A Sports Revolution

Transcription

A Sports Revolution

Hong Kong Sector Initiation
11 July 2016
Consumer Cyclical | Sportswear
Overweight (Initial Rating)
Sportswear
Stocks Covered:
Ratings (Buy/Neutral/Sell):
Last 12m Earnings Revision Trend:
A Sports Revolution
We forecast China’s sports industry to grow at a healthy 17% CAGR over
the next 10 years on lifestyle changes and government policy support.
support In
our view, international brands like Nike and Adidas are not major threats to
local brands, given the latter’s functional designs and value-for-money
value
products.. Copycat players will be marginalised, we believe. ANTA and
XTEP are our Top Picks as endgame winners amongst the local brands. We
are NEUTRAL on Li Ning and Belle. While their structural issues are priced
in, the outlook for both companies remains challenging.
Increased sports participation. Chinese consumers are increasingly embracing
sports on the back of lifestyle changes. The official General Administration of
Sports (GAS) data showed a 67%
% YoY rise in marathon runners and >2x YoY
increase in number of marathons in 2015.. Consumer surveys also state that
individual sports like running is the most popular and fastest-growing
fastest
market
segment. We believe football is poised to be the next high-growth
high
segment given
President Xi Jinping’s pro-football
football policies, which
whic are influencing both public and
private sector investments in its development.
Domestic brands can be winners. ANTA Sports Products (ANTA) and XTEP
International (XTEP) have gained incremental market share over the last three
years and saw a strong recovery post 2012 sportswear market bust. They
outperformed domestic peers due to their specialisation in selected sports
categories – basketball (ANTA) and running (XTEP).
(XTEP This is via the development
of functional quality products and focused brand
bra
building – ANTA’s National
Basketball Association (NBA) and XTEP’s marathon sponsorships. While we
expect international brands like Nike and Adidas
didas to dominate China's sportswear
market, we believe that domestic companies such as ANTA and XTEP would
hold market leadership in the mass market segment,
segment going forward.
Cross company comparisons on key metrics.
metrics ANTA is the undisputed
domestic market leader. It has the highest sales/store, EBIT margins and ROEs
amongst peers. XTEP enjoy high ROEs but has lower EBIT margins due to its
heavy investments in advertising & promotions (A&Ps),
(
which we view as a
positive to drive sustainable longer-term
term growth. Product positioning, backed by
A&P investments to develop a unique brand identity is key in our view and is
exhibited by both ANTA and XTEP. Currently trading at 0.9x PEG, valuations for
both ANTA and XTEP, based on its price/unit
price
of growth is undemanding
compared to Nike Inc’s (Nike) 1.5x PEG.
Policy support tailwind. We estimate a 17% CAGR for Chinese sports industry
in 2016-2025, based on the Government’s
overnment’s target of a CNY5trn sports industry by
2025 (vs CNY900bn forecast in 2016).. To put this into perspective, China’s
current sports industry accounts for 0.7% of 2015 GDP, significantly behind that
of the US, where sports represents 3.5% of 2013 GDP. Government bodies like
GAS have specified tangible milestones for sports infrastructure construction and
we believe that this is a key driver of sports demand in China going forward.
Recommendations. ANTA and XTEP are our Top Picks. We initiate coverage
on ANTA and XTEP with BUY ratings.. We like both companies for their strong
growth and direct market exposure to the Chinese sportswear sector. While Nike
and Adidas are favoured
red by international investors for their strong growth via
direct retail expansion, China, the fastest growing sportswear market globally,
only accounts for 10-15% of these company's
mpany's total sales. We are NEUTRAL on
Belle International (Belle) on its
ts structural problems (which may require major
business model restructuring) and Li Ning. We
e have reservations on the Li Ning’s
renewed focus in expanding its casual wear segment and its
i strategic direction in
opening department store point of sale (POS) counters. While current valuations
for both seemed fair,, the outlook remains challenging.
challenging
P/E (x)
P/B (x)
Dec-17F
11.8
Dec-17F
3.2
Com pany Nam e
ANTA Sports Products Ltd
Price
HKD14.88
Target
HKD19.00
Belle International Holdings Ltd
HKD4.33
HKD3.90
9.3
1.1
Li Ning Co Ltd
HKD3.91
HKD3.80
30.3
2.0
XTEP International Holdings Ltd
HKD3.95
HKD5.80
9.2
1.3
Dec-17F Rating
6.0 BUY
4.9
-
Powered by the EFA Platform
NEUTRAL
NEUTRAL
6.5
1
BUY
Target Price
HKD 19.00
HKD 5.80
Marathon statistics in China
1,500,000
1,600,000
160
140
1,400,000
1,200,000
120
134
900,000
1,000,000
100
80
800,000
570,000
000
600,000
60
400,000
40
51
39
200,000
20
0
0
2013
2014
# of Participants (LHS)
2015
# of Competitions (RHS)
Source: General Administration of Sports
Market share of sportswear brands in China
12.0%
9.9%
10.0%
8.7%
9.0%
8.0%
6.0%
4.0%
2.0%
Anta
5.1%
5.1%
5.2%
5.3%
5.5%
4.2%
4.1%
3.9%
2.5%
2.3%
2.3%
2013
2014
2015
5.3%
Li Ning
Xtep Int'l
361 Degrees
0.0%
Source: Nielsen
Table of Contents
Anta…………………………………21
XTEP………………………………..36
Belle……………………….………..48
Li Ning…………………………… …62
.
Yield (%)
Source: Company data, RHB
See important disclosures at the end of this report
Top Picks
ANTA Sports Products (2020 HK) – BUY
XTEP International (1368 HK) – BUY
4
2/2/0
N/A
Analyst
Robin Yuen, CFA
+852 2103 9202
robin.yuen@rhbgroup.com
Peak Sport
Sportswear
11 July 2016
Investment Thesis
Structural growth story fuelled by the rise of the middle class
Lifestyles are changing. The Chinese consumer, on aggregate, has more spare time as
the economy transitions into automated assembly lines and value-add
value
services sectors
from low-end labour-intensive manufacturing.. Wages are rising and, as more young
graduates join newer and more dynamic companies, they will build the newest layer of
China’s middle class. As seen in the other developed nations, the middle class tends to
engage in more sporting activities than its working class counterparts. Thus, as the middle
class in China grows, we will have structural growth in sports
sport activities and the
consumption of its paraphernalia.
Sports participation on the rise
Running is both China’s biggest sport and, arguably,
arguably one of the fastest growing. This is
evidenced by increases seen in 2015 in the number of marathon runners
run
registering for
events (+67%)
%) and more than doubling of events held vs 2014.
Football is poised to be the next high-potential
potential market thanks to President Xi’s pro-football
pro
policies, which have influenced both public and private sector investments in its
development. Brands are already sponsoring football youth academies and more such
training facilities – including those affiliated with overseas football clubs – are slated to be
built in the next 10 years.
International and domestic brands to benefit
We forecast for international brands like Nike and Adidas to continue dominating sales in
Tier 1 and Tier 2 cities, propped
ped by demand for both high-performance
high
sporting goods and
stylish athleisure fashion trends.. We see domestic brands like ANTA and XTEP remaining
strong in Tier 3 and Tier 4 cities, as they provide
provid affordable, value-for-money products for
consumers with modest means and/or specific requirements.
As with most consumer products, we believe that the market is big enough to
accommodate both premium
remium and value brands, allowing both international and domestic
products to co-exist
exist and surf on the wave of rising sports participation.
In terms of pricing, Nike and Adidas’s footwear have a full retail price in the CNY500-1,500
CNY500
per pair price range. The more popular products, such as Nike’s Flyknit shoes, are at the
CNY1,200 per pair price point. XTEP and ANTA’s
ANTA shoes range between CNY250-400 per
pair,, which is an entirely different market segment all together.
2
Sportswear
11 July 2016
Recommendations
BUYs
ANTA (2020 HK, TP: HKD19.00). This is our Top Pick because we like ANTA’s market
positioning as a mass-market
market producer in Tier 3 and Tier 4 cities. We agree with the
company’s market strategy of dominating the basketball category with elite NBA star
endorsements and its respective co-development
development of signature products like the KT series.
We believe ANTA has demonstrated execution excellence,
excellence which will help the company
enjoy above-sector growth rates. It boasts the highest ROEs and sales per store
stor metric in
the domestic sportswear space currently.
ANTA currently trades at 13.5x FY16F P/E. Our DCF-based TP of HKD19.00 implies 17x
FY16F P/E, or 1SD above its 3-yearr mean P/E of 15x, which can be explained by its
improving ROEs. This P/E is at a 35%
% discount to that of Nike and Adidas,
Adidas and only at a
55% premium over its domestic competitors. Our TP also reflects a PEG of 1.1x of our 33
year CAGR forecast of 16%, which we deem as reasonable
reason
for a large-cap stock with
clear growth prospects and a strong management team.
XTEP (1368 HK, TP: HKD5.80). We also like XTEP for its successful repositioning in the
running sports category via focused sponsorship of marathons as well as viable functional
products. We also like the company’s first-mover
mover initiative into football boots.
boots This makes it
well positioned to capture the explosive growth potential inherent in China’s football
segment. Finally, XTEP’s valuations are also cheap, as the counter trades at around 10%
below the sector’s 11x average. The company boasts the second-highest ROEs after
ANTA in this space.
XTEP currently trades at 10x FY16F P/E. Our DCF-based
DCF
HKD5.80 TP implies 15x FY16F
P/E, more than +2SD over its past 3-year average P/E, justified by its improving ROE and
exposure to the fastest growing sports categories – running and football. This also implies
a 40% discount to Nike/Adidas’ss average P/E of 25x, and a 35% premium over the sector
average of 11x.
NEUTRAL
Belle (1880 HK, TP: HKD3.90). We are concerned with Belle’s structural problems that
may require a major
or business model restructuring.
restructuring The company faces negative doubledigit same-store sales growth (SSSG) and store closures for its core footwear business,
with no recovery in sight. Belle’s sportswear retailing business – an inherently low-margins
business – cannot balance out footwear’s decline despite strong growth in international
sports brands. Should the company restructure, this will imply significant volatility to its
earnings with one-off
off restructuring costs and write-offs.
write
Nonetheless, Belle’s current share
price appears to have priced-in
in these concerns.
Belle currently trades at 9x FY16F P/E.. Our DCF-based
DCF
HKD3.90 TP assumes future
topline shrinkage and margins compression. Our valuation implies 8x FY17F P/E, -2SD
below its mean P/E. This is reasonable as Belle faces deteriorating profitability.
Li Ning (2331 HK, TP: HKD3.80). We have reservations over Li Ning’s renewed focus to
expand its casual segment and strategic direction to open department store POS
counters. We do not see Li Ning returning to either its former profitability or to the similar
levels enjoyed by its domestic peers.. This is because we see execution challenges ahead
of its turnaround process. We believe consensus is too optimistic on Li Ning’s recovery
story and think the stock is correctly priced now,
now given the risks.
Li Ning currently trades at 41x FY16F P/E.. Our HK3.80 TP is based on 1.9x FY16F P/BV
(-1SD below its past-3-year mean), due to:
i.
Its lower-than-sector margins;
ii.
The difficulty in estimating a recovery date as management has consistently
missed operational milestones;
iii.
Difficult casualwear retail conditions.
We used P/BV as P/E is ineffective for companies with compressed profitability. Although
Li Ning’s net profit (NP) may double in FY18 from a low base, its NPMs (c.5%) are still
significantly below peers’ c.+10%. The stock trades at 2.2x FY16F P/BV, c.35% higher
than peers. We believe consensus is too optimistic, given execution risks ahead.
3
Sportswear
11 July 2016
Key risks for the sector
i. Retail weakness and higher discounts in casual wear to hurt sportswear sales;
ii. Category
ategory expansion into sportswear from traditional apparel names;
iii. international brands moving downmarket;
iv. Raw materials price inflation (eg petrochemicals and cotton);
v. Wage inflation.
4
Sportswear
11 July 2016
Increasing Sports Participation
Keep fit, stay healthy and show it off mentality
Exercise and healthy lifestyles are now in vogue,
vogue according to conclusion in GAS’
“2014 National Fitness Survey”. The number of urban and rural residents who regularly
exercised significantly increased as a percentage of the population, with a higher level of
consumption per capita, in comparison to data collected in 2007. The survey also showed
that “improving health and physical fitness” was
wa the top concern amongst respondents.
This concern was selected by 79% and 73% of male and female respondents respectively.
♦ Keeping fit is increasingly regarded as
Social media and technology is a key driving force behind sports participation. This is
due to the “show off” factor, in our view.. According to Nielsen’s “2015
“2
Sports Enthusiast
Tracker”, 60% of respondents say they enjoyed
enjoy
posting pictures, statistics or
achievements of their respective sports activities on social media.
media WeChat and Weibo are
the key platforms for sharing in China.. 60% of respondents also have downloaded sports
apps on their mobile phone, with Codoon as the top download at 21%, with Nike Running
next at 16%, and Nike Training Club and Adidas
didas Mi Coach at 7% each.
♦ Social
Figure 1: Rising health consciousness
ess reflected by diet
cool and healthy
media has cultivated a showoff culture, which is driving the
participation rate for sport amongst
the masses
Figure 2: TV celebrity Yuan Shanshan (20m fan base) shows
off her fitness regimen on Sina Weibo
China/HK Demand for Instant Noodles
48,000
6.0%
44,000
3.7%
44,030
4.0%
44,400
2.0%
0.0%
42,470
42,000
40,430
-2.0%
-4.0%
40,000
-3.9%
-6.0%
38,000
YoY Change (%)
Servings (m)
46,000
46,220
5.0%
-8.0%
-8.9%
36,000
2011
2012
2013
China / Hong Kong
2014
-10.0%
2015
YoY China/HK
Source: World Instant Noodles Association
Source: Weibo, RHB
Higher sports participation drives growth in the sports-related
sports
consumption (both
staples & discretionary).. According to Nielsen, 80% and 70% of the population purchased
sneakers and sportswear respectively in the previous year.
year At the same time, 61%
purchased sports drinks, 41% bought sports equipment and 30% signed up for gym
memberships. In the beverage
rage sector, functional products retail sales outgrew the market,
with vitamin drinks rising 30% YoY and energy drinks
drink up 21% YoY in 2014. By
comparison, regular packaged water report reported a 14.3% YoY rise during the same
period.
♦ Sports drinks and equipment usage
Middle-class does more sports. The top
op characteristics common amongst people who
regularly exercise are:
♦ Sports participation is correlated with
i. Strong education;
ii. Above average income;
iii. Senior job positions.
GAS’ 2014 National Fitness Survey showed that:
that
i. 67% of regular exercisers held bachelor’s degrees or higher;
ii. 28% of regular exercisers worked in mid- to senior-level positions;
iii. Regular exercisers reported an average household income of over CNY10,699,
which is 36% higher than those households that do not participate in sports.
We believe this makes sense. Ass China moves away from a labour-intensive economy,
workers will be able to free up time to improve their work-life
work
balance and, naturally, sports
is an outlet that both improves physical health and acts as a source of entertainment.
5
are driving spending up
education, income and job seniority
Sportswear
11 July 2016
Running is the most popular sport, as it can be done anywhere (with
(
no need to book
facilities), anytime (just need a lighted path is needed at night)
night and with anyone (solo or
with friends). Barrier to “entry” is cheap, requiring only a pair of sneakers as low as
CNY200 and with no training needed to get started.
♦ Running is the number one sport
amongst active exercisers…
exercisers
According to the Nielsen survey, running is the most preferred sport with 71% and 69% of
male and female consumers respectively preferring to run. This is followed by badminton
(men: 52%, women: 58%). Men also preferred
red basketball (44%) and swimming (38%),
while women tended to lean towards swimming (35%) and yoga (31%).
Figure 3: Basketball is the top team sport amongst men
Figure 4: Women prefer to do “individual” sports
Womens' Preferred Sport
71%
Percentage of Survey Respondents
Percentage of Survey Respondents
Mens' Preferred Sport
80%
70%
60%
52%
50%
44%
38%
40%
30%
20%
10%
0%
Running
Badminton
Basketball
80%
70%
69%
58%
60%
50%
35%
40%
20%
10%
0%
Running
Swimming
Source: Nielsen, RHB
Badminton
Swimming
Yoga
Source: Nielsen, RHB
People watch football, but do not play it. Sports viewership, however, contrasts from a
consumer’s actual behaviour. Nielsen found that the most popular sports to watch in China
are:
i.
ii.
iii.
iv.
31%
30%
♦ … but team sports like football and
basketball
asketball are more exciting to watch
Football (63%);
Basketball (61%);
Swimming (61%);
Badminton (53%).
Within the football segment, the foreign leagues are the most popular, with the UEFA
Champions League (39%) and English Premier League (36%) leading the way. The
domestic Chinese Super League (8%),, on the other hand, is largely ignored. This is not a
surprise,, given media reports with regards to alleged rigged matches and rampant
corruption within the domestic league. Basketball viewership,
v
on the other hand, is more
balanced, at 56% for the NBA and 34% for the Chinese Basketball Association (CBA).
We believe the striking contrast between football viewership vs
v participation is due to the
lack of good soccer fields. We also believe
e that the latest President Xi led pro-football
policies will attempt to correct this deficiency.
Increase in the number of sanctioned sports events and athletes. According to official
data, in 2015, the number of runners registering for marathons increased 67% YoY. At the
same time, the number of such events behind held grew by 163% (ie more than doubled).
