Anta Sports Products [2020.HK]

Transcription

1 Anta Sports Products [2020.HK] Buying Amer Sports is Ambitious, but Many Questions Unanswered On 12 Sept 2018, Anta Sports confirmed that it is partnering with private equity firm Fountain- Vest Partners to submit a non-binding preliminary indication of interest in acquiring the entire share capital of Finland-listed Amer Sports (AMEAS FH) for a cash consideration of EUR40.00/share. Amer is a multi-brand company focusing on various niche markets, and we believe the deal will further enhance Anta s brand portfolio and global footprint. Although the details are not yet finalized, we don t expect the deal to be viewed positively by the market. If executed, the deal will saddle Anta with higher gearing, higher FX risk and lower margins. Whether these will be offset by organic growth and synergy effects will need to be addressed by the Company. While Amer may contribute more earnings to Anta if things go well, our preliminary calculation suggests the deal could have a negative earnings impact if the costs incurred are higher than expected (Figure 7). We believe Anta s share price performance will remain lacklustre in the near term, given the high uncertainty of this deal. We keep our earnings unchanged at the moment. But we lower our target 2019E PER multiple from 24x to 19x and our TP from HK$48.1 to HK$38.0 to reflect the uncertain outcome of the deal and unfavourable market environment. Downgrade to HOLD. Investment Highlights An Earnings Dilutive LBO Deal: As EUR40/share is being offered in cash, we expect the consideration to be EUR4.7b (RMB37.5b). Management emphasized that the deal will be financed by bank loans and that there is no need to tap capital markets. Since Anta has net cash of RMB9b on hand, we don t see an imminent need for equity financing, as (1) its funding cost of 3-4% p.a. is low enough; and (2) more PE firms may join the deal. But the deal is likely to be earnings dilutive, as Anta is paying 30x 2018E PER for Amer. Pros: Acquiring Niche Market Leader & Global Presence. Amer has an extensive global brand portfolio (e.g. Wilson, Salomon and Arc teryx), and the brands are mostly market leaders in various niche markets. Most are doing well on their own, especially in APAC. We agree there should be synergy effects in both sourcing and marketing channels. Acquiring Amer will also help Anta tap into growing niche markets, such as skiing and other outdoor sports. Cons: (1) Higher Gearing & FX Risk; Lower Margins. Regardless of how the deal is structured, Anta will consolidate Amer if the deal is done. This will drag Anta s financials down, given Amer s high debt (EUR820m net debt), lower margins and FX exposure. Cons: (2) Ambiguous Overall Direction. Some of the brands owned by Amer overlap with Anta s existing brand portfolio, such as Descente. This may raise investor concerns about the overall direction of the Company, as brands like Descente are still loss-making and in the early-development stage. Furthermore, although Amer is a Finnish company, many of its businesses are based in the US. This may create uncertainty about future operations as Sino-US trade relations continue to worsen. HOLD (Downgrade from BUY) Close: HK$33.25 (Sept 12, 2018) Target Price: HK$38.00 (+14.5%) Price Performance Market Cap Shares Outstanding Auditor China Consumer Sector Sporting Goods US$11,475m 2,684.8m KPMG Free Float 48.4% 52W range 3M average daily T/O Major Shareholding September 13, 2018 Sources: Company, Bloomberg Source: Bloomberg HK$ US$37.8m Chairman Ding Shizhong (61.81%) Stay on The Sidelines Initially. Unless the Company can provide more clarity on the projected financials, we expect the cons to outweigh the pros in investors eyes. This will Tony Li, CFA Analyst create a vicious circle, as the earnings dilution effect will continue to worsen as Anta s share price continues to face near-term weakness. We believe it is better to stay on the (852) sidelines and wait for more details on the transaction. Downgrade to HOLD. Our earnings forecast is unchanged at this moment, but we lower our target 2019E PER multiple from tonyli@chinastock.com.hk 24x to 19x and our TP from HK$48.1 to HK$38.0 to reflect the uncertainty surrounding the deal and the unfavourable market environment. Key Financials (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Wong Chi Man, CFA Head of Research Revenue 13,346 16,692 21,204 26,437 31,678 YoY Change 20.0% 25.1% 27.0% 24.7% 19.8% (852) Net Profit After Tax 2,386 3,088 3,751 4,701 5,718 YoY Change 16.9% 29.4% 21.5% 25.3% 21.6% EPS (RMB) cmwong@chinastock.com.hk YoY Change 16.8% 22.8% 19.5% 25.3% 21.6% ROE 25.0% 32.3% 27.4% 31.3% 34.4% P/E 30.5x 24.8x 20.8x 16.6x 13.6x Dividend Yield 2.2% 2.9% 3.4% 4.2% 5.1% Sources: Company, CGIS Research 1 (HK$) Turnover (RHS) Price (LHS) (HK$ million)

