Company Update

Date Industry Peak Sport (1968.HK) BUY 9 Jul 2014 Decent 2Q14 Operational Results Growth momentum maintained, in-line with our forecast

Closing Price Target Price Peak Sport (“Peak”thereafter) reported decent 1Q15 sales fair re- Company Update Company sults. It saw mid-teens yoy growth in wholesale order value for 3 HK$1.91 HK$2.45 consecutive seasons (see figure 1), though 1Q15 ASP remained flat high base effect. After 2 years of consolidation, retail outlets by Key Data 1Q14 and 2Q14 both maintained at 2013’s level (see figure 3) while the entire retail channel saw breakeven or profitability for the first Outstanding Shares 2,098 mn time since the consolidation commenced, suggesting Peak’s retail Market Cap. HK$ 4,007 mn network has fully recovered. Retailers continued strong sales mo- 6-mth Avg Daily Turnover HK$ 5.2 mn mentum with 4 straight quarters of SSSG (see figure 4), while the 12-mth High / Low HK$ 2.17 / HK$ 1.12 discount rate at retail level improved from 30% off in 2013 to 25- 28% off in 1H14 as well. 14PE 11.4x

PB 0.7x Professional sportswear and overseas segment as new growth drivers Div. yield 8.4% The group continued to see strong sales growth in its professional ROE 6.0% products such as (see figure 6) and running shoes. E ROA 4.7% -running 2 (see figure 6), the new running series launched this sum- mer was also a success. Such rising demand suggests the group is Net Debt/Equity net cash amplifying its focus on professional sportswear, which shall drive Major Shareholders Peak’s earnings in the years ahead given the growing number of Xu’ s family 68.4% sophisticated customers in ’s sportswear market. The group Source : Bloomberg, Emperor Securities Research sold its products to over 80 countries and 2013 overseas sales surged 37% to RMB533mn and accounted for 20% of 2013 total rev- enue, up by 7 ppt over the year. Leveraging on the major sports events held in 1H14 such as Winter Olympics, Australian Open and French Open, as well as the competitive prices the group offered in Share Price of Peak developed markets, Peak would continue to deliver encouraging HK$ results for its overseas segment, we expect. 3

Maintain BUY 2 The 1H14 performances at both wholesale and retail levels indicate that Peak is well on track for growth again in 2014. Trading at 11.4x 1 14PE and 8.4% dividend yield, Peak's valuation is undemanding giv- en its solid recovery prospects and emerging growth drivers. We 0 continue to see re-rating potential for Peak amid prevailing opti- Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 mism in its earnings outlook, and maintain BUY with a TP of HK$2.45 which implies a 15x 14PE and ~14% upside. Change (%) 1-mth 3-mth 6-mth 12-mth Financial Information Peak -10.5 -11.7 -3.7 49.8 YE: Dec 2011 2012 2013 2014E 2015E Revenue (RMB mn) 4,647 2,903 2,613 2,953 3,395 MSCI China 3.0 2.9 3.8 18.1 Index Growth 9.4% -37.5% -10.0% 13.0% 15.0% Source : Bloomberg Net profit (RMB mn) 778 311 244 276 320 Growth -5.4% -60.1% -21.3% 12.8% 16.0% Emperor Securities Research EPS (RMB cents) 37.07 14.80 11.64 13.13 15.24 Tel : (852) 2836 2763 DPS (HK$ cents) 14.00 10.00 16.00 12.56 14.57 Fax : (852) 2831 8089 PE (x) 4.0 10.1 12.9 11.4 9.8 Email : [email protected] Div. yield (%) 7.3 5.2 8.4 6.6 7.6 Source: Peak, Emperor Securities Research WWW.EMPERORCAPITAL.COM 1

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)

2Q13 Oct 2012 negative high-twenties %

3Q13 Jan 2013 na

1Q14 Jul 2013 na Peak reported mid-teens yoy growth in wholesale order value for 3 consec- 2Q14 Nov 2013 high single-digit (vs Peak’s 2Q13 sales) utive seasons. 3Q14 Feb 2014 mid-teens