In the private sector, sports event organiser Wisdom Sports Group (Wisdom) (1661 HK,
NR) – whose revenue is from advertising services and ticket sales – plans to triple the
number of marathons it holds in China.. It also expected the number of participants to top
10m in 2015. In a recent Bloomberg report, Wisdom brand
b
manager Mr Anders Wong
said, “The majority of Chinese people face such heavy pressures in everyday life, in order
to relieve that, as they move up the quality of life chain, we see necessary links for this to
develop.”
♦ Rise
All this data
ata and corporate guidance further reinforces
reinforce our view that China is on the cusp
of a sporting revolution amongst the masses,, which will drive demand for functional gear.
Anecdotally, we have witnessed more street-side
side promotions of runningrunning and/or sportsrelated events. In our channel check in March, we noticed cities such as Shenzhen having
promotions booths for charity-based
based running events,
event which were being held at the outdoor
areas of shopping malls. The instructions on the wall stated:
♦ On-the-ground
On
i. Add the event on WeChat;
ii. Upload your daily running progress;
iii. Compare against running peers;
6
in sports participation lead by
running
observations also
support the apparent heightened
interest in running
run
Sportswear
11 July 2016
iv. Receive prizes.
Figure 5: Information pavilion promoting a running event
Figure 6: China marathon
arathon runners and events on the rise
1,500,000
1,600,000
1,400,000
160
140
1,200,000
120
134
900,000
1,000,000
100
800,000
80
500,000
600,000
570,000
60
400,000
400,000
200,000
33
20
22
0
0
2011
2012
2013
2014
# of Participants (LHS)
Source: RHB
40
51
39
2015
# of Competitions (RHS)
Source: General Administration of Sportss (GAS)
(
♦ Yoga is also on the rise
In other sports disciplines, we noticed that the Pure Group, a HK-based operator of
upscale gyms, said revenue for its Shanghai yoga outlet jumped 60% YoY in Jan-Nov
2015.
Figure 7:: Urban Chinese like to exercise in the gym –
walking and running represent the #1 and #2 most popular
activities
Figure 8: Rising middle
iddle class to doing more sports
Chinese household income levels, 2013-2030
350
300
35
CNY ('000)
250
22
23
27
29
50
85
60
200
78
141
128
150
118
91
100
189
57
50
50
0
20
112
80
37
2013
2015
Affluent (more than 229K)
Low middle class (between 60K - 106K)
2020
2025
2030
Middle class (between 106K - 229K)
Poor (less than 60K)
Source: GAS
Source: McKinsey & Co, RHB
Figure 9: China disposable income continues to rise
Figure 10: Per capita sportswear
portswear consumption – China has
room for growth as it remains well behind most developed
countries
( CNY)
350
35,000
12%
11% 11%
13%
12%
10%
9%
250
14%
11%
10%
9%
247
16%
%
14%
(USD)
14%
25,000
300
18%
30,000
20,000
302
20%
17%
12%
9%
10%
15,000
6%
8%
200
148
150
100
50
4%
5,000
2%
0
Disposable income per capita (urban) - LHS
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0%
2001
0
YoY growth - RHS
Source: National Bureau of Statistics, RHB
119 111 110
92
57
6%
10,000
133
Source: Euromonitor
7
39 33
19 16
4
3
Sportswear
11 July 2016
Chinese sportswear lagging behind peers in other countries. The Chinese consumer
spends on average only USD19 per year on sportswear, which is significantly behind
shoppers in the US or even HK. Part of the reason could be attributed to the discrepancy
in disposable income per capita, ie China is only at USD700 per month while the US is at
USD3,200.
However, we believe the bigger reason could be the lack of a sporting culture. For
example, sports mad Brazil’s disposable income per capita is only USD800
USD
per month,
similar to that of China’s, but Brazilian consumers’ spending is almost double at USD39 vs
China’s USD19. Nonetheless, ass number of middle class consumers in China increases,
their disposable income also rises and, thus, sports participation rate also increases. This,
in turn, will see Chinese per capita spend
end on sportswear set to rise,
rise in our view.
8
♦ Per capita sportswear spend behind
peer countries, set to rise
Sportswear
11 July 2016
Domestic Brands Can Be Winners Too
International brands have grabbed significant market share since 2011 at the
expense of domestic names.. That period was marked by channel-stuffing and the
irrational optimism on new store expansions amongst the domestic brands.
♦ Internationa
ernational brands have gained at
the expense of domestic brands post
2011
Looking at market share data, Nike and Adidas each gained c.6ppts
c
in market share in
2011-2015,
2015, with most of their gains in the earlier part of that
th period. This was as domestic
brands suffered from a lack of product differentiation or visible research & development
(R&D), which rendered their products rather homogenous.
Figure 11: China sportswear market share (by brand) – market share value shows
Nike, Adidas, ANTA and XTEP
25.0%
20.9%
20.0%
16.0%
15.0%
17..9%
16.9%
15.1%
16.0%
9.8%
10.0%
16.1%
15.0%
9.5%
8.5%
4.6%
5.1%
9.5%
6.1%
9.5
5%
6.3
3%
Adidas
Anta
Li Ning
10.8%
7.2%
5.8%
4.0%
Nike
13..4%
13.1%
4.5%
15.1%
14.5%
11.5%
5.0%
18.4%
19.2%
8.7%
9.0%
5.1%
5.3%
9.9%
Xtep Int'l
361 Degrees
5.3%
New Balance
Hongxing Erke
2.4%
Peak Sport
0.0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Euromonitor
Still, there were outperformers amongst the domestic names, as after 2012, ANTA
and XTEP not only kept pace with the industry growth rate, they also managed to capture
small pieces of market share.
♦ Nonetheless, there were select
s
winners amongst domestic brands
We believe the reason why the companies managed to outperform their domestic peers is
due to their focus on selected sports categories,
categories namely basketball and running
respectively. This was done via the development of functional quality products in those
th
two segments, augmented by focused brand building,
building namely NBA (ANTA) and marathon
(XTEP) sponsorships. In the end game, we foresee Nike and Adidas continuing to be clear
market leaders, but with one to two domestic players following
follow
closely behind. Our pick is
ANTA and XTEP.
Survival of the fittest. We believe industry consolidation is likely, as the remaining
domestic companies may continue to lose market share and eventually exit the market.
We believe the reason for the loss of market share is,
is again, due to:
i. A lack of product differentiation – this is given that many of the domestic brands have
h
their roots as original equipment manufacturers (OEMs) that were renowned at
imitating the latest styles;
ii. The lack of an innovation culture;
iii. The lack of a unique brand image.
9
♦ Industry consolidation is the likely end
game, with one or two dominant
domi
domestic brands
Sportswear
11 July 2016
Why not just buy Nike and Adidas?
Not a China pure play. For the
he unconstrained investor, Nike and Adidas are brand names
that are interesting to look at for exposure to global sportswear.
sportswear However, they are not a
China growth proxy, as their exposure this market is small. For Nike, only 10% of its sales
are in the Greater China market. The bulk of its sales (45%) are from North America.
Adidas is a similar case, where 15% of its sales are from Greater China. Its biggest chunk,
27%, comes from Western Europe.
♦ Nike and Adidas can be a good global
ANTA’s profitability is in-line with Nike. Looking on the EBIT margins, one may jump to
the conclusion that Nike’s Greater China segment’s 32% EBIT margins is lucrative,
l
implying 21% of its global EBITs are from China.
♦ Nike’s
play, but a poor proxy for China
China EBIT margin is likely in
line with ANTA’s
However we point out that “unallocated overheads” have not been
be
factored into this
number. Hence, the actual EBIT margins may be closer to the mid-20s level (assuming
equal allocations across all regions), which actually comes in line with ANTA’s 24% EBIT
margin.
Figure 12: Nike’s Greater China performance
erformance
FYE June (USDm)
Sales
Wholesale consumers
Direct to consumer
Total sales - Greater China
EBIT
EBIT margin
FY13
FY14
FY15
2,079
399
2,478
813
32.8%
2,041
561
2,602
816
31.4%
2,233
831
3,064
993
32.4%
-1.8%
1.8%
40.6%
5.0%
9.4%
48.1%
17.8%
YoY Change
Wholesale consumers
Direct to consumer
Total sales - Greater China
Source: Nike, RHB
Direct-to-consumer model driving the bulk of growth. Upon closer inspection, the
majority of Nike’s growth in Greater China comes from “direct to consumer” sales, which is
essentially the company moving downstream into the retail business. While 48% growth in
this segment is spectacular, it is driven by POS expansion
e
off a small base and SSSG
estimated to be in single digits (the actual figure is not disclosed) when you read between
the lines at their analyst briefings.
Nike’s venture into retail is a double-edged
edged sword,
sword ie it allows stronger control over the
brand’s presentation, increases operating leverage and boost profitability when times are
good, but it can backfire when sales falter. Note that this is same strategy as Li Ning’s
hybrid model.
Valuations at a glance
Growth at reasonable prices. As suggested by their PEG ratios, our Top Picks
P
ANTA
and XTEP have relatively low valuationss in comparison to their EPS growth. For each
percentage point of growth, investors only pay 0.9x in P/E for domestic brands.
brands By
comparison, Nike’s growth is much more expensive at 1.5x in P/E per percentage point of
growth.
Figure 13: Price per unit of growth
ANTA
XTEP
Nike
Adidas
P/E (historical)
17.6
14.1
29.3
P/E (fwd 1-year)
15.1
12.4
25.1
27.4
16.3%
13.8%
16.6%
31.5%
0.93
0.90
1.51
0.87
EPS g (fwd 1-year)
PEG (fwd 1-year)
36.1
Note: Historical based on last fiscal year end. Anta, Xtep, Adidas are Dec-end
Dec
while
Nike is May-end
Source: RHB, Bloomberg
Are Nike and Adidas a major threat to domestic sportswear players?
International brands here to stay. We see Nike and Adidas as fixtures in the Chinese
sportswear market, where they will grow at the expense of smaller domestic names like
361 Degrees, Peak and Erke. Nike’s management has been bullish, stating at its analysts
10
♦ Nike growth comes from via selfowned branded retail stores, while
SSSG may be in line with its Chinabased peers
Sportswear
11 July 2016
conference calls that it estimates that the company can deliver “mid-teens [EPS] growth
over [the] next five years”.
Direct-to-consumer is focused in top tier cities.
cities We note that Nike’s direct-to-consumer
store network is primarily located in Tier 1&2
2 cities.
cities This means that the firm is not in direct
competition with domestic sportswear names whose stores are located in Tier
T 3&4 cities.
Given most of the growth in disposable income comes from Tier 3 and Tier 4 cities, Nike is,
arguably, not in the best position to capture this growth. This is also why its management
declared in 2013 that it was shifting its strategic focus to grow stores in Tier 2-4 cities.
♦ Nike’s
direct-to-consumer stores are
primarily in Tier
T 1 and Tier 2 cities
Coexistence along the pricing line. We believe the domestic names offers a value-formoney proposition while foreign brands offer prestige or state-of-the-art performance
technology. Each occupies a different segment in the consumer decision-making rationale
spectrum. In terms of pricing, Nike and Adidas
didas footwear products are priced at the
CNY500-1,500 range at full retail price.. The most popular products – such as Nike’s
Flyknit shoes – are at the CNY1,200 price point. XTEP and ANTA’s shoes are priced in
the CNY250-400 range,, which is an entirely different market segment all together.
Therefore, we see coexistence in the long run amongst these players.
Nike may not move downmarket. Some investors ponder a “what if” scenario should
Nike move downmarket in price to compete with the domestic brands. We believe such a
scenario is unlikely. In our view, Nike and/or Adidas would be foolish to move downmarket
as:
i. Their shoes are already selling well;
ii. Any downward move may cannibalise
e their higher-end
higher
sales;
iii. Any
ny downward move using cheaper quality may tarnish their brand image.
At every investor day, Nike’s management conveys the fact that the company prides itself
in bringing “innovation to the product and to be premium overall”.
ov
The company also does
not see “consumer
consumer resistance or an unwillingness to pay for the premium value [Nike
[
is]
providing” in China.. This is a strong indicator that the company will maintain its trajectory
as a premium, cutting-edge
edge name, especially as customers are willing to pay for its
products.
Even though the scope of this report primarily focuses
focus on domestic sportswear names, we
believe it will be a feasible strategy to invest in the supply chain of
o the international sports
brands and, thus, highlight such companies with this exposure:
exposure
i. Pou Sheng International (Pou Sheng) (3813 HK, NR) is the second-largest
distributor for Nike and Adidas in China, behind Belle’s sportswear distribution
dist
business. Its store
tore network is primarily in Tier
T 3 and Tier 4 cities and is concentrated
in small counters within department stores.
stores By comparison, international brands
primarily operate in Tier 1 and Tier 2 high
gh street shops. Pou Sheng has historically
operated at EBIT margins below its peers,
peers but is said to have been making
operational improvements lately.
ii. Kingmaker Footwear (Kingmaker) (1170 HK,
HK NR) is a leading footwear original
design manufacturer (ODM) with over 60% of its products manufactured in Vietnam.
New Balance Athletic Shoe Inc (New Balance) is its largest client. Other brands that
its customers include ASICS, CAT,, Clarks and Skechers. Kingmaker is looking to
ramp up capacity by a CAGR of 21% in FY16-18,
FY16
but the company is currently facing
a leadership crisis. This is because,, according to various media reports, founder and
chairman Mr Mickey Chen was killed in April following a heated altercation with a
manager at a Kingmaker factory in Thuan An, Vietnam.
11
♦ The scope
s
of our report is primarily on
domestic sportswear names
Sportswear
11 July 2016
Cross-company analysis
Figure 14: Comparison matrix
FY2015
Operational
ANTA
Self-Production of Goods ratio
E-commerce (% of Sales)
Replenishment Orders (% of Sales)
7,031 ANTA Core
1,458 ANTA Kids
591 Fila (Self-owned)
6% Fila Stores
90% (T2 & Below)
90%
50
58 days
4-5 months
49% Footwear
15.9% Apparel
High SD
10%
Financial
GP Margin
Wholesale Discount
EBIT Margin
A&P ratio/dollar spend
R&D ratio/dollar spend
ROE:
Asset turnover (Sales/Assets)
NP Margin (NP/Sales)
Financial leverage (Asset/Equity)
ROE
Dividend Payout Ratio
Net Cash (CNYm)
Shares (m)
Net Cash per Share
46.6%
60.0%
24.2%
11.5% (CNY1,279m)
2.8% (CNY579m)
14.9%
89.0%
18.3%
145.7%
23.8%
70.0%
5,503
2,499
2.20
Store Network
Percentage Self-Owned
T3/T4 percentage
Real-time coverage
Number of Distributors
Inventory Days (Listco)
Inventory Days (Channel)
Store Metrics
Reported Revenue (CNYm)
Retail
Wholesale
Retail Revenue per area (CNY/sqm)
Self-Op Retail
Franchisees/Wholesale Partners
Retail Revenue per outlet (CNY/store)
Self-Op Retail
Total retail floor area (sqm)
Self-Op Retail
Outlets
Self-Op Retail
International brands
Domestic brands
XTEP
Peak
Li Ning
361 Degrees
0%
9%
18%
7,000 Core
600 Kids
0%
85%
85%
38
58 days
4-5
5 months
57% Footwear
14% Apparel
10%
4%
5,999 Core
0%
87.10%
52%
100
63 days
n/a
77.6% Footwear
46.4% Apparel
"Small"
n/a
7,208 Core
2,350 Kids
0%
71.70%
70%
31
78 days
4.2 months
70% Footwear
20% Apparel
5.80%
0%
45.0%
55.0%
2.2%
14.3% (CNY1014m)
1.9% (CNY135m)
0.6%
102.8%
0.2%
202.2%
0.4%
0.0%
1,247
2,159
0.58
42.2%
62.0%
17.4%
14.7% (CNY781m)
2.3% (CNY121m)
13.6%
65.3%
11.8%
166.6%
12.8%
60.0%
2,866
2,149
1.33
38.7%
62%
20.2%
8.7% (CNY270m)
2% (CNY62m)
8.6%
50.0%
12.6%
136.0%
8.6%
75.8%
3,376
2,389
1.41
40.9%
65%
20.5%
12.8% (CNY570.5m)
3.1% (CNY139.6m)
10.1%
51.0%
11.6%
169.0%
10.0%
41.2%
2,404
2,068
1.16
6,133 Core
25%
n/a
76%
50
100 days
7.1 months
China DX
Adidas
Nike
Belle
Pou Sheng
1,267 Core
31%
n/a
n/a
n/a
132 days
n/a
9,000 (China)
25%
n/a
n/a
n/a
110
n/a
10,000+ (China)
Small
n/a
n/a
n/a
94
n/a
7,111 Sportswear
100%
55.20%
100%
0
90
n/a
7836
63%
c40%
62.5%
n/a
142
n/a
n/a
15%
n/a
0
n/a
n/a
0
n/a
n/a
0
insignificant
n/a
0
insignificant
n/a
56.2%
55%
17.7%
17.2% (CNY252m)
2.9% (CNY42m)
8.1%
13.0%
55.0%
110.0%
7.9%
60.0%
4,714
5,536
0.85
48.4%
n/a
6.3%
13.9%
0.8%
11.2%
131%
3.8%
228%
11.2%
47.1%
-EUR299m
200
-EUR1.49
46.0%
n/a
13.6%
10.5%
n/a
27.8%
152%
10.7%
171%
27.8%
28.4%
USD4,664m
1,685
USD2.77
56.3%
n/a
8.8%
n/a
n/a
11.7%
128%
7.2%
127%
11.7%
63.2%
6,921
8,181
0.85
33.3%
n/a
4.3%
n/a
n/a
7.4%
175%
2.8%
152%
7.4%
0.0%
(52)
5,379
-0.01
11,126
n/a
8,623
7,089
2,357
3,864
5,295
0
5,295
3,108
0
3,108
4,459
0
4,459
1,469
402
628
18,394
n/a
n/a
19,629
n/a
n/a
19,716
19,716
n/a
14,721
9,286
5,435
n/a
25,393
14,199
18,594
0
18,335
0
15,299
0
13,328
10,126
16,041
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2,539,346
1,555,776
1,859,391
0
1,833,483
0
1,363,166
0
1,332,825
1,012,594
1,604,087
n/a
n/a
n/a
n/a
2,912,260
n/a
1,878,652
1,878,652
n/a
848,900
166,000
461,800
0
760,000
0
534,529
0
955,800
39,700
87,000
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
0
8,489
1,515
4,618
0
7,600
0
5,999
0
9,558
397
870
n/a
n/a
n/a
n/a
6,770
n/a
4,943
2,893
Note: Red denotes estimates, Belle’s numbers are from FY16 (end-February) – its store
tore metrics represent its sportswear segment only
Source: Companies data, RHB
12
Sportswear
11 July 2016
Store efficiency ratio. ANTA’s sales per store are by far the most efficient amongst the
domestic players,, achieving CNY2.5m per store.
store This is 30% more efficient than second
placed Li Ning (arguably tied with XTEP as well). Our analysis on sales per retail floor
area leads to similar conclusions, though we assumed 100sqm on average per store for
those companies that do not disclose gross floor area (GFA).
