Equity Research Consumer Discretionary Sport (1968 HK) Buy (maintained) Target price: HK$2.41 Signing of NBA All-Star player to enhance brand equity and ease concerns Signing of Dwight Howard to enhance brand equity Dwight Howard is an eight-time NBA All-Star player and his team, the Houston Rockets, is one of the most popular NBA teams in China. He has many followers on Weibo, especially Tencent Weibo where his number of followers is greater than Kobe Bryant s and Jeremy Lin s (Fig 1). His followers on Sina Weibo and Tencent Weibo are also 3x and 10x that of Tony Parker s, suggesting he will replace Tony Parker to become s most popular endorsed NBA player in China. We believe the signing will enhance s brand equity. After the end of the co-operation with NBA China in Oct 2014, has been seeking to endorse an NBA All-Star player to promote its basketball products. The signing of Dwight Howard 1) delivers what management had promised, and 2) should ease investor concerns that less sponsorship resources should be spent in China, given its internationalization strategy. Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 1010 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Sponsorship of LeTV Sports Shake Run LeTV Sports will launch its self-branded running event, Shake Run, this month in Zhengzhou, followed by another eight running events in different cities in 2015. Shake Run is a 5km fun run targeting fans of music and running. will showcase and sell its products during the event. Singapore s leading sportswear chain becomes a distributor During the 2Q16 sales fair held last week, signed a distribution agreement with Sports Link. According to management, Sports Link is Singapore s largest sportswear chain. This will expand s distribution network in Singapore. SSS trend We expect SSS momentum (digit growth in 2Q15) to be maintained in Jul and Aug thanks to solid demand and ongoing optimization of its store network. Maintain Buy and TP of HK$2.41 s share price has fallen 28% over the past three months and underperformed all its peers. Running and basketball are s key product categories, contributing >60% of footwear sales in 1H15. The latest sponsorships should help promotion of s brand and ease investor concerns that less sponsorship resources be spent in the China market. Trading at 9.2x P/E (vs peers' average of 12.2x) and with a 7.1% yield (vs peers' average of 4.2%) in FY15, its valuation is still undemanding. Figure 1: NBA stars followers on Weibo Stock performance Sina Weibo Tencent Weibo followers (m) followers (m) Sponsor 30% 20% 10% 0% -10% -20% Source: Bloomberg Key data -30% Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Source: Bloomberg HSI Sep 17 close (HK$) 1.95 Shares in issue (m) 2388.9 Major shareholder Xu Jingnan (37.4%) Market cap (HK$ bn) 4.6 3M avg. vol. (m) 14.8 52W high/low (HK$) 2.94/1.38 Valuation Lebron James na 1.1 Nike Dwyane Wade 5.5 1.1 Li Ning Jeremy Lin 4.2 8.3 Adidas Kobe Bryant 3.6 3.9 Nike Steve Curry 1.8 0.3 Under Armour Dwight Howard 1.5 9.1 Kevin Garrett 1.2 3.0 Anta Tony Parker 0.5 0.9 Chandler Parsons 0.3 0.0 Anta Rajon Rondo 0.2 0.1 Anta Klay Thompson 0.1 0.1 Anta Luis Scola 0.1 3.2 Anta Derrick Rose 0.1 3.9 Adidas Source: Tencent Weibo and Sina Weibo, GF Securities (HK) Turnover (Rmb m) Net profit (Rmb m) Sources: Company data, GF Securities (HK) EPS (Rmb) EPS YoY P/E Ex-net cash P/E Yield BPS (Rmb) 2013 2,613 244 0.116-21 13.3 3.0 8.2 2.0 0.8 6.0 2014 2,841 321 0.153 31 10.1 1.7 6.2 2.0 0.8 7.7 2015E 3,087 382 0.170 11 9.2 0.9 7.1 2.1 0.8 8.3 2016E 3,363 414 0.173 2 8.9 0.4 6.2 2.1 0.7 8.2 2017E 3,664 446 0.187 8 8.2 0.0 6.7 2.2 0.7 8.5 P/B ROE
