Equity Research Consumer Discretionary Anta Sports (2020 HK) Buy (maintained) Target price: HK$18.50 Strong FY14 results; order book momentum maintained FY14 results above expectation Net profit jumped 29% YoY in FY14, 3% above our and market expectation mainly due to a lower-than-expected effective tax rate (22.7% vs our estimate of 25.2%), followed by further write-backs for inventory and doubtful debt. Revenue climbed 23% YoY, 2% above market consensus due to stronger-than-expected e-commerce sales and store for its FILA and kids segments. GM widened 3.4pp to 45.1%, 0.4pp above market consensus. Excluding inventory write-backs, GM still increased 2.6pp to 44.5%, driven by an increased revenue mix from its high-gm FILA segment and reduced subsidies to distributors. OP margin increased by 1.1pp to 22.6% driven by GM expansion, but partly offset by a 0.9ppt and 0.7ppt increase in A&P and staff expenses ratio, respectively. 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 E-commerce and FILA led revenue We estimate the Anta brand and other segments delivered 11% and 71% YoY revenue, respectively. E-commerce revenue came in at nearly 100% YoY in FY14. We believe accelerated in 2H14 led by online events in 4Q14. In the long-term, management expects 20% of revenue to come from e-commerce. FILA also saw strong revenue driven by 25% store and very good SSSG. Management revealed that sales per unit area for FILA was highest among high-end brands in shopping malls in China. Strong operating cash flow Operating cash flow jumped 49% YoY on good working capital control. A/R days dropped 3 days to 35 days. Only 5% of A/R was past due in FY14 (vs 9% in 1H14 and 15% in FY13). Order book momentum maintained Anta reported digit order book in 3Q15, in line with our expectation. This was the first trade fair held since the allegations about the company s chairman, Mr Ding. Footwear order book was also at low double-digit. Basketball footwear accounted for a digit to low-teen percentage of footwear order volume, while NBA-branded footwear accounted for 20-30% of basketball footwear order volume. Market share gain Anta s market share is expected to have increased in 4Q14 as it continued to outperform peers with digit SSSG (6% for 361 Degrees and low single-digit for Peak). Stock performance 75% 50% 25% 0% -25% Feb-14 May-14 Aug-14 Nov-14 Feb-15 Source: Bloomberg Key data Source: Bloomberg HSI Anta Feb 12 close (HK$) 14.10 Shares in issue (m) 2496.9 Major shareholder Ding Shizhong (55.4%) Market cap (HK$ bn) 35.2 3M avg. vol. (m) 7.4 52W high/low (HK$) 18.00/10.36 Store expansion plan The FILA store number grew from 416 in FY13 to 519 in FY14. The company expects to have 550-600 FILA stores in FY15. For its kids segment, the store number jumped from 881 in FY13 to 1,228 in FY14 and the store number target in FY15 is set at 1,500-1,600. For the Anta brand, management plans to further trim its store number from 7,622 (vs 7,757 in FY13) to 7,400-7,500 by closing low-efficiency stores and merging small stores into large stores in FY15. That said, management is aiming for better SSSG in FY15. Maintain Buy We forecast net profit of 19% in FY15 led by 21% revenue (11% and 44% from the Anta brand and other segments, respectively) and expect its net profit to outperform its peer average of 11%. We like Anta s diversified drivers from various segments and its