♦ ANTA ranks first in store sales
efficiency
We believe ANTA’s
’s superior efficiency is supported by a sold company structure. From
our channel checks and conversations, we learnt
learn that management invests in time when
educating staff and franchisees. We believe this boosts
boost knowledge on best retail practices
and selling points of ANTA’s products.. This, in turn,
turn helps deliver strong customer
satisfaction at the company’s stores. At the same time, strong store profitability not only
boosts employee morale, but also incentivises
es them in the form of sales commissions.
Wholesale discount. Since ANTA’s
’s franchise operators are more profitable vis-à-vis the
competition – as a result of higher asset turnover – we believe this is why the company’s
wholesale discount is amongst the lowest in the domestic sportswear sector. Note that the
lower the wholesale discount, the more expensive it is for franchisees to purchase
inventory from ANTA.
♦ High profitability for ANTA’s
distributors allows the firm to charge
more by providing less wholesale
discounts
Li Ning’s lowest wholesale discount is an outlier
utlier due to a structural reason – namely it
does not produce its own goods. Its business is the purest version of the asset-light
asset
business model, such that it relies on third-party
party manufacturing while the company itself
has no manufacturing facilities. Li Ning’s costs are resultantly higher than in-house
in
production and, subsequently, the company gives less wholesale discounts
discount to its
franchisees to maintain profitability. We gather from sources that Li Ning’s distributors face
one of the lowest distributor margins in the industry. This has led to a decline in the
number of its distributors, which has to take over those locations to run self-owned stores.
ROE. We analyse sportswear companies’ ROEs using the DuPont analysis and break
down the data to asset turnover, profit margins and financial leverage elements. We find
that ANTA has the highest ROE amongst the pack with the strongest asset turnover at
103%. This was due to its business model of having no manufacturing assets on the
balance sheet.
♦ ANTA and XTEP enjoy the highest
ROE amongst peers
ROEs
On the other hand, China Dongxiang’s (DX) ROE of 8.1% appears to be in line with peers,
but this is not the case as its core operations are actually unprofitable (NPM = 0%). This is
after stripping out an investment gain of CNY800m, leaving its core ROE at 0%.
Under intrinsic valuations,, companies with high ROEs deserve higher equity valuations.
This is why ANTA consistently trades at a premium to its peers, and why we think XTEP is
a value buy, given its high ROEs and relatively low P/Es.
P/E
Figure 15: Functional vs fashion
ashion breakdown
♦ High ROE = high
h
P/E relationship
Figure 16: Product positioning
ositioning
100%
90%
80%
40%
30%
34%
70%
50%
50%
50%
50%
Xtep
Peak
43%
60%
50%
40%
30%
60%
70%
66%
20%
58%
10%
0%
Anta
Li Ning
Functional
361
Degrees
Adidas
Fashions
Note: Different companies use different definitions – Li Ning treats all non-sports
lifestyle products as functional, while ANTA regards all apparels
apparel using synthetic
fabric as functional
Source: RHB
Source: Peak Sport’ FY15 presentation
13
Sportswear
11 July 2016
Figure 17: Trade fair orders
Trade Fair Data
Anta
1Q13
2Q13
3Q13
4Q13
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
high SD
high SD
high SD
low DD
low DD
low DD
low DD
low DD
low DD
low DD
high SD
low DD
Li Ning
(-)
(-)
(-)
(-)
(-)
(-)
low-DD
mid DD
low 20s
mid DD
high-DD
low-DD
mid DD
high-DD
low DD
high-SD
China DX
NA
NA
NA
NA
NA
NA
NA
NA
low-DD
low-DD
low-DD
low-DD
30-40%
30-40%
Flat
low SD
low SD
low SD
low SD
10%
~10%
high SD
high SD
Xtep
Peak Sports
361 Sports
(-) 20-30% (-) 15-25% (-) 10-20% (-) 5-15%
1Q14
(-) 15-20% (-) 15-20%
(-) ~20%
Flat
(-) high-20s
N/A
-23%
-23%
-19%
(-) 15-17% (-) high SD (-) mid SD (-) low SD
-17%
N/A
high SD
mid-DD
mid-DD
mid-DD
mid-DD
mid-DD
mid-DD
mid-DD
mid-DD
low-DD
(-) low-SD
-8%
-8%
-7%
8%
11%
11%
16%
18%
15%
15%
high SD
high SD
Note: SD = single digits, DD = double digits
SSSG is leading indicator for trade fair orders.
orders Trade fair orders are generally placed
six months before delivery, eg orders for 4Q16 collection
col
would have been placed in Apr
2016. From the trend above, we see that ANTA’s
ANTA 1Q14 trade fair orders have returned
into positive territory, which coincided with retail SSSG performance in 3Q15 and 4Q13
turning a corner.
FY16-17 orderbook likely to slow down. With SSSG decelerating in 2H15 and 1Q16, we
expect trade fair orders to also slow down. We learned that distributors in general are
stocking high-ticket
ticket apparel items such as heavy jackets to avoid the negative impact from
the erratic winter. Thus, apparel ASPs are generally
genera down across the board. Note that
during winter
inter 2015, the weather was warm at the beginning
be
but cold later, hence higherpriced winter apparels did not sell well at time of arrival.
Overall sales volume improved towards
rds the end of the season, when there were more
discounts.. Footwear, on the other hand, maintained
maintain
both ASP and volume growth. This
was on increased functionality of the items and higher usage.
Inventory levels not materially different for market leaders.
leaders XTEP and ANTA reported
similar levels of inventory – ie 4-5
5 months of inventory – in their retail channels. Peak
Sport Products Co Ltd (Peak) (1968 HK, NR),
NR) which has more homogenous and less
competitive products, in our view, is likely to have rising inventory levels as its distributors
reduced apparel volume order by low double digits.
Figure 18: SSSG by company
Same Store Sale Growth
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
Anta
Flat
Flat
Flat
mid-SD
mid-SD
low DD
high-SD
high-SD
high-SD
high-SD
high-SD
mid-SD
mid-SD
Li Ning
N/A
N/A
N/A
N/A
low-SD
(-) mid-SD
low-SD
mid-SD
mid-SD
low-teens
mid-SD
low-SD
low-SD
China DX
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
21.5%
Xtep
Flat
Flat
Flat
Flat
low-SD
mid-SD
mid-SD
mid-SD
mid-SD
high-SD
mid-SD
mid-SD
mid-SD
Peak Sports
Flat
Flat
low-SD
low-SD
low-SD
low-SD
low-SD
low-SD
mid-SD
mid-SD
high-SD
mid-SD
flat
-1.5%
-0.8%
Flat
1.5%
1.8%
2.8%
4.7%
5.5%
6.3%
7.2%
8.1%
7.9%
7.2%
4.5%
11.0%
0.5%
2.5%
1.3%
4.5%
1.3%
5.0%
-1.8%
15.3%
-2.8%
14.4%
-5.6%
5.3%
-4.2%
10.9%
-7.8%
12.4%
-7.7%
6.5%
-10.4%
6.0%
-16.5%
6.2%
361 Sports
Belle
Footwear
Sportswear
Note: SD = single digits; DD = double digits
Source: Companies data, RHB
14
Sportswear
11 July 2016
Tailwinds From
rom Policy Support
♦ Sports industry as a driver to spur
In the last two years, the Government has demonstrated its eagerness to spur domestic
consumption in an effort to bolster GDP growth to above 6%. It has set out specific
milestones to be implemented via
ia various policy legislations (see Appendix). We believe
promoting the sports sector will be a healthy and sustainable way to boost domestic
consumption, as:
domestic consumption
developed in terms of sports spending as a proportion of GDP;
i. China remains underdeveloped
ii. Sporting lifestyle will improve healthiness, reducing the burden on medicare.
♦ Industry CAGR of 17% for the next 10
We estimate a 17% CAGR for Chinese sports products
produ
in 2016-2025, based on the
Government’s target to establish a CNY5trn sports industry by 2025 and today’s estimated
value of CNY900bn.
years
We are confident that the actual growth may exceed the target as we are witnessing a
bottom-up grassroots change in sporting behaviour,
behaviour rather than just a top-down
investment and dollar-led initiative.
acco
for 0.7% of GDP in 2013,
To put things into perspective, China’s sports industry accounted
which was still significantly behind the US where sports represented
represent 3.5% of GDP in 2013.
Figure 19: Size of sports industry
Figure 20: Size of population of frequent exercisers
(mn people)
550
6,000
4.0%
5,000
3.5%
500
5,000
500
4,000
3.5%
2.5%
3,000
2.0%
1.5%
1.0%
0.5%
2.2%
CNY (bn)
As % of GDP
3.0%
450
400
2,000
378
900
1,000
1.3%
350
0.7%
0
0.0%
China 2013
China 2025 Gov. target
US 2013
EU 2013
300
China 2013
% of total GDP - LHS
China 2025 - Gov. target
Sports industry gross value - RHS
Source: General Administration of Sports (GAS),, European Commission, Wind, US
Census Bureau, RHB
Source: State Council, GAS, RHB
Figure 21: Sports sector
ector as % of GDP across nations
Figure 22: Sporting goods sales and manufacturing per
capita
(USD)
4.0%
600
544.5
3.45%
3.5%
500
3.0%
400
2
2.50%
2.5%
2.20%
2.0%
300
236.9
1.80%
200
1.5%
1.0%
154.8
180
180.0
195.0
195.7
South
Korea
2010
Hong
Kong
2014
Japan
2007
100
0.67%
0.5%
17.4
31.5
China
2008
China
2013
0
0.0%
China - 2013
UK - 2008
EU - 2013
Japan - 2007
US - 2013
Source: Sports English European Commission, General Administration of Sports of
Japan, US Census Bureau, RHB
Taiwan
2014
Source: Various official data, RHB
15
UK
2008
US
2013
Sportswear
11 July 2016
Football As The Next Frontier
The President loves football. Xi Jinping’s fondness for football has spurred significant
investments by Chinese businessmen.
Foreign acquisitions foreshadow subsequent China investments.
investments A consortium led
by private equity groups China Media
ia Capital and CITIC Capital purchased a 13% stake in
the parent holding company of Manchester City Football
F
Club (FC), a leading English club
in the Barclay’s Premier League, for USD400m in Dec 2015. The holding company, City
Football Group, has an ambitious
ous global business plan and its chairman Mr Khaldoon Al
Mubarak wished to secure the deal to tap into the potential of the China market.
♦ Foreign football clubs see “incredible
We see this big football deal as precursor
sor to foreign direct investment (FDI) related to
football in China. We foresee:
i. Football academies being built domestically;
♦ President Xi wishes to see football
potential” in China
academy and infrastructure built in
China
ii. Fan clubs being established;
iii. Exhibition matches being held in the East Asian nation with top-tier foreign teams
against established local teams – this will spur local ticket and memorabilia product
sales, eg football jerseys.
It is no coincidence that President Xi included a trip to Manchester City’s facilities in Oct
2015 as part of his official visit to the UK.
Figure 23: President Xi’s fondness for football – selfie taken
by Manchester City and Argentina star striker Mr Sergio
Aguero with the Chinese leader
Figure 24:: President Xi’s passion for the game
Source: Twitter
Source: Associated Press
Other Chinese football acquisitions. Aston Villa FC was bought in May for GDP60m by
the Recon Group, a private company controlled by Chinese businessman Mr Tony Xia. Mr
Xia intends to “make more moves in investing in the [football] industry in China”. UK teams
are not the only acquisitions. In Mar 2015, Dalian Wanda Group Co Ltd (Dalian Wanda)
paid EUR45m for a 20%
% stake in a leading Spanish La Liga club Atletico Madrid. In an
interview with the Wall Street Journal (WSJ),
), Dalian Wanda chairman
c
Mr Wang Jianlin
said the deal would further help his group’ss expansion into the entertainment segment and
improve Chinese football. Atletico Madrid plans to build a new youth training centre
cent for
Chinese players studying in Spain to nurture future Chinese talent. Note that Mr Wang
also bought World Triathlon Corp for USD650m and will help China host its maiden
Ironman Triathlon event in 2016.
♦ Chinese ownership of foreign sports
Helps grow the sports apparel and gear market. All in all, increased football-based
activities in China will spur consumer interest in the sport – increasing participation rate
and developing another pillar in the country’s
’s portfolio of popular sports. We view the
popularisation of an additional sport (ie football)
football to be synergistic to the sports sector,
rather than a zero-sum game. Even
ven though the total leisure time for an active sports
enthusiast is limited, each additional sport participated
participate in will require the purchase of an
additional set of outfit/gear particular to sport.
sport This results in increased spending in
aggregate sporting goods.
