Pou Sheng International (3813 HK)

Rating Maintain Neutral

Privatization undone but life still goes on Target price HK$1.19 From HK$1.45

Current Price HK$1.39 Upside: -14.4% Privatization proposal disapproved, no surprise on FY18E guidance Company Update

PS announced on Apr 9 that its parent’s (Pou Chen) plan to take the company private had been canceled as 10.8% of the votes held by all the Disinterested Scheme Shareholders voted against the proposal. Under the relevant restrictions 13 April 2018 of the Takeovers Code relating to the making of subsequent offers, Pou Chen, Yue Yuen (551.HK) or any other related party in the privatization proposal cannot Hayman Chiu propose another deal within the next 12 months. PS share price tumbled as [email protected] much as 37.5% after trading resumed on Apr 10. (852) 2235 7677 Management held a call yesterday to clarify the above issue and provide update/guidance on revenue (target low-teens growth Yoy), GM (~FY17 due to Trading Data inventory provision continues), OPM (3.5%-4.0%) which gave us no surpeise, 52-Week Range (HK$) 2.03/1.05 however, the current market consensus for FY18E OPM is higher than PS guidance (average at 4.4%), we expect a new round of earnings downgrade 3 Mth Avg Daily Vol (m) 23.3 cycle would occur again and poses pressure on share price. Meanwhile, PS No of Shares (m) 5,341.0 target ~300 net store openings in FY18E (vs.PS guided 600-800 net openings Market Cap (HK$m) 7,424.0 during FY16 result call in Mar 2018). Though PS would still benefit from both Major Shareholders (%) Yue Yuen (62.41%) Nike and continued expansion in China, emerging is still Auditors Deloitte undergoing de-stocking this year, we believe the net sore openings is still quite Result Due 1Q18: May 2018 challenging task for PS.

Transformation still possesses execution risks, current competitive Company description landscape and investors’ lack of confidence remains an overhang Established in 1989 and listed in June 2008, Pou Sheng (PS) is one of the leading sportswear Pou Sheng continue to explore and invest heavily in various new initiatives such distributors in China with ~25% market share. In as i) expanding omni-channel capabilities; ii) planning organized addition to Nike and Adidas, the company adopts promotional activities; iii) enhancing store offering and iv) providing multi- strategy and distributes , sports-related content and services. We believe these initiatives may benefit , Under Armour and PONY products etc. Pou Sheng in the long run, however would still involve execution risks that would pose negative impact on Pou Sheng’s near term operation. In addition the As of December 2017, Pou Sheng’s retail network investors’ confidence has not been recovered since the outbreak of the comprises of 8,778 stores, in which ~62% are accounting treatment issue in Jan 17, hence still remains an overhang on Pou directly operated stores. Sheng’s valuation.

PCG Bros still ramping up, expect loss narrows in FY18E Price Chart

Management mentioned during the call that PCG Bros posted RMB50mn loss in FY17. As the business is still ramping up and recruitment of experienced staff is still required, management still expect the business to be loss-making in the near term (expect loss narrows to ~RMB26mn)

Cut FY18E/19E EPS, unattractive valuation on near term fundamentals; Maintain Neutral, investors to stay aside

We cut Pou Sheng’s FY18E/19E EPS by 19.5%/10.1% respectively and hence Sources: Bloomberg, CIRL expect a stagnant EPS growth in FY16-19E. Pou Sheng is trading at FY18E 14.4x P/E (~6.5% discount to leading peers) which we believe is unattractive on the grounds of near term fundamentals. We lowered Pou Sheng’s TP from HK$1.45 to HK$1.19 (20% discount to international peers, implying a largely unchanged FY18E 12.3x target PE (vs. 12.2x in our last update in Feb) and reiterate Pou Sheng’s rating at Neutral. We advise investors to stay aside.