market share expansion underpinned by strong execution and rising brand equity. Mr Ding attended yesterday s analyst presentation and reiterated that the allegations about his involvement in a tax corruption investigation are untrue. The company s execution looks unaffected by the allegations given the solid 3Q15 order book and that the company is set to soon endorse a new NBA all-star player, according to news reports. We believe these factors could restore investor confidence. We maintain our TP of HK$18.50, still based on 18X FY15 P/E. Stock valuation Turnover (RMB m) Net profit (RMB m) EPS (RMB) EPS YoY P/E Yield BPS (RMB) 2012 7,623 1,359 0.545-21 20.8 3.4 2.8 4.1 20.7 2013 7,281 1,315 0.527-3 21.2 3.4 2.9 3.8 18.9 2014 8,923 1,700 0.681 29 16.4 4.3 3.2 3.5 22.7 2015E 10,761 2,031 0.814 19 13.8 4.5 3.5 3.2 24.8 2016E 12,475 2,361 0.946 16 11.7 5.3 4.0 2.8 25.9 P/B ROE
Figure 1: Anta s digit order book in 1Q15 followed a high base Anta 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 20-30% 15-25% 10-20% 5-15% high singledigit digit digit digit digit digit digit Li Ning Xtep 15-20% Peak 0% 361 Degrees 23% 15-20% 25-30% 23% Figure 2: Anta s better-than-peer SSSG Figure 3: FY14 results review 20% 15-17% high singledigit high singledigit 0% 17% 11% 11% 7% 8% 11% 11% 16% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 digit digit digit digit mid single- Anta 0% 0% 0% Li Ning ------------- 9% ------------- Xtep 0% 0% 0% 0% Peak 0% 0% 361 Degrees -2% -1% 0% 2% 2% 3% 5% 6% Y/E Dec (Rmb m) FY14 FY13 % change 2H14 2H13 % change 1H14 1H13 % change Revenue 8,923 7,281 23% 4,801 3,915 23% 4,122 3,367 22% Cost of sales (4,896) (4,242) 15% (2,634) (2,260) 17% (2,262) (1,982) 14% Gross profit 4,027 3,039 32% 2,167 1,655 31% 1,860 1,384 34% Other income 97 110-12% 55 81-32% 42 29 44% Other net gains/(losses) (11) (8) 41% (10) (2) 489% (2) (6) -74% Selling and distribution expenses (1,697) (1,199) 41% (978) (706) 38% (719) (493) 46% Administrative expenses (397) (376) 5% (202) (199) 1% (195) (178) 10% Operating profit 2,019 1,566 29% 1,033 829 25% 986 736 34% Adjusted operating profit (excl write-down/writeback of inventory and doubtful debts provisions) 1,914 1,599 20% 988 828 19% 926 771 20% Finance income 248 212 17% 131 102 29% 117 110 6% Finance costs (24) (25) -4% (10) (9) 12% (14) (16) -14% Profit before tax 2,243 1,753 28% 1,154 922 25% 1,089 831 31% Tax expense (510) (423) 21% (236) (223) 6% (274) (200) 37% Profit after tax 1,733 1,330 30% 918 699 31% 815 630 29% Non-controlling interests (32) (15) 120% (20) (10) 101% (12) (5) 162% Net profit 1,700 1,315 29% 898 689 30% 803 626 28% EPS (RMB) 0.68 0.53 29% 0.36 0.28 30% 0.32 0.25 28% DPS (HK$) 0.61 0.48 27% 0.25 0.19 32% Margin & Ratio Gross margin 45.1 41.7 3.4 45.1 42.3 2.9 45.1 41.1 4.0 Adjusted gross margin (excluding write-down/write back of inventories provisions) 44.5 41.8 2.6 44.6 42.3 2.3 44.4 41.3 3.1 Operating margin 22.6 21.5 1.1 21.5 21.2 0.3 23.9 21.9 2.0 Adjusted operating margin (excluding writedown/write back of inventories and doubtful debts 21.5 22.0 (0.5) 20.6 21.2 (0.6) 22.5 22.9 (0.4) provisions) SG&A expenses ratio 23.5 21.6 1.8 24.6 23.1 1.4 22.2 19.9 2.3 A&P expenses ratio 12.0 11.1 0.9 13.0 12.1 0.9 10.8 9.9 0.9 Staff expenses ratio 11.0 10.3 0.7 10.5 10.6 (0.2) 11.6 9.9 1.7 Net margin 19.1 18.1 1.0 18.7 17.6 1.1 19.5 18.6 0.9 Effective tax rate 22.7 24.1 (1.4) 20.5 24.2 (3.7) 25.2 24.1 1.1 Payout ratio 71.0 71.7 (0.7) 61.7 60.2 1.5 FY14 FY13 change 1H14 1H13 change Inventory days 58 59 (1) 59 58 1 A/C receivables days 35 38 (3) 38 39 (1) A/C payable days 54 65 (11) 69 59 10 FY14 FY13 change 1H14 FY13 change Anta stores 7,622 7,757-2% 7,701 7,757-1% FILA stores 519 416 25% 441 416 6% Net cash (RMB m) 5,431 5,074 7% 5,299 5,062 5% Page 2
