Pou Sheng International (3813 HK)

Rating BUY Maintain

Omni-channel model continues to pay off Target Price HKD 2.74 From HK$2.77 Current price HKD 1.74 Upside: +57.7% % FY20 net profit slight miss due to lower OPM in 4Q20 Company Update PS FY20 revenue and net profit attributable to shareholders dropped 5.7%/64.1% Yoy to USD3,709mn/USD 44mn respectively. PS net profit came 22 April 2021 6.4% lower than our estimates. In 4Q20, PS GM picked up for the 2 consecutive quarter and reached 31.6% (+1.2ppts QoQ) , while OPM was slightly down to 3.1% (vs. 3.5%/3.6% in 3Q20 and 2Q20) due to higher rentals for larger-scale Hayman Chiu stores, as well as online business related expenses. [email protected]

PS cash conversion cycle shortened to 142 days (vs. 156 days in FY19), in RMB (852) 2235 7677 terms, mainly driven by lower inventory turnover days at 143 (vs. 150 days) as PS proactively reduce channel inventory (inventory balance slipped ~27% to Trading Data RMB5,870mn by end-2020). PS slashed their total borrowings by 46% Yoy (vs. 39% in 1H20), hence their net gearing ratio was significantly lowered to 2.6% (vs. 52-Week Range (HK$) 2.34/1.40 18.7%/38.1% in 3Q20/FY19). PS net closed further 217 stores in 4Q20, in which 3 Mth Avg Daily Vol (m) 3.68 direction operation store accounted for 70% of total store closure. No of Shares (m) 5,356.9 Market Cap (HK$m) 9,320.9 PS would still benefit from both Nike and continued expansion in Greater Major Shareholders (%) Yue Yuen (62.41%) China. Management sticked to their OPM guidance at 7% in FY21E. We expect Auditors Deloitte this would be mainly driven by mid-teens sales growth (incl. sales growth from various 3rd party channels such as Tmall, JD, Vipshop etc), improved sales Result Due 1Q21E: May 2021 efficiency from offline channel (i.e. increased contribution of large size stores to drive sales, FY19/FY20 accounted for 9%/13% of directly operated stores), Company description increased omni-channel sales contribution high teens, accompanied by sequential GM improvement. PS targets to open 300-500 stores in FY21E ,after Established in 1989 and listed in June 2008, Pou having closed down >750 stores (mainly direct operation stores) in FY20. Sheng (PS) is one of the leading sportswear distributors in China with ~25% market share. In Good start in FY21E;Omni-channel strategy continues to pay off addition to Nike and Adidas, the company adopts multi- strategy and distributes , PS 4Q20 SSSG drop further narrowed to 1.0%, and in 2M21 SSSG further , Under Armour and PONY products etc. accelerated to high 20’s Yoy, which also drove sales grew ~46% Yoy in USD terms (or +13% vs. 2M19). We believe this was mainly driven by i) lower As of Dec 31, 2020, Pou Sheng’s retail network inventory level and hence lower retail discount, and ii) China’s economy comprises of 9,075 stores, in which ~58% are continue to pick up in 4Q20 and stabilized COVID-19 help consumer directly operated stores. sentiment.

Pou Sheng’s omni-channel revenue grew 27.6% Yoy and accounted for 17% of Price Chart total revenue, in which B2C sales contribution stood at 73% by end 4Q20 (vs. HK$ 9M20). We attributed the encouraging result to Product Sharing Platform (PSP) 3.5 which currently cover >60% of direct brick & mortar stores and regional 3.0 rd warehouses to share inventory and provide data to 3 party platforms (incl. 2.5 T-Mall, JD, Vipshop. Newly launched WeChat Mini stores took up ~2% of B2C 2.0 sales with better ASP, conversion and return rate) to drive online traffic. We 1.5 continue to believe improvement in operating efficiency would be achieved 1.0 through i) increasing PSP coverage, ii) enhancing online business through 0.5 YYSports platform and co-operating with strategic partners, hence 0.0

achieving economy of scale to drive PS earnings/margin in the long run.