2 Amer Sports: What is the deal structure? Background: On 12 Sept 2018, Anta Sports confirmed that it is partnering with private equity firm FountainVest Partners to submit a non-binding preliminary indication of interest to acquire the entire share capital of Finland-listed Amer Sports (AMEAS FH). The deal is offered for a cash consideration of EUR40.00/share. If the deal is successful, this will be the largest acquisition ever by a Chinese sporting goods company. Unlike previous acquisitions (e.g. Descente and FILA) by Anta, the deal size is much larger and it involves acquiring a listed company with a global presence. The deal requires the approval of at least 90% of the shareholders of issued shares of Amer Sports on a fully diluted basis, and all necessary regulatory approvals. Figure 1: Recent Acquisitions by Anta Sports Date Brand Origin Area Type of Est. Transaction Consideration Dec-15 Sprandi Russia Leisure footwear M&A Tens of Million US$ Feb-16 Descente Japan Skiing, cross-training and running JV RMB150m Invested in JV Feb-17 Kolon Sport South Korea Outdoor sportswear products & winter sports products JV < RMB500m Oct-17 Kingkow Hong Kong Kid s fashion products M&A ~HK$60m Sep-18 Amer Sports Finland Various niche markets (e.g. skiing, EUR4.7b M&A cycling, baseball, diving) (RMB37.5b) Sources: Company, CGIS Research estimates Further Deal Details: As this is only a non-binding preliminary indication, the details of the deal have yet to be finalized. However, several key points were highlighted by Anta management on 12 Sept 2018: (1) Bank loan financing will be sufficient to finance the deal, and there should be no need to tap capital markets (both debt and equity financing). The average cost of financing will be 3-4% p.a. in this case. (2) More private equity investors, in addition to FountainVest Partners, may join the consortium. (3) Anta will be the largest party in the consortium, so the stake owned by Anta will be over 50%. (4) Amer Sports will be privatized after the acquisition is completed, but it may be relisted in the capital markets to allow the private equity investor(s) to exit. Our Take: We believe the deal will be funded by bank loans only, as Anta has RMB9 billion in net cash on hand. The participation of a private equity firm also allows the risk to be shared and lowers Anta s capital requirements. 2

3 Amer Sports: Multi-brand Leader in Niche Markets Founded in 1950, Amer Sports is a sporting goods company based in Finland. Its brand portfolio consists of leaders in various niche markets, such as Salomon, Arc teryx, Peak Performance, Atomic, Mavic, Suunto, Wilson and Precor. As its brand portfolio suggests, Amer sports has an extensive presence in different sports fields and countries. As at the end of December 2017, Amer Sports owned sales organizations in 34 countries, as a result of continuous M&A. For example, it just acquired Peak Performance in These brands are independently run by their own teams. This is why Anta management believes there will be room for synergy if Anta acquires Amer Sports. Figure 2: Brand Portfolio of Amer Sports Brand Country of Origin Target Market Product Area Salomon France Mountaineering, hiking, trail running Bindings, boots, skis and apparel Arc teryx Canada Outdoor sports Outerwear and equipment Peak Performance Sweden Sports fashion Apparel Atomic Austria Skiing - ski racing, freeskiing, crosscountry skiing and backcountry skiing Outerwear and equipment Mavic France Cycling Suunto Finland Outdoor sports and diving Wheel-tyre systems, pedals, helmets, shoes and apparel Dive computers, instruments and sports watches Wilson United States Tennis, baseball, American football, golf, basketball, softball, badminton and squash Equipment and apparel Precor United States Fitness Gym equipment Armada Skis United States Skiing Outerwear and equipment ENVE Composites United States Cycling Carbon fiber bicycle rims and components Louisville Slugger United States Baseball Equipment (Baseball bats) DeMarini United States Baseball Equipment (Baseball bats) Sports Tracker Finland Fitness Smartphone applications Sources: Company, CGIS Research 3

