.1% 2.0% 1.7% 1.8% 1.8% COLUMBIA SPORTSW COLM US 30,588 438.23 (1.3) 15.8 42.4 31.3 24.3 21.5 19.4 0.8% 1.0% 1.1% 1.2% 1.3% Average 71,996 (1.8) 19.6 30.9 34.6 41.1 34.3 28.4 1.0% 1.0% 1.0% 1.2% 1.3%

POU SHENG INTL 3813 HK 11,796 2.21 (16.3) 18.8 -39.8 327.3 23.4 12.3 10.3 0.0% 0.0% 0.0% 2.0% 2.3%

Sportswear distributors BELLE INTL 1880 HK 36,183 4.29 (20.8) (26.3) 7.4 6.1 6.3 10.6 9.1 4.3% 4.4% 12.4% 8.0% 6.8% ABC-MART INC 2670 JP 36,049 436.79 (4.6) (0.6) 22.0 22.2 20.7 19.6 18.6 0.9% 0.9% 1.2% 1.9% 2.0% CALERES INC CAL US 11,165 259.99 31.0 24.9 31.0 24.3 20.0 16.9 16.2 0.8% 0.9% 0.9% 0.8% 0.9% FOOT LOCKER INC FL US 74,118 559.96 7.5 10.8 28.1 25.8 20.7 16.9 15.1 1.0% 1.1% 1.2% 1.4% 1.5% DSW INC-CL A DSW US 14,396 179.87 8.7 (2.9) 13.7 12.4 14.1 15.6 16.3 1.0% 2.1% 3.2% 3.4% 3.5% GENESCO INC GCO US 9,749 490.63 18.5 11.2 12.6 12.4 13.1 14.5 16.2 0.0% 0.0% 0.0% 0.0% 0.0% FINISH LINE-A FINL US 6,263 154.41 (12.6) 10.0 13.6 12.1 12.1 16.7 15.3 1.0% 1.4% 1.6% 1.8% 2.0% DICK'S SPORTING DKS US 46,217 410.28 (12.7) 49.5 20.6 19.7 19.0 18.3 17.1 0.9% 0.9% 1.0% 1.0% 1.2% JD SPORTS FASHIO JD/ LN 29,966 30.79 11.8 55.1 1.6 1.5 1.5 1.5 1.4 10.3% 12.0% 14.4% 17.0% 18.2% Average 28,490 6.0 19.8 17.9 16.3 15.2 15.0 14.5 2.3% 2.8% 3.3% 3.9% 4.2%

POU SHENG INTL 3813 HK 11,796 2.21 (16.3) 18.8 -39.8 327.3 23.4 12.3 10.3 0.0% 0.0% 0.0% 2.0% 2.3%

Source: Bloomberg, CIRL estimates

Exhibit 9: Pou Sheng’s 12 month Forward P/E Ratio

Exhibit 1: 12 mths Forward P/E Pork25 avg. -1std. products +1std.

sold20 in supermark 15 a et counters - 10

-1std. 5

0 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

S ource: Bloomberg, CIRL

R isk Factors

Downside risks include: 1) Nike and Adidas sales slowdown in China; 2) excess inventory in distribution channels; 3) rising overheads; 4) increasing competition from international and PRC peers and 5) slower than expected ramip in PCG Bro’s China business.

Page 5 / 6

Rating Policy

Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected] Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected] Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected] Chloe Chan Research Analyst (852) 2235 7170 [email protected] Johnny Yum Research Assistant (852) 2235 7619 [email protected]

Analyst Certification I, Hayman Chiu, Research Director of Cinda International Research Limited., hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International Research Limited cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so may contain uncertainty. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, and it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International Research Limited will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.

Page 6 / 6