16 Apr 2020 CMB International Securities | Equity Research | Company Update Anta Sports (2020 HK) BUY (Maintain) Strong beat in 1Q and likely turnaround in 2Q Target Price HK$77.39 (Previous TP HK$62.26) Maintain BUY and raised TP to HK$ 77.39, based on 33x FY20E P/E (raised from Up/Downside +25.6% 26x as we are expecting a bottom out in 2Q20E). Slight/ strong beat from Anta/ Current Price HK$61.60 FILA in 1Q20 and healthy recovery so far in Apr 2020 are signs of turnaround in 2Q20E, and hence we believe its current valuation of 26x FY20E P/E is still China Sportswear Sector attractive, vs Li Ning/ Nike/ Adidas’s 35x/ 36x/ 28x. Walter Woo Slight beat for Anta in 1Q20, less than expected buybacks. Anta retail (852) 3761 8776 sales fell by 20-25% YoY in 1Q20, better than the Company’s guidance of [email protected] 20-30% YoY decline. We attribute the beat to its robust e-commerce growth (+ve MSD), especially the boost from Anta.com and Wechat mini program Stock Data (~20% online sales in 1Q20). Also its retail discounts was better than Mkt Cap (HK$ mn) 166,440 expected, which is only slightly more than 30% off and ~4ppt higher than Avg 3 mths t/o (HK$ mn) 728.75 normal. Inventory to sales ratio was 5.5x, slightly above its normal level of 52w High/Low (HK$) 79.9/42.0 4-5x. In fact, amount of buybacks YTD was only RMB 300-500mn (CMBIS Total Issued Shares (mn) 2,702.0 est. 2-3% of 1H20E’s inventory), far better than planned level of 10-15%. Source: Bloomberg Strong beat for FILA in 1Q20, temporary inventory surge should not be Shareholding Structure a worry. FILA retail sales fell by only MSD YoY in 1Q20, better than the Mr. Ding Shizhong (CEO), Mr. 61.06% Company’s guidance of 10-20% YoY decline (implying a strong rebound in Ding Shijia (V-Chairman), Mr. Lai Shixian (CFO) & Family Mar 2020). We believe the beat was also due to the ramp up of e-commerce Free Float 38.94% growth (+ve 160%), partly due to low base. This speedy recovery, in our view, Source: HKEx was driven by mid-high end buyers whose purchasing power is not much affected by COVID-19 outbreak. Retail discounts was ~28% off, ~2-3ppt Share Performance higher than normal. Inventory to sales ratio was high at 8x, comparing to Absolute Relative 1-mth 3.7% 3.2% normal level of 5-6x, but we are not worried because this effectively indicated 3-mth -20.7% -5.5% the rapid growth planned by the Company. Note that the management is highly 6-mth -15.0% -6.7% confident on its 30% growth target in FY20E, aided by strong e-commerce. 12-mth 12.4% 38.8% Source: Bloomberg Not much pressure for Amer so far. Amer sports was dragged by the virus outbreak in 1H20E but impact should be limited, as the management pointed 12-mth Price Performance (HK$) out that cash flow should not be distorted much, as long as: 1) virus situation Stock HSI can be stabilized by Jun 2020 and 2) overall sales is not dropping by more 90.0 than 20% in FY20E. However, a recurring loss would still be likely in FY20E. 80.0 70.0 Maintain BUY and lifted TP to HK$ 77.39. We cut our FY20E/ 21E/ 22E 60.0 diluted EPS estimates by 2.1%/ 