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Exhibit 1 :We cut Pou Sheng’s FY18E/19E EPS forecasts and introduce FY20E estimates Exhibit(USD Mn) 1: FY18 (old) FY18 (new) Diff FY19 (old) FY19 (new) Diff FY20E Yoy

PorkRevenue 2,754 3,052 10.8% 3,000 3,411 13.7% 3,833 12.4%

products 1,068 11.1% 1,200 14.3% 1,348 12.4% soldGP in 961 1,050

supermark etGPM counters 34.9% 35.0% 10bps 35.0% 35.2% 20bps 35.2% flat

Net Profit 79 64 -19.1% 95 85 -10.5% 118 38.9%

EPS 0.015 0.012 -19.5% 0.018 0.016 -10.1% 0.022 38.9%

Source: CIRL estimates

Exhibit 2:Pou Sheng’s 4Q17 SSSG and GM improved

Exhibit16.0 1: 38.0 36.3 36.3 14.0 14.0 36.0 35.8 Pork 36.2 35.6 34.9 34.5 12.0 12.3 34.0 33.4 34.7 33.2 33.6 products10.0 10.0 32.0 31.1 9.0 8.6 30.530.8 30.3 30.9 8.0 8.0 8.0 30.3 29.8 sold in 7.5 30.0 29.6 29.5 29.7 29.7 28.9 29.4 29.1 29.0 6.0 6.0 5.9 5.6 28.0 28.3 supermark5.0 5.0 27.4 4.0 26.0 3.0 2.0 et counters 1.9 1.5 24.0 0.0 (1.0) 0.4 (1.0) 22.0 (2.0)

20.0

1Q13 2Q13 3Q13 1Q14 3Q14 4Q14 1Q15 2Q15 4Q15 1Q16 2Q16 3Q16 1Q17 3Q17 4Q17 2Q14 3Q15 4Q16 2Q17 (2.0) 4Q13

(4.0)

2Q11 4Q11 2Q12 4Q12 5Q12 2Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 2Q16 4Q16 2Q17 4Q17 1Q11 3Q11 1Q12 3Q12 4Q13 2Q14 4Q14 2Q15 4Q15 3Q16 1Q17 3Q17 Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Pou Sheng's GPM (%)

Source: Company data, CIRL

Exhibit 3: Nike’s Greater China sales picked up last quarter while Adidas growth momentum continues

Exhibit 1: 35.0 32.0 30.0 30.0 Pork 30.0 30.0 26.0 28.0 28.0 products 25.0 25.0 21.0 20.0 20.0 sold in 19.0 16.0 15.0 13.0 13.0 15.0 supermark 13.0 10.0 11.0 9.0 11.0 11.0 et counters 8.0 6.0 5.0 6.0 5.0

0.0

3Q12 4Q12 1Q13 4Q13 1Q14 2Q14 1Q15 2Q15 3Q15 2Q16 3Q16 4Q16 3Q17 4Q17 1Q12 2Q12 2Q13 3Q13 3Q14 4Q14 4Q15 1Q16 1Q17 2Q17

Adidas (Greater China) Overall

Source: Company data, CIRL

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Exhibit 4: Increased franchised stores net openings drove Pou Sheng’s total store counts slightly increased in 3Q17 QoQ PouExhibit Sheng's store 1: count FY12 FY13 FY14 FY15 FY16 FY17 *1Q17 **2Q17 **3Q17 **4Q17 DirectPork operation 3,659 3,665 4,263 4,943 5,560 5,465 5,545.0 5,464.0 5,464 5,465 Franchised 2,276 2,263 2,689 2,893 3,199 3,313 3,298.0 3,036.0 3,152 3,313 Totalproducts 5,935 5,928 6,952 7,836 8,759 8,778 8,843 8,500 8,616 8,778 Direct stores' growth 0.2% 16.3% 16.0% 12.5% -1.7% -0.3% -1.5% 0.0% 0.0% Franchisedsold in stores' growh -0.6% 18.8% 7.6% 10.6% 3.6% 3.1% -7.9% 3.8% 5.1% Totalsupermark growth -0.1% 17.3% 12.7% 11.8% 0.2% 1.0% -3.9% 1.4% 1.9% Direct stores (%) 61.7% 61.8% 61.3% 63.1% 63.5% 62.3% 62.7% 64.3% 63.4% 62.3% Franchisedet counters stores (%) 38.3% 38.2% 38.7% 36.9% 36.5% 37.7% 37.3% 35.7% 36.6% 37.7%