4 Amer Sports: Brief Financials Amer Sports has been growing steadily in terms of revenue, which reached EUR2,685m in FY2017 (ended 31 December). But because of its extensive global operations and M&A, its profit has fluctuated in recent years. However, based on the consensus numbers and recent updates by the company, Amer Sports should see an earnings recovery in FY2018E. The drivers include strong China sales and good performance from winter sports equipment (Arc teryx) and sports equipment (likely Wilson). Based on our estimates and Capital IQ s figures, Amer s revenue is 6% higher than Anta s, but its profit is only around 1/3 of Anta s due to lower margins. Based on Capital IQ s figures, EUR40/share means the valuation of the consideration is 30x 2018E PER. Figure 3: Amer Sports Key Financials Income Statement (EUR m) FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E Net Sales 2, , , , , , , ,106.4 YoY Change 3.5% 4.3% 13.7% 3.5% 2.4% 4.3% 6.3% 4.3% EBT YoY Change 53.3% -39.0% 118.2% 3.0% -17.9% 46.3% 19.3% 9.1% Net Profit YoY Change 56.0% -38.6% 119.5% 4.4% -26.5% 66.3% 19.6% 8.4% EBT Margin 5.9% 3.5% 6.6% 6.6% 5.3% 7.4% 8.3% 8.7% Net Margin 4.2% 2.5% 4.8% 4.8% 3.5% 5.5% 6.2% 6.5% EPS - Diluted (EUR) If Anta offers EUR40 / share: Equivalent PER 50.0x 29.9x 25.0x 23.3x Sources: CGIS Research, Capital IQ for consensus figures Figure 4: Anta vs Amer in RMB million (assuming EUR/RMB: 8.00) 25,000 20,000 21,204 22,406 15,000 10,000 5,000 3,832 1,241 - Sales Net Profit Anta Amer Sources: Capital IQ consensus (for Amer), CGIS Research estimates (for Anta) 4

5 Amer Sports: Brief Financials Figure 5: Amer Sports Revenue and Profit Breakdown Revenue Breakdown FY2013 FY2014 FY2015 FY2016 FY2017 Revenue (EUR m) - by Product Outdoor 1, , , , ,670.9 Ball Sports Fitness Total 2, , , , ,685.2 Revenue Mix - by Product Outdoor 60.4% 61.5% 60.4% 61.1% 62.2% Ball Sports 25.8% 24.1% 25.5% 25.6% 24.3% Fitness 13.9% 14.4% 14.1% 13.3% 13.4% Total 100.0% 100.0% 100.0% 100.0% 100.0% Revenue (EUR m) - by Geography EMEA 1, , , , ,173.5 Americas , , ,122.2 Asia Pacific Total 2, , , , ,685.2 Revenue Mix - by Geography EMEA 48.0% 47.7% 44.0% 43.2% 43.7% Americas 39.3% 39.2% 42.2% 42.6% 41.8% Asia Pacific 12.7% 13.0% 13.8% 14.2% 14.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% Profit Breakdown Operating Profit (EUR m) - by Product Outdoor Ball Sports Fitness Corporate Items (23.5) (22.9) (26.9) (37.0) (29.3) Total Operating Profit Mix - by Product Outdoor 82.0% 74.6% 76.0% 88.8% 83.4% Ball Sports 17.4% 21.3% 22.0% 20.2% 20.9% Fitness 15.8% 17.6% 14.7% 7.7% 9.3% Corporate Items -15.2% -13.6% -12.7% -16.7% -13.6% Total 100.0% 100.0% 100.0% 100.0% 100.0% Operating Margins - by Product Outdoor 9.8% 9.2% 10.5% 12.3% 10.7% Ball Sports 4.9% 6.7% 7.2% 6.7% 6.9% Fitness 8.2% 9.3% 8.7% 4.9% 5.6% Overall 7.3% 7.6% 8.4% 8.5% 8.0% Sources: CGIS Research, Capital IQ 5