Figure 2: Order book growth for sportswear companies 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 high singledigit growth digit growth digit growth digit growth digit growth digit growth digit growth digit growth digit growth Anta low-teens mid-twenties mid-teens high-teens low-teens mid-teens Li Ning NA NA NA growth growth growth growth growth growth high singledigit decline digit decline digit decline digit growth digit growth digit growth digit growth Xtep 0% 10% decline digit growth growth growth growth growth growth growth mid-teens mid-teens mid-teens mid-teens mid-teens mid-teens mid-teens growth 361 Degrees 11% decline 11% decline 7% decline 8% 11% 11% 16% 18% 15% Source: Company data, GF Securities (HK) Figure 3: SSS trend for sportswear companies Anta Li Ning Xtep 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 mid singledigit growth digit growth digit growth digit growth digit growth digit growth high-teens growth digit decline digit growth digit growth digit growth growth growth digit growth digit growth digit growth digit growth digit growth growth digit growth digit growth digit growth digit growth digit growth 361 Degrees 2% 3% 5% 6% 6% 7.2% Source: Company data, GF Securities (HK) Figure 4: Key assumptions (Rmb m) FY13 FY14 FY15E FY16E FY17E Total revenue 2,613 2,841 3,087 3,363 3,664 growth % -10.0% 8.7% 8.6% 8.9% 9.0% China market 2,080 2,189 2,401 2,609 2,835 growth % -17.3% 5.2% 9.7% 8.7% 8.7% Overseas market 533 653 685 754 829 growth % 37.2% 22.5% 5.0% 10.0% 10.0% Gross profit 927 1,079 1,167 1,275 1,392 Gross margin 35.5% 38.0% 37.8% 37.9% 38.0% Selling & distribution expenses ratio 12.8% 12.6% 12.0% 12.4% 12.7% Administrative expenses ratio 9.6% 10.3% 8.8% 8.4% 8.4% Operating profit margin 13.8% 15.9% 17.6% 17.6% 17.5% Effective tax rate 37.4% 34.4% 33.8% 33.5% 33.5% Net profit 244 321 382 414 446 growth % -21.3% 31.3% 19.1% 8.3% 7.8% Net profit margin 9.3% 11.3% 12.4% 12.3% 12.2% Payout ratio 108.8% 62.3% 70.0% 55.0% 55.0% Sources: Company data, GF Securities (HK) estimates Page 2
Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Company report Figure 5: P/E band 8 (HK$) 7 6 5 4 3 2 1 17x 14x 12x 10x 7x Sources: Bloomberg, GF Securities (HK) estimates Figure 6: Sportswear sector valuation table Price TP Mkt Cap P/E (x) EPS growth Revenue growth Yield P/B (x) ROE Sportswear Ticker Rating (Sep 17 2015) (HK$) (HK$ m) FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY15E FY15E Anta 2020 HK Buy 18.78 21.40 46,951 21.9 18.9 15.8 29 17 18 23 22 19 3.2 3.8 4.5 4.3 24.4 1968 HK Buy 1.95 2.41 4,658 10.1 9.2 8.9 31 11 2 9 9 9 6.2 7.1 6.2 0.8 8.3 Xtep 1368 HK Buy 3.77 3.80 8,214 13.6 12.5 9.8 (21) 10 26 10 12 12 4.4 4.0 5.1 1.3 11.0 China Dongxiang 3818 HK NR 1.97 na 10,907 9.4 20.5 21.9 334 (54) (6) (11) 18 15 3.8 4.2 3.6 0.9 3.4 Li Ning 2331 HK NR 3.63 na 6,844 na 157.8 16.5 na na 857 16 18 15 na 0.1 0.5 1.8 1.8 Hosa 2200 HK NR 2.88 na 4,777 9.5 9.1 9.1 4 4 0 19 11 10 na na na na 22.8 361 Degrees 1361 HK NR 2.49 na 5,148 10.3 8.1 6.5 88 27 24 9 13 19 3.9 4.9 6.4 0.8 10.1 Pou Sheng Intl 3813 HK NR 1.22 na 6,562 na na na na na na na na na na na na na na Average 12.5 33.8 12.7 77 3 131 11 15 14 4.3 4.0 4.4 1.6 11.7 Source: Company data, GF Securities (HK) estimates, Bloomberg #Company year-end in Mar. Its financial year 2014/2015/2016/2017 data are shown as FY14/15E/16E to facilitate data comparison. Excluding Li Ning and China Dongxiang, s peer average FY15/16 P/E is 12.2x/10.3x. Page 3
