Accumulate. Anta Sports (2020.HK) Slow recovery from the trough. 18 July 2014 HONG KONG RETAIL SECTOR COMPANY RESULTS. Rating: Intatiate at Accumulate

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1 Slow recovery from the trough HONG KONG RETAIL SECTOR COMPANY RESULTS Rating: Accumulate Turnover dropped by 4.5% YoY to RMB 7.28bn, but GPM was up 3.7% to 41.7%. NPM was stable at 18% with an attractive payout ratio of 71.7% in FY213. Satisfactory inventory management was stemmed from adopting new retailoriented strategy. A sign of an improvement of store efficiency has been seen amidst the strategic restructuring of the distribution network. High trade receivables and payables could be a concern on the revenue/expense quality and the cash conversion cycle. Mid-single-digit SSS growth in the 1Q14 and Low-double-digit 4Q14 order book growth revealed a growing sales momentum Financial Highlights Anta s net profit in FY213 declined 3.2% YoY to RMB 1.315bn with a stable net profit margin of 18.1% (212:17.8%). The 4.5% YoY drop of total turnover to RMB 7.28bn was largely driven by low sales performance in Footwear and Apparel categories (-7.7% YoY; -2.8% YoY) offsetting 19.5% YoY growth in Accessories. Gross profit margin of 41.7% (+3.7% ppts) was in line with the management guideline, revealing a good sign of cost control in FY213. A final div of HK$ 22 cents per ordinary share together with the interim div of HK$ 19 cents and HK$ 7 cents for special div contributed an attractive payout ratio of 71.7% in this current fiscal year (212: 71.7%). Significant increment of trade receivables & payables were recorded, posting a threat on the revenue/expense quality. More core ANTA store closures in 2H13 showed the restructuring of distribution channels could be rolled over in 214. How we view this A steady SSS growth with a strong order book and the stable inventory level indicated Anta was on a right track to recovery amidst the ongoing industry-wide consolidation. We forecast the earnings in FY 214 could grow 7.8%-1.5% with a stable GPM. Still, we are cautious with the sustainability of the revenue growth afterwards based on (1) fierce rivalry among local and imported competitors such as Nike and Adidas; (2) the market acceptance of new differentiated product lines, and; (3) potential impact for doubtful debts due to high receivables Investment Action We expect Anta managed to achieve a 2-year revenue CAGR of 7.75% and 1% EPS CAGR in , factoring in an intense competition among the peers and our conservative view on the recovery of the China s sportswear industry. Our TP of HK$ is based on 16.7x FY15 P/E, implying potential 6.82% capital upside. Thus, we initiate with Accumulate investment rating. Upside risk is higher-thanexpected sales growth and faster-than-expected recovery. Downside risk is lowerthan-expected sales revenue and inventory pile-up. Key Financial Summary FYE Dec FY11 FY12 FY13 FY14E FY15E Revenue (RMB mn) 8,95 7,623 7,281 7,871 8,461 NPAT (RMB mn) 1,724 1,356 1,33 1,53 1,594 EPS (RMB cents) P/E (X) BVPS (RMB) P/B (X) DPS (HKD) ; PSR Estimates Target Price (HKD) Forecast Dividend (HKD) Closing Price (HKD) Potential Upside Intatiate at Accumulate Company Description Anta Sports Product Limited is a leading Chinese sportswear brand with an extensive distribution network in second and third tier cities in China. The company primarily designs, develops, manufactures and markets ANTA sportswear including footwear, apparel and accessories. Company Data Raw Beta (Past 2yrs weekly data) Market Cap. (HKD mn) 31,97 Enterprise Value (HKD mn) 25, week range (HKD) Closing Price in 52 week range Jul-13 Major Shareholders 1.ANTA INTL GROUP HLDG LTD 2. ANDA HOLDINGS LTD 3. ANDA INVESTMENTS Valuation Method PE Alan Fong alanfong@phillip.com.hk (+852) Sep Nov Jan % % 5% 1% 17-Mar May-14 Volume, mn 22 hk equity HSI 17-Jul-14 N/A % 6.72% 4.82% Page 1