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Company report Figure 4: Major assumptions (Rmb m) FY11 FY12 FY13 FY14 FY15E FY16E Total revenue 8,905 7,623 7,281 8,923 10,761 12,475 % 20.2% -14.4% -4.5% 22.5% 20.6% 15.9% - Anta products 7,886 6,808 5,823 6,435 7,169 7,965 % 16.5% -13.7% -14.5% 10.5% 11.4% 11.1% - Other products 1,019 815 1,458 2,488 3,592 4,511 % 58.9% -20.1% 79.0% 70.6% 44.4% 25.6% -- FILA 692 1,223 1,678 2,053 % 76.8% 37.1% 22.4% -- Kids 451 680 984 1,213 % 50.5% 44.8% 23.3% -- E-commerce 255 497 820 1,107 % 95.0% 65.0% 35.0% -- Others 60 88 110 138 % 25.0% 25.0% 25.0% Gross profit 3,762 2,893 3,039 4,027 4,882 5,693 Gross margin 42.3% 38.0% 41.7% 45.1% 45.4% 45.6% - Anta products 41.2% 43.0% 43.4% 43.6% - Other products 44.2% 48.5% 48.9% 49.2% Selling & distribution expenses ratio 16.3% 13.6% 16.5% 19.0% 19.4% 19.7% Administrative expenses ratio 4.2% 5.5% 5.2% 4.4% 4.6% 4.4% Operating profit margin 22.6% 20.5% 21.5% 22.6% 22.5% 22.7% Effective tax rate 20.2% 21.6% 24.1% 22.7% 23.0% 23.0% Net profit 1,730 1,359 1,315 1,700 2,031 2,361 % 11.5% -21.5% -3.2% 29.3% 19.5% 16.2% Net profit margin 19.4% 17.8% 18.1% 19.1% 18.9% 18.9% Payout ratio 61.1% 71.7% 71.7% 71.0% 61.7% 61.7% estimates Figure 5: P/E band 25 HK$ 20 22x 18x 15 14x 10 10x 5 6x 0 Figure 6: Valuation comparison for sportswear companies Sources: Bloomberg, GF Securities (HK) estimates Sources: Bloomberg, GF Securities (HK) estimates Price TP Mkt Cap P/E (x) EPS Revenue Yield P/B (x) ROE Sportswear Ticker Rating (Feb 11 2015) (HK$) (HK$ m) FY13 FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY15E FY15E Anta 2020 HK Buy 14.10 18.50 35,207 21.2 16.4 13.8 11.6 29 19 17 23 21 17 4.3 4.5 5.3 3.2 24.8 Peak 1968 HK Accumulate 2.16 2.27 4,532 14.7 12.9 10.8 9.7 15 20 9 9 9 9 4.3 5.2 5.7 0.8 7.7 Xtep 1368 HK Hold 2.59 3.66 5,641 7.4 7.8 7.3 6.7 (5) 7 7 3 6 7 6.6 7.2 7.9 0.9 12.4 China Dongxiang 3818 HK NR 1.29 na 7,142 26.8 26.9 24.3 22.6 (0) 10 8 (7) 7 10 5.7 3.0 3.0 0.7 2.6 Li Ning 2331 HK NR 3.03 na 5,711 na na 94.7 13.3 na na 613 10 15 13 0.0 0.5 1.9 1.8 2.7 361 Degrees 1361 HK NR 2.26 na 4,673 17.6 10.4 9.5 6.0 69 9 58 6 14 16 3.8 3.8 4.4 0.7 9.8 Pou Sheng Intl 3813 HK NR 0.62 na 3,335 na na na na na na na na na na na na na na na Average 17.5 14.9 26.7 11.7 22 13 118 7 12 12 4.1 4.0 4.7 1.3 10.0 Page 3
Figure 7: Financial statements Income statement Balance sheet Year end Dec 31 (Rmb m) FY12 FY13 FY14 FY15E FY16E Year end Dec 31 (Rmb m) FY12 FY13 FY14 FY15E FY16E Revenue 7,623 7,281 8,923 10,761 12,475 Fixed assets Cost of sales (4,730) (4,242) (4,896) (5,879) (6,782) PPE 918 935 1,068 1,158 1,241 Gross profit 2,893 3,039 4,027 4,882 5,693 Lease prepayments 154 149 163 159 154 Prepayment for acquisition of land use rights 151 152 147 147 147 Other income 125 110 97 121 145 Intangible assets 529 507 489 463 436 Other net (loss)/income 3 (8) (11) (11) (11) Other financial assets 31 39 20 20 20 Selling & distribution expenses (1,038) (1,199) (1,697) (2,082) (2,458) Deferred tax