Figure 7: Financial statements Income statement Balance sheet Year end Dec 31 (Rmb m) FY13 FY14 FY15E FY16E FY17E Year end Dec 31 (Rmb m) FY13 FY14 FY15E FY16E FY17E Revenue 2,613 2,841 3,087 3,363 3,664 Fixed assets Cost of sales (1,686) (1,762) (1,920) (2,088) (2,272) PPE 533 506 487 469 453 Gross profit 927 1,079 1,167 1,275 1,392 Lease prepayments 204 176 172 168 164 Deposits for acquisition of land use rights 37 37 37 37 37 Other income 19 23 19 20 22 Intangible assets 23 25 27 28 30 Selling & distribution expenses (334) (359) (371) (417) (465) Deferred tax assets 27 45 45 45 45 Administration expenses (252) (291) (270) (284) (307) 824 790 768 747 729 Operating profit 360 451 545 593 642 Current assets Net finance cost 30 37 32 29 28 Inventories 366 346 380 422 459 Profit before tax 390 489 577 622 670 A/C receivables 907 868 896 976 1,042 Income tax expense (146) (168) (195) (208) (225) Prepayments 71 118 128 140 152 Net profit 244 321 382 414 446 Pledged deposit 348 502 692 836 992 EPS (Rmb) 0.12 0.15 0.17 0.17 0.19 Term deposit 1,000 1,400 1,800 2,100 2,400 Cash and cash equivalents 1,933 1,850 2,285 2,234 2,258 Growth rates 4,624 5,084 6,183 6,708 7,304 Revenue (10) 9 9 9 9 Net profit (21) 31 19 8 8 Total assets 5,448 5,874 6,951 7,456 8,032 EPS (21) 31 11 2 8 Current liabilities Margin & ratios A/C payables 242 154 201 219 238 Gross margin 35.5 38.0 37.8 37.9 38.0 Other payables 174 265 246 267 291 OP margin 13.8 15.9 17.6 17.6 17.5 Amount due to a related party 0 0 0 0 0 Net margin 9.3 11.3 12.4 12.3 12.2 Bank borrowings 530 702 969 1,171 1,389 Effective tax rate 37.4 34.4 33.8 33.5 33.5 Current tax liabilities 65 68 80 85 92 Payout ratio 108.8 62.3 70.0 55.0 55.0 1,010 1,190 1,496 1,743 2,010 Cash flow statement Non-current liabilities Year end Dec 31 (Rmb m) FY13 FY14 FY15E FY16E FY17E Bank borrowings 237 350 415 502 595 Deferred tax liabilities 80 87 87 87 87 Profit before tax 390 489 577 622 670 317 437 503 589 683 Depreciation and amortization 47 50 50 48 46 Net finance cost (30) (37) (32) (29) (28) Equity (Reversal of)/provision for impairment of receivables 15 0 10 0 0 Shareholders' equity 4,122 4,247 4,951 5,124 5,340 Write-down/(reversal write-down) of inventories (3) 0 0 0 0 Others 6 4 5 5 5 Total liabilities & equity 5,448 5,874 6,951 7,456 8,032 Change of working capital 167 55 (45) (94) (73) Tax paid (85) (176) (182) (202) (216) Financial ratios Operating cash flow 507 384 383 351 404 Year end Dec 31 FY13 FY14 FY15E FY16E FY17E Capex (75) (25) (27) (27) (27) Current ratio 4.6 4.3 4.1 3.8 3.6 Interest received 42 45 60 65 73 Quick ratio 4.2 4.0 3.9 3.6 3.4 (Increase) in pledged deposit (47) (155) (190) (144) (156) (Increase) in time deposit with mat. >3 months (775) (400) (400) (300) (300) A/C receivable turnover days 135 114 104 102 101 Others 0 1 0 0 0 A/C payable turnover days 45 41 34 37 37 Investing cash flow (855) (534) (558) (407) (410) Inventory turnover days 81 74 69 70 71 Change of borrowings 270 286 332 288 311 Asset turnover 0.5 0.5 0.4 0.5 0.5 Interest paid (13) 0 (28) (36) (45) Total assets/total equity 1.3 1.4 1.4 1.5 1.5 Dividend paid (217) (200) (233) (247) (236) Net cash (Rmb m) 2,514 2,699 3,393 3,497 3,666 Share issue 0 1 540 0 0 Others (1) (20) 0 0 0 ROE 6.0 7.7 8.3 8.2 8.5 Financing cash flow 38 67 611 4 30 ROA 4.7 5.7 6.0 5.7 5.8 Net change of cash flow (310) (83) 436 (52) 24 Forex changes 6 (0) 0 0 0 Sources: Company data, GF Securities (HK) estimates Page 4
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