♦ Diversity of sports played increases
16
establishments paves
pave the way for
developing sports
infrastructure/events in China
the likelihood of more gear sets
purchased
Sportswear
11 July 2016
Sector Valuations
Figure 25: Valuation table 1 – sportswear
Company
Ticker
HSI
CSI300
Price Mkt cap
(USDm)
3-mth
avg t/o
(USDm)
P/E
Hist
(x)
P/E
FY1
(x)
P/E EPS FY1 EPS FY2 3-Yr EPS PEG Div yld PB/V PB/V
FY2
YoY%
YoY% Cagr (%)
(x) Hist (%) Hist
FY1
(x)
(x)
(x)
20,564
10.2
11.4
10.3
(10.3)
10.4
3,192
13.9
13.1
11.7
6.1
12.5
51.3
33.2
23.6
55.8
32.8
Sector avg
3.1
3.3
4.0
1.1
1.2
2.1
1.7
1.0
1.6
40.0
0.8
0.3
1.9
1.6
Domestic Sportswear - H-share
Anta Sports Prod
2020 HK
14.88
4,798
17.5
15.7
13.5
11.8
16.0
15.0
15.4
0.8
4.5
3.7
3.4
Xtep Intl
1368 HK
3.95
1,125
2.4
11.7
10.4
9.2
13.4
12.0
12.1
0.8
5.1
1.5
1.4
Li Ning Co Ltd
2331 HK
3.91
950
4.2
NM
40.5
30.3
NM
NM
NM
0.1
0.0
2.0
2.0
China Dongxiang
3818 HK
1.36
971
1.8
8.1
11.5
10.5
(29.9)
9.8
(6.8) N/A
7.7
0.7
0.7
361 Degrees
1361 HK
2.01
536
0.5
6.9
6.3
5.6
9.2
13.9
14.2
6.2
0.7
0.6
Peak Sport
1968 HK
2.11
650
2.5
10.4
10.1
9.1
3.1
10.5
8.6
1.2
7.1
0.9
0.8
Pou Sheng Intl
3813 HK
2.18
1,498
1.8
23.2
14.8
12.8
57.0
15.8
32.3
0.5
N/A
N/A
1.5
12.7
15.3
12.7
11.5
12.8
12.6
0.6
5.1
1.6
1.5
Average
0.4
International Sportswear
Nike Inc -Cl B
NKE US
55.92
94,210
595.3
25.3
23.2
20.2
9.1
14.7
13.5
1.7
1.1
7.7
7.5
Adidas Ag
ADS GR
124.40
28,795
85.7
39.5
28.8
24.8
36.9
16.4
23.4
1.2
1.3
4.4
4.1
Puma Se
PUM GR
197.05
3,306
0.6
79.5
51.7
34.5
54.5
49.8
47.7
1.1
0.3
1.9
1.8
UA US
40.52
16,835
272.8
75.0
67.3
50.9
11.5
32.2
23.8
2.8
N/A
10.1
8.8
LULU US
Under Armour-A
Lululemon Ath
75.20
10,301
140.7
39.6
35.1
29.7
12.8
18.1
16.2
2.2
N/A
9.1
8.2
Asics Corp
7936 JP 1,584.00
3,144
26.5
29.4
23.0
15.9
27.7
44.9
29.0
0.8
1.5
1.6
1.4
Mizuno Corp
8022 JP
599
1.0
27.4
21.0
17.7
30.6
19.0
21.0
1.0
2.2
0.6
0.6
45.1
35.7
27.7
26.2
27.9
24.9
1.5
1.3
5.1
4.6
454.00
Average
Sportswear OEM
Yue Yuen Ind
551 HK
31.80
6,759
6.6
17.3
14.3
12.8
20.7
11.9
13.3
1.1
3.8
N/A
1.4
Win Hanverky
3322 HK
1.34
222
0.3
7.0
N/A
N/A
N/A
N/A
N/A
N/A
8.6
0.7
N/A
Pegasus Intl Hld
676 HK
1.17
110
0.0
83.8
N/A
N/A
N/A
N/A
N/A
N/A
21.4
1.2
N/A
Kingmaker Foot
1170 HK
1.74
156
0.2
10.0
8.3
6.7
20.8
23.8
22.6
0.4
5.7
1.1
0.9
29.5
11.3
9.8
20.8
17.8
17.9
0.7
9.9
1.0
1.2
(9.3) (1.0)
Average
Footwear
Belle Intl
1880 HK
4.33
4,708
11.0
7.1
8.8
9.4
(18.8)
(6.4)
Stella Internati
1836 HK
13.68
1,401
1.7
11.5
13.6
11.5
(15.0)
17.7
Le Saunda
738 HK
1.63
148
0.1
7.7
10.9
11.6
(29.1)
(6.7)
Daphne Internati
210 HK
1.22
259
0.3
N/A
N/A
17.4
N/A
N/A
8.8
11.1
12.5
(21.0)
1.5
Average
Source: Bloomberg, RHB
17
4.4
1.3
1.2
3.0
4.6
6.2
1.4
1.4
N/A
N/A
11.3
0.7
0.7
(190.4) N/A
N/A
0.5
0.5
7.3
1.0
0.9
(65.6)
1.8
Sportswear
11 July 2016
Figure 26: Valuation table 2 – sportswear
Company
Ticker
Rev
Rev NP Hist NP FY1
Net
Net
Hist
FY1 (USDm) (USDm) gearing gearing
(USDm) (USDm)
Hist (%) FY1 (%)
Beta
Gross
Net
Net
ROE
ROE Sh px Sh px
margin margin margin Hist (%) FY1 (%) 1-mth 3-mth
Hist (%) Hist (%) FY1 (%)
%
%
HSI
10.4
9.1
(3.4)
1.0
CSI300
12.5
12.3
0.9
0.2
Sector avg
3.0
0.0
0.6
39.4
1.9
2.7
2.3
7.0
(5.9)
14.4
Domestic Sportswear - H-share
Anta Sports Prod
2020 HK
1,663
1,943
325
362
0.0
0.0
0.2
46.6
18.3
18.5
24.9
25.7
(7.1)
(23.8)
Xtep Intl
1368 HK
792
873
99
108
0.0
0.0
0.3
42.2
11.8
12.1
13.0
14.2
(4.1)
(9.5)
Li Ning Co Ltd
2331 HK
1,060
1,221
2
27
0.0
0.0
0.8
45.0
0.2
2.3
0.6
10.4
18.5
9.5
China Dongxiang
3818 HK
220
249
120
68
0.0
N/A
0.6
55.5
54.7
27.3
8.1
5.7
(2.9)
(12.5)
361 Degrees
1361 HK
667
755
77
85
0.0
N/A
1.1
40.9
11.6
11.2
10.1
10.9
(12.2)
(26.1)
Peak Sport
1968 HK
465
505
59
64
0.0
N/A
0.6
38.7
12.6
12.6
8.6
8.5
(4.1)
1.4
Pou Sheng Intl
3813 HK
2,300
2,541
64
99
5.9
N/A
0.6
33.3
2.8
3.9
N/A
10.4
(4.0)
26.7
1,024
1,155
107
116
0.8
0.0
0.6
43.2
16.0
12.6
10.9
12.3
(2.3)
(4.9)
Average
International Sportswear
Nike Inc -Cl B
NKE US
32,376
35,119
3,760
4,097
0.0
0.0
0.9
46.2
11.6
11.7
30.1
32.0
3.3
(5.9)
Adidas Ag
ADS GR
15,283
16,989
573
789
5.3
10.5
0.8
48.3
3.7
4.6
12.8
14.8
4.1
21.0
Puma Se
PUM GR
3,061
3,242
34
51
0.0
0.0
0.6
45.5
1.1
1.6
2.3
3.6
(7.8)
2.1
UA US
3,963
4,957
233
273
32.3
34.0
0.9
48.1
5.9
5.5
15.4
14.3
3.8
(6.9)
Under Armour-A
Lululemon Ath
LULU US
2,061
2,346
266
294
0.0
0.0
0.6
48.4
12.9
12.5
23.1
25.0
5.2
18.0
Asics Corp
7936 JP
4,255
3,983
102
132
5.9
0.0
1.2
42.5
2.4
3.3
5.6
6.8
(32.7)
(17.7)
Mizuno Corp
8022 JP
Average
1,947
1,944
21
27
21.8
18.9
0.8
38.6
1.1
1.4
2.3
3.0
(11.5)
(11.8)
8,992
9,797
712
809
9.3
9.0
0.8
45.4
5.5
5.8
13.1
14.2
(5.1)
(0.2)
16.1
Sportswear OEM
Yue Yuen Ind
551 HK
8,435
8,774
390
491
0.0
0.0
0.2
23.4
4.6
5.6
N/A
10.7
1.1
Win Hanverky
3322 HK
495
N/A
31
N/A
0.0
N/A
1.0
30.2
6.3
N/A
11.0
N/A
(10.7)
0.0
Pegasus Intl Hld
676 HK
75
N/A
1
N/A
0.0
N/A
1.0
12.3
1.8
N/A
1.3
N/A
(6.4)
(2.5)
Kingmaker Foot
1170 HK
Average
302
377
15
18
0.0
N/A
0.3
16.4
5.1
4.9
10.8
7.4
(3.3)
(26.0)
2,327
4,575
110
254
0.0
0.0
0.6
20.6
4.5
5.2
7.7
9.0
(4.8)
(3.1)
Footwear
Belle Intl
1880 HK
6,099
6,100
765
681
0.0
0.0
1.2
56.3
7.2
10.6
11.7
14.2
(1.4)
(1.6)
Stella Internati
1836 HK
1,770
1,712
121
102
0.0
0.0
0.3
21.0
6.8
6.0
12.5
9.9
(28.0)
(24.8)
8.2
0.0
Le Saunda
738 HK
256
238
19
16
0.0
N/A
0.5
66.0
7.5
6.9
9.6
Daphne Internati
210 HK
1,080
975
(49)
(2)
0.0
N/A
N.A
56.4
(4.5)
(0.2)
(8.0)
2,301
2,256
0.0
0.0
0.7
49.9
4.3
5.8
6.5
Average
214
199
18
(0.4) (10.3)
8.0
(9.9)
(1.2)
27.1
(0.1)
Sportswear
11 July 2016
Appendix
Timeline of China’s Sports Reforms
2014 State Council’s opinions on sports development
On 2 Oct 2014, the State Council issued the Opinions on Accelerating Development of
Sports Industry and Promoting Sports Consumption (關於加快發展體育產業促進體育消費
的若干意見) report. In a nutshell, the Government
overnment wishes to:
to
♦ The Government
G
is to grow the sports
industry, with a target of CNY5trn by
industry
2025
i. Promote healthy living;
sports
ii. Stimulate the masses to enthusiastically participate in sports;
iii. Encourage market-oriented capital to invest in sports;
sports
iv. Clear
lear policy barriers to foster rapid development.
To quantify this policy, the Government
overnment targets to increase the size of the sports industry
to CNY5trn. According to various estimates,
estimates the size of the industry in 2014 was
forecasted to be in the range of CNY400bn-900b
900bn. The sports industry generally refers to
sporting goods, apparel, equipment, media
dia advertising, ticket sales, health and fitness
spending.
♦ Numerical targets, reform specifics,
Specifically, the Government is looking to:
i. Increase sports activity per person and average exercise space to 2 sq m per person;
and tax subsidies are decreed
ii. Remove administrative hurdles in the hosting
host
of commercial and grassroots sporting
events;
iii. Reform the sporting events management system;
system
iv. Improve the governance structure of professional clubs;
clubs
v. Encourage foreign investment into the Chinese sports industry.
industry
Government-identified high-tech
tech sports companies will have their corporate income tax
reduced to 15% (from 25%),, while those engaging in cultural and sports activities will have
their operations tax reduced to 3%
% (see the following link for further details).
2015 State Council’s memorandum on football reform
r
In Mar 2015, China’s central reform group – chaired by President Xi – established a plan
called the Overall Plan of Chinese Soccer Reform and Development” (中國足球改革發展
總體方案) to revive football in China. President Xi has been a passionate football fan since
childhood and had previously expressed his wish in 2012 (when he was Vice President)
for China to:
i. Qualify for the World Cup;
ii. To host a World Cup;
iii. To win a World cup.
randum was the dissociation of Chinese Football
The biggest take away from this memorandum
Association (CFA) from the GAS,, turning the former into a fully
full fledged non-governmental
organisation (NGO). Previously, officials from GAS ran the CFA.
19
♦ President Xi is to transform his soccer
dream into reality
Sportswear
11 July 2016
2016 National Development and Reform Commission’s
Commission (NDRC) football plan
In April, the NDRC and other departments jointly issued the Notice on China Soccer LongTerm Development Plan (中國足球中長期發展規劃 (2016-2050 年)). Government leaders
view football as a sunrise and eco-friendly
friendly industry. Their view is that the development of
the sport will expand consumption, bring together the sports industry and related industry
developments, and become part of economic growth.
♦ The NDRC has issued specific
milestones for football development
In 2016-2020, the focus will on building a foundation. Specifics include:
include
i. Increasing the number of football academies to 20,000 while – at the same time –
pushing for at least 30m elementary and middle school students participating in the
sport;
ields to over 70,000, ie an average of 0.5-0.7
ii. Raising the number of national football fields
fields per 10,000 people.
In 2021-2030, the objective is to become a first-class
first
footballing nation, with the national
men’s team in top ranked within Asia and the women’s team becoming global leaders.
Specifics include having 10,000 professional soccer coaches,
coaches and each elementary and
middle school having one football field at least..
2016 GAS’ sports plan
th
In May, GAS released the 13 5-Year
Year Plan in sports development (體育發展「十三五」規
劃 ) report. The latter primarily reconfirmed the sports-related
sports
targets mentioned in the
policies issued earlier by the NDRC and State Council, ie the sports industry to reach
CNY3trn by 2020. However, it added:
i. Sports value-added services are to represent 30% of the industry;
industry
ii. Spending on sports to comprise over 2.5% of per capita disposable income (see link).
The report targets the number of citizens frequently
frequent exercising to reach 435m and to
increase the area for exercise facilities to reach 1.8 sq m per person. By 2020, there
should be the constructions of 25,500 new public fitness centres (both outdoors and
indoors) in cities, counties and villages combined.
To encourage youth participation, the country is to build over 6,300 youth sports centres
and 15,500 sports-oriented schools. Entrance
e fees and tuition would either be free or
subsidised. The plan mentions the need to accelerate sports-related lotteries to fund the
public infrastructure developments mentioned above.
20
♦ GAS issues specific milestone for
building public sports infrastructure
Sportswear
11 July 2016
11 July 2016
Buy
Target Price:
Price:
Market Cap:
Bloomberg Ticker:
Best-In-Class
Class Leader Deserves a Premium
We initiate coverage on Anta with a BUY and HKD19.00 TP (28% upside).
This industry leader has grown faster than its peers due to:
1. Strong execution of marketing strategies;
2. Innovations stemming from R&D; and
defined advertising and promotion (A&P) campaigns.
3. Well-defined
Its renewed focus to grow its e-commerce wing, and aim to utilise its cash
pile gives it additional growth drivers on top of Anta core-brand growth.
Share Data
Avg Daily Turnover (HKD
HKD/USD)
52-wk
wk Price low/high (HKD)
(
Free Float (%)
Shares outstanding (m)
Estimated Return
Core brand growth momentum still strong.
strong We expect ANTA Sports
Products’ (Anta) 2016 trade fair orders (eg for Anta Kids, and its e-commerce
wholesale segment) to result in revenue growth of 10% YoY, as actual orders
may grow by the low double-digits.. Trade fair orders
orde represent 90% of its total
orders (the remaining 10% comprise replenishment orders). Its same-store
same
sales growth (SSSG) is strong – SSSG was at mid to high single-digits in 1Q151Q16. Its channel inventory period is also at healthy levels, ie at a normal 4-5
months. We expect FY17F trade
e fair order growth to be similar to that of FY16.
FY16
Shareholders (%)
Ding Family
Robust growth from multiple brands. We believe sales growth will be more
sustainable than before. The growth of its core brand, Anta, is back on track
and management can now
ow focus on developing its low-base,
low
high-growth
potential segments. Fila, Anta Kids and its e-commerce
e
retail channel have
reported sales increasing 50% YoY in FY15, and this would be a meaningful
growth driver. We estimate that Anta accounted for 70% of total sales in FY15,
although this proportion may decline to 52% by FY18 as the company benefits
from growth via its ancillary brands/channels.
HKD19.00
HKD14.90
USD4,797m
2020 HK
129m/16.7m
14.2 - 24.1
34
2,501
28%
66.0
Share Performance (%)
YTD
Absolute
(30.2)
Relative
(24.7)
1m
(7.1)
(4.3)
3m
(24.1)
(25.8)
6m
(28.6)
(29.8)
Source: Bloomberg
ANTA Sports Products Ltd (2020 HK)
Price Close
Relative to Hang Seng Index (RHS)
25
23
21
150
140
130
19
17
15
13
30
120
110
100
90
25
20
Initiate coverage with BUY. We believe Anta deserves to trade at a premium
to its domestic sportswear peers because of its faster earnings growth, high
ROEs and operating margins – which are the widest in the industry. Our DCFbased TP of HKD19.00 implies 17xx FY16F P/E,
P/E or 1SD above its 3-year mean
P/E of 15x, which can be explained by its improving ROEs. This P/E is at a 35%
discount to that of Nike and Adidas,, and only at a 55% premium over its
domestic competitors. Our TP also reflects a PEG of 1.1x of our 3-year
3
CAGR
forecast of 16%, which we deem as reasonable for a large-cap
large
stock with clear
growth prospects and a strong management team.
team Key downside risks would
be price competition
tition from sportswear peers and channel oversupply.
Forecasts and Valuations
Dec-14
Dec-15
Dec-16F
Dec-17F
Dec-18F
Total turnover (CNYm)
8,923
11,126
12,781
14,683
16,868
Reported net profit (CNYm)
1,700
2,041
2,367
2,723
3,136
Recurring net profit (CNYm)
1,700
2,041
2,367
2,723
3,136
Recurring net profit growth (%)
29.3
20.0
16.0
15.0
15.2
Recurring EPS (CNY)
0.68
0.82
0.95
1.09
1.26
DPS (CNY)
0.48
0.57
0.66
0.76
0.88
Recurring P/E (x)
18.8
15.7
13.5
11.8
10.2
P/B (x)
4.10
3.73
3.45
3.17
2.90
P/CF (x)
18.8
18.6
15.8
13.6
11.8
3.8
4.5
5.2
6.0
6.9
13.1
10.1
8.6
7.3
6.2
Dividend Yield (%)
EV/EBITDA (x)
Return on average equity (%)
Net debt to equity
22.7
net cash
24.9
net cash
Our vs consensus EPS (adjusted) (%)
26.5
net cash
1.5
28.1
net cash
0.7
21
29.6
net cash
1.9
15
10
May-16
Mar-16
Jan-16
Nov-15
Sep-15
5
Jul-15
Vol m
Improving brand equity via sponsorships paves the way for sustained
growth.. Anta has been successful on this front.
fro
It has built ties with sports
associations (like for basketball) and is starting to build brand equity in football.
Basketball is the third most popular sport behind running and badminton in
China,, according to a 2015 Nielsen survey. We believe Anta’s strength in this
sport gives it a key advantage in retaining market share.
12m
(6.4)
5.6
Source: Bloomberg
Core rolling P/E (x)
25
23
21
19
17
15
13
Jan-13
Jan-14
14
Source: Bloomberg
Analyst
Robin Yuen, CFA
+852 2103 9202
Jan-15
Jan-16F
Hong Kong Initiating Coverage
11 July 2016
Financial Exhibits
Financial model updated on : 2016-06-24.