2 A temporary decline on sales could build a better brand equity Anta reported a slight shrink of the 213 sales revenue to RMB 7.28bn (-4.5% YoY) while the net income declined 3.2% YoY to RMB 1.315bn, which we believe could be related to the restructuring of the sales distribution and lower-than-expected demand for the local sportswear products. At the end of Dec 213, there were 7,757 core Anta stores (212: 8,75), 881 Kids sportswear series stores (212: 833) and 416 FILA stores (212: over 3), in coherent to the Management s effort on enhancing store quality in terms of location, size and store layout rather than the number of stores. We expect Anta continues to promote their sixth-generation store image standard to retailers so that the better brand could boost a sustainable strong growth on sales. The GPM and NPM improved - The rebound in GPM of 41.7% (212:38.%) and NPM of 18.1% (212: 17.8%) affirmed the comprehensive monitoring system, which includes the expansion of the ERP system coverage in the retail channels and weekly report by retailers, could enhance the operation efficiency. The total GPM % change was attributed largely by Footwear (5.5% YoY) (213: 44.5% vs 212: 39.%) and Apparel (2.4% YoY) (213:39.6% vs 212:37.2%). The improvement on the efficiency was largely driven by less proactive de-stocking practice in FY13. We believe Anta could stand out from peers with a stable NPM and GPM amidst the industry-wide consolidation. Fig: Gross profit margin & Net profit magain 45% 4% 35% 3% 25% 2% 15% Gross profit margin Net profit margin 1% FY11 FY12 FY13 FY14E FY15E A sign to recovery Anta s reported strong 4Q14 order book growth of LDD increase and the retail SSSG for 1Q14 increased by a MSD (213: MSD increase) comfort us with the uptrend growth since the beginning of 214. We attribute the sales recovery to Anta s higher store efficiency and the better brand equity. Fig. Anta Quarterly Order Book Trends & Retail SSSG Trend over Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Quarterly Order Book Trend 2-3% decline 15-25% decline 1-2% decline 5-15% decline HSD increase HSD increase HSD increase LDD increase Retail SSSG Trend Flat Flat Flat MSD increase MSD increase Page 2

3 Inventory level remained stable While the inventory level of RMB 689mn grew.28% YoY, the FY213 sales revenue declined 4.5% to RMB 7.28bn. The average inventory turnover days increased 8 days to 59 days (63 days after adjustment), revealing Anta may suffer from storage cost for longer period of storage time. Fig: Inventory Level (RMB mn) with YoY growth (%) Raw materials Work in progress Finished goods Inventories Growth 4% 35% 3% 25% 2% 15% 1% 5% FY9 FY1 FY11 FY12 FY13 % High Receivables & High Payables lowered the revenue/expense quality- The FY13 trade payables of RMB 866.6mn (+36.83% YoY) resulted to the 18-day increase in day s payables outstanding. We believe the strong bargaining power to suppliers could enable Anta to retain more fund reserve for the distribution restructuring and R&D. Still, 82% of the trade payables was due within 3 months and would be recorded accordingly later. We expect the NPM in the Q1 214 may suffer modestly. The trade receivables of RMB 922.3mn grew 29.8% YoY, inducing a 4-day increase in day s sales outstanding. Anta would face a risk for the doubtful debts. The adjusted CCC of 37 days suggested a better control on cash conversion, largely driven by the surge of day s payable outstanding. We expect there would be more insight in the incoming interim report. Fig: Trade receviables & payable (RMB mn) with YoY growth (%) Fig: Operating Effiency Analysis Trade receivables less doubful debts Trade payables Days inventory outstanding, adj Days sales outstanding Trade receivables less doubful debts growth Trade payables growth Days payable outstanding Cash Conversion Cycle (CCC), adj 1, 1% 7 8 1, % 1% 6% 8% 6% 4% 4% 2% 2% % % FY9 FY1 FY11 FY12 FY13-2% FY9 FY1 FY11 FY12 FY13 The penetration of Nike and Adidas in China could damage Anta s earnings - Nike (China) Inc and Adidas Sports (China) Ltd led the sportswear markets in China with the market shares of 12% and 11% in 212 respectively according to Euromonitor International. Though Nike and Adidas were struggling in the recent past, the companies seemed to have found a right strategy to reposition its brand in the region and could be benefit from consumers in China becoming more brand-aware. These two imported giants armed with heavy investment in R&D would have more flexibility for the ever-changing taste and preference of the consumers in China. The accelerating expansion into the country s lower-tier cities would also post a threat for the local players. Page 3