Jul-20 Jul-18 Jul-19

Oct-20 Oct-18 Oct-19

Apr-19 Jan-20 Jan-19 Apr-20 Jan-21 Apr-18 Fine-tune FY21E/22E EPS on lower GM forecast; Maintain BUY with new TP at HK$2.74, beware of near term price volatility Sources: Bloomberg, CIRL

We fine tuned Pou Sheng’s FY21E/22E EPS by -10.5%/+1.0% respectively mainly on lower GM assumption. PS is trading at undemanding FY21E 7.7x P/E (>1 s.d. below 5-year average and ~62% discount to Topsports), We believe PS still deserve a re-rating story as their operating efficiency and profitability would further improve, after having launched various initiatives. We derived Pou Sheng’s new TP at HK$2.74, hence implying FY21E 12.4x target PE, we maintain Pou Sheng’s rating at BUY. However, we advise investors to be aware of near term price volatility after global (incl. Nike, Adidas and H&M) refused to buy Xinjiang cotton.

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Exhibit 1: We fine tuned Pou Sheng’s FY21E/22E EPS forecasts Exhibit(USD Mn) 1: FY21E (old) FY21E (new) Diff FY22E (old) FY22E (new) Diff

4,642 4,488 -3.3% 5,345 5,199 -2.7% PorkRevenue

productsGP 1,578 1,495 -5.3% 1,823 1,752 -3.9%

sold in GPM 34.0% 33.3% -70 bps 34.1% 33.7% -160 bps supermark

et 171 153 -10.5% 201 203 1.0% Net Profit counters EPS 0.032 0.029 -10.5% 0.038 0.038 1.0% Source: CIRL estimates

Exhibit 2: Pou Sheng’s 4Q20 SSSG drop further narrowed (left), Nike’s latest quarterly sales (end- Feb) in Greater China accelerated

20.0

14.0 12.3 60.0 10.0 10.0 10.1 8.09.0 8.0 8.6 8.98.7 8.4 6.0 7.5 6.0 50.0 5.0 5.0 5.9 5.6 4.2 (1.0) 3.0 1.9 1.5 2.2 1.9

0.0 (1.0) 0.4 -1.0 40.0

1Q14 3Q18 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q13 (2.0) 30.0 (10.0) -13.0 20.0 -17.8 (20.0) 10.0

(30.0) 0.0 -32.5 (10.0) (40.0) (20.0) Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Nike (Greater China growth %, ex-FX) Footwear Apparel Euqipment

Source: Company data, CIRL

Exhibit 3: PS monthly sales gradually back to pre-COVID-19 level

Exhibit 1: 500 Pork 450 products

sold400 in

350 supermark et300 counters

250

200

150

100

50

0

Source: Company data, CIRL

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Exhibit 4: Pou Sheng’s total store reduced by >700 in FY20 and mainly from direct operations Exhibit 1: Pork products sold in supermarket counters

Source: Company data, CIRL (***1Q18-3Q20 growth rate are on QoQ basis)

Exhibit 5: Peers’ profitability comparison

Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY20 code FY20A FY20A FY20A GM (%) OM (%) PM (%) Pork PRC - Sportswear brands/OEMs productsANTA SPORTS PROD 2020 HK 23.0 10.9 (13.8) 58% 26% 15% LI NING CO LTD 2331 HK 20.9 12.2 (69.9) 49% 15% 12% INTL 1368 HK 7.4 4.2 (15.2) 39% 12% 6% sold361 in DEGREES 1361 HK 5.9 3.2 (58.8) 38% 13% 8% HONMA GOLF LTD 6858 HK (2.8) (1.8) 0.8 51% 1% -3% supermarkYUE YUEN IND 551 HK N/A N/A #N/A N/A 22% 2% -1% Average 14.3 7.6 (31.4) 47% 13% 10% et counters

International - Sportswear peers NIKE INC -CL B NKE US 33.4 10.4 52.5 43% 8% 7% ADIDAS AG ADS GR 7.9 2.5 20.6 50% 4% 2% LULULEMON ATH LULU US 38.0 24.1 (18.1) 56% 22% 16% PUMA SE PUM GR 5.0 2.0 29.1 47% 4% 2% UNDER ARMO-C UA US (6.7) (2.6) 29.1 48% -14% -12% COLUMBIA SPORTSW COLM US 7.0 4.5 (20.4) 49% 5% 4% ASICS CORP 7936 JP (10.4) (4.5) 32.8 46% -1% -5% MIZUNO CORP 8022 JP 5.0 3.1 0.9 41% 4% 3% Average 12.6 7.2 15.8 48% 8% 5%

