Pou Sheng International (3813 HK)

Rating BUY Maintain

Operating leverage to drive earnings Target Price HKD 3.32 From HK$2.67 Current price HKD 2.59 Upside: +28.1% % 9M19 net profit beat on GM and lower SG&A% ; FY19E guidance Company Update maintained

9 December 2019 Though PS 9M19 revenue was largely in-line with our estimate (71% of our FY19E), its net profit attributable to shareholders was still ahead of our forecasts (83% of our FY19E estimates), which grew 47.7% to US$88.0mn. We attributed Hayman Chiu the beat to i) GM came in at 34.5% (100 bps higher than our FY19E forecast), [email protected] in which 3Q19 GM arrived at 34.2%; ii) 6.0% SSSG in 3Q19 with stable retail discount, while SG&A ratio was down 29bps Yoy to ~29.8% in 9M19 which (852) 2235 7677 drove OPM up 106 bps Yoy to 5.8%, in which 3Q19 OPM improved by 190 bps and reached 4.9% and iii) lower effective tax rate (9M19 :29.0% vs. Trading Data 9M18: 31.7%) even though tax rate was similar to that in 1H19 52-Week Range (HK$) 2.97/1.47

3 Mth Avg Daily Vol (m) 3.69 Management sticked to their guidance in 1H19 result, with revenue to grow mid-high teens, driven by mid-high single digit SSSG and low-mid teens Yoy No of Shares (m) 5,356.5 growth from online sales. PS still expects both GM and OPM to range between Market Cap (HK$m) 13,873.3 34.0-34.5% and 5% respectively (vs.3-4% OPM guidance in FY18). PS Major Shareholders (%) Yue Yuen (62.41%) re-iterated their OPM to expand 200bps to 7% by FY21E, which would be driven Auditors Deloitte by mid-teens sale growth, emerging and licensee turnaround, and Result Due 4Q19: Mar 2019 increased omni-channel sales contribution. We also believe improvement in operating efficiency would also be achieved through PS Product Sharing Company description Platform (PSP) which only will cover 60% of direct brick & mortar stores. Established in 1989 and listed in June 2008, Pou Continue to benefit from and Nike expansion in China, Sheng (PS) is one of the leading sportswear Omni-channel contribution to increase distributors in China with ~25% market share. In addition to Nike and Adidas, the company adopts PS net store openings came in at 213 in 3Q19, in which ~61% were directly multi- strategy and distributes , operated stores. We still believe PS to benefit from both Nike and Adidas , Under Armour and PONY products etc. continued expansion in China, as Adidas mentioned earlier in its 1H19 result that As of Sept 30, 2019, Pou Sheng’s retail network Greater China sales would accelerate in 2H19, while Nike’s Greater China sales comprises of 9,651 stores, in which ~61% are momentum (+27% Yoy on currency neutral basis vs. +10% on Group level) still remains intact in latest quarterly result (As of Aug 2019) directly operated stores.

Pou Sheng continue to explore and invest in various new initiatives for future growth, these include i) expanding omni-channel capabilities (would Price Chart HK$ contribute 20% of sales in FY21E vs. 11%/11.9% in FY18/1H19, ii) through 3.5 introducing more in-season sales and more effective off-season products 3.0 rd through various 3 party channels; iii) Product Sharing Platform between 2.5 online and offline stores; iii) enhancing online business through YYSports 2.0 platform and co-operating with strategic partners, hence achieving 1.5 economy of scale as fixed costs are relatively lower for online business. 1.0 0.5

We continue to believe these initiatives would be earnings/margin accretive to PS 0.0

in the long run, however would still involve execution risks.

Jun-17 Jun-18 Jun-19

Dec-16 Dec-18 Dec-19 Dec-17

Raise FY19E-21E EPS on operating leverage; Maintain BUY, continue to Sources: Bloomberg, CIRL deserve re-rating story

We lift Pou Sheng’s FY19E-21E EPS by 10.7%/13.3%/16.4% respectively on higher GM assumption, accompanied by lower SG&A ratio. These would continue to bring operating leverage to PS. PS is trading at FY20E 11.6x P/E (~40% discount to international leading peers) which we believe is undemanding as PS’ business is back on the right track, both operating efficiency and profitability would further improve after having launched various initiatives, which would still favour the re-rating cycle. We derived Pou Sheng’s new TP at HK$3.32 (unchanged 20% discount to international peers), implying FY20E 14.8x target PE and maintain Pou Sheng’s rating at BUY.

