Flashnote 11 September 2018 Hong Kong EQUITIES Anta Sports (2020 HK) 2020 HK Outperform Finally, a sizable acquisition Price (at 06:50, 11 Sep 2018 GMT) HK$37.30 Event Valuation HK$ 50.00 According to media reports, Finnish sports company, Amer Sports (AMEAS - PER FH, Not rated), has received an indication of interest, with a valuation of 12-month target HK$ 50.00 €4.6bn (US$5.3bn), from a consortium including Anta Sports and Asian private Upside/Downside % +34.0 equity firm, FountainVest Partners. Anta has yet to comment on the news; 12-month TSR % +38.3 however, the company maintains its “Single-Focus, Multi-Brand & Omni- Volatility Index Medium Channel” growth strategy. There are limited details on the deal in terms of GICS sector shareholding structure of the consortium, financing and transaction timing. Consumer Durables & Apparel Market cap HK$m 100,146 Impact Market cap US$m 12,758 A risk-taking move? In a simple scenario, if we assume Anta wants only 51% Free float % 38 control of Amer Sports, this would mean it would have to pay around 30-day avg turnover US$m 40.5 RMB18.5bn in cash, aside from taking on the Amer Sports’ current debt. Anta Number shares on issue m 2,685 currently has net cash of around RMB8.8bn, which means it is likely it would require external financing for the deal, with a higher probability of debt, as we Investment fundamentals believe a major shareholder may want to avoid dilution of its controlling stake. Year end 31 Dec 2017A 2018E 2019E 2020E In terms of valuation, based on the current offer Amer Sports is valued at a Revenue m 16,692 23,460 29,558 34,677 ~25x FY19E PER (based on FactSet consensus earnings) vs Anta at a ~17x EBIT m 3,989 5,746 7,153 8,472 EBIT growth % 24.5 44.1 24.5 18.4 FY19E PER (based on our estimate). Our initial discussions with investors Reported profit m 3,088 4,199 5,274 6,235 suggest a pretty mixed view on the deal, as some worry Anta may not have Adjusted profit m 3,088 4,199 5,274 6,235 the expertise to run an overseas operation, while others view the acquisition EPS rep Rmb 1.15 1.56 1.96 2.32 as a necessary step to further growth. We believe the brands under Amer EPS rep growth % 20.3 36.0 25.6 18.2 EPS adj Rmb 1.15 1.56 1.96 2.32 sports are niche that should be able to avoid head-on competition in the China EPS adj growth % 20.3 36.0 25.6 18.2 market and allow Anta to slowly nurture their presence. From a margin PER rep x 28.4 20.9 16.6 14.0 perspective, given Amer Sports and Anta’s revenue scale is similar, there PER adj x 28.4 20.9 16.6 14.0 could be meaningful synergies from the scaling of procurement as well. We Total DPS Rmb 0.88 1.25 1.51 1.74 Total div yield % 2.7 3.8 4.6 5.3 wait for Anta to disclose more details as appropriate. ROA % 24.0 26.9 29.4 31.3 A non-binding preliminary indication of interest from a consortium. Anta ROE % 26.6 28.8 31.7 32.7 Sports and Asian private equity firm, FountainVest Partners, intends to acquire EV/EBITDA x 19.5 13.8 11.1 9.4 the entire share capital of Amer Sports through a cash tender offer. So far Net debt/equity % -47.5 -47.9 -47.1 -48.3 P/BV x 6.3 5.7 4.9 4.3 Amer Sports has not engaged in any negotiations with the Consortium and has yet to make any decisions regarding the indication of interest. The deal is still 2020 HK rel HSI performance, & rec history subject to different conditions, including a due diligence investigation of the Board of Directors of ANTA and the Investment Committee of FountainVest, availability of financing from identified financing sources and receipt of a recommendation from the Board of Directors of Amer Sports. Completion of any such cash tender offer would in turn be subject to further conditions, including approval by shareholders holding at least 90% of the shares of Amer Sports and receipt of all necessary regulatory approvals. Details about Amer Sports. Amer Sports achieved FY17 net sales of €2.685bn, up 2% YoY on reported basis and 4% on currency-neutral basis. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. For comparison purposes, Anta’s revenue in FY17 was around €2.162bn. LFL Source: FactSet, Macquarie Research, September 2018 gross margin was around 45.3%, down from 46.3% last year due to currency (all figures in Rmb unless noted, TP in HKD) headwinds. This compares with Anta at 49.4%. The EBIT margin, excluding items affecting comparability, was at 8%, down from 8.5% last year. This is lower than Anta’s EBIT margin of 24.5%. China net sales reached €120m, up Analysts 15% YoY, and accounted for ~4% of total sales. The Outdoor category accounted for 62% of sales, while ball sports and fitness accounted for 24% Macquarie Capital Limited Terence Chang +852 3922 3581 and 14%, respectively. Amer Spots owns Salomon, Wilson, Atomic, [email protected] ARC’TERYX, Mavic, Suunto and Preco, among other brands. Linda Huang, CFA +852 3922 4068 Action and recommendation [email protected] We maintain our Outperform rating as we wait for more details in order to provide a more detailed analysis. Please refer to page 2 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research Anta Sports (2020 HK) Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield, which is currently around 9%. minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Mazi Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return Recommendation proportions – For quarter ending 30 June 2018 AU/NZ Asia RSA USA CA EUR Outperform 52.87% 61.26% 48.86% 47.54% 69.86% 46.61% (for global coverage by Macquarie, 3.51% of stocks followed are investment banking clients) Neutral 34.10% 27.25% 36.36% 46.72% 21.92% 43.22% (for global coverage by Macquarie, 2.10% of stocks followed are investment banking clients) Underperform 13.03% 11.49% 14.77% 5.74% 8.22% 10.17% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients) 2020 HK vs HSI, & rec history (all figures in HKD currency unless noted) Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2018 12-month target price methodology 2020 HK: HK$50.00 based on a PER methodology Company-specific disclosures: 2020 HK: Macquarie Capital Limited makes a market in the securities of Anta Sports Products Ltd. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 15-Aug-2018 2020 HK Outperform HK$50.00 28-Feb-2018 2020 HK Outperform HK$45.70 12-Jan-2018 2020 HK Outperform HK$44.00 16-Aug-2017 2020 HK Outperform HK$35.00 02-Aug-2017 2020 HK Outperform HK$30.00 17-May-2017 2020 HK Outperform HK$26.90 23-Feb-2017 2020 HK Outperform HK$28.60 28-Oct-2016 2020 HK Outperform HK$23.70 30-Aug-2016 2020 HK Outperform HK$21.00 23-Jul-2016 2020 HK Outperform HK$18.90 24-Feb-2016 2020 HK Outperform HK$19.80 Target price risk disclosures: 2020 HK: Any inability to compete successfully in their markets may harm the business.