6 Our First Take on the Deal The deal is likely to be viewed negatively by the market We believe the deal will be a focus of the capital markets in the near term. If it is successfully completed, it will be the largest deal ever in the China sporting goods industry. It will also strengthen Anta s position as one of the largest sporting goods companies in the world. However, based on the information available so far, we believe the cons may outweigh the pros at the moment. Unless the Company can provide more clarity and convincing figures about the proposed deal, we expect the market to continue to react negatively. #1 Pros: Acquiring 13 Niche Leaders at Once. Acquiring Amer Sports will allow Anta to acquire 13 internationally well-recognized brands at once. Most of the brands owned by Amer are leaders in their respective niche markets. For example, Wilson is a leading producer of tennis rackets, while Arc teryx is a leading high-end outdoor apparel and equipment brand. Niche markets are growing particularly fast in China, so the brands acquired will allow Anta to tap into these emerging markets. It will also allow Anta to be better prepared for the 2022 Beijing Winter Olympics. #2 Pros: Potential Synergy. According to Anta management, there will be room to create synergy. Most of the brands owned by Amer are operated independently. Therefore, Anta will be able to consolidate the supply chain after the acquisition. Also, these 13 brands could share Anta s marketing channels in China. According to Amer Sports, sales in China reached EUR120m in Before the deal proposed by Anta, they targeted sales of EUR200m in the long run. We think EUR200m will be achievable with the help of Anta s resources. Figure 6: Amer Sports Global Headcount US, France and Canada Accounted for the Most in 2017 Sources: Amer Sports 6

7 #1 Cons: Ambiguous Overall Direction. Some of the brands owned by Amer overlap with Anta s existing brand portfolio, such as Descente and Kolon Sports. This may cause investor concern about the overall direction of the Company, as brands like Descente are still loss-making, as they are in the early-development stage. #2 Cons: Risks related to the China-US Trade War. Although Amer is a Finnish company, many of its business are located in the US. Amer Sports also has a significant headcount in the US. This may create uncertainty about the future operations, as Sino- US trade relations continue to worsen. #3 Cons: Higher Gearing and FX Risk, and Lower Margins. Regardless of how the deal is structured, Anta will consolidate Amer if the deal is done. This will drag down Anta s financials, given Amer s high debt (EUR820m net debt), lower margins and FX exposure (to be explained later). Figure 7: Brand Portfolio of Anta Sports The Dotted Area is Where Amer Sports Will Be Positioned What will happen to Kolon & Descente? Sources: Company, CGIS Research 7