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Exhibit 1: We revised up Pou Sheng’s FY19E-21E EPS forecasts (USDExhibit Mn) 1: FY19 (old) FY19 (new) Diff FY20 (old) FY20 (new) Diff FY21 (old) FY21 (new) Diff RevenuePork 4,051 4,051 0.0% 4,689 4,689 0.0% 5,490 5,427 -1.1% products GPsold in 1,377 1,390 0.9% 1,608 1,622 0.8% 1,894 1,894 0.0% supermark GPM 34.0% 34.3% +30 bps 34.3% 34.6% +30 bps 34.5% 34.9% +40 bps et counters

Net Profit 105 117 10.7% 132 149 13.3% 163 190 16.4%

EPS 0.020 0.022 10.7% 0.025 0.028 13.3% 0.031 0.036 16.4%

Source: CIRL estimates

Exhibit 2:Pou Sheng’s 3Q19 SSSG at mid-single digit growth, while GM expanded Yoy

Exhibit16.0 1: 38.0 14.0 36.236.3 Pork 14.0 36.0 35.8 35.6 36.3 35.2 12.3 34.9 34.7 34.5 34.6 12.0 34.0 33.4 33.9 products 33.2 33.6 33.833.3 33.2 33.5 10.0 10.0 10.1 32.0 9.0 31.1 30.9 8.6 8.98.7 8.4 sold8.0 in 8.0 8.0 30.0 6.0 7.5 29.129.5 29.0 30.329.8 29.7 28.9 28.329.4 supermark6.0 5.9 5.6 6.028.0 5.0 27.4 4.0 4.2 26.0 3.0 et2.0 counters 2.2 1.9 1.5 24.0 0.4 0.0 22.0 (1.0(2.0))

(2.0) (1.0) 20.0

2Q13 3Q13 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q13 1Q14 2Q14 3Q14 4Q16 1Q17 2Q17 3Q17

(4.0)

2Q12 3Q12 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 4Q12 5Q12 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Pou Sheng's GPM (%)

Source: Company data, CIRL

Exhibit 3: Nike’s Greater China sales momentum remains intact last quarter

Exhibit 1: 40.0 Pork

products30.0

sold in 20.0 supermark et counters

10.0

0.0

(10.0)

(20.0)

Nike (Greater China growth %, ex-FX) Footwear Apparel Euqipment

Source: Nike, CIRL

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Exhibit 4: Pou Sheng’s total store net openings reached 665 by 3Q19 PouExhibit Sheng's store 1: count FY17 FY18 *1Q17 **2Q17 **3Q17 **4Q17 **1Q18 **2Q18 **3Q18 **4Q18 **1Q19 **2Q19 **3Q19 DirectPork operation 5,465 5,648 5,545.0 5,464.0 5,464 5,465 5,517 5,531 5,585 5,648 5,733 5,895 5,995 Franchised 3,313 3,551 3,298.0 3,036.0 3,152 3,313 3,319 3,417 3,397 3,551 3,660 3,756 3,869 Totalproducts 8,778 9,199 8,843 8,500 8,616 8,778 8,836 8,948 8,982 9,199 9,393 9,651 9,864 Directsold stores' in growth -1.7% 3.3% -0.3% -1.5% 0.0% 0.0% 1.0% 0.3% 1.0% 1.1% 1.5% 2.8% 1.7% Franchised stores' growh 3.6% 7.2% 3.1% -7.9% 3.8% 5.1% 0.2% 3.0% -0.6% 4.5% 3.1% 2.6% 3.0% Totalsuperm growth ark 0.2% 4.8% 1.0% -3.9% 1.4% 1.9% 0.7% 1.3% 0.4% 2.4% 2.1% 2.7% 2.2% Directet countersstores (%) 62.3% 61.4% 62.7% 64.3% 63.4% 62.3% 62.4% 61.8% 62.2% 61.4% 61.0% 61.1% 60.8% Franchised stores (%) 37.7% 38.6% 37.3% 35.7% 36.6% 37.7% 37.6% 38.2% 37.8% 38.6% 39.0% 38.9% 39.2%