Sportswear distributors JD SPORTS FASHIO JD/ LN 33.4 11.4 121.2 47% 7% 4% TOPSPORTS INTERN 6110 HK 38.2 12.5 32.6 42% 10% 7% DICK'S SPORTING DKS US 18.1 6.1 175.0 29% 4% 3% FOOT LOCKER INC FL US 23.2 11.1 97.5 32% 8% 6% ABC-MART INC 2670 JP 11.5 10.0 (54.1) 53% 16% 11% FRASERS GROUP PL FRAS LN 6.9 2.5 77.3 42% 3% 2% ACCENT GROUP LTD AX1 AU 14.2 7.1 84.7 57% 11% 7% CALERES INC CAL US 15.3 4.6 182.6 41% 4% 2% GENESCO INC GCO US 9.4 4.4 116.8 48% 4% 3% Average 34.0 13.9 92.6 41% 9% 6%

Source: Bloomberg, CIRL

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Exhibit 6: Financial Summary IncomeExhibit statement 1: Cash flow Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E RevenuePork 3,933 3,709 4,488 5,199 6,121 Pre-tax profit 177 63 212 282 344 Gross profit (reported) 1,342 1,133 1,495 1,752 2,063 Taxes paid (36) (49) (54) (52) (62) EBITDAproducts 295 188 280 357 429 Depreciation & amortization 84 93 29 30 32 Depreciation 84 93 29 30 32 Associates & Others 74 87 94 99 119 EBITsold in 211 94 251 327 397 CFO bef. WC change 298 194 281 359 433 Net interest income (exp.) (35) (34) (41) (47) (56) Change in working cap 13 212 (273) (315) (415) Associatessupermark 0 2 2 2 2 Cashflow from operation 311 406 8 44 17 Exceptionals/others 0 0 0 0 0 CAPEX (117) (87) (91) (91) (91) Profitet counters before tax 177 63 212 282 344 Free cash flow 195 319 (83) (47) (74) Tax expenses (50) (17) (58) (77) (94) Dividends 0 0 0 0 0 Minority interest 7 2 2 2 2 Balance sheet adj. (196) 75 99 137 151 Net profit 120 44 153 203 248 Sharse issued 0 0 0 0 0 Dividends 0 0 0 0 0 Others 0 0 0 0 0 Diluted EPS (US$) 0.023 0.008 0.029 0.039 0.047 Net cash flow (2) 394 16 90 77 Net cash (debt) start (423) (424) (30) (14) 75 Balance sheet Net cash (debt) at year-end -424 -30 -14 75 153 Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Cash & equiv 89 252 255 345 422 Ratios Trade receivables 433 487 574 665 783 Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Other receivables 0 0 0 0 0 Growth rate (%) Inventories 1,160 850 958 1,103 1,299 Revenue 14.9% -5.7% 21.0% 15.8% 17.7% Other current assets 5 3 3 3 3 EBITDA 32.6% -36.4% 49.0% 27.7% 20.3% Fixed assets 634 671 706 699 679 EBIT 44.8% -55.4% 166.2% 30.3% 21.5% Intangible assets 118 102 86 70 70 Net profit 47.3% -63.5% 247.7% 33.2% 22.1% Investment, associates etc 77 100 100 100 100 Fully diluted EPS 46.6% -63.5% 247.7% 33.2% 22.1% Total assets 2,516 2,465 2,682 2,985 3,356 Margins (%) Gross margin (reported) 34.1% 30.6% 33.3% 33.7% 33.7% Account payables 385 468 560 655 771 EBITDA 7.5% 5.1% 6.2% 6.9% 7.0% Other payables 129 152 152 152 152 EBIT 5.4% 2.5% 5.6% 6.3% 6.5% Short-term debt 513 282 270 270 270 Net margin 3.1% 1.2% 3.4% 3.9% 4.1% Other current liabs 98 112 112 112 112 Other ratios Long-term debts 0 0 0 0 0 ROE (%) 11.0% 3.9% 12.5% 14.5% 15.2% Deferred tax and others 276 311 292 292 292 ROA (%) 5.3% 1.8% 5.9% 7.2% 7.8% Other long-term liabs 0 0 0 0 0 Net gearing (%) 38.1% 2.6% 1.1% -5.0% -8.7% Total liabilities 1,401 1,325 1,384 1,479 1,596 Interest coverage (x) -6.1 -2.8 -6.1 -6.9 -7.1 Receivables days 43.1 45.2 43.1 43.5 43.2 Share capital 7 7 7 7 7 Payables days 54.2 66.4 68.3 69.4 69.4 Reserves 1,094 1,119 1,276 1,484 1,738 Inventory days 163.3 120.5 116.8 116.8 116.8 Shareholders' equity 1,101 1,125 1,283 1,491 1,745 Effective tax rate (%) -28.2% -27.3% -27.3% -27.3% -27.3% Minorities 14 15 15 15 15 Total equity 1,115 1,141 1,298 1,506 1,760 Net cash (debt) (424) (30) (14) 75 153