Asia
Hong Kong
Consumer Cyclical
Bloomberg
2020 HK
Buy
Financial summary
Recurring EPS (CNY)
EPS (CNY)
DPS (CNY)
BVPS (CNY)
Weighted avg adjusted shares (m)
Dec-14
0.68
0.68
0.48
3.12
2,496
Dec-15
0.82
0.82
0.57
3.43
2,499
Dec-16F
0.95
0.95
0.66
3.72
2,499
Dec-17F
1.09
1.09
0.76
4.04
2,499
Dec-18F
1.26
1.26
0.88
4.42
2,499
Valuation basis
Valuation metrics
Recurring P/E (x)
P/E (x)
P/B (x)
FCF Yield (%)
Dividend Yield (%)
EV/EBITDA (x)
EV/EBIT (x)
Dec-14
18.8
18.8
4.10
4.6
3.8
13.1
14.1
Dec-15
15.7
15.7
3.73
4.7
4.5
10.1
10.9
Dec-16F
13.5
13.5
3.45
5.8
5.2
8.6
9.2
Dec-17F
11.8
11.8
3.17
6.8
6.0
7.3
7.7
Dec-18F
10.2
10.2
2.90
8.0
6.9
6.2
6.5
Income statement (CNYm)
Total turnover
Gross profit
EBITDA
Depreciation and amortisation
Operating profit
Net interest
Pre-tax profit
Taxation
Minority interests
Recurring net profit
Dec-14
8,923
4,027
2,092
(159)
1,933
224
2,243
(510)
(32)
1,700
Dec-15
11,126
5,185
2,658
(188)
2,470
133
2,829
(741)
(48)
2,041
Dec-16F
12,781
5,989
3,046
(188)
2,857
172
3,264
(849)
(48)
2,367
Dec-17F
14,683
6,916
3,507
(188)
3,319
191
3,744
(974)
(48)
2,723
Dec-18F
16,868
7,988
4,044
(188)
3,855
213
4,302
(1,119)
(48)
3,136
Cash flow (CNYm)
Change in working capital
Cash flow from operations
Capex
Cash flow from investing activities
Dividends paid
Cash flow from financing activities
Dec-14
(68)
1,706
(236)
(865)
(1,072)
(238)
Dec-15
(415)
1,724
(229)
(413)
(1,334)
(1,294)
Dec-16F
(189)
2,029
(160)
(99)
(1,657)
(1,657)
Dec-17F
(218)
2,354
(160)
(80)
(1,906)
(1,906)
Dec-18F
(251)
2,718
(160)
(58)
(2,195)
(2,195)
Balance sheet (CNYm)
Total cash and equivalents
Tangible fixed assets
Total other assets
Total assets
Short-term debt
Other liabilities
Total liabilities
Shareholders' equity
Minority interests
Total equity
Net debt
Total liabilities & equity
Dec-14
6,244
1,378
659
11,384
1,348
36
3,379
7,795
209
8,005
(4,896)
11,384
Dec-15
6,733
1,725
621
12,502
1,330
39
3,688
8,580
235
8,814
(5,403)
12,502
Dec-16F
7,340
1,730
598
13,565
1,330
39
3,993
9,290
282
9,572
(6,010)
13,565
Dec-17F
8,042
1,735
575
14,794
1,330
39
4,357
10,107
330
10,437
(6,712)
14,794
Dec-18F
8,840
1,741
553
16,199
1,330
39
4,773
11,048
378
11,425
(7,510)
16,199
Key metrics
Revenue growth (%)
Recurrent EPS growth (%)
Gross margin (%)
Operating EBITDA margin (%)
Net profit margin (%)
Dividend payout ratio (%)
Capex/sales (%)
Interest cover (x)
Dec-14
22.5
29.2
45.1
23.4
19.1
71.1
2.6
(8.63)
Dec-15
24.7
19.9
46.6
23.9
18.3
70.0
2.1
(18.62)
Dec-16F
14.9
16.0
46.9
23.8
18.5
70.0
1.3
(16.59)
Dec-17F
14.9
15.0
47.1
23.9
18.5
70.0
1.1
(17.37)
Dec-18F
14.9
15.2
47.4
24.0
18.6
70.0
0.9
(18.12)
DCF-based
Key drivers
i. Product mix upgrade, sports participation rate
Key risks
i. Channel
oversupply,
homogenization,
competition pricesve prices offered by its rivals
Company Profile
Anta is the leading domestic sportswear brand with
store network of over 7000 stores in the PRC. Based
in Fujian, company manufactures using a mix of OEM
and self-own factories, but relies on franchise
distributors to sell at retailthe retail level.
22
11 July 2016
Investment Thesis
Initiate coverage with BUY. Our TP of HKD19.00 is based on 17x FY16F P/E, or:
i. At a 35% discount to Nike and Adidas; and
ii. At only a 55% premium over its domestic peers.
We believe Anta deserves to trade at a premium to its domestic sportswear peers
because of its faster earnings growth, high ROE and the highest operating margin in the
space.
20
along with a 3-year
We expect the company to book 16% YoY earnings growth in 2016,
earnings CAGR of 16% for FY15-18F as well. Anta is the market leader and best-in-class
best
operator with the highest operating margins and ROEs among the six domestic
sportswear players. It also has the most liquidity and has the highest market cap.
Figure 1: Anta has the widest
idest margins and highest profitability
FY15
GP margin
EBIT margin
ROE
Anta
46.6%
24.2%
14.9%
Li Ning
45.0%
2.2%
0.6%
Xtep
42.2%
17.4%
13.6%
Peak
38.7%
20.2%
8.6%
361 Degrees China Dongxiang
40.9%
56.2%
20.5%
17.7%
10.1%
8.1%
Source: Company data, Bloomberg, RHB
From our analysis, we think the reason why Anta has high GP margins is due to the low
wholesale discount rates it offers (ie its ex-factory
factory prices are higher). Essentially, this
bigger “squeeze” on distributors is possible because Anta’s retailers
retailer enjoy high profitability,
which is measured by sales per store or sales per sqm. We believe Anta distributors are
more effective in their retail operations compared to its peers. This is due to its focused
product positioning, extensive staff training and its efforts to strengthen morale through
commissions.
Higher GP margins and controlled
ntrolled overhead expenses would flow into higher EBIT
margins, NP margins, and ultimately ROEs.
Core brand growth momentum still strong
Its 2016 trade fair orders (ie for Anta, Anta Kids,
Kids and its e-commerce wholesale segment)
suggest that revenue may grow 10% YoY this year, as actual orders grew in the low
double digits on average. Note that trade fair
ir orders account for 90% of Anta’s branded
business (remaining 10% comprise orders to replenishment stock). Anta has booked
strong SSSG, ie between mid to high single-digits
digits in 1Q15-1Q16.
1Q15
Its channel inventory
period, as well, is healthy at a normal 4-5 months.
onths. We expect the growth of its FY16F
trade fair orders to be similar to that of FY16.
Robust growth from multiple brands
Fast segmental growth. We expect the remainder of its sales growth to come from its
non-core brands.
ds. We believe this growth would be more sustainable than before as its
core brand growth is back on track (since 2012), and management can focus on
developing low-base
base segments that also have high growth potential. Fila, Anta Kids and its
e-commerce retail channel reported a 50% YoY increase in sales FY15, and we believe
they would be meaningful drivers to support Anta’s growth trajectory. We think that its core
brand, Anta,, accounts for 70% of company sales in FY15 – although the proportion could
drop
p to 52% by FY18 as the company benefits from growth via its ancillary
brands/channels.
♦ Becoming a multi-brand
multi
operator
Anta Kids. Anta’s children’s wear segment is slated for
f high growth, since the State
Council
ouncil of the People’s Republic of China has recommended that football and basketball
basket
be included in physical education programmes in schools. Anta executive director James
Zheng said that the children’s wear industry is “still very fragmented with more than a
thousand brands in China and (there are) no leading brands”.
E-commerce is expected to account for 20% of group sales in the future (FY15: high
single-digits),
s), according to management’s expectations. This percentage is about the
same as that of international brands like Nike,
Nike Adidas and GAP. We believe that a
successful e-commerce strategy will
ill boost sales and enhance brand equity.
23
♦ E-commerce
commerce on a high growth
trajectory
11 July 2016
Note that Anta’s self-operated e-commerce
commerce flagship store Anta.cn as well as online
platforms including Tmall and JD.com account for over 50% of total
tot e-commerce sales. Its
distributors account for the remainder of e-commerce
commerce sales.
Figure 2:: Revenue by brand or channel in FY15
Figure 3: Forecasted revenue
venue by brand or channel
FY15
FY
FY18F
2.5%
7.5%
15.0%
15.0%
Anta Core
Anta Core
Anta Kids
47.5%
Fila
7.5%
70.0%
Fila
20.0%
E-commerce
Anta Kids
E-commerce
Descente
Descente
15.0%
Source: RHB
Source: RHB
known sportswear brand of Italian origin that is targeted towards the highhigh
Fila is a well-known
end market. In China, Fila points of sale are split between self-owned
self
businesses (70%)
and distributors (30%). The self-owned
owned retail store segment enjoys a GP margin of over
70% (and EBIT margin of 10-20%). As its Fila business scales up, Anta is set to record
enhanced GP margins, thanks to the mix of types of retail businesses
businesse it has. Going
forward, we believe sales of Fila sales will exceed that of Anta products, due to the
expansion of its POS network from a low base.
♦ Starting to unlock Fila’s potential, as it
Descente JV.. We expect the famous Japanese ski-wear
s
brand to provide positive, but
limited earnings contributions by FY18. Descente makes premium luxury and high-tech
functional apparel. However, its ski apparel may appeal to a too-niche
too
target market and
its prices too high to be widely accepted by China’s mainstream consumer market. We
regard this brand as similar to the fashionable outdoor apparel brand Columbia – although
Descente products are more expensive.. We also note that the Winter Olympics 2022
would likely be a major direct catalyst to boost Descente product sales (see page 14 for
more details).
♦ Descente
Descent is a premium-positioned
is a complementary higher-end
higher
sport
fashion brand
Japanese winter apparel brand
Building brand equity via sponsorships
ponsorships to carve a path for growth
A successful brand helps to create a product, service and image that is easily
differentiated from that of its competitors.
s. A “killer” product, thus, is an easy way for
consumers to remember the brand. Renowned examples include Nike’s Air Jordan
basketball shoes, Adidas’s Predators, Copa Mundial football boots and even Li Ning’s N90
badminton gear, used by world badminton champion Lin Dan.
♦ A successful brand helps to create a
product, service and image that can
be differentiated from that of
competitors
Anta has been successful on this front by developing affiliations with sports associations,
especially those linked to basketball. It is also starting to build itself as a brand associated
with football.
Riding on the NBA hype. Anta has dominated the basketball apparel category in China
through the endorsements of National Basketball Association (NBA) stars such as Kevin
Garnett, Klay Thompson and Luis Scola. It signed on its first player in 2009. Anta also
launched its NBA co-branded
anded basketball shoes collection in 2004. Interestingly enough,
Peak Sports is also known to have invested in NBA star sponsorships, but the players that
endorse its products are less popular – and second-tier
second
players would create less hype for
their sponsoring
soring brands, in our view. Thus, we believe Anta is well-positioned
well
to continue
grabbing market share in the basketball space, which is arguably the largest sports
category in China.
Toehold in football apparel category.. Anta launched its football footwear products for
children in Sep 2015 and for adults in Jan 2016. Its football products are marketed as
“value for money” items. Children’s apparel are priced at CNY179 and upwards, while
items for adults are priced at CNY269-599.
599. It has also signed on Zheng Zhi, the current
captain of China’s national football team, as a product ambassador.
24
♦ Started investing in grassroots
football after Xtep’s lead
11 July 2016
Its marketing activities include organising matches, training young players and launching
professional footballll boots for youth with organisations such as Evergrande Football
School, Jiangsu Youth Soccer League.
Largest-cap
cap and strongest growth play in the domestic Sportswear sector
We believe Anta has become and may continue to be widely held by institutional
investors, as we, as well as the consensus, expect the sportswear sector to record
positive sales growth against the backdrop of a weak discretionary market. Due to its high
level of liquidity, transparency, and the quality of its management, Anta remains a favorite
amongst long fundss looking to deploy money in China’s consumer discretionary space.
♦ Most liquid and large-cap
large
domestic
Anta highlighted on 23 Feb that its
ts sales volume has surpassed Nike’s sports shoe sales
volume. Thus, it became the first sportswear company to record a sales value of
CNY11.126bn in 2015 in China. With items sold at lower prices than Nike (Anta products
are roughly cheaper by 50%), it sold 40m pairs of sports shoes – greater than what Nike
sold in China. Management has set a target to achieve CNY100bn in sales revenue for
2025.
♦ Sells more volume than global leader
Anta is a large-cap
cap stock with ample liquidity. The company’s track
trac record of delivering
consistent growth may sustain its valuation in line with that of its international peers going
forward.
♦ Anta has the potential to be ranked
25
sportswear maker
Nike
amongst international sportswear
names
11 July 2016
Risks
Possible slowdown in SSSG.. In 1Q16, SSSG decreased slightly to “mid single-digits”
from an average of “high single-digits” for the
th previous six quarters (3Q14-4Q15).
However, management attributes the deceleration of its SSSG to lower ASPs – erratic
weather patterns led to heavier retail discounting.
discounting However, Anta maintained that that its
actual sales volume was still strong and there was no build-up
build
of channel inventory.
♦ SSSG as a retail health indicator
Trade fair orders likely impacted if inventory builds up. Distributors and franchisees
are becoming more cautious as Anta’ss trade fair sales growth has dipped to “high-SD” (ie
single-digit) growth for the 3Q16 collection,, from “low-DD” (double-digit) reported for the
prior seven quarters (ie 4Q14-2Q16),, before rebounding to “low-DD”
“low
again for 4Q16.
♦ Trade fair orders would be hurt if
ASP downtrend. Management attributes the deceleration of its orders from the 3Q16
trade fair to end-users
users downgrading purchase choices. Distributors
D
ordered more
functional T-shirts
shirts and running jackets, as opposed to heavy down jackets to hedge
against the possibility of erratic weather.
♦ ASPs are decreasing but sales
Wholesale discounts. If distributors record negative SSSG for an extended period, Anta
may consider lifting its wholesale discounts to keep distributors in the black. Anta has
maintained its wholesale discount at c.40% since 2013.
2013
♦ Unprofitability at the distributor level
SSSG cools down
volumes more than make up for the
decline
may result in Anta dishing out larger
discounts
Valuation
We expect
ect Anta to achieve a strong sales CAGR of 16% in FY16-18F, supported by:
♦ CAGR growth of 16% projected for
the next 3 years
i. Trade fair order growth in the low teens;
ii. Mid single-digit SSSG; and
iii. Strong growth from a low base in Fila, Anta Kids and its e-commerce channels.
We do not expect significant GP margin growth as we think that it recorded an all-time
all
high of 46.6% in 2015 due to the low petrochemical prices. However, an upgrade in its
product mix to focus on more functional apparel would slightly boost its margin.
We expect selling and distribution costs to be stable as we do not anticipate Anta to
significantly change its store count. Meanwhile, its advertising budget has stayed at
relatively similar levels to that of previous years. We expect earnings to increase
inc
at a
CAGR of 16% for FY15-18F.
♦ No significant change in cost structure
stru
We initiate coverage on Anta with BUY and a TP of HKD19.00, implying 17x FY16F P/E,
ie 1SD from its 3-year
ear mean P/E of 15x. Our valuation is justified by Anta’s improving
ROEs. Our P/E is also at a 35%
% discount to Nike and Adidas (25x forward P/E), and at
only a 55% premium over its domestic peers (11x forward P/E) because we believe it will
continue to deliver above-industry growth,
h, based on the improvement of its brand equity.
As Anta increases in its scale, it may even approach the level of valuations of Nike and
Adidas. Our target P/E also puts the stock on a PEG of 1.1x of our three-year
three
CAGR
forecast of 16%, which we deem as reasonable for a large-cap
large
company with clear growth
prospects and a strong management team.
♦ Trading at a deserved premium to
26
domestic names, and at a discount to
international peers
11 July 2016
Figure 4: Anta has always traded at a premium vs its domestic peers
Sportswear P/E Chart (5-year)
(5
80.0
70.0
60.0
50.0
40.0
31.5
30.0
25.7
20.0
15.7
11.8
8.0
6.9
10.0
0.0
Jan-11
Jul-11
Jan-12
Anta
Jul-12
Xtep
Jan-13
Jan
Jan-14
Jul-13
Li Ning
Jul-14
361 Degrees
Jan-15
China DX
Jul-15
Jan-16
Nike
Adidas
Note: Large spikes in P/Es of Li Ning and China DX are due to their respective large decline in earnings
Figure 5: Forward P/E band
30.00
+2SD @20.2x
25.00
Share Price (HKD)
+1SD @17.8x
20.00
Mean @15.3x
15.00
-1SD @12.9x
-2SD @10.4x
10.00
5.00
May-16
Jan-16
Mar-16
Nov-15
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
0.00
We corroborated our valuation with a DCF calculation as well. Our analysis shows that the
stock has intrinsic value of HKD19.00 per share, premised on a WACC of 13% and
terminal growth assumption of 1%.
27
11 July 2016
Figure 6: DCF valuation
(CNYm)
Valuation Date: 7/5/2016
Time Period
Adj Time Period
EBIT
FY16F
FY17F
FY18F
FY19F
FY20F
FY21F
FY22F
FY23F
FY24F
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Dec-24
FY25F Term Val.