4Q14 Apr 2014 mid-teens

1Q15 Jun 2014 mid-teens

Source: Peak

Figure 2: ASPs of Peak’s Products

Footwear Apparel Financial year / Event YoY growth YoY growth

2013 0.8% 1.8%

1Q15 ASP remained flat on high base 3Q14 sales fair in Feb 2014 low single-digit low-teens effect. 4Q14 sales fair in Apr 2014 low single-digit mid single-digit

1Q15 sales fair in Jun 2014 flat flat

Source: Peak

Figure 3: Distribution Channels of Peak

Date Number of retail outlets Number of exclusive distributors

31 Mar 2012 7,523 na

30 Jun 2012 7,059 na

Peak started to consolidate her distri- 30 Sep 2012 6,739 na bution channels in 2012 by closing 31 Dec 2012 6,483 59 down non-performing retail outlets. The consolidation is on track to meet 31 Mar 2013 6,358 na

the management’s target that the 30 Jun 2013 6,194 na number of retail outlets would main- 30 Sep 2013 6,088 na tain at 2013’s level. 31 Dec 2013 6,012 66

31 Mar 2014 6,016 na

30 Jun 2014 6,000 na

Source: Peak

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Peak Sport Products Co., Limited Emperor Securities Limited

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

Period Growth

3Q12 0.0%

4Q12 0.0%

1Q13 0.0%

Peak’s retailers saw same store sales 2Q13 0.0% growth for 4 consecutive quarters. 3Q13 low single-digit

4Q13 low single-digit

1Q14 low single-digit

2Q14 low single-digit

Source: Peak

Figure 5: Peer Comparison

Security Revenue Net profit Div. 2014 P/B Net Market Code at Company growth growth yield P/E gearing cap. HKEx in 2013 in 2013 (%) (X) (x) (%) (HK$ mn)

1968.HK Peak -10.0% -21.3% 8.4 11.4 0.7 net cash 4,007 Peak outperformed her comparable peers in 2013 as shown by her top line consecutive 2331.HK Li Ning -12.8% 0.0 na 2.1 24.3 7,264 and bottom line performance. Her loss stocks offer the highest yield among 1368.HK -21.8% -25.2% 5.4 9.7 1.2 net cash 7,207 peers as well.

1361.HK -27.6% -70.1% 2.8 10.1 0.6 net cash 3,639

Average na -18.1% na 4.2 na 1.2 na 5,529

Sources: Bloomberg, Emperor Securities Research

Risks

▇ 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 Advertisements at Major Sports Events

Source: Media, Emperor Securities Research

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Peak Sport Products Co., Limited Emperor Securities Limited

Company Background

Peak is principally engaged in manufacturing and the distribution of sportswear including footwear, apparel and accessories. She has three production facilities located in and Jiangxi with total estimated an- nual production capacities of 11 mn pieces of apparel products and 9 mn pairs of footwear products in 2014. For the revenue mix of latest results, Chinese market / overseas market accounted for 80% / 20% respectively while footwear / apparel / accessories accounted for 40% / 58% / 2% re- spectively.

Figure 8: 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 her U.S. headquarters in Los Angeles.

