Anta Sports Company Update BUY Equity | Hong Kong | Retailing-Softline 25 January 2013 Recent share price decline offers better entry point; Buy Raymond Ching >> +852 2161 7992 Research Analyst Merrill Lynch (Hong Kong) Expect 3Q13 trade fair orders to improve sequentially [email protected] Our recent check reconfirms our view of gradual SSS, retail discount and channel Chen Luo, CFA >> +852 2161 7734 inventory improvement. We believe the recent share price weakness offers better Research Analyst Merrill Lynch (Hong Kong) entry point & expect Anta’s 3Q13 trade fair orders (to be announced in end-Feb) [email protected] to see some sequential improvement vs 2Q13 (down 15-25%). Anta is our top pick in sportswear segment on market leadership, higher earnings visibility & solid balance sheet. Valuation is attractive at 9x CY13E ex-cash P/E. We see potential Stock Data upside to the 6% dividend yield as Anta may consider raising its payout ratio. Price HK$6.89 Price Objective HK$8.90 Stable sales network and solid balance sheet Date Established 6-Jan-2013 Anta‘s AR and inventory days are the healthiest among the sportswear brands. Investment Opinion C-1-7 With stable working capital cycle, we project its net cash to reach RMB4.5bn Volatility Risk HIGH /4.8bn in 2012/13E (33/35% of market share). We expect limited inventory 52-Week Range HK$4.03-HK$9.90 buyback or account receivables provision (if any) on its stable sales network and Mrkt Val / Shares Out (mn) US$2,216 / 2,494.0 Market Value (mn) HK$17,183 improving profitability of its distributors/retailers. Average Daily Volume 10,444,760 BofAML Ticker / Exchange ANPDF / HKG SSS and channel inventory are gradually improving Bloomberg / Reuters 2020 HK / 2020.HK We expect Anta’s 4Q12 SSS to decline by low-single digit, better than mid- to ROE (2012E) 20.1% high-single digit decline in 3Q12. Meanwhile, 4Q12 retail discounts were also 5% Net Dbt to Eqty (Dec-2011A) -47.0% Est. 5-Yr EPS / DPS Growth -5.5% / -5.5% less than 3Q12, based on our channel check. On a lower base coupled with an Free Float 31.0% improvement in volume and ASP, we expect SSSG to approach flat-to-slightly positive level in 2013. At present, Anta’s channel inventory is slightly below five months (20% higher than normal level). We believe its channel inventory issue will be resolved by 2H13 based on the 20% spring/summer orders reduction vs flattish SSSG in 1H13. The healthy channel inventory in 2H13 should drive a stronger trade fair recovery in 4Q13 with 1Q14 orders (announcing in Aug 2013) likely to return to growth. Estimates (Dec) (CNY) 2010A 2011A 2012E 2013E 2014E [email protected]. Net Income (Adjusted - mn) 1,551 1,730 1,330 1,091 1,222 EPS 0.620 0.692 0.532 0.436 0.489 EPS Change (YoY) 23.9% 11.5% -23.1% -18.0% 12.0% Dividend / Share 0.450 0.520 0.330 0.280 0.310 Free Cash Flow / Share 0.539 0.530 0.296 0.368 0.426 Valuation (Dec) This report is intended for 2010A 2011A 2012E 2013E 2014E P/E 9.41x 8.07x 10.41x 12.67x 11.31x Dividend Yield 7.70% 9.31% 5.96% 5.07% 5.61% EV / EBITDA* 5.37x 4.65x 5.80x 6.87x 6.16x Free Cash Flow Yield* 9.75% 9.58% 5.36% 6.66% 7.70% * For full definitions of iQmethod SM measures, see page 7. c58da9b710df662c >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. Unauthorized redistribution of this report is prohibited. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 8 to 10. Analyst Certification on Page 6. Price Objective Basis/Risk on page 6. Link to Definitions on page 6. 11241416 Anta Sports 25 January 2013 SM iQprofile Anta Sports Key Income Statement Data (Dec) 2010A 2011A 2012E 2013E 2014E Company Description (CNY Millions) Listed on July 10, 2007 on the Hong Kong Stock Sales 7,408 8,905 7,849 6,691 7,322 Exchange, Anta is the second-biggest domestic Gross Profit 3,171 3,762 3,237 2,701 2,956 sportswear brand and the fourth-largest overall in Sell General & Admin Expense (1,477) (1,825) (1,737) (1,442) (1,538) China. The company is vertically integrated from Operating Profit 1,737 2,011 1,575 1,329 1,494 design, R&D, manufacturing to brand management Net Interest & Other Income 106 149 133 115 124 and wholesale. It sells Anta products to 50 Associates NA NA NA NA NA distributors that either wholesale to sub-distributors Pretax Income 1,843 2,160 1,708 1,444 1,618 Tax (expense) / Benefit (297) (436) (384) (361) (405) or directly sell to end-consumers through >6,600 Net Income (Adjusted) 1,551 1,730 1,330 1,091 1,222 stores nationwide. Average Fully Diluted Shares Outstanding 2,500 