assets 151 149 149 149 149 Administration expenses (420) (376) (397) (490) (554) 1,934 1,931 2,037 2,095 2,147 Operating profit 1,563 1,566 2,019 2,419 2,827 Current assets Net finance cost 166 187 224 277 315 Inventories 687 689 867 1,041 1,201 Profit before tax 1,730 1,753 2,243 2,697 3,141 A/C receivables 666 852 876 1,024 1,152 Income tax expense (374) (423) (510) (620) (723) Prepayments 707 1,081 825 991 1,143 Non-controlling interests 3 (15) (32) (45) (58) Other financial assets 830 510 535 535 535 Net profit 1,359 1,315 1,700 2,031 2,361 Plegded bank deposits 225 215 210 210 210 EPS (RMB) 0.54 0.53 0.68 0.81 0.95 Fixed deposits held at banks with maturity over 3 months 980 495 1,100 1,400 1,700 Cash and cash equivalents 4,008 4,344 4,934 5,254 5,829 Growth rates 8,102 8,187 9,347 10,456 11,770 Revenue (14) (4) 23 21 16 Net profit (21) (3) 29 19 16 Total assets 10,036 10,118 11,384 12,552 13,917 EPS (21) (3) 29 19 16 Current liabilities Margin & ratios A/C payables 633 867 582 699 806 Gross margin 38.0 41.7 45.1 45.4 45.6 Other payables 1,141 1,023 1,072 1,223 1,340 OP margin 20.5 21.5 22.6 22.5 22.7 Bank borrowings 997 490 1,348 1,348 1,348 Net margin 17.8 18.1 19.1 18.9 18.9 Amounts due to related parties 2 7 6 6 6 Effective tax rate 21.6 24.1 22.7 23.0 23.0 Tax payables 125 187 176 248 289 Payout ratio 71.7 71.7 71.0 61.7 61.7 2,898 2,574 3,185 3,524 3,790 Cash flow statement Non-current liabilities Year end Dec 31 (Rmb m) FY12 FY13 FY14 FY15E FY16E Long-term payable to non-controlling interests 39 37 36 36 36 Deferred tax liabilities 167 159 158 158 158 Profit before tax 1,730 1,753 2,243 2,697 3,141 205 195 194 194 194 Depreciation and amortization 110 130 159 191 198 Net finance cost (170) (175) (229) (277) (315) Equity (Reversal of)/provision for doubtful debts 44 26 (46) (10) 0 Shareholders' equity 6,752 7,154 7,795 8,578 9,620 Write-down/(reversal write-down) of inventories 91 8 (59) (15) 0 Non-controlling interests 180 195 209 255 312 Others 13 (32) 3 0 0 6,933 7,349 8,005 8,833 9,933 Due to related parties 1 4 (1) 0 0 Change of working capital 429 (425) (68) (221) (215) Total liabilities & equity 10,036 10,118 11,384 12,552 13,917 Interest received 163 206 205 305 345 Tax paid (446) (367) (522) (565) (671) Financial ratios Operating cash flow 1,965 1,128 1,686 2,105 2,483 Year end Dec 31 FY12 FY13 FY14 FY15E FY16E Capex (227) (179) (263) (250) (250) Current ratio 2.8 3.2 2.9 3.0 3.1 Acquisition of subsidiaries (136) (15) 0 0 0 Quick ratio 2.6 2.9 2.7 2.7 2.8 Disposals 8 7 4 0 0 Inventory turnover days 50 59 58 59 60 Others 0 0 0 0 0 A/C payable turnover days 47 65 54 40 40 Change of other financial investments (841) 312 (6) 0 0 A/C receivable turnover days 34 38 35 32 32 Change in pledged deposit (210) 9 5 0 0 Change in time deposit with maturity over 3 month 430 485 (605) (300) (300) Asset turnover 0.8 0.7 0.8 0.9 0.9 Investing cash flow (976) 620 (865) (550) (550) Total assets/total equity 1.4 1.4 1.4 1.4 1.4 Net cash (RMBm) 5,046 5,074 5,431 6,052 6,926 Change of borrowings 997 (528) 858 0 0 Others (4) (5) (13) (4) (4) ROE 20.7 18.9 22.7 24.8 25.9 Dividend paid (996) (878) (1,090) (1,230) (1,355) ROA 14.9 13.0 15.8 17.0 17.8 Share issue 0 4 6 0 0 Financing cash flow (3) (1,408) (238) (1,234) (1,359) Net change of cash flow 986 341 583 321 574 estimates Page 4
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk Page 5