8 What Is the Potential Financial Impact? In our preliminary assessment, we conducted scenario analysis based on our estimates and market consensus figures. We also make some major assumptions about the transaction. In short, we think the acquisition may lift earnings in the near term if everything goes smoothly, and there may even be upside to earnings if the synergy is better than expected. However, we consider a negative impact on earnings to be more likely. The reasons are as follows: We consider a negative impact on earnings to be more likely (1) The valuation of the consideration is 30x/25x 2018E/19E PER, which is earnings dilutive after the share price correction on 12 Sept (2) We estimate that there will be huge goodwill amounting to EUR3.8b (RMB30.8b) created by the deal. This will be on top of the enormous goodwill of EUR431m carried by Amer. The goodwill will be subject to an impairment test, and any impairment could have a huge negative impact on Anta s earnings. (3) Volatility in interest costs and FX rates. (4) Additional costs incurred in the acquisition. We combine our original forecast for Anta and market consensus figures for Amer Sports from Capital IQ. Key Assumptions 1. Total Consideration: EUR4,688m in all cash 2. Anta s stake in the consortium: 70% 3. Amer will be consolidated into Anta effectively from 1 Jan Bank loans raised by Anta: RMB % interest cost p.a. 5. EURRMB = 8.00 and there is no FX gain/ loss 6. Base case We don t expect there to be margin enhancement from the deal but the contribution from Amer will still enhance Anta s EPS after finance costs. 7. Bear case We expect additional expenses (around RMB800m) to be incurred in the deal, which will drag down Anta s financials for the year. Figure 8: Financial Impact of the Acquisition Preliminary Estimates Key Financials (RMB m) FY2017 FY2018E FY2019E FY2020E Anta - Before Amer Deal Revenue 16, , , ,678.1 YoY Change 25.1% 27.0% 24.7% 19.8% EBT 4, , , ,938.0 YoY Change 30.2% 21.3% 25.0% 21.4% Net Profit 3, , , ,718.3 YoY Change 29.4% 21.5% 25.3% 21.6% EPS (RMB) YoY Change 22.7% 19.4% 25.3% 21.6% Anta - After Amer Deal - Base Case Revenue 16, , , ,529.1 YoY Change 25.1% 27.0% 137.1% 12.5% EBT 4, , , ,156.7 YoY Change 30.2% 21.3% 44.9% 20.9% Net Profit 3, , , ,125.4 YoY Change 29.4% 21.5% 33.7% 22.1% EPS (RMB) YoY Change 22.7% 19.4% 33.6% 21.6% Anta - After Amer Deal - Bear Case Revenue 16, , , ,529.1 YoY Change 25.1% 27.0% 137.1% 12.5% EBT 4, , , ,387.5 YoY Change 30.2% 21.3% 30.2% 23.2% Net Profit 3, , , ,565.7 YoY Change 29.4% 21.5% 18.7% 25.0% EPS (RMB) YoY Change 22.7% 19.4% 18.7% 25.0% Sources: CGIS Research estimates 8

9 Valuation Our EPS forecast is unchanged as the deal is not yet finalized. To recap, our latest forecast is that Anta s EPS for 2018E/2019E/2020E will be RMB1.40/1.75/2.13, suggesting 19.5%/25.3%/21.6% YoY growth. We continue to be positive on Anta s core operations, as the performance of the core ANTA brand and the emerging FILA brand should deliver solid earnings. Nonetheless, the uncertainty created from the proposed Amer Sports transaction cannot be ignored. We estimate that the downside risk from the deal may outweigh the potential benefits at this stage. Unless the Company can demonstrate clearly on how earnings and margins can be improved in this sizable deal, we believe investors should wait for more clarity at this stage. Downgrade to HOLD. Our earnings forecast is unchanged at the moment, but we lower our target 2019E PER multiple from 24x to 19x and our TP from HK$48.1 to HK$38.0 to reflect the uncertainty about the deal and the unfavourable market environment. Figure 9: Forward PER of Anta Sports HKD x 24x 19x 14x 9x 5 Sources: Bloomberg, CGIS Research 9