2,500 2,500 2,500 2,500 Key Cash Flow Statement Data Investment Thesis Net Income 1,551 1,730 1,330 1,091 1,222 We expect Anta's earnings to gradually improve in Depreciation & Amortization 84 90 110 94 92 2H13 with sales to turn slightly positive and margins Change in Working Capital (295) (454) (170) 252 27 to improve on A&P reduction, tighter operating cost Deferred Taxation Charge NA NA NA NA NA control and reduced supports to distributors. We are Other Adjustments, Net 93 81 (178) (217) 14 positive on the company given its 1) market Cash Flow from Operations 1,433 1,448 1,093 1,219 1,355 leadership, 2) strong channel management and Capital Expenditure (89) (127) (353) (301) (293) supply chain, 3) relatively clean channel inventory (Acquisition) / Disposal of Investments NA NA NA NA NA Other Cash Inflow / (Outflow) 585 (611) 133 115 124 and 4) higher earnings visibility with less Cash Flow from Investing 496 (738) (220) (186) (169) operational restructuring in the near term. Shares Issue / (Repurchase) 6 1 0 0 0 Cost of Dividends Paid (940) (1,055) (823) (698) (773) Cash Flow from Financing (939) (1,059) (828) (704) (779) Free Cash Flow 1,344 1,321 739 918 1,062 Stock Data Net Debt (3,388) (3,016) (3,060) (3,390) (3,797) Price to Book Value 2.0x Change in Net Debt (954) 350 (44) (329) (407) Key Balance Sheet Data Property, Plant & Equipment 503 473 725 952 1,165 Other Non-Current Assets 806 952 928 908 897 Trade Receivables 990 1,709 1,720 1,375 1,404 Cash & Equivalents 3,391 3,018 3,062 3,391 3,799 Other Current Assets 1,363 2,043 1,993 1,917 1,963 Total Assets 7,054 8,194 8,429 8,544 9,228 Long-Term Debt NA NA NA NA NA Other Non-Current Liabilities 160 171 134 39 185 Short-Term Debt 3 2 2 2 2 Other Current Liabilities 1,161 1,602 1,395 1,224 1,327 Total Liabilities 1,324 1,776 1,530 1,265 1,514 Total Equity 5,731 6,419 6,899 7,279 7,714 Total Equity & Liabilities 7,054 8,194 8,429 8,544 9,228 iQmethod SM - Bus Performance* Return On Capital Employed 27.8% 27.6% 19.4% 15.1% 15.9% Return On Equity 28.8% 28.7% 20.1% 15.5% 16.4% Operating Margin 23.4% 22.6% 20.1% 19.9% 20.4% EBITDA Margin 24.6% 23.6% 21.5% 21.3% 21.7% iQmethod SM - Quality of Earnings* Cash Realization Ratio 0.9x 0.8x 0.8x 1.1x 1.1x Asset Replacement Ratio 1.3x 1.8x 4.1x 4.1x 3.6x Tax Rate (Reported) 16.1% 20.2% 22.5% 25.0% 25.0% Net Debt-to-Equity Ratio -59.1% -47.0% -44.4% -46.6% -49.2% Interest Cover NA NA NA NA NA Key Metrics * For full definitions of iQmethod SM measures, see page 7. 2 Anta Sports 25 January 2013 Table 1: Sportswear valuations Company BB Share BofAML Reported Div Net cash as % of Name Code CURR Price Rating Mkt Cap (US$ m) P/E Ex-cash P/E ROE P/B P/B YIELD market cap 2012 2013 2014 2012 2013 2014 2012 2012 2013 Sportswear DONGXIANG 3818 HK HKD 1.23 BUY 878 28.1 19.9 16.9 6.8 2.8 1.8 2.9 0.8 0.8 2.5% 92.8% ANTA 2020 HK HKD 6.89 BUY 2,216 10.4 12.7 11.3 7.6 8.9 7.6 20.1 2.0 1.9 6.0% 34.8% LI NING 2331 HK HKD 5.30 Un-perform 722 NA NA NA NA NA NA NA 1.4 1.5 0.0% 1.5% XTEP* 1368 HK HKD 3.15 NR 884 6.2 7.8 7.5 4.8 6.1 5.5 15.6 1.3 1.2 7.9% 27.3% 361 DEGREES 1361 HK HKD 2.14 BUY 571 5.2 6.3 5.7 3.8 3.4 2.8 14.0 0.8 0.7 8.7% 51.1% POU SHENG 3813 HK HKD 0.56 NEUTRAL 385 339.8 10.7 8.4 570.6 12.7 9.9 -2.2 0.4 0.4 0.0% -19.4% PEAK* 1968 HK HKD 1.51 NR 409 5.9 6.3 5.6 0.8 0.8 0.7 9.5 0.6 0.6 5.4% 87.6% Sub-total 46.9 4.6 11.6 71.2 0.7 7.6 10.9 1.3 1.2 4.4% 38.5% Source: Company, BofA Merrill Lynch Global Research estimates Table 2: Sportswear SSSG Brand Owners 2010 1Q11 2Q11 1H11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E Dongxiang Low SD negative LSD negative negative negative negative negative Negative Negative mid teens Negative low teens Negative Mid single digit Li Ning 3.9% Low SD (where Jan/Feb: 3.5%) Low SD Low SD Low SD slight negative flat (est) slight negative mid single digit negative mid single digit negative Anta High SD High SD Slight HSD High SD Mid SD Flat Low SD Down LSD Down MSD to HSD Down MSD Down LSD 361 Degrees ~16% 14.7% 18.1% 16.4% 14.1% 9.4% 14% 6.9% 5.1% 4.1% 4% Xtep 7-8% 12% 15% 14% Low SD Low SD ~8% Low SD Negative Negative 5% Peak 13-14% 12.7% 12.2% low teens 6.2% 1.7% 8% 0% -18.0% 0% Pou Sheng 2-3% 7-8% 5% 6.5% 4% 3% 5% -2-3% 4-5% 3-4% 3% Belle ~Sportswear 5% 7% 5.5% 6-7% 2.5% 3.5% 5% -2.4% 5% 3.6% 10% Source: Company, BofA Merrill Lynch Global Research estimates Table 3: Sportswear retail discount trends in Shenzhen and Guangzhou Jul 12 - Aug 12 Sep 12 Golden week 2012 Oct 12 Nov 12 Dec 12 Jan 13 Last season Last season Last