Source: Company data, CIRL (*1Q17 growth data vs. FY16, **2Q-4Q17 growth rate are on QoQ basis)

Exhibit 5: Peers’ profitability comparison Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY17 code FY17 FY17 FY17 GM (%) OM (%) NM (%) Pork

Sportswear distributors ABC-MARTproducts INC 2670 JP 13.4 11.5 (52.5) 54% 18% 12% 11% CALERES INC CAL US 14.2 6.2 41.0 41% 4% 3% 43% FOOTsold LOCKER in INC FL US 24.8 17.1 (33.9) 34% 13% 9% 106% DSW INC-CL A DSW US 12.7 8.4 (22.3) 28% 7% 5% 39% GENESCOsupermark INC GCO US 9.3 5.9 3.8 49% 5% 3% 53% FINISH LINE-A FINL US 9.1 5.7 (20.1) 30% 3% -1% 30% DICK'Set counters SPORTING DKS US 17.3 8.4 (8.3) 30% 6% 4% 26% JD SPORTS FASHIO JD/ LN 39.8 18.9 (36.9) 49% 10% 8% -3% Average 20.1 N/A N/A 39% 8% 6% 44%

POU SHENG INTL 3813 HK 22.0 23.4 (64.8) 35% 4% 2% -3% Source: Bloomberg , CIRL

Exhibit 6: Financial Summary IncomeExhibit statement 1: Cash flow Year to Dec (US$ Mn) FY16A FY17A FY18E FY19E FY20E Year to Dec (US$ Mn) FY16A FY17A FY18E FY19E FY20E Revenue 2,444 2,775 3,052 3,411 3,833 Pre-tax profit 125 97 102 133 184 GrossPork profit (reported) 868 972 1,068 1,200 1,348 Taxes paid (37) (35) (42) (45) (51) EBITDA 172 162 172 212 271 Depreciation & amortization 38 50 54 59 66 Depreciationproducts 38 50 54 59 66 Associates & Others 59 67 73 78 89 EBIT 135 112 119 152 205 CFO bef. WC change 185 179 187 226 288 Net interest income (exp.) (8) (15) (16) (18) (20) Change in working cap (149) (215) (62) (57) (153) Associatessold in (2) (1) (1) (1) (1) Cashflow from operation 36 (36) 124 169 135 Exceptionals/others 0 0 0 0 0 CAPEX (77) (85) (96) (96) (96) Profitsupermark before tax 125 97 102 133 184 Free cash flow (41) (121) 29 73 39 Tax expenses (39) (36) (35) (46) (63) Dividends 27 13 15 19 27 Minority interest 1 3 3 3 3 Balance sheet adj. (115) (31) (129) (148) (197) Netet profitcounters 84 58 64 85 118 Sharse issued (7) 0 0 0 0 Dividends 27 13 15 19 27 Others 0 0 0 0 0 Diluted EPS (RMB) 0.02 0.01 0.01 0.02 0.02 Net cash flow (136) (139) (86) (55) (131) Net cash (debt) start (25) (161) (300) (386) (441) Balance sheet Net cash (debt) at year-end -161 -300 -386 -441 -572 Year to Dec (US$ Mn) FY16A FY17A FY18E FY19E FY20E Cash & equiv 69 73 53 38 47 Ratios Trade receivables 347 419 447 493 554 Year to Dec (US$ Mn) FY16A FY17A FY18E FY19E FY20E Other receivables 0 0 0 0 0 Growth rate (%) Inventories 633 824 906 969 1,119 Revenue 6.2% 13.6% 10.0% 11.8% 12.4% Other current assets 43 0 0 0 0 EBITDA 35.8% -5.9% 6.3% 22.7% 27.9% Fixed assets 130 168 224 279 330 EBIT 44.4% -16.6% 5.8% 28.2% 34.4% Intangible assets 165 153 128 106 84 Net profit 30.8% -31.1% 10.1% 32.4% 38.9% Investment, associates etc 57 53 53 53 53 Fully diluted EPS 33.2% -30.8% 10.1% 32.4% 38.9% Total assets 1,444 1,690 1,811 1,938 2,188 Margins (%) Gross margin (reported) 35.5% 35.0% 35.0% 35.2% 35.2% Account payables 288 310 351 392 436 EBITDA 7.1% 5.8% 5.6% 6.2% 7.1% Other payables 9 20 20 20 20 EBIT 5.5% 4.0% 3.9% 4.5% 5.3% Short-term debt 231 373 439 479 619 Net margin 3.5% 2.1% 2.1% 2.5% 3.1% Other current liabs 9 16 0 0 0 Other ratios Long-term debts 0 0 0 0 0 ROE (%) 9.6% 6.3% 6.6% 8.5% 11.1% Deferred tax and others 25 21 22 23 24 ROA (%) 6.1% 3.7% 3.7% 4.5% 5.7% Other long-term liabs 0 0 0 0 0 Net gearing (%) 18.3% 31.6% 39.4% 43.0% 52.5% Total liabilities 562 741 832 914 1,099 Interest coverage (x) -17.7 -7.6 -7.3 -8.4 -10.0 Receivables days 49.8 50.4 51.8 50.3 49.9 Share capital 7 7 7 7 7 Payables days 66.8 62.8 64.5 64.7 64.0 Reserves 871 935 965 1,010 1,075 Inventory days 146.6 166.7 166.7 160.0 164.4 Shareholders' equity 877 942 972 1,017 1,082 Effective tax rate (%) -31.5% -36.8% -34.2% -34.2% -34.2% Minorities 4 7 7 7 7 Total equity 882 949 979 1,024 1,089 Net cash (debt) (161) (300) (386) (441) (572) Sources: Company Data, CIRL estimates