10 Key financials (potential contribution from Amer not included) Income Statement (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Balance Sheet (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Revenue 13,346 16,692 21,204 26,437 31,678 Bank Balances and Cash 5,830 6,968 8,521 10,854 13,962 COGS (6,887) (8,451) (9,996) (12,007) (14,065) Restricted Bank Deposits 1,687 2,586 2,586 2,586 2,586 Gross Profit 6,459 8,241 11,207 14,430 17,613 Trade Receivables 2,641 3,733 4,018 4,257 4,495 SG&A (3,515) (4,710) (6,694) (8,727) (10,677) Inventories 1,295 2,155 2,619 3,060 3,163 Other Operating Items Other Current Assets Operating Profit 3,203 3,989 5,044 6,364 7,729 Total Current Assets 11,453 15,442 17,744 20,758 24,206 Finance Income, Net Other Items PP&E 1,170 1,203 1,700 1,569 1,500 Net Profit Before Tax 3,311 4,311 5,229 6,537 7,938 Goodwill & Intangible Assets Income Tax (866) (1,152) (1,397) (1,747) (2,121) Other Non Current Assets 1,123 1,724 1,080 1,172 1,271 Net Profit After Tax 2,386 3,088 3,751 4,701 5,718 Total Non Current Assets 2,770 3,632 3,485 3,446 3,476 Minority Interest (After Tax) Total Assets 14,224 19,074 21,230 24,204 27,682 EPS (RMB) DPS (RMB) Trade Payables 3,060 3,978 3,284 4,095 4,907 Short-term Borrowings ,509 1,812 2,123 EBITDA 3,472 4,545 5,539 6,769 8,139 Other Current Liabilities EBIT 3,246 4,295 5,225 6,488 7,879 Total Current Liabilities 4,273 4,498 5,222 6,443 7,681 Revenue Growth 20.0% 25.1% 27.0% 24.7% 19.8% Long-term Borrowings Operating Profit Growth 18.8% 24.5% 26.5% 26.2% 21.4% Other Non-current Liabilities Net Profit Growth 16.9% 29.4% 21.5% 25.3% 21.6% Total Non-current Liabilities EPS Growth 16.8% 22.8% 19.5% 25.3% 21.6% Total Liabilities 4,327 4,714 5,483 6,770 8,077 Gross Margin 48.4% 49.4% 52.9% 54.6% 55.6% Total Common Equity 9,549 13,706 15,011 16,608 18,680 Operating Margin 24.0% 23.9% 23.8% 24.1% 24.4% Minority Interest Net Profit Margin 17.9% 18.5% 17.7% 17.8% 18.1% Total Equity 9,896 14,361 15,746 17,434 19,605 Total Equity & Liabilities 14,224 19,074 21,230 24,204 27,682 Cash Flow Statement (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Ratios FY2016 FY2017 FY2018E FY2019E FY2020E Net Profit After Tax 2,386 3,088 3,751 4,701 5,718 ROE 25.0% 32.3% 27.4% 31.3% 34.4% D&A Add-back ROA 16.8% 21.7% 19.7% 22.1% 23.6% Net Change in Working Capital (216) (381) (1,411) Other Operating Items Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash CFO 2,468 3,181 2,735 5,274 6,626 EBITDA Interest Coverage 54x 293x 1158x 139x 139x CAPEX (626) (589) (97) (141) (182) Rec. Turnover Days Other Investing Items 111 (990) Inventory Turnover Days CFI (515) (1,579) (97) (141) (182) Payables Turnover Days Other Payables Turnover Days Dividends Paid (1,541) (1,937) (2,446) (3,103) (3,647) Net Change in Debt (392) (827) 1, Current Ratio 2.68x 3.43x 3.40x 3.22x 3.15x Issue of Shares 15 3, Quick Ratio 2.38x 2.95x 2.90x 2.75x 2.74x Other Financing Items 535 2, Valuation FY2016 FY2017 FY2018E FY2019E FY2020E CFF (1,398) (2) (1,085) (2,799) (3,336) P/E 30.5x 24.8x 20.8x 16.6x 13.6x Total Cash Flow 555 1,601 1,553 2,334 3,108 P/B 7.6x 5.6x 5.2x 4.7x 4.2x Free Cash Flow 1,819 2,502 2,725 5,209 6,536 Dividend Yield 2.2% 2.9% 3.4% 4.2% 5.1% Sources: Company, Capital IQ, CGIS Research estimates 10

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 20/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: