China / Hong Kong Equity Radar ANTA Sports Version 1 | Bloomberg: 2020 HK EQUITY | Reuters: 2020.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 30 Sep 2019 BUY (Initiating coverage) Strong portfolio of brands to drive Last Traded Price ( 30 Sep 2019):HK$64.85(HSI : 26,092) growth Price Target 12-mth:HK$74.50 (14.8% upside) • Expect sustainable momentum at Anta and Fila brands to Analyst drive solid earnings CAGR of 30% for FY18-20 CH/HK Research Team+852 36684181 • Positive on its multi-brand strategy which provides drivers for medium to longer run, despite near-term Price Relative uncertainties from Amer acquisition • Initiate BUY with a TP of HK$74.5, representing 15% upside to current level Strong FY18-20 earnings CAGR of 30%. Following a strong 80% revenue growth in 1H19, we expect Fila to sustain a solid momentum in 2H19 on store expansion (1,900-2,000 POS vs 1,788 as of June 19) and improving store productivity, with its contribution to overall revenue to further increase to from the 44% level in 1H19. Coupled with solid momentum for the Anta brand, Forecasts and Valuation we expect revenue to grow a decent 32% in FY19. On margin FY Dec (RMBm) 2017A 2018A 2019F 2020F Turnover 16,692 24,100 31,695 38,138 front, we expect a relatively stable margin in the 2H19 (vs ~320bps EBITDA 4,230 6,032 8,371 10,448 expansion in 1H19 OP margin) on higher marketing expenses. All- Pre-tax Profit 4,311 5,767 7,937 9,996 in, we estimate FY19 earnings to grow 34%. We expect Fila Net Profit 3,088 4,103 5,486 6,909 EPS (RMB) 1.17 1.53 2.04 2.57 momentum to moderate in FY20 but should remain a key driver, EPS (HK$) 1.29 1.68 2.25 2.83 with FY18-20 earnings CAGR at 30%. EPS Gth (%) 23.2 30.8 33.6 25.9 Diluted EPS (HK$) 1.29 1.68 2.25 2.83 Strong brand portfolio covering a wide market segment. We are DPS (HK$) 0.81 1.01 1.15 1.44 BV Per Share (HK$) 5.62 6.47 7.73 9.10 positive on Anta’s multi-brand strategy, which provides the PE (X) 50.4 38.5 28.8 22.9 company a well-diversified exposure to a wide market segment, P/Cash Flow (X) 48.9 35.6 20.3 20.5 spanning from mass market to premium, and performance to P/Free CF (X) 59.6 43.6 24.5 25.7 EV/EBITDA (X) 34.7 24.9 19.1 15.1 fashion. The acquisition of Amer Sports, which was completed in Net Div Yield (%) 1.2 1.6 1.8 2.2 March 2019, should further strengthen its brand portfolio. Pending P/Book Value (X) 11.5 10.0 8.4 7.1 more details on Amer’s strategy, 2H19 would be a seasonally Net Debt/Equity (X) CASH CASH 0.0 CASH ROAE(%) 22.5 26.0 28.9 30.9 stronger half for the brand. In longer run, there should be synergies Earnings Rev (%): New New between Amer’s strong production expertise and Anta’s well- Consensus EPS (RMB) 2.07 2.59 established retail and distribution capability in China. Other Broker Recs: B:31 S:0 H:5 Valuation: Source of all data on this page: Company, DBS Bank (Hong Kong) Limited We derived our TP of HK$74.5 based on DCF, which translates into (“DBS HK”), Thomson Reuters a FY20 PE of c.26x. Key Risks to Our View: Macro slowdown, rising competition, execution risk relating to Amer integration, forex At A Glance Issued Capital (m shrs) 2,701 Mkt Cap (HK$m/US$m) 175,177 / 22,344 Major Shareholders (%) Anta International Group Holdings Ltd 61.1 Free Float (%) 38.9 3m Avg. Daily Val. (US$m) 52.00 GICS Industry: Consumer Discretionary / Consumer Durables & Apparel Bloomberg ESG disclosure score (2017)^ 44.0 - Environmental / Social / Governance 36.5 / 43.9 / 57.1 ^ refer to back page for more information sa- CS /DL Equity Radar ANTA Sports Growth Prospects and Valuation Sales Breakdown – Product category (2018) A diversified brand portfolio for wide market segment. Anta Footwear has a strong portfolio of brands which cater to a wide range of 36% Accessories market segments from mass market to premium market. The 3% company has divided its brands into 3 major categories - performance sports (Anta, Anta Kids, Sprandi), Fashion sports (Fila, Kingkow) and outdoor sports (Descente, Kolon, Amer). Apparel Each brand group having a dedicated design, branding, sales 61% and marketing, while there are organization team for retail, merchandising, production and e-commerce for better synergy. While its core brand Anta has stronger exposure in second and Gross Profit Breakdown – Product category (2018) lower tiered cities, its other brands such as Fila and Descente Accessories are more prevalent in the first and higher-tiered market. Footwear 3% Among domestic players, Anta’s brand portfolio is considered 33% to be the most comprehensive and diversified. Mergers & acquisitions. The acquisition of Amer Sports in March 19 has further strengthened the company’s brand Apparel portfolio. Amer sells sports equipment, footwear and apparel 64% through its brands including Salomon, Atomic, Wilson, Arc’teryx, Suunto, Peak Performance and Precor. With a 57.95% stake in the JV, the Amer’s results are expected to be Sales Breakdown- Segments (1H19) included in Anta Sports’ as share of profits from JV. The JV recorded a loss of Rmb849m in 1H19 (Mar – Jun 19) on a revenue of almost Rmb4bn, partly due to one-off as well as All other FILA brand seasonality of Amer, which business is skewed more towards brands 44% 5% winter season. As such, better contribution is expected in 2H19, with growth to accelerate going forward. The key risk would be on execution. While Anta’s track record in Fila illustrated its ability in managing acquired brands, it does not ANTA brand guarantee success in Amer’s case which has a much higher 51% overseas exposure. Gross Profit Breakdown- Segments (1H19) Sportswear demand still going strong. Being a market leader, Anta would remain a key beneficiary of the growing All other sportswear demand in China, with its expanding brand brands portfolio providing additional impetus for market share growth. 5% FILA brand In terms of store expansion, it will focus mostly on Fila, which 56% target 1,900-2,000 POS by end FY19 (1,788 in 1H19) with moderate expansion for Anta (10,300-10,400 POS by end FY19 ANTA brand vs 10,223 in 1H19) and other brands (15-25 for Decente, 20- 39% 30 for Kingkow). Source: Company, DBS HK Page 2 Equity Radar ANTA Sports Balance Sheet: Net cash declined to Rmb459m in 1H19, from Rmb9,971m in Leverage & Asset Turnover (x) FY18 due to the Amer acquisition. As a result, the company has lowered its dividend payout to c.30% in 1H19 from 61% in 1H18. Excluding the acquisition, operating cash inflow remained strong at Rmb3.4bn+ in 1H19. Share Price Drivers: The company will be giving more update on Amer strategy in early December which should provide more clarity on its outlook and alleviate some of the market concerns. A successful integration of Amer sports could serve as potential ROE catalysts for the share price. Meanwhile, a stronger-than- expected 3Q sales performance could be another catalyst. Key Risks: Global economic uncertainties such as economic slowdown are key risks, while stiff competition in sports or the athleisure segment would be another major challenge. The execution risk on the Amer acquisition would also be closely watched out for by investors. Environment, Social, Governance: Forward PE Band Rising to new challenges in environmental protection, corporate management, manufacturing etc., Anta has been putting more focus on innovation and creativeness. That includes the production of more environmental-friendly sportswear products using new and green materials, exploration of new production techniques, enhancement of automation in production processes, deployment of upgraded retail platform to improve efficiency. Company Background PB Band ANTA Sports Products designs, develops, manufactures, and markets sportswear, including sports footwear, apparel and accessories. The brand was established in 1991 and the company currently has about 12,500 stores which sell its portfolio of well-known brands including ANTA, FILA, DESCENTE, SPRANDS, KINGKOW, and KOLON SPORT. It also acquired Amer Sports Corporation in 2019, a Finnish sporting goods company that has several internationally well-known brands focused on outdoor sports related clothing, equipment and footwear. Source: Company, DBS HK Page 3 Equity Radar ANTA Sports Income Statement (RMB m) FY Dec 2016A 2017A 2018A 2019F 2020F Revenue 13,346 16,692 24,100 31,695 38,138 Cost of Goods Sold (6,887) (8,451) (11,413) (14,518) (17,122) Gross Profit 6,459 8,241 12,687 17,176 21,016 Other Opng (Exp)/Inc (3,256) (4,252) (6,987) (9,233) (11,014) Operating Profit 3,203 3,989 5,700 7,944 10,002 Net Interest (Exp)/Inc 108 322 68 (7) (6) Pre-tax Profit 3,311 4,311 5,767 7,937 9,996 Tax (866) (1,152) (1,533) (2,222) (2,799) Minority Interest (59) (71) (131) (229) (288) Net Profit 2,386 3,088 4,103 5,486 6,909 EBITDA 3,421 4,230 6,032 8,371 10,448 Growth Revenue Gth (%) 20.0 25.1 44.4 31.5 20.3 EBITDA Gth (%) 18.8 23.7 42.6 38.8 24.8 Opg Profit Gth (%) 18.8 24.5 42.9 39.4 25.9 Net Profit Gth (%) 16.9 29.4 32.9 33.7 25.9 Margins & Ratio Gross Margins (%) 48.4 49.4 52.6 54.2 55.1 Opg Profit Margin (%) 24.0 23.9 23.7 25.1 26.2 Net Profit Margin (%) 17.9 18.5 17.0 17.3 18.1 ROAE (%) 25.0 22.5 26.0 28.9 30.9 ROA (%) 16.8 16.2 16.8 15.0 16.6 ROCE (%) 22.9 23.2 23.1 19.8 21.9 Div Payout Ratio (%) 65.9 64.0 60.2 51.3 51.3 Net Interest Cover (x) NM NM NM 1,209.5 1,608.2 Source: Company, DBS HK Page 4 Equity Radar ANTA Sports Balance Sheet (RMB m) FY Dec 2016A 2017A 2018A 2019F 2020F Net Fixed Assets 1,327 1,909 2,536 3,429 4,571 Invts in Associates & JVs 0 0 0 11,707 11,707 Other LT Assets 1,443 1,724 2,553 4,435 4,586 Cash & ST Invts 7,322 9,404 10,091 6,258 8,855 Inventory 1,295 2,155 2,892 3,680 4,340 Debtors 2,641 3,733 2,505 3,294 3,964 Other Current Assets 195 150 3,796 3,697 3,697 Total Assets 14,224 19,074 24,374 36,500 41,719 ST Debt 938 148 1,244 1,244 1,244 Creditors 3,060 3,978 5,633 7,166 8,451 Other Current Liab 275 373 671 1,601 1,794 LT Debt 40 0 70 5,477 5,477 Other LT Liabilities 14 215 236 1,070 1,159 Shareholder’s Equity 9,549 13,706 15,777 18,971 22,335 Minority Interests 348 654 743 971 1,259 Total Cap.