Dec-25
1
2
3
4
5
6
7
8
9
10
0.47
1.47
2.47
3.47
4.47
5.47
6.47
7.47
8.47
9.47
8,205
3,091
3,553
4,089
4,703
5,338
5,978
6,606
7,200
7,741
14.9%
15.1%
15.0%
13.5%
12.0%
10.5%
9.0%
7.5%
6.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
2,288
2,629
3,026
3,480
3,950
4,424
4,888
5,328
5,728
6,072
154
154
154
177
201
225
249
271
292
309
∆CapEx
-150
-150
-150
-195
-221
-248
-274
-298
-321
-340
∆Net w orking Capital
-189
-218
-251
-289
-328
-367
-405
-442
-475
-504
0
0
0
0
0
0
0
0
0
0
Free Cash Flow (FCF)
2,103
2,416
2,779
3,174
3,602
4,035
4,458
4,859
5,224
5,537
5,593
NPV*
1,986
2,019
2,055
2,077
2,086
2,067
2,021
1,950
1,854
1,740
14,641
NPV of discrete forecasts
19,856
50.0%
Terminal Grow th Rate
NPV of terminal value
14,641
36.9%
WACC
34,497
86.9%
Terminal Value FCF
5,428
13.7%
NPV of Terminal Value (End)
-235
-0.6%
NPV of Terminal Value (Today)
39,690
100.0%
Multi-stage grow th rate
Tax Rate
Net Operating Profit After Tax (NOPAT)
Depreciation
Others
DCF Valuation
Firm Value
Add: Net Cash/(Debt)
Less: Minority Interests
Equity Value (CNY)
CNYHKD
Equity Value (HKD)
Term inal Value
0.84
47,251
Shares Outstanding
2,499
Value per Share (HKD)
19.00
Source: RHB
28
1.0%
13.0%
5,224
43,532
1,854
11 July 2016
Financials
Expect steady growth to continue. We forecast Anta’s topline to increase at a CAGR of
15% in FY15-18F.
18F. This growth is focused on its front end, primarily driven by SSSG and
secondarily boosted by its store-based
based expansion.
We think Anta is likely to achieve 15% YoY sales growth in FY16, as:
i. Orders for its items from
om trade fairs for its 2016 collections grew by low double-digits
for its Anta-branded products;
commerce increased faster than for Anta.
ii. Sales of Fila, Anta Kids and e-commerce
♦ Growth mostly from organic SSSG
Management believes 7,000 stores would be a ceiling for the size of its store network for
its core brand. As such, it would be more interested in increasing store efficiency rather
than growing the number of stores going forward. Product-wise, we assume that it will
focus on enhancing the functionality of the items (which would drive its value-for-product
value
appeal). This will lead to growth in both its footwear and apparel divisions. In line with its
value-for-product strategy, we
e expect its GP margin to inch up to 46-47%
46
in our forecast
period (2016-2018).
and some from store growth
Figure 7: Revenue by brand
Revenue - By Brand
Anta Core
Anta Kids
Fila
E-commerce
Descente
Total
2015
2016F
2017F
2018F
70.0%
7.5%
15.0%
7.5%
0.0%
100%
62.5%
10.0%
16.7%
10.0%
0.8%
100%
55.0%
12.5%
18.3%
12.5%
1.7%
100%
47.5%
15.0%
20.0%
15.0%
2.5%
100%
Note: Actual numbers not disclosed in public filings
Source: RHB, Company data
Figure 8: Revenue by product type
(CNY m)
Revenue - by Product
Footwear
Apparel
Accessories
Total
Figure 9: Gross margins breakdown
2013
2014
2015
2016F
2017F
2018F
3,421
3,575
286
7,281
4,111
4,451
361
8,923
5,074
5,592
460
11,126
5,835
6,430
515
12,781
6,710
7,395
577
14,683
7,717
8,504
646
16,868
-8%
-3%
19%
-4%
20%
25%
26%
23%
23%
26%
27%
25%
15%
15%
12%
15%
15%
15%
12%
15%
15%
15%
12%
15%
YoY Change
Footwear
Apparel
Accessories
Group Revenue
Group Revenue
(CNYm) per store
YoY change
2013
2014
2015
2016F
2017F
2018F
45%
40%
35%
41.7%
46%
45%
38%
45.1%
46%
48%
37%
46.6%
46%
48%
37%
46.9%
47%
48%
37%
47.1%
47%
49%
37%
47.4%
Figure 10: Store network by brand
Store Count
Anta Brand
Kids
Lifestyle
Fila
Total Store Number
YoY change
(CNY m)
Gross margins
Footwear
Apparel
Accessories
Overall
Figure 11: Cost structure
2013
2014
2015
2016F
2017F
2018F
7,757
881
0
416
9,054
7,622
1,228
0
519
9,369
3%
7,031
1,458
0
591
9,080
-3%
7,050
1,750
0
675
9,475
4%
7,100
2,000
0
750
9,850
4%
7,150
2,200
0
825
10,175
3%
0.80
-2%
0.97
21%
1.21
25%
1.38
14%
1.52
10%
1.68
11%
Note: Revenue refers to sell-in
in wholesale value, which is approximately 40% of the
full retail price for Anta products
(As % of Sales)
Costs Structure
S&D expenses
A&P expense
Admin expenses
2013
2014
2015
2016F
2017F
2018F
16.0%
13.6%
3.9%
19.0%
12.0%
4.4%
19.9%
11.5%
4.5%
20.0%
12.0%
4.5%
20.0%
12.0%
4.5%
20.0%
12.0%
4.5%
Tax rate
16.1%
22.7%
26.2%
26.0%
26.0%
26.0%
EBIT margins also stable. In terms of cost structure, we see no major store expansion in
the next three years and no major subsidies made to support renovation works for its
distributors. Anta’s advertising and promotions (A&P) expense may ramp up as the Winter
Olympics occurs in China in 2002, as it may wish to increase media exposure then.
29
♦ A&P
A& may increase as we move
towards the 2022 Olympics
11 July 2016
Net cash to fund potential M&A.. Anta had a net
n cash position of CNY5,428m as of endFY15, or HKD2.59 per share. During its latest analyst meeting, CEO and chairman Mr
Ding Shizhong explained that the cash will be used to acquire other sportswear brands
such as Descente,, as part of the company’s efforts
effo
to become a multi-brand apparel
company.
Figure 12: Positive OCF funds dividend payments
♦ Aims to use its cash pile by acquiring
other sportswear brands
Figure 13: Growing cash pile
9,000
4,000
8,000
3,000
8,194
7,000
2,000
1,000
1,686
0
(1,000)
(865)
(238)
2,860
CF from financing
1,903
(413)
(99)
(53)
(26)
7,318
6,000
3,126
(CNY m)
(CNY m)
3,236
CF from investing
CF from operations
6,538
5,000
4,000
4,934
5,166
2014
2015
Cash Balance - end
3,000
(1,294) (1,766) (2,026) (2,224)
2,000
(2,000)
1,000
0
(3,000)
2014
2015
2016F
2017F
2018F
Note: OCF = operating cash flow
Source: Company data
2017F
2018F
Dividends.. We expect Anta to maintain its dividend payout ratio of 70% (which was the
ratio for FY14 and FY15). Its large cash balance, coupled with its increasing cash flow
from operations, makess this ratio highly sustainable. There is even a possibility of a
special dividend in the future, although management has been downplaying that scenario.
2016F
30
♦ More than enough cash to sustain a
70% dividend payout ratio
11 July 2016
Management Profile
Mr Ding Shizhong (丁世忠
丁世忠),
hairman, CEO, aged 45. He is primarily responsible for the
丁世忠 chairman,
overall corporate strategies, brand management, planning and business development of
the group. He joined the company in Jul 1994 and is dedicated to expanding and
promoting the group’s business as well as developing
develop
China’s sporting goods industry. Mr
Ding is the brother of Mr Ding Shijia, a cousin of Mr. Wang Wenmo
W
and a brother-in-law of
Mr Lai Shixian.
Mr Ding Shijia (丁世家
丁世家),
eputy chairman, executive director,
director aged 51. Mr Ding is
丁世家 deputy
primarily responsible
ible for the management of the group’s
g
footwear operations. He joined in
Jul 1994. Mr Ding is the brother of Mr Ding Shizhong.
Shizhong
Mr Lai Shixian (賴世賢
賴世賢),
賴世賢 aged 41, COO,, executive director and vice president. Mr Lai
is responsible for the overall administrative
ministrative management of the group. Mr Lai joined in Mar
2003. He holds an EMBA degree from China Europe International Business School. Mr
Lai is a brother-in-law of Mr Ding Shizhong and Mr Ding Shijia.
Mr Wang Wenmo (王文默
王文默),
director aged 59. He is primarily responsible for
王文默 executive director,
the management of apparel operations. He joined in Jun 2000 and has over 20 years of
experience in the apparel industry. Mr Wang is the cousin of Mr Ding Shizhong and Mr
Ding Shijia.
Mr Lam Jim (林戰
林戰),
44 He was an
林戰 chief financial officer, company secretary, aged 44.
executive director and chief financial officer of Soho China Limited (410 HK) and Top
Spring International Holdings Limited (3688 HK) and the chief financial officer of I.T
Limited (999 HK)) and Greentown China Holdings Limited (3900 HK) He is also a member
of the Hong Kong Institute
nstitute of Certified Public Accountants.
Accountants
31
11 July 2016
Timeline
•
1994: The group was founded by Mr Ding Siren, the father-in-law of Mr. Ding
Shizhong
•
2004:: Became an equipment sponsor for the Chinese Basketball Association
(CBA)
•
2006:: Renewed CBA sponsorship for seven years with an expiry date in 2012
•
2007:: Listed in June at the top of the HKD4.28-5.28
HKD4.28
range on 20x FY08F P/E;
competitor Li Ning traded at 33xx FY08F then. 25% of the company’s total shares
were made available, with 15% greenshoe
reenshoe fully exercised.
exercised The company in
HKD3.64bn in proceeds from this exercise.
exercise Its global sponsor was Morgan
Stanley.
•
2009:: Acquired the Fila’s business in the PRC
•
2010:: Endorsed NBA stars Luis Scola and Kevin Garnett
•
2013: Endorsed NBA star Rajon Rondo
do
•
2014:
•
•
i.
Launched NBA-branded
branded products in China;
ii.
Collaborated on the Anna Sui x FILA collection;
iii.
Signed Korean actor Lee Min Ho as a Fila ambassador.
2015:
i.
Endorsed NBA star Klay Thompson and launched the signature “KT1”
basketball shoe;
ii.
Signed on actor Chris Evans as a new Fila ambassador;
iii.
Launched the Jason Wu x FILA 2016 collection;
iv.
Signed Zheng ZZhi, captain of China’s national soccer team, as
ambassador for newly launched professional soccer boots.
2016: Appointed Mr Jim Lam as its new
n
CFO in February after Mr Ling Shing
Ping, the outgoing CFO, resigned citing family reasons.
Auditor
KPMG is currently Anta’s auditor.
32
11 July 2016
Appendix
Company description.. Anta is a brand owner and manufacturer of sportswear in the
PRC. It designs, manufactures
ctures and outsources, as well as wholesales sports footwear and
apparel to distributors responsible for retailing exclusively under the Anta brand. The
company hosts four trade fairs a year to introduce seasonal collections.
Insights from our factory tour. We toured Anta’s manufacturing facilities in Jinjiang back
in 2015 and came away impressed by the level of automation, quality control process and
level of commitment in its R&D.
Figure 14: Inside Anta’s footwear production line
Figure 15: Applying the sole by hand
Source: RHB
Source: RHB
Figure 16: Meticulous quality control inspection
Figure 17: Sales staff training in progress
Source: RHB
Source: RHB
33
11 July 2016
Figure 18: Science lab for footwear testing
Figure 19: Scientists at work
Source: RHB
Source: RHB
Descente JV. Under the JV, Anta, Descente Global Retail (DGR) and Itochu will
collaborate in designing and distributing products bearing the Descente trademark in
China on an exclusive basis. Ownership would be split by 60%, 30% and 10% between
Anta, DGR and Itochu respectively. Anta will
ill also allocate CNY150m for the initial capital
injection.
The Descente brand features premium, high-quality
high
ski apparel with industry-leading
technology and award-winning
winning functionality. From our channel checks in Japan during
Winter 2015, we noticed ASPs of ski jackets ranged from HKD3,000 to HKD7,000. The
Descente website also states that it sponsors apparel and gear for the Canadian, Swiss
and Spanish Olympic ski teams.
We believe this JV is strategically meaningful because of;
of
i. Its high-end product positioning exposure; and
ii. Multi-brand diversification.
However, earnings contributions are likely to be insignificant, as only a part of China’s
consumer base may be able to afford the products at higher prices. Management also
expects to open only a “handful” of stores (direct-retail
(direct
model, akin to that for Fila) by
FY17; with
th a maximum rollout of 100 stores nationally in the longer term, as it intends to
preserve the brand’s exclusive image.
Figure 20:: Descente consistently books robust revenue
Figure 21: Descente ski jackets
ckets
Revenue (JPYbn)
160
140
120
100
80
60
40
20
0
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Est Est
Source: Bloomberg
Source: Descente website
34
11 July 2016
SWOT Analysis
• Top domestic brand in China
• Winning market share against domestic peers
• Established R&D capabilities to deliver value-forvalue
money for consumers
• Time-tested execution abilities
• International
brands (Nike,
Adidas, Under
Armour)
expanding their
self-operated
retail networks
in China at an
unprecedented
pace
• Licensed brand
Fila to provide
profit
contributions
after its recent
operational
turnaround
• Large net cash
stockpile allows
for abundant
M&A
possibilities
• Beijing Winter
Olympics 2022
to spur interest
in sports
• Brand equity still unable to match that of international
brands
• Total A&P
P budget overshadowed by international
brands on a global basis
Recommendation Chart
Price Close
27
22
17
12
7
2
Jul-11
Oct-12
Jan-14
14
May-15
35
11 July 2016
Buy
Target Price:
Price:
Market Cap:
Bloomberg Ticker:
Running Ahead Of The Pack
1m
(4.1)
(1.3)
3m
(10.2)
(11.9)
6m
(7.5)
(8.7)
XTEP International Holdings Ltd (1368 HK)
Price Close
4.9
211
4.4
187
3.9
163
3.4
139
2.9
115
2.4
25
91
20
15
10
May-16
Mar-16
5
Source: Bloomberg
We believe the company is attractively valued,
valued as it is currently trading below
sector at 11x, but commands superior ROEs of 15% vs the sector’s 11%.
15
14
13
Key risks:
12
11
i. SSSG slowdown;
ii. Channel oversupply;
iii. Price competition from sportswear peers.
10
9
8
Jan-13
Jan-14
14
Source: Bloomberg
Dec-14
Dec-15
Dec-16F
Dec-17F
Dec-18F
4,778
5,295
5,848
6,417
6,996
478
623
706
790
876
478
623
706
790
876
(21.1)
30.3
13.4
12.0
10.8
Recurring EPS (CNY)
0.22
0.29
0.33
0.37
0.41
DPS (CNY)
0.13
0.17
0.20
0.22
0.24
Recurring P/E (x)
15.5
11.7
10.4
9.2
8.3
P/B (x)
1.58
1.51
1.42
1.34
1.26
10.2
P/CF (x)
Dividend Yield (%)
EV/EBITDA (x)
Net debt to equity
10.9
13.4
11.6
3.9
na
5.1
5.8
6.5
7.2
6.74
5.24
4.58
3.98
3.45
10.4
net cash
13.0
net cash
14.1
net cash
14.9
net cash
Our vs consensus EPS (adjusted)
36
15.6
net cash
12m
53.7
65.7
Source: Bloomberg
Jan-16
Initiate BUY. Our DCF-based HKD5.80 TP implies 15x FY16F P/E,
P/E more than
+2SD over its past 3-year average P/E,
E, justified by its improving ROE and
exposure to the fastest growing sports categories – running and football. This
also implies a 40% discount to Nike/Adidas’ss average P/E of 25x, and a 35%
premium over the sector average of 11x.
YTD
Absolute
(4.4)
Relative
1.1
Nov-15
Capitalising on football momentum. Sales from its football products currently
cu
represent <5% of the company’s revenue. However, given the Government’s
latest policy announcement to make China a top football nation by 2050, this
market has significant potential for growth. XTEP is a first-mover
first
among the
domestic brands to produce
duce football boots, so we believe it has the right
strategy to capitalise on its existing brand equity and R&D achievement to
secure this market.
60.3
Sep-15
Running is biggest market. Demand
emand for running equipment would be
augmented by China consumers’ ever-increasing
increasing sports participation.
Marathons in China have reached a new high at 134 events (from 51 events, up
+160%), with participants also up to a record high of 1.5m people in 2015,
according to the Chinese Athletic Association.
Association This is a >10x increase
compared to the 13 events total in 2010. We believe 2016 is poised for another
year of strong growth,, driving up demand for functional running gear.
17.6m/2.26m
2.95 - 4.74
40
2,209149
47%
Shareholders (%)
Mr. Ding Shui Po
Jul-15
Functionality leading product mix upgrade.
upgrade Functional products should
boost GPM via its product mix upgrade effect as they command higher ASPs,
which translate into higher GPM – c.3ppts over regular products. XTEP
International (XTEP) targets this ratio to improve to 70% – in line with
Nike/Adidas’ level – in 2-3 years’ time.
Share Data
HKD/USD)
52-wk
(
Free Float (%)
Estimated Return
Vol m
We initiate coverage on XTEP with a BUY and DCF-based HKD5.80 TP
(47% upside). It has successfully carved a niche in the running segment
via effective A&P and functional products, while maintaining its presence
in casual sports fashion. We see GPM improving on product mix upgrade
from enhanced functionality, while SSSG would remain healthy,
heal
as
running is the fastest growing sport in China.