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

Source: Peak

Figure 9: 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: Peak

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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 2,953 3,395 PBT 937 406 390 459 533 Cost of sales (2,814) (1,845) (1,686) (1,876) (2,123) Depreciation 31 39 43 43 43 Gross profit 1,833 1,058 927 1,077 1,272 Change in w orking cap. (472) (158) 167 (31) (40) Other income 31 45 62 56 57 Taxation and others (186) (106) (93) (218) (262) Distribution expenses (713) (461) (334) (377) (455) Operating cashflow 311 180 507 254 275 Administrative expenses (213) (228) (252) (284) (329) Capex (229) (183) (75) (73) (73) EBIT 938 414 403 471 545 M&A/ disposals 0 0 0 0 0 Finance expenses (2) (8) (13) (12) (12) Bank deposits and others (83) (313) (780) 42 42 Profit before tax 937 406 390 459 533 Investing cashflow (311) (496) (855) (31) (31) Taxation (159) (95) (146) (184) (213) Change in debt 161 335 270 166 166 Net profit 778 311 244 276 320 New share issues 1 0 0 0 0 EPS (RMB cents) 37.07 14.80 11.64 13.13 15.24 Dividend paid (227) (272) (217) (207) (240) DPS (HK$ cents) 14.00 10.00 16.00 12.56 14.57 Others (1) (7) (14) (12) (12) Financing cashflow (66) 56 38 (53) (86) Sources: Peak, Emperor Securities Research Change in cash (67) (260) (310) 170 158 Forex effect 5 (6) 6 6 6 Beginning cash 2,566 2,503 2,237 1,933 2,109 Ending cash 2,504 2,237 1,933 2,109 2,273 Sources: Peak, 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 2,109 2,273 Profitability (%) Trade & other rec. 1,089 1,093 978 1,098 1,255 Gross margin 39.4% 36.5% 35.5% 36.5% 37.5% Inventories 421 386 366 421 492 EBITDA margin 20.9% 15.6% 17.1% 17.4% 17.3% Other current assets 194 526 1,348 1,348 1,348 EBIT margin 20.2% 14.3% 15.4% 16.0% 16.1% Current assets 4,208 4,242 4,624 4,975 5,367 Net profit margin 16.7% 10.7% 9.3% 9.3% 9.4% PPE 439 495 480 473 467 Grow th (%) Other non-current assets 233 312 345 380 430 Revenue 9.4% -37.5% -10.0% 13.0% 15.0% Total assets 4,880 5,049 5,448 5,829 6,264 EBITDA -4.9% -53.3% -1.3% 15.2% 14.3% Short-term debts 161 496 530 530 530 EBIT 30.7% -55.9% -2.6% 16.9% 15.7% Trade & other pay. 562 373 415 560 748 Net profit -5.4% -60.1% -21.3% 12.8% 16.1% Other current liabilities 55 29 65 65 65 EPS -90.5% -60.1% -21.3% 12.8% 16.0% Current liabilities 777 898 1,010 1,154 1,342 Other Key Ratios Long-term debts 0 0 237 403 569 Current ratio (x) 5.4 4.7 4.6 4.3 4.0 Other non-current liabilities 59 67 80 81 81 Debt/ total asset (%) 3.3% 9.8% 14.1% 16.0% 17.5% Non-current liabilities 59 67 317 484 650 Net debt/ equity (%) net cash net cash net cash net cash net cash Total Liability 836 964 1,327 1,638 1,992 Dividend payout (%) 29.6% 53.0% 107.8% 75.0% 75.0% Owners' Equity 4,044 4,084 4,122 4,191 4,271 ROA (%) 17.1% 6.3% 4.7% 4.9% 5.3% Sources: Peak, Emperor Securities Research ROE (%) 20.7% 7.6% 6.0% 6.6% 7.6% BV per share (HK$) 2.5 2.5 2.5 2.5 2.6 Sources: Peak, Emperor Securities Research

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Peak Sport Products Co., Limited Emperor Securities Limited

Disclaimers And Disclosures

The information contained in this report has been compiled from sources believed to be reliable and has been compiled with high integrity, but Emperor Securities Limited (“Emperor Securities”) or any member of Emperor Capital Group (“ECG”) does not make any representation or warranty as to its accuracy, completeness or correctness. The information and opinions contained in this report are or may be subject to change or revision without any notice. This report is for information purposes only. No representation, warranty or guarantee whatsoever, whether expressed or implied, is made as to its accuracy or completeness and should not be construed as an offer to buy or sell or the solicitation of an offer to buy or sell the securities mentioned. Emperor Securities and ECG do not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use in whole or in part of this report or any of its contents.

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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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