Sources: Company Data, CIRL estimates

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Exhibit 7: Peers valuation comparison bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) Exhibit 1: code (HKD mn) (HKD) 1M 3M YTD FY17A FY18A FY19A FY20E FY21E FY22E FY17A FY18A FY19A FY20E FY21E FY22E

PRCPork - Sportswear brands/OEMs PROD 2020 HK 327,914 121.30 (3.7) 4.8 (1.3) 89.8 66.9 53.8 53.2 35.7 27.9 0.6% 0.8% 0.6% 0.6% 1.0% 1.5% LI NING CO LTD 2331 HK 124,457 50.00 5.7 0.0 (6.2) 201.7 142.3 71.2 65.6 44.8 34.9 0.0% 0.2% 0.4% 0.4% 0.7% 0.9% YUEproducts YUEN IND 551 HK 33,775 20.95 23.2 27.9 29.8 8.5 14.2 14.3 -37.1 14.8 11.2 7.1% 7.2% 5.3% 1.3% 3.9% 5.2% XTEP INTL 1368 HK 11,538 4.53 22.1 32.1 17.1 16.2 20.9 12.7 13.0 20.5 13.9 2.7% 4.5% 5.0% 3.0% 4.2% 5.1% 361sold DEGREES in 1361 HK 4,549 2.20 28.7 129.2 103.7 8.6 12.6 9.3 9.4 8.7 7.7 4.8% 4.1% 4.2% 3.8% 5.1% 5.6% HONMA GOLF LTD 6858 HK 3,598 5.94 (1.0) 28.0 16.9 9.8 13.0 12.2 27.0 17.6 16.8 3.6% 3.8% 4.1% 1.9% 3.7% 3.9% supermarkAverage 84,305 12.5 37.0 26.7 55.8 45.0 28.9 33.6 23.7 18.7 3.8% 3.4% 3.3% 1.8% 3.1% 3.7% POU SHENG INTL 3813 HK 9,749 1.82 6.4 7.1 (1.1) 20.9 15.0 10.2 28.1 8.1 6.1 1.1% 1.4% 0.0% 0.0% 0.0% 0.0% et counters International - Sportswear peers NIKE INC -CL B NKE US 1,631,036 1,034.60 (1.8) (6.0) (5.9) 52.1 111.2 51.7 58.5 42.5 33.6 0.5% 0.6% 0.7% 0.7% 0.8% 0.9% ADIDAS AG ADS GR 487,109 2,430.39 (8.8) (9.7) (11.1) 50.9 31.1 27.7 121.8 34.4 26.4 0.9% 1.3% 0.0% 0.7% 1.2% 1.6% LULULEMON ATH LULU US 311,205 2,387.68 (0.9) (12.6) (11.7) 139.2 161.2 83.9 62.9 66.9 45.8 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR 112,866 748.29 (7.3) (10.0) (11.6) 93.5 64.5 48.5 137.6 47.4 31.9 1.5% 0.4% 0.0% 0.3% 0.7% 1.0% UNDER ARMO-C UA US 70,389 140.94 0.2 20.5 21.9 - - - -42.3 134.6 60.6 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% COLUMBIA SPORTSW COLM US 53,204 801.43 (2.0) 14.4 18.0 68.1 26.6 21.0 72.3 25.3 21.2 0.7% 0.9% 0.9% 0.3% 1.0% 1.1% ASICS CORP 7936 JP 25,141 132.41 0.8 (7.7) (6.1) 27.9 -17.3 48.6 -28.4 58.8 30.7 1.2% 1.3% 1.6% 1.3% 1.4% 1.5% MIZUNO CORP 8022 JP 4,309 162.11 1.9 10.5 13.2 80.4 11.9 9.7 9.7 -300.2 16.8 2.2% 2.2% 2.2% 2.2% 2.3% 2.3% Average 152,032 (2.3) 0.8 1.8 73.2 67.7 41.6 77.1 58.6 33.4 1.3% 1.2% 1.6% 1.0% 1.3% 1.5%