3.3%/ 3.1%, to factor in 1) slightly slower 50.0 Anta’s offline sales, 2) slightly higher losses from Amer but 3) slightly faster 40.0 FILA growth and 4) lower finance costs. We maintain BUY and lifted TP to 30.0 4/2019 6/2019 8/2019 10/2019 12/2019 2/2020 HK$ 77.39, based on 33x FY20E P/E (up from 26x as we are expecting a turnaround in 2Q20E). The valuation is undemanding at 26x FY20E P/E. Source: Bloomberg Earnings Summary Auditor: KPMG (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E Related Reports Revenue (RMB mn) 24,100 33,928 38,586 46,504 52,698 1. Anta Sports (2020 HK, BUY) - More YoY growth (%) 44.4 40.8 13.7 20.5 13.3 resilient than the industry and NP att. (RMB mn) 4,103 5,344 5,754 8,246 9,845 recovering – 25 Mar 2020 2. Anta Sports (2020 HK, BUY) - EPS (RMB) 1.53 1.92 2.06 2.96 3.53 Impressive 4Q sales and CB was well YoY growth (%) 32.8 25.7 7.7 43.3 19.4 accepted - 15 Jan 2020 Consensus EPS (RMB) n/a n/a 2.15 2.95 3.58 3. Anta Sports (2020 HK, BUY) - Solid FILA growth and operating leverage - P/E (x) 35.5 28.3 26.3 18.3 15.4 16 Oct 2019 P/B (x) 9.2 7.3 6.1 5.2 4.6 Yield (%) 1.3 1.1 1.5 3.8 4.6 ROE (%) 27.8 29.8 26.2 31.5 32.6 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 16 Apr 2020 Earnings revision Figure 1: Earnings revision New Old Diff (%) RMB mn FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Revenue 38,586 46,504 52,698 39,305 47,259 53,462 -1.8% -1.6% -1.4% Gross profit 20,737 25,970 29,812 20,954 26,415 30,267 -1.0% -1.7% -1.5% EBIT 8,825 11,828 13,790 9,062 12,293 14,286 -2.6% -3.8% -3.5% Net profit att. 5,754 8,246 9,845 5,876 8,529 10,155 -2.1% -3.3% -3.1% Diluted EPS (RMB) 2.064 2.958 3.531 2.107 3.059 3.642 -2.1% -3.3% -3.1% Gross margin 53.7% 55.8% 56.6% 53.3% 55.9% 56.6% 0.4ppt -0.1ppt 0ppt EBIT margin 22.9% 25.4% 26.2% 23.1% 26.0% 26.7% -0.2ppt -0.6ppt -0.6ppt Net profit att. margin 14.9% 17.7% 18.7% 14.9% 18.0% 19.0% 0ppt -0.3ppt -0.3ppt Source: Company data, CMBIS estimates Figure 2: CMBIS estimates vs consensus CMBIS Consensus Diff (%) RMB mn FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Revenue 38,586 46,504 52,698 36,722 46,266 55,525 5.1% 0.5% -5.1% Gross profit 20,737 25,970 29,812 19,590 25,724 31,192 5.9% 1.0% -4.4% EBIT 8,825 11,828 13,790 8,311 11,543 13,708 6.2% 2.5% 0.6% Net profit att. 5,754 8,246 9,845 5,849 8,096 9,900 -1.6% 1.9% -0.6% Diluted EPS (RMB) 2.064 2.958 3.531 2.152 2.946 3.583 -4.1% 0.4% -1.4% Gross margin 53.7% 55.8% 56.6% 53.3% 55.6% 56.2% 0.4ppt 0.2ppt 0.4ppt EBIT margin 22.9% 25.4% 26.2% 22.6% 24.9% 24.7% 0.2ppt 0.5ppt 1.5ppt Net profit att. margin 14.9% 17.7% 18.7% 15.9% 17.5% 17.8% -1ppt 0.2ppt 0.9ppt Source: Bloomberg, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 16 Apr 2020 Focus Charts Figure 3: Retail sales growth – foreign bands Figure 4: Retail sales growth – domestic bands 90% (yoy growth) Nike 35% (yoy growth) Li Ning, +ve 30- 70% China, 23.0% 35% 20% 50% Adidas Xtep, 30% China, over 20% 15.0% 10% 5% FILA, -10% -5.0% -10% -30% Pou Sheng, Anta, -25.1% -ve 20- 1Q16 2Q17 1Q19 3Q16 4Q16 1Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2Q19 