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Exhibit 7: Peers valuation comparison Exhibit 1: bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code (HKD mn) (HKD) 3M YTD FY14 FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17E FY18E FY19E

PRCPork - Sportswear peers LI NING CO LTD 2331 HK 13,942 6.40 (6.2) 1.1 -9.4 17.0 73.1 36.1 22.6 17.2 0.0% 0.1% 0.1% 0.6% 0.8% ANTAproducts SPORTS PROD 2020 HK 104,161 38.80 18.3 9.4 53.6 47.3 42.7 31.8 26.7 20.6 1.5% 1.7% 2.1% 2.5% 3.2% INTL 1368 HK 7,959 3.58 39.5 17.0 17.8 14.0 17.4 16.8 14.6 12.8 4.3% 3.4% 4.8% 4.4% 5.0% 361sold DEGREES in 1361 HK 5,479 2.65 (10.2) (1.9) 9.3 9.2 9.4 7.4 8.4 7.8 4.8% 2.6% 4.0% 4.6% 4.9% HOSA INTL LTD 2200 HK 4,618 2.77 (8.6) 4.9 16.0 - - 14.0 12.4 11.1 3.0% 2.4% 3.0% 0.0% 0.0% HONMA GOLF LTD 6858 HK 5,287 8.68 8.0 11.0 - - 15.3 20.6 14.2 12.2 0.0% 0.0% 2.5% 2.8% 3.3% YUEsupermark YUEN IND 551 HK 39,482 23.95 (22.1) (22.0) 13.2 12.3 10.5 10.5 9.1 10.3 5.0% 5.8% 6.2% 8.8% 6.6% Average 22,655 2.3 2.5 22.0 20.7 28.1 19.6 15.4 13.2 3.7% 2.7% 3.2% 4.0% 4.0% et counters POU SHENG INTL 3813 HK 6,837 1.28 0.0 13.3 204.7 14.6 11.0 15.9 14.4 10.9 0.0% 2.8% 1.4% 1.6% 2.1%