Chin XTEP is an attractive value
play, priced at 11x FY16F P/E (vs
vs industry leader
lead ANTA Sports Products’
15x), and delivering 10% NP CAGR growth in FY16F-18F.
FY16F
HKD5.80
HKD3.95
USD1,125m
1368 HK
Analyst
Robin Yuen, CFA
+852 2103 9202
Jan-15
Jan-16F
11 July 2016
Financial Exhibits
Asia
Hong Kong
Consumer Cyclical
Bloomberg
1368 HK
Buy
Financial summary
Recurring EPS (CNY)
EPS (CNY)
DPS (CNY)
BVPS (CNY)
Dec-14
0.22
0.22
0.13
2.16
2,177
Dec-15
0.29
0.29
0.17
2.26
2,149
Dec-16F
0.33
0.33
0.20
2.39
2,149
Dec-17F
0.37
0.37
0.22
2.54
2,149
Dec-18F
0.41
0.41
0.24
2.70
2,149
Valuation basis
Valuation metrics
Recurring P/E (x)
P/E (x)
P/B (x)
FCF Yield (%)
Dividend Yield (%)
EV/EBITDA (x)
EV/EBIT (x)
Dec-14
15.5
15.5
1.58
(1.7)
3.9
6.74
7.21
Dec-15
11.7
11.7
1.51
8.4
5.1
5.24
5.63
Dec-16F
10.4
10.4
1.42
5.4
5.8
4.58
4.87
Dec-17F
9.2
9.2
1.34
6.6
6.5
3.98
4.21
Dec-18F
8.3
8.3
1.26
7.7
7.2
3.45
3.63
Total turnover
Gross profit
EBITDA
Operating profit
Net interest
Pre-tax profit
Taxation
Minority interests
Dec-14
4,778
1,947
705
(45)
660
(38)
770
(284)
(8)
478
Dec-15
5,295
2,237
833
(57)
776
(28)
893
(257)
(14)
623
Dec-16F
5,848
2,495
938
(57)
882
(20)
1,007
(287)
(14)
706
Dec-17F
6,417
2,764
1,051
(57)
994
(14)
1,125
(321)
(14)
790
Dec-18F
6,996
3,042
1,169
(57)
1,113
(13)
1,245
(355)
(14)
876
Cash flow (CNYm)
Capex
Proceeds from issue of shares
Dividends paid
Dec-14
(417)
(16)
(106)
(538)
2
(288)
17
Dec-15
163
669
(59)
397
36
(317)
(720)
Dec-16F
(106)
545
(150)
(160)
0
(424)
(438)
Dec-17F
(98)
632
(150)
(160)
0
(474)
(488)
Dec-18F
(100)
714
(150)
(160)
0
(526)
(540)
Intangible assets
Total investments
Total other assets
Total assets
Short-term debt
Other liabilities
Total liabilities
Minority interests
Total equity
Net debt
Dec-14
4,443
857
(3)
58
5
7,864
1,222
0
3,154
4,700
10
4,710
(2,604)
7,864
Dec-15
4,377
863
(8)
197
11
8,114
1,489
2
3,242
4,852
20
4,872
(2,766)
8,114
Dec-16F
4,450
966
(13)
197
16
8,540
1,489
2
3,386
5,134
20
5,154
(2,839)
8,540
Dec-17F
4,564
1,069
(18)
197
21
9,001
1,489
2
3,531
5,451
20
5,470
(2,954)
9,001
Dec-18F
4,711
1,173
(23)
197
26
9,499
1,489
2
3,678
5,801
20
5,821
(3,101)
9,499
Key metrics
Revenue growth (%)
Gross margin (%)
Capex/sales (%)
Interest cover (x)
Dec-14
10.0
(21.1)
40.8
14.8
10.0
60.3
2.2
17.2
Dec-15
10.8
32.0
42.2
15.7
11.8
59.9
1.1
27.9
Dec-16F
10.4
13.4
42.7
16.0
12.1
60.0
2.6
45.0
Dec-17F
9.7
12.0
43.1
16.4
12.3
60.0
2.3
70.8
Dec-18F
9.0
10.8
43.5
16.7
12.5
60.0
2.1
88.1
DCF-based methodology.
Key drivers
i. Product mix upgrade, sports participation rate.
Key risks
i. Channel
oversupply,
competition prices.
homogenization,
Company Profile
Xtep is amongst the top 3 domestic sportswear brands
in China with over 7,000 stores in its network. It
operates an asset-light wholesale model that relies on
franchisees to exclusively distribute its branded goods
at retail outlets.
37
11 July 2016
Investment Thesis
Initiating coverage with a BUY and HKD5.8
5.80 TP. Our DCF-based TP of HKD5.80
implies 15x FY16F P/E, over +2SD
2SD over its past 3-year
3
mean P/E, justified by its
improving ROE and exposure to the fastest growing sports segments of running and
football. This also implies a 40% discount to Nike/Adidas’s
Nike/Adidas average P/E of 25x, and a 35%
premium over the sector average of 11x. We believe the company is attractively valued,
as it is currently trading below sector at 11x, but commands superior ROE of 15% vs
sector’s 11%.
XTEP is the third largest sportswear brand in the China with a 5.3% market share
s
in 2015,
also ranking third amongst domestic names (just behind Li Ning with 5.5%) and #5 overall,
according to Euromonitor data. We believe the company’s diversification into a hybrid
functional and fashion sportswear brand will help it maintain its growth momentum and
grow market share going forward.
♦ Third largest domestic sportswear
brand by retail value
Figure 1: XTEP’s market share is growing steadily
25.0%
20.9%
20.0%
16.0%
15.0%
17.9% 18.4%
16.9%
15.1% 14.5%
13.1%
16.0%
19.2%
15.1% 15.0%
Nike Inc
16.1%
13.4%
11.5%
10.0%
5.0%
10.8%
9.9%
9.8% 9.5% 9.5% 9.5%
8.7% 9.0%
8.5%
7.2%
6.1% 6.3%
5.8%
5.1% 5.3% 5.3%
4.5% 4.0% 4.6% 5.1%
2.4%
Adidas Group
Anta(China) Co Ltd
Li Ning Co Ltd
Xtep International Holdings Ltd
361 Degrees International Ltd
New Balance Athletic Shoe Inc
Hongxing Erke Group
Peak Sport Products Co Ltd
0.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Euromonitor
Transitioning to a functional brand. Between 2008 and 2011, XTEP was focused on
casual sports fashion, as exemplified by making pop-singers
pop
Nicholas Tse, Jolin Tsai,
amongst others, as brand ambassadors and holding music concerts as part of its
(advertising & promotion) A&P expenditure. However,
Howev
starting in 2012, the company
began building its image as a brand catering to competitive sports through the Hong Kong
Standard Chartered Marathon as the official sports apparel sponsor, as well as various
other international-level
level marathons in China. In 2015, it took a step further by actively
transforming itself into a professional sports brand by manufacturing functional running
shoes, football shoes, and even smartphone-enabled
enabled smart running shoes. It increased its
investment in sports marketing by employing sports celebrities, organising Xtep Runners
Club (特步族) events, and sponsoring the most number (17 events) of marathons in
Greater China amongst the sportswear brands.
♦ Two-pronged
Two
approach: Functional &
Functionality leading product
ct mix upgrade.
upgrade Latest orders in 2016 had functional
products representing c.50% of its merchandise (vs sub 30% in 2015). XTEP targets this
ratio to improve to 70% - in line with Nike/Adidas’ level – in 2-3 years’ time. Note that
functional products boost GPM via product mix upgrade effect, as they command higher
ASPs, which translate into a higher GPM by c.3ppt over regular products.
♦ GPM boost from greater mix from
XTEP introduced and branded several technologies into their functional products that
resulted in a strong functional
unctional product push in 2015. They have hired 10 research &
development (R&D) directors, previously from major labels such as Adidas, Nike, Puma
and Sketchers, amongst others, to lead this initiative.
38
Fashion in product positioning
functional products
11 July 2016
Figure 2: Functional technologies
Year of
Technology
Introduction Usage
“Dynamic Foam” (動力巢 )
2015 Footwear
“Reactive Coil” (減震旋 )
2015 Footwear
“Air Mega” (氣能環 )
2015 Footwear
“Softpad” ( 柔軟墊 )
2016 Footwear
“Xtep-Aroma” (X香科技 )
2015 Footwear
"Silvadur” (仙 X盾 )
2015 Footwear
“Xtep-Cool” (特步冰爽科技 )
2015 Footwear
"X Walk Easy"
2015 Footwear
"X-Flex"
2015 Footwear
“Xtep Sports Elastic
Technology” (X-S.E.T.)
2015 Apparel
“XTEP-FROZEN”
2015 Apparel
“XTEP-DRY”
2015 Apparel
DupontTM Sorona® cotton
2015 Apparel
Description
Major running series: Improve shock absorption to protect runners' joints
Major running series: Support shape recovery from compression and impact; sole integrity, foot stability
Major running series: Support structure around sole, provide flexible range of cushioning for foot impact
Cooperation with Dow Chemical Company, extra comfort and protection
Long lasting scent release
Release silver ion which restrain odor and pathogenic microorganisms.
Heat absorption
Soft sole allows easy to put on and walk healthily, comfortable and light
Regular cutting grooves on the sold improves flexibility and stability, also offering comfort to the barefoot.
Improve elasticity for stretching exercises
Improve coolness via reflecting sunlight and absorbing heat when in contact with skin
Improve quick drying via transferring moisture from skin to surface of fabric
Lightweight and soft to skin comfort, waterproof, quick dry, antibacterial and deodorization
Source: Company, RHB
Running is the biggest market. XTEP’s focus on marathon sponsorship is part of its
strategic decision to be branded as the number one domestic name in the sports category
of running. It hosted 17 international-level
level marathons in 2015.
♦ Running is the most popular sport
amongst sports enthusiasts
As part of its “Sports+” strategy, XTEP intends to develop a runner’s ecosystem where it:
i. Hosts running competitions;
ii. Supplies sponsored apparel;
iii. Generates digital marketing campaigns;
iv. Organises free training classes for running preparation.
Taking its cue from Nike’s successful rollout of the Nike Running Club, we believe these
soft selling strategies will be key to building brand equity for new and veteran runners
alike. Demand for running equipment will be augmented by China’s
China consumers’ everincreasing sports participation.
Figure 3: XTEP’s marathon sponsorship
Figure 4: XTEP Running Club event
Marathons in China have reached a new high at 134 events (from 51 events, up 160%),
with participants up to a record high of 1.5m persons in 2015, according to the Chinese
Athletics Association (中國田徑協會).. Compared to the 13 events total in 2010, this is a
10x increase. We believe 2016 is poised for another year of strong growth.
39
♦ Record number of marathon events
hosted in China year after year
11 July 2016
Figure 5: A&P breakdown
Spending Category
Sponsorships of marathon and running events
Sponsorships of sports and entertainment TV programs
Sponsorship of sports spokesperson
Store Upgrade to 7th generation with running image
Figure 6: XTEP’s football sponsorships
Pecentage
30%
40%
20%
10%
Capitalising on the football momentum. XTEP also sees high potential in football and it
has been allocating resources such as R&D
D and sponsorships in this sports category.
Sales from football products currently represent less than 5% of its revenue. However,
given the latest government policy announcement targeting China as a top football nation
by 2050, this market also has significant
icant potential to grow. XTEP is a first-mover
first
within
domestic brands in producing football boots, so we believe it has the right strategy to
capitalise on its existing brand equity and R&D achievement to secure this market.
♦ President Xi Jin Ping’s dream to fuel
an explosive growth in football via
infrastructure spending
Risks
Possible same
ame store sales growth (SSSG) slowdown. SSSG has slowed to “mid
single-digits” for the last three quarters (from 3Q15-1Q16).
3Q15
However, management
indicates distributor confidence and channel inventory had remained stable and
unchanged, YTD in 2016.
♦ SSSG as a retail health
heal indicator
Trade fair orders likely impacted if inventory builds up. Distributors and franchisees
have reduced orders such that trade fair growth decelerated to only “high single-digits” in
3Q16 and 4Q16, from c.10% in 2Q16.
♦ Trade fair orders hurt if SSSG (sell(sell
ASP downtrend. The latest trade fair saw a product mix downgrade – distributors ordered
more functional T-shirts
shirts and running jackets, as opposed to heavy down jackets to hedge
he
against possibility of erratic weather, which leads
lead to lower ASPs.
♦ ASPs decreasing but volumes more
Wholesale discounts.. If distributors see negative SSSG for an extended period, Xtep
may consider hiking the wholesale discount to keep distributors’ profitability.
♦ Unprofitability at the distributor level
40
through) falters
than make up for that
may require higher wholesale
discount from the listco
11 July 2016
Valuation
DCF-based TP of HKD5.80. We value XTEP at HKD5.80 based on an intrinsic valuation.
The implied P/E of 15x FY16F is above the sector average of 11x for domestic sportswear,
which is reasonable, as it earns a higher ROE based on better asset turnover.
turnover It is also
best positioned to capture growth from the fastest growing sports categories such as
running and football. We believe DCF is a suitable valuation methodology as the company
appears to have entered a normalized growth phase with steady cash flows. Please see
the sector note for the valuation computation table.
table
♦ TP implies 15x
1 FY16F
Figure 7: DCF valuation & assumptions
(CNYm)
Time Period
Adj Time Period
EBIT
FY16F
FY17F
FY18F
FY19F
FY20F
FY21F
FY22F
FY23F
FY24F
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Dec-24
FY25F Term Val.
Dec-25
1
2
3
4
5
6
7
8
9
10
0.50
1.50
2.50
3.50
4.50
5.50
6.50
7.50
8.50
9.50
1,699
1,027
1,139
1,258
1,371
1,467
1,540
1,602
1,650
1,683
11.0%
10.4%
9.0%
7.0%
5.0%
4.0%
3.0%
2.0%
1.0%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
734
814
899
980
1,049
1,101
1,145
1,180
1,203
1,215
57
57
57
62
66
70
72
75
76
77
∆CapEx
-150
-150
-150
-68
-73
-77
-80
-82
-84
-84
-106
-98
-100
-110
-117
-123
-128
-132
-134
-136
0
0
0
0
0
0
0
0
0
0
534
623
705
864
925
971
1,010
1,040
1,061
1,072
1,082
NPV*
503
519
520
564
534
496
456
416
375
335
2,823
4,717
45.1%
2,823
27.0%
WACC
7,540
72.1%
Terminal Value FCF
1,061
2,938
28.1%
8,842
-20
-0.2%
10,459
100.0%
Tax Rate
Depreciation
Others
Term inal Value
DCF Valuation
Firm Value
Equity Value (CNY)
CNYHKD
0.84
Equity Value (HKD)
12,451
Shares Outstanding
2,149
5.80
Source: RHB
6.00
+2SD @12.9x
Share Price (HKD)
5.00
+1SD @11.3x
4.00
Mean @9.8x
3.00
-1SD @8.2x
-2SD @6.6x
2.00
1.00
0.00
Jun-13
Dec-13
Jun-14
Dec-14
14
Jun-15
Dec-15
41
1.0%
13.0%
375
11 July 2016
Financials
Figure 9: Topline forecast
2013
Sales
Footwear
Apparel
Accessories
Total
Figure 10: GP forecast
2014
2015
2016F
2017F
2018F
2,247
2,012
84
4,343
3,043
1,688
47
4,778
3,258
1,927
110
5,295
3,486
2,196
166
5,848
3,730
2,504
248
6,482
3,991
2,854
373
7,218
YoY growth
Footwear
-15.9%
Apparel
-25.5%
Accessories
-16.7%
Total
-20.7%
35.4%
-16.1%
-44.0%
10.0%
7.1%
14.2%
133.9%
10.8%
7%
14%
50%
10.4%
7%
14%
50%
10.8%
7%
14%
50%
11.4%
Store Network
Xtep
Xtep Kids
Total Stores
YoY Change
7,360
0
7,360
-2.0%
2013
2014
2015
2016F
2017F
2018F
40.9%
39.8%
34.0%
40.2%
42.1%
38.5%
36.9%
40.8%
43.8%
39.7%
39.7%
42.2%
44.3%
40.2%
40.2%
42.7%
44.8%
40.7%
40.7%
43.1%
45.3%
41.2%
41.2%
43.5%
Figure 11: Store forecast
2013
GP margins by segment
Footwear
Apparel
Accessories
Total
Figure 12: Cost structure forecast
2014
7,110
500
7,610
3.4%
2015
7,180
600
7,780
2.2%
2016F
7,230
650
7,880
1.3%
2017F
7,280
700
7,980
1.3%
2018F
Cost Structure
SG&A expenses
Admin
Tax Rate
7,330
750
8,080
1.3%
2013
2014
2015
2016F
2017F
2018F
23.3%
9.6%
30.1%
26.9%
10.2%
36.9%
27.6%
9.0%
28.7%
27.6%
9.0%
28.5%
27.6%
9.0%
28.5%
27.6%
9.0%
28.5%
Expect steady sales growth to continue. XTEP’s
XTEP’ sales have grown every year since
2013, and it has achieved a steady CAGR of 10% over the last two years. We expect this
trend to continue with a 10% CAGR over FY16F-FY18F,
FY16F
as topline growth will mostly
come from organic SSSG of 9-10%
10% YoY in FY16-18.