Source: Company data, CIRL (*1Q17 growth data vs. FY16, **1Q17-2Q19 growth rate are on QoQ basis)

Exhibit 5: Peers’ profitability comparison

Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY18 code FY18 FY18 FY18 GM (%) OM (%) PM (%) Pork

Sportswear distributors ABC-MARTproducts INC 2670 JP 13.1 11.3 (52.5) 53% 17% 12% CALERES INC CAL US 13.6 6.1 41.0 42% 5% 3% FOOTsold LOCKER in INC FL US 20.1 13.5 (33.9) 32% 7% 4% GENESCO INC GCO US 5.7 3.6 3.8 48% 3% -5% DICK'Ssupermark SPORTING DKS US 17.5 8.2 (8.3) 29% 6% 4% ACCENT GROUP LTD AX1 AU 11.6 7.2 15.5 57% 9% 6% SPORTSet counters DIRECT IN SPD LN 8.5 4.0 14.7 40% 6% 1% JD SPORTS FASHIO JD/ LN 37.6 17.7 (36.9) 48% 9% 7% Average 25.6 14.3 N/A 41% 8% 6%

POU SHENG INTL 3813 HK 22.0 23.4 (64.8) 35% 4% 2% Source: Bloomberg, CIRL

Exhibit 6: Financial Summary Income statement Cash flow ExhibitYear to Dec (US$ 1: Mn) FY17A FY18A FY19E FY20E FY21E Year to Dec (US$ Mn) FY17A FY18A FY19E FY20E FY21E Revenue 2,775 3,422 4,051 4,689 5,427 Pre-tax profit 97 124 180 226 284 PorkGross profit (reported) 972 1,147 1,390 1,622 1,894 Taxes paid (29) (38) (39) (51) (59) EBITDA 175 223 233 285 349 Depreciation & amortization 63 77 27 29 30 productsDepreciation 63 77 27 29 30 Associates & Others 71 64 76 92 100 EBIT 112 146 205 256 318 CFO bef. WC change 201 226 244 296 356 Net interest income (exp.) (15) (22) (26) (30) (34) Change in working cap (203) (190) (225) (212) (246) soldAssociates in (1) (0) (0) (0) (0) Cashflow from operation (1) 36 19 84 110 Exceptionals/others 0 0 0 0 0 CAPEX (85) (79) (57) (57) (57) supermarkProfit before tax 97 124 180 226 284 Free cash flow (86) (43) (38) 27 53 Tax expenses (36) (39) (54) (68) (85) Dividends 13 17 24 31 39 etMinority counters interest 3 3 9 9 9 Balance sheet adj. (67) (96) 52 (22) 67 Net profit 59 82 117 149 190 Sharse issued 0 1 0 0 0 Dividends 13 17 24 31 39 Others 0 0 0 0 1 Diluted EPS (US$) 0.011 0.016 0.022 0.029 0.036 Net cash flow (140) (121) 38 35 159 Net cash (debt) start (161) (301) (423) (385) (350) Balance sheet Net cash (debt) at year-end -301 -423 -385 -350 -191 Year to Dec (US$ Mn) FY17A FY18A FY19E FY20E FY21E Cash & equiv 72 110 162 352 562 Ratios Trade receivables 419 497 585 677 783 Year to Dec (US$ Mn) FY17A FY18A FY19E FY20E FY21E Other receivables 0 0 0 0 0 Growth rate (%) Inventories 824 1,010 1,199 1,381 1,591 Revenue 13.6% 23.3% 18.4% 15.7% 15.7% Other current assets 0 0 0 0 0 EBITDA 1.8% 26.8% 4.6% 22.3% 22.5% Fixed assets 169 185 175 161 138 EBIT -16.6% 30.1% 40.7% 24.6% 24.5% Intangible assets 153 138 120 101 82 Net profit -30.6% 39.4% 43.0% 27.9% 27.2% Investment, associates etc 53 58 58 58 58 Fully diluted EPS -30.3% 39.0% 43.0% 27.9% 27.2% Total assets 1,690 1,997 2,298 2,730 3,214 Margins (%) Gross margin (reported) 35.0% 33.5% 34.3% 34.6% 34.9% Account payables 310 316 414 452 582 EBITDA 6.3% 6.5% 5.7% 6.1% 6.4% Other payables 0 0 0 0 0 EBIT 4.0% 4.3% 5.1% 5.5% 5.9% Short-term debt 373 533 547 702 753 Net margin 2.1% 2.4% 2.9% 3.2% 3.5% Other current liabs 36 70 70 70 70 Other ratios Long-term debts 0 0 0 0 0 ROE (%) 6.4% 8.1% 10.1% 10.9% 11.6% Deferred tax and others 21 17 17 17 17 ROA (%) 3.7% 4.4% 5.4% 5.9% 6.4% Other long-term liabs 0 0 0 0 0 Net gearing (%) 31.7% 39.8% 30.8% 23.5% 10.6% Total liabilities 741 936 1,048 1,240 1,421 Interest coverage (x) -7.6 -6.7 -8.0 -8.6 -9.3 Receivables days 50.4 48.9 48.7 49.1 49.1 Share capital 7 7 7 7 7 Payables days 62.8 50.8 56.8 53.8 60.1 Reserves 935 1,029 1,218 1,457 1,761 Inventory days 166.7 162.0 164.4 164.4 164.4 Shareholders' equity 942 1,036 1,225 1,464 1,768 Effective tax rate (%) -36.8% -31.8% -30.0% -30.0% -30.0% Minorities 7 25 25 25 25 Total equity 949 1,062 1,250 1,490 1,793 Net cash (debt) (301) (423) (385) (350) (191)