International - Sportswear peers NIKE INC -CL B NKE US 857,436 531.98 4.8 8.3 45.0 64.9 64.9 64.9 29.7 25.2 0.8% 0.9% 1.0% 1.1% 1.3% ADIDAS AG ADS GR 424,606 2,029.49 24.4 25.5 83.8 64.1 64.1 64.1 25.7 21.8 0.7% 0.8% 1.1% 1.5% 1.8% UNDER ARMO-C UA US 55,339 117.67 6.0 12.5 - - - - 50.0 37.5 0.0% 0.0% 0.0% 0.0% 0.0% LULULEMON ATH LULU US 97,846 722.34 16.7 17.1 48.2 - - - 36.4 29.7 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR 63,132 4,185.77 35.4 19.1 94.7 - - - 33.4 26.4 0.1% 0.2% 2.6% 0.6% 0.8% ASICS CORP 7936 JP 29,266 146.41 10.7 11.5 22.2 30.8 30.8 30.8 26.2 23.9 1.0% 1.1% 1.1% 1.3% 1.5% MIZUNO CORP 8022 JP 6,130 230.62 (5.3) (4.8) 28.3 25.1 25.1 25.1 44.3 28.0 1.5% 1.4% 1.6% 1.6% 1.6% COLUMBIA SPORTSW COLM US 44,388 633.95 9.9 12.4 41.5 - - - 24.9 22.8 0.8% 0.9% 0.9% 1.1% 1.1% Average 102,958 14.0 13.3 52.0 46.2 46.2 46.2 33.8 26.9 0.8% 0.9% 1.4% 1.2% 1.3%

POU SHENG INTL 3813 HK 6,837 1.28 0.0 13.3 204.7 14.6 11.0 15.9 14.4 10.9 0.0% 2.8% 1.4% 1.6% 2.1%

Sportswear distributors ABC-MART INC 2670 JP 40,364 489.04 (0.9) 3.4 23.6 21.0 23.0 19.8 18.8 18.3 1.5% 1.6% 1.8% 1.9% 2.0% CALERES INC CAL US 11,754 273.17 4.2 3.9 40.0 18.5 18.9 23.2 16.4 14.2 0.8% 0.8% 0.8% 0.8% 0.8% FOOT LOCKER INC FL US 42,586 360.54 (3.2) (2.0) 16.1 12.9 12.0 9.4 11.2 10.2 1.9% 2.2% 2.4% 2.5% 3.0% DSW INC-CL A DSW US 13,800 173.09 4.3 3.0 13.4 13.1 14.4 14.6 15.6 13.7 3.4% 3.6% 3.6% 3.6% 4.5% GENESCO INC GCO US 7,036 353.24 27.5 38.5 11.4 11.0 11.0 9.4 14.7 13.7 0.0% 0.0% 0.0% 0.0% 0.0% FINISH LINE-A FINL US 4,377 105.97 (0.4) (7.1) 8.7 8.0 27.9 -30.4 20.1 19.0 2.4% 2.7% 3.0% 3.2% 3.5% DICK'S SPORTING DKS US 28,557 273.02 4.4 21.0 12.8 12.2 12.3 13.6 11.5 11.9 1.4% 1.6% 1.7% 2.0% 2.5% JD SPORTS FASHIO JD/ LN 37,237 38.26 (5.3) 1.8 76.2 55.7 32.3 20.0 14.6 13.5 12.4% 13.5% 14.6% 15.6% 17.9% Average 23,214 3.8 7.8 25.3 19.0 19.0 15.7 15.3 14.3 3.4% 3.7% 4.0% 4.2% 4.9%

POU SHENG INTL 3813 HK 6,837 1.28 0.0 13.3 204.7 14.6 11.0 15.9 14.4 10.9 0.0% 2.8% 1.4% 1.6% 2.1%

Sou rce: Bloomberg, CIRL estimates

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

Exhibit 1:

Pork25 avg. 12 mths Forward P/E Ratio -1std.

products sold20 in +1std. a supermark15 et counters - 10 -1std.

5

0 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Source: 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 Senior Research Analyst (852) 2235 7619 [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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