POU SHENG INTL 3813 HK 9,749 1.82 6.4 7.1 (1.1) 20.9 15.0 10.2 28.1 8.1 6.1 1.1% 1.4% 0.0% 0.0% 0.0% 0.0%

Sportswear distributors JD SPORTS FASHIO JD/ LN 88,002 85.30 (5.5) (5.6) (6.8) 44.6 35.2 30.5 25.8 25.8 22.5 0.2% 0.2% 0.2% 0.1% 0.1% 0.2% TOPSPORTS INTERN 6110 HK 68,586 11.06 (6.4) 0.0 (4.7) - - - 24.5 22.9 18.3 0.0% 0.0% 0.0% 2.5% 3.8% 2.9% DICK'S SPORTING DKS US 51,249 574.02 1.2 32.9 31.4 28.6 24.4 22.4 20.6 13.0 14.6 0.8% 0.9% 1.2% 1.5% 1.7% 1.9% FOOT LOCKER INC FL US 43,407 416.53 1.7 35.8 32.6 10.8 24.0 11.4 10.9 20.4 11.4 2.0% 2.3% 2.6% 2.8% 1.3% 2.1% ABC-MART INC 2670 JP 36,980 448.01 4.0 12.1 9.6 18.2 17.8 17.2 17.0 31.6 20.6 1.9% 2.0% 2.7% 2.7% 2.8% 2.7% FRASERS GROUP PL FRAS LN 25,108 48.35 (4.2) 0.1 0.6 12.2 121.7 21.9 - 25.9 17.3 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% ACCENT GROUP LTD AX1 AU 7,513 13.87 3.5 3.5 1.7 42.7 27.8 24.7 24.0 16.8 16.5 1.3% 3.0% 3.6% 2.3% 5.1% 5.1% CALERES INC CAL US 5,287 139.46 9.1 33.2 14.7 11.8 8.8 -136.8 8.0 -12.4 10.5 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% GENESCO INC GCO US 4,910 327.49 (8.8) 51.1 40.1 8.7 -7.2 -15.6 9.8 -21.1 11.4 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average 36,782 (0.6) 18.1 13.2 22.2 37.1 21.3 17.6 22.3 15.1 1.3% 1.7% 2.0% 1.9% 2.3% 2.4%

POU SHENG INTL 3813 HK 9,749 1.82 6.4 7.1 (1.1) 20.9 15.0 10.2 28.1 8.1 6.1 1.1% 1.4% 0.0% 0.0% 0.0% 0.0%

Source: Bloomberg, CIRL (As of Apr 21 market close)

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

Exhibit25 1: 12 mths Forward P/E Ratio Pork avg. product20 s

sold in +1std. 15 supermark a

et counters -1std. 10 -

5

0 Dec-17 Dec-18 Dec-19 Dec-20

Source: Bloomberg, CIRL

R isk Factors

Downside risks include: 1) Longer than expected sales recovery from Nike and Adidas in Greater 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] Edith Li Senior Research Analyst (852)2235 7515 [email protected] Farica Li Research Analyst (852) 2235 7617 [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. The whole or a part of this report should not be reproduced to others.

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