Sources: Company Data, CIRL estimates

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Exhibit 7: Peers valuation comparison Exhibit 1: bloomberg Year Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code End (HKD mn) (HKD) 3M YTD FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18 FY19E FY20E

PRCPork - Sportswear brands/OEMs LI NING CO LTD 2331 HK 12/2018 60,433 26.10 12.7 210.7 76.9 105.3 74.3 40.4 33.2 0.0% 0.0% 0.4% 0.8% 1.0% ANTAproducts SPORTS PROD 2020 HK 12/2018 205,479 76.05 19.3 102.5 71.1 54.1 43.2 35.4 28.0 1.0% 1.2% 1.0% 0.9% 1.1% INTL 1368 HK 12/2018 9,949 3.96 (9.6) (6.8) 14.3 13.8 11.6 12.8 9.7 4.1% 5.8% 5.3% 4.8% 6.3% 1361 HK 12/2018 2,812 1.36 (15.0) (16.0) 6.0 5.3 7.8 5.6 4.9 5.2% 7.7% 6.6% 7.9% 9.2% HOSAsold INTL LTDin 2200 HK 12/2017 484 0.29 0.0 0.0 1.6 1.7 - - - 22.9% 24.7% 0.0% 0.0% 0.0% HONMA GOLF LTD 6858 HK 03/2019 3,593 5.90 (10.5) (28.1) - 9.7 13.0 10.5 13.6 0.0% 3.6% 3.9% 5.1% 3.5% YUEsupermark YUEN IND 551 HK 12/2018 36,677 22.75 3.9 (9.2) 9.0 9.0 9.3 15.4 14.9 6.1% 6.6% 6.6% 6.5% 6.4% Average 39,967 0.1 31.6 29.8 28.4 26.5 20.0 17.4 7.9% 8.3% 4.0% 4.3% 4.6% et counters POU SHENG INTL 3813 HK 12/2018 13,873 2.59 0.0 71.5 20.5 29.4 21.1 14.1 11.1 1.5% 0.8% 1.0% 1.4% 1.8%

International - Sportswear peers NIKE INC -CL B NKE US 05/2019 1,170,651 749.91 8.0 29.2 43.7 37.8 82.2 37.2 32.2 0.6% 0.7% 0.8% 0.9% 1.0% ADIDAS AG ADS GR 12/2018 481,809 2,404.04 (0.9) 51.6 55.1 50.4 30.8 28.3 25.2 0.7% 1.0% 1.3% 1.4% 1.6% UNDER ARMO-C UA US 12/2018 63,346 134.65 (3.3) 6.4 - - - 50.6 36.9 0.0% 0.0% 0.0% 0.0% 0.0% LULULEMON ATH LULU US 01/2019 235,380 1,806.79 13.6 89.8 122.6 105.3 122.0 61.5 48.6 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR 12/2018 89,057 590.47 (2.4) 59.0 164.8 73.8 50.9 39.3 32.2 0.1% 1.9% 0.5% 0.7% 0.9% ASICS CORP 7936 JP 12/2018 24,122 127.06 18.5 25.6 21.6 26.8 -16.6 43.6 31.0 1.3% 1.3% 1.3% 1.6% 1.6% MIZUNO CORP 8022 JP 03/2019 5,446 204.92 6.5 22.1 38.3 101.6 15.1 14.2 12.4 1.6% 1.8% 1.7% 1.7% 1.8% COLUMBIA SPORTSW COLM US 12/2018 48,413 716.95 (4.8) 8.9 33.6 60.9 23.8 19.1 17.9 0.8% 0.8% 1.0% 1.1% 1.1% Average 135,368 3.9 37.6 68.5 65.2 54.1 36.7 29.5 0.9% 1.2% 1.1% 1.2% 1.3%