4 22.HK: Price: HK$ (17/7/214); TP: HK$ 13.31; Recommendation: Accumulate Income Statement (RMB mn) FY11 FY12 FY13 FY14E FY15E Valuation Ratios FY11 FY12 FY13 FY14E FY15E Sales Revenue 8,95 7,623 7,281 7,871 8,461 P/E (X) Cost of sales (5,142) (4,73) (4,242) 4,542 4,95 P/B (X) Gross Profit 3,762 2,893 3,39 3,329 3,511 EV/EBITDA (X) EBITDA 2,11 1,673 1,696 1,928 1,997 Dividend Yield (%) 4.3% 3.3% 3.4% 3.4% 3.4% Depreciation & Amortisation (9) (11) (131) (134) (144) EBIT 2,12 1,563 1,566 1,795 1,853 Growth & Margins (%) Taxation (436) (374) (423) (446) (456) Growth Net finance income/cost Revenue 2.2% -14.4% -4.5% 8.1% 7.5% Profit After Tax 1,724 1,356 1,33 1,53 1,594 EBITDA 15.4% -2.4% 1.4% 13.7% 3.6% Non-controlling Interest 6 3 (15) 3 3 EBIT 15.8% -22.3%.1% 14.6% 3.3% Net Income, reported 1,73 1,359 1,315 1,527 1,591 Net Income, adj. 11.5% -21.5% -3.2% 16.1% 4.2% Margins Gross Profit margin 42.3% 38.% 41.7% 42.3% 41.5% Per share data (RMB) EBITDA margin 23.6% 21.9% 23.3% 24.5% 23.6% EPS (cents) EBIT margin 22.6% 2.5% 21.5% 22.8% 21.9% DPS (HKD) Net Profit Margin 19.4% 17.8% 18.1% 19.4% 18.8% BVPS Key Ratios Balance Sheet (RMB mn) FY11 FY12 FY13 FY14E FY15E ROE (%) 27.2% 2.1% 18.4% 21.3% 21.2% PPE 715 1,71 1,84 1,99 1,123 ROA (%) 21.1% 13.5% 13.% 15.3% 15.8% Intangibles Net Debt/(Cash).9% 25.8% 12.1%.7%.7% Other Net Gearing (X) n.m. 9.9% 4.8% - - Total non-current assets 1,425 1,934 1,931 1,944 1,96 Inventory Trade and Other receivable 1,79 1,373 1,933 1,74 1,538 Cash & Cash Equivalent 4,443 5,212 5,55 5,246 5,462 Others Total current assets 6,77 8,12 8,187 8,14 8,132 Total Assets 8,194 1,36 1,118 9,958 1,92 Accounts Payables 1,472 1,774 1,889 1,756 1,645 Others 133 1, Total current liabilities 1,64 2,898 2,574 2,61 2,44 Long term loans Others Total non-current liabilities Non-controlling interest Shareholder Equity 6,372 6,752 7,154 7,158 7,487 ; PSR Estimates Page 4

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