3Q19 4Q19 1Q20 2Q16 -25% Xtep's retail sales 25% FILA's retail sales Nike China sales Li Ning group's retail sales Adidas China sales Pou Sheng sales Anta brand's retail sales Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Figure 5: Sportswear brands sales growth trend Retail sales growth (Management comments at annual result) Period 4Q19 Jan20E Feb20E Mar20E 1Q20E 2Q20E 1H20E 2H20E FY20E 45%/ 25% drop 90% of budget Li Ning 30-40% Very strong (early/ late Mar) (May) Double digit Mid single Anta 15-20% 20-30% drop 0-10% drop Mid teen drop up digit drop FILA 50-55% 10-20% drop 10-20% up Flat 30% plus 20% plus Xtep 20% plus 20% plus 80% drop 40% drop 25-30% drop 70% of budget 60%-65% of Pou Sheng 19.0% 25.0% 82% drop 80% of budget (late Mar) budget Retail sales growth (Actual or CMBIS estimates) Period 4Q19 Jan20E Feb20E Mar20E 1Q20E 2Q20E 1H20E 2H20E FY20E Li Ning 35% 28% -70% -25% -17% -5% -11% 26% 7% Anta 18% 18% -70% -30% -23% -8% -15% 13% -1% FILA 53% 40% -70% -5% -5% 25% 10% 40% 25% Xtep 23% 23% -80% -40% -27% -10% -19% 13% -3% Pou Sheng 19% 25% -82% -35% -25% -8% -16% 15% -1% Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 16 Apr 2020 Figure 6: Sportswear brands sales growth trend Operating numbers 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20E Nike China sales 21.0% 17.0% 15.0% 16.0% 12.0% 15.0% 19.0% 25.0% 20.0% 31.0% 24.0% 22.0% 27.0% 23.0% -20.0% Adidas China sales 25.0% 25.0% 30.3% 27.7% 28.0% 32.0% 26.0% 27.0% 26.0% 23.0% 16.0% 14.0% 11.0% 15.0% -30.0% Anta brand's SSSG +ve Low- +ve 20%- +ve Mid- +ve 20%- +ve 20%- +ve Low- +ve Mid- +ve Mid- +ve Low- +ve Mid- +ve Mid- +ve High- -ve 20%- Anta brand's retail sales +ve LDD +ve HDD teens 30% teens 25% 25% teens teens teens teens teens teens teens 25% +ve Mid- +ve Mid- +ve Mid- +ve Low- +ve Low- +ve Low- -ve 20%- Core brand +ve MSD +ve HSD +ve LSD +ve MSD +ve HSD +ve HSD +ve HSD +ve HSD teens teens teens teens teens teens 25% -ve 20%- Kids over 30% over 30% over 30% 25%-30% over 30% over 40% over 40% over 25% Over 25% Over 25% Over 20% 30% Over 25% 25% 25% +ve Mid- Online over 50% over 100% over 50% over 50% over 50% over 40% over 40% over 25% Over 20% Over 25% 25% 35% Over 40% +ve MSD teens +ve 40%- +ve 50%- +ve 40%- +ve 85%- +ve 80%- +ve 90%- +ve 90%- +ve 80%- +ve 65%- +ve 55%- Non-Anta brands (FILA/ Desecente/over 50% overKolon/ 50% Sprandi/ King Kow) 50% 60% 50% 90% 85% 95% 95% 85% 70% 60% FILA brand's retail sales 50%-55% 50%-55% -ve MSD -ve 20%- Core brand 25% Kids -ve LSD FILA Fusion +ve MSD Online 160% Other brands 30%-35% 25%-30% -ve HSD Mid- +ve Low- +ve Low- +ve Low- +ve Mid- +ve Mid- +ve Mid- +ve High- +ve Low- Li Ning group's SSSG +ve HSD Flat +ve HSD -ve LSD +ve HSD teens teens teens teens teens teens teens teens twenties +ve Low- +ve Low- +ve Low- +ve Low- +ve High- Direct retail +ve LSD +ve HSD -ve MSD Flat -ve MSD +ve HSD +ve HSD +ve MSD +ve HSD teens teens teens teens teens +ve Low- +ve Low- +ve Low- +ve Mid- Wholesales +ve LSD +ve LSD -ve MSD +ve LSD -ve MSD +ve HSD +ve MSD +ve LSD +ve HSD +ve MSD teens teens teens teens +ve High- +ve High +ve