POU SHENG INTL 3813 HK 12/2015 13,873 2.59 0.0 71.5 20.5 29.4 21.1 14.1 11.1 1.5% 0.8% 1.0% 1.4% 1.8%

Sportswear distributors ABC-MART INC 2670 JP 02/2019 43,990 533.01 8.7 21.7 25.0 21.6 21.1 20.5 19.8 1.4% 1.6% 1.7% 2.1% 2.3% CALERES INC CAL US 01/2019 6,853 168.32 (1.4) (22.7) 11.7 14.3 10.6 9.4 9.1 1.3% 1.3% 1.3% 1.3% 1.3% FOOT LOCKER INC FL US 01/2019 33,385 311.90 1.1 (25.1) 10.3 8.1 17.9 8.7 8.1 2.5% 2.7% 2.9% 3.4% 3.8% GENESCO INC GCO US 01/2019 4,334 288.96 2.1 (16.7) 9.0 7.7 -6.4 11.3 9.1 0.0% 0.0% 0.0% 0.0% 0.0% DICK'S SPORTING DKS US 01/2019 31,588 359.42 29.4 47.1 16.1 17.9 15.3 14.2 12.9 1.2% 1.3% 1.5% 2.0% 2.4% ACCENT GROUP LTD AX1 AU 06/2019 4,921 9.08 1.8 41.2 24.9 28.0 18.2 17.3 15.9 3.4% 1.9% 3.9% 4.8% 5.0% TOPSPORTS INTERN 6110 HK 02/2019 56,927 9.18 N/A N/A - - - - 18.2 0.0% 0.0% 0.0% 0.0% 2.3% SPORTS DIRECT IN SPD LN 04/2019 18,467 35.40 34.4 44.5 6.5 8.9 89.1 24.1 17.6 0.0% 0.0% 0.0% 0.0% 0.0% JD SPORTS FASHIO JD/ LN 01/2019 78,450 80.61 22.2 124.3 68.1 42.2 33.3 28.2 24.1 0.2% 0.2% 0.2% 0.2% 0.2% Average 30,991 12.3 26.8 21.5 18.6 29.4 16.7 15.0 2.0% 1.8% 2.3% 2.7% 2.8%

POU SHENG INTL 3813 HK 12/2015 13,873 2.59 0.0 71.5 20.5 29.4 21.1 14.1 11.1 1.5% 0.8% 1.0% 1.4% 1.8%

Source: Bloomberg, CIRL (As of Dec 6 market close)

Exhibit 8: Pou Sheng’s 12 month Forward P/E Ratio

Exhibit25 1:

Pork avg. 12 mths Forward P/E Ratio

products20

sold in +1std. 15 supermark a et counters - 10 -1std.

5

0 Dec-15 Dec-16 Dec-17 Dec-18

S ource: Bloomberg, CIRL

R isk Factors

Downside risks include: 1) Nike and Adidas sales slowdown in China; 2) longer than expected clear-up time for emerging brands’ inventory; 3) lengthened store closures 4) rising overheads; 5) increasing competition from international and PRC peers, 6) slower than expected ramp up in PCG Bro’s China business & 7) coporate governance issue.

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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] Lewis Pang Associate Director (852) 2235 7847 [email protected] Kenneth Li Associate Director (852) 2235 7619 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected] Leanna Xiao Research Analyst (852) 2235 7719 [email protected] Chloe Chan Research Analyst (852) 2235 7170 [email protected] Edith Li Research Analyst (852)2235 7515 [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.

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