FY16
Point of sale (POS) expansion will
contribute c.1% to the topline. Organic
rganic SSSG growth will mostly come from ASP upgrades
via functional products, while the remainder will be driven by volume increases. Store
network is relatively saturated at c.8,000
000 locations
locatio under a single brand, so we do not
believe POS expansion will be a meaningful driver going forward.
♦ Growth driven by organic SSSG via
GPM slated for an uptrend by 0.5ppt each year, as XTEP incorporates
incorporate a higher
percentage of functional products. We see raw material input prices (apparel fabric and
shoe plastics, which are driven by cotton and oil prices) to be stable going forward, while
small increases can be passed over to the end--consumer through price hikes.
♦ GPM helped via mix of more
Operations margin stable from an unchanged store network.
network We assume a stable
cost structure in terms of selling, general and administrative (SG&A) expenses, as we
foresee limited new store expansionss and no major changes in its distribution network
structure. Expenses such as R&D and A&P would likely be controlled in line with the
budgets of previous years.
♦ EBIT margin stable on no major
both volume and ASP increases
functional products
expansion plans
Thus the recurring net profit grows 11-13%
13% in FY16F-18F.
FY16F
Balance sheet healthy with net cash. The company
c
has net cash of over CNY2,900m
as at end-FY15. From our conversation with
th CEO Mr Ding Shui Po, we have learned that
his areas of interest include stadium management, organisation
organi
of sporting events, sports
broadcasting rights, and creating running clubs. These would be growth areas to better
utilise
e extra capital, especially under supportive government policies recently enacted in
2014 and 2015. (Please refer to the sector report for details).
details
♦ Net cash position
Constant dividend payouts.. Management has been consistent in paying out dividends to
shareholders. Payout ratio has been 50-60%
60% in FY11-15,
FY11
and we expect payout at 60%
going forward, in line with management guidance in the absence of any major acquisitions
requiring significant cash outflow.
♦ Dividend payout at 60% sustainable
sust
42
11 July 2016
Management Profile
Mr Ding Shui Po (丁水波
丁水波),
CEO aged 45. He has over 27 years
丁水波), founder, chairman and CEO,
of experience in the sportswear industry and is responsible for the overall corporate
strategies, planning and business development of the Group. Mr. Ding founded the group
in 1999.
irector and vice president,
president aged 43. Ms. Ding
Ms Ding Mei Qing (丁美清
丁美清),
丁美清 executive director
has over 17 years of experience in the sportswear industry and is responsible for footwear
operation, design and technology development. She has led the design team that created
the collections for the trendy and youthful mass market segment. Ms. Ding joined the
group in 1999. She is the sister of Mr Ding Shui Po and the wife of Mr Lin Zhang Li.
Mr Lin Zhang Li (林章利
林章利),
irector and vice president, aged 44. Mr Lin has
林章利 executive director
over 17 years of experience in the sportswear industry and is responsible for the apparel
business. He joined the group in 1999.
Mr Ding Ming Zhong (丁明忠
丁明忠),
irector and vice
vic president, aged 39. He has
丁明忠 executive director
over 17 years of experience in the sportswear industry and is responsible for the
accessories business. Mr Ding joined the group
roup in 1999.
1999 He is the brother of Mr Ding Shui
Po.
何睿博), aged 50, CFO, company secretary,
Mr Ho Yui Pok, Eleutherius “Terry” (何睿博
何睿博
executive director,
irector, investor relations spokesperson.
spokesperson
He has over 26 years of
experience in auditing, accounting and financial management and is responsible for the
overall financial and accounting affairs and investor relations. Mr. Ho graduated from the
University of Kent (肯特大學) with a Bachelor
achelor’s degree in accounting in 1987 and a
Masters degree in management science in 1989. Prior to joining the group, he was a chief
financial officer, company secretary and authorised
authoris
representative of GST (416 HK,
delisted in 2009) from 2005 to 2007, and a financial controller of EC-Founder
EC
(618 HK,
NR) from 2000 to 2005. In addition, he worked for an international accounting firm as a
manager from 1994 to 1996. He is a fellow member of the Institute
Inst
of Chartered
Accountants in England and Wales, a fellow member of the Hong Kong Institute of
Certified Public Accountants, and an associate member of the Hong Kong Institute of
Directors.
43
11 July 2016
Auditor Info
Ernst & Young (EY) has been the company’s external
exter
auditor since its IPO in May 2008.
Timeline
•
In 1999, Mr Ding founded Sanxing Sports,
Sports primarily an OEM manufacturer of
sportswear for various international brands until 2005.
•
In 2002, it signed Nicholas Tse (謝霆鋒
謝霆鋒) as the first brand ambassador
•
In 2003, it signed Twins, a Hong Kong Cantopop female duo as ambassadors
•
In 2005, it became the sole official sportswear partner for the 10 National
Games or better known as the China Olympics (第十屆中國全國運動會)
•
In 2006, it began phasing out its OEM business and adopted wholesale
distribution. Started multi-brand
brand strategy – beginning with a Disney licence. The
agreement allowed XTEP to design, create, manufacture, and sell
apparel/footwear/accessories
ear/accessories in PRC using the Disney trademark and various
characters.
•
In 2007, XTEP sponsored its first marathon, the Xi’an City Wall International
Marathon. Started Koling brand business. Carlyle Group invested in the company.
•
In 2008, listed
isted on the Hong Kong Exchange (HKEx). Signed Taiwanese
celebrities Jolin Tsai (蔡依林) and Wilber Pan (潘瑋柏).
(
•
In 2009, became the title sponsor for entertainment program Day Day Up (天天向
上).
). Kicked off the XTEP music concert that included celebrities such as Nicholas
Tse, Jolin Tsai, Charlene Choi, Wilber Pan.
•
In 2010, became the official apparel sponsor for the Birmingham City Football
Club in the English Premier League. Started partnering with Sohu.com and
Taobao.com to develop its e-commerce
commerce business. Started sponsoring domestic
football leagues in schools. Scaled
caled down its Disney Sport and Koling brands.
•
In 2011, became the official technology sponsor and exclusive sportswear and
accessory provided to Villareal CF in the Spanish La Liga. Launched XTEP Kids
brand. Signed Han Geng (韓庚),
), a Mandarin pop star and former
f
member of
Super Junior, South Korea boy band.
•
In 2012, became the sole apparel sponsor for the Standard Chartered Hong
Kong Marathon. Also sponsored nine international marathons in China. Signed
S
Gwei Lun-mei ( 桂綸鏷 ), a critically acclaimed Taiwanese actress,
ac
and the
American world class sprinter Justin Gatlin to don XTEP products. Established
XTEP Runners Club (特跑族)) where members receive regular updates regarding
professional running tips, systematic training courses and equipment.
th
44
11 July 2016
Appendix
Figure 13: Product technology used in XTEP’s apparel
a
Figure 14:: Display of sportswear for runners
Figure 15:: Ladies’ footwear display
Figure 16: XTEP kids
Figure 17: XTEP running festival
45
11 July 2016
Figure 18: Sports sponsorships
Figure 19: Entertainment marketing
arketing
Figure 20: XTEP sponsored marathons
Figure 21:: XTEP sponsored football clubs
46
11 July 2016
SWOT Analysis
• Known for stylish and functional sportswear products
in the China
• Roots and expertise from its footwear OEM heritage
• International
Brands: Nike,
Adidas may
move into Tier
3&4 cities to win
market share
• Fashionable
casual wear
faces increasing
competition as
fast fashion
Zara, H&M
increase their
footprint in
China
• Football is a
high-potential
growth sports
segment
• XTEP has
established
strong toeholds
in sponsoring
kids football
establishments
and U-18
leagues
• Weaker brand equity vs international names Nike
and Adidas
• XTEP’s R&D in sports functionality is relatively new
and its technology may be less convincing than the
international brands
Price Close
4.9
4.4
3.9
3.4
2.9
2.4
1.9
Jul-11
Oct-12
Jan-14
14
May-15
47
11 July 2016
Neutral
Target Price:
Price:
Market Cap:
Bloomberg Ticker:
The Era Of Department Store Footwear Is Over
We initiate coverage on Belle with a NEUTRAL and HKD3.90 TP (10%
downside). We believe its footwear wing’s foreseeable decline outweighs
contributions from the growing sportswear segment. We expect EPS to
decline despite a lower base in 2016, as department store channels face
structural declines in foot traffic. This is
s as middle class consumers
switch to shopping malls and multi-usage
usage complexes. Its 5% dividend
yield is at risk on potential structural reforms down the line.
line However, the
share price appears to have priced in the poor outlook.
HKD3.90
HKD4.33
USD4,707m
1880 HK
Share Data
HKD/USD)
81.0m/10.5m
52-wk
(
4.17 - 8.75
Free Float (%)
75
8,434181
Estimated Return
-10%
Shareholders (%)
Mr Tang Yiu
20.8
Schroders
5.0
YTD
1m
3m
6m
12m
Absolute
(25.6)
(1.4)
(1.6)
(19.8)
(45.9)
Relative
(20.1)
1.4
(3.3)
(21.0)
(33.9)
Source: Bloomberg
Belle International Holdings (1880
(
HK)
Price Close
9.7
106
99
91
84
76
7.7
5.7
69
61
Feb-15
Feb-16
Feb-17F
Feb-18F
Feb-19F
40,008
40,790
41,089
41,667
42,870
4,738
4,313
3,506
3,283
3,220
4,764
4,291
3,484
3,261
3,198
8.2
(9.9)
(18.8)
(6.4)
(1.9)
Recurring EPS (CNY)
0.58
0.52
0.43
0.40
0.39
DPS (CNY)
0.60
0.16
0.19
0.18
0.18
Recurring P/E (x)
6.47
7.11
8.76
9.36
9.54
P/B (x)
1.24
1.22
1.13
1.06
1.00
P/CF (x)
5.87
6.20
8.37
9.01
9.35
Dividend Yield (%)
16.1
4.4
5.1
4.8
4.7
EV/EBITDA (x)
3.42
3.61
4.11
4.16
4.02
Net debt to equity
18.5
net cash
17.3
net cash
13.5
11.8
net cash
net cash
(1.9)
(5.5)
48
10.9
net cash
(8.5)
May-16
Source: Bloomberg
17
15
13
11
9
7
Jan-14
Jan-15
Source: Bloomberg
Mar-16
Jan-16
Nov-15
Sep-15
3.7
160
140
120
100
80
60
40
20
Jul-15
Vol m
Margins set to slump on business mix dilution, as Belle International’s (Belle)
higher margins footwear business (manufacturing and retail) faces negative
same-store sales growth (SSSG) (-16% YoY) on store closures (-2% YoY) as of
late. Given that 90% of its footwear points of sale (POS) are in department
stores (footwear and sportswear combined are 70%),
70%) a channel with decreasing
foot traffic, we expect the decline to continue. Retail-only
Retail
sportswear is growing
fast, but its contributions have been unable to make up the difference.
differ
Sportswear cannot save the ship. Investors ponder if sportswear can save
Belle, as the likes of Nike and Adidas are posting 20-30%
20
YoY growth in China.
We argue in the negative, as:
i. Footwear is too big to replace, representing 70% of its EBIT;
ii. Sportswear is both in distribution and Tier 3&4 cities only, meaning
operating margins are limited at c.10%;
iii. Nike’s headline growth is actually driven by direct-to-customer
direct
(DTC) store
openings – its sales to wholesale only grew 9% in FY15 (Feb).
Restructuring is a risky wild card. Management intends to restructure Belle
to be more efficient in both retail and manufacturing, albeit without disclosing
timeline or details. From our coverage of apparel names (eg Esprit and Trinity),
major restructuring plans run a high risk of delays and/or outright failure.
Similarities to Belle’s situation include distribution channel traffic declines, poor
value-for-product
product propositions and a down-trending
down
macroeconomic
environment. Operating margins may even come under bigger pressure.
p
Initiate coverage with NEUTRAL. Belle’s share price has fallen 75% since its
2013 peak. This reflects deteriorating fundamentals and concerns over its future
outlook. Our DCF-based HKD3.90 TP assumes future topline shrinkage and
margins compression. Our valuation implies 8x FY17F P/E, -2SD below its
mean P/E. This is reasonable as Belle faces deteriorating profitability.
Key risks. Upside risks include hit products from Nike and Adidas, reduced
competition amongst footwear competitors and a spin-off
spin
listing of Belle’s
sportswear business. Downside risks include its potential restructuring causing
disruptions, peers’ increased discounting and channel inventory stuffing by
sportswear competitors.
Analyst
Robin Yuen, CFA
+852 2103 9202
Jan-16
11 July 2016
Financial Exhibits
Financial model updated on: 2016-07-07.
Asia
Hong Kong
Consumer Cyclical
Bloomberg
1880 HK
Neutral
Financial summary
Recurring EPS (CNY)
EPS (CNY)
DPS (CNY)
BVPS (CNY)
Feb-15
0.58
0.57
0.60
3.02
8,266
Feb-16
0.52
0.53
0.16
3.07
8,181
Feb-17F
0.43
0.43
0.19
3.30
8,181
Feb-18F
0.40
0.40
0.18
3.52
8,181
Feb-19F
0.39
0.39
0.18
3.73
8,181
Valuation basis
Valuation metrics
Recurring P/E (x)
P/E (x)
P/B (x)
FCF Yield (%)
Dividend Yield (%)
EV/EBITDA (x)
EV/EBIT (x)
Feb-15
6.47
6.51
1.24
12.4
16.1
3.42
4.06
Feb-16
7.11
7.08
1.22
11.7
4.4
3.61
4.38
Feb-17F
8.76
8.70
1.13
8.7
5.1
4.11
5.25
Feb-18F
9.36
9.29
1.06
7.8
4.8
4.16
5.44
Feb-19F
9.54
9.48
1.00
7.4
4.7
4.02
5.32
Total turnover
Gross profit
EBITDA
Operating profit
Net interest
Income from associates & JVs
Pre-tax profit
Taxation
Minority interests
Feb-15
40,008
23,010
6,857
(1,085)
5,772
386
22
6,601
(1,851)
(13)
4,764
Feb-16
40,790
22,958
6,158
(1,085)
5,073
268
72
5,898
(1,596)
11
4,291
Feb-17F
41,089
22,263
5,017
(1,085)
3,932
342
72
4,854
(1,359)
11
3,484
Feb-18F
41,667
21,854
4,608
(1,085)
3,523
415
72
4,545
(1,273)
11
3,261
Feb-19F
42,870
22,095
4,423
(1,085)
3,338
487
72
4,457
(1,248)
11
3,198
Cash flow (CNYm)
Capex
Dividends paid
Feb-15
(625)
5,249
(1,437)
(601)
(1,716)
(1,687)
(2,824)
Feb-16
16
4,925
(1,361)
190
0
(4,976)
(8,681)
Feb-17F
(403)
3,644
(1,000)
(614)
0
(1,350)
(1,350)
Feb-18F
(418)
3,385
(1,000)
(531)
0
(1,568)
(1,568)
Feb-19F
(448)
3,265
(1,000)
(460)
0
(1,468)
(1,468)
Intangible assets
Total investments
Total other assets
Total assets
Short-term debt
Other liabilities
Total liabilities
Minority interests
Total equity
Net debt
Feb-15
8,386
5,699
3,812
1,849
443
32,537
2,658
57
7,414
24,923
199
25,122
(5,728)
32,537
Feb-16
7,782
6,087
2,583
1,581
458
31,055
861
51
5,769
25,076
210
25,286
(6,921)
31,055
Feb-17F
9,341
6,126
2,459
1,631
458
33,004
861
51
5,791
26,992
221
27,213
(8,481)
33,004
Feb-18F
10,763
6,164
2,335
1,681
458
34,853
861
51
5,835
28,786
232
29,018
(9,903)
34,853
Feb-19F
12,120
6,203
2,211
1,731
458
36,713
861
51
5,925
30,545
243
30,788
(11,259)
36,713
Key metrics
Revenue growth (%)
Gross margin (%)
Capex/sales (%)
Interest cover (x)
Feb-15
8.7
10.4
57.5
17.1
11.8
105.0
3.6
72.8
Feb-16
2.0
(9.0)
56.3
15.1
10.6
31.3
3.3
45.6
Feb-17F
0.7
(18.8)
54.2
12.2
8.5
44.7
2.4
83.1
Feb-18F
1.4
(6.4)
52.4
11.1
7.9
44.7
2.4
68.2
Feb-19F
2.9
(1.9)
51.5
10.3
7.5
44.7
2.3
64.6
DCF-Valuation.
Key drivers
SSSG via department store traffic, store expansions,
raw material inflation.
Key risks
i. Peer discounting environment, e-commerce
growth.
Company Profile
The largest retailer of ladies’ footwear in the PRC, and
Sportswear through company-owned, licensed and
distribution brands. The Company also sells
handbags, accessories and men’s footwear.
49
11 July 2016
Investment Thesis
Established in 1991, Belle is the largest retailer of women’s footwear in China, in terms of
both company brand and licensed products. For its footwear business, Belle is vertically
integrated, as it designs, produces, markets and retails its own-brand products. For the
sportswear business, the company is one of the largest distributors of international brands
(eg Nike and Adidas)) in China. Both Belle’s footwear and sportswear stores are located in
Tier 1-4 cities, and c.70% of its POS are in major department stores like Parkson, Golden
Eagle and New World.
Initiate coverage on Belle with a NEUTRAL call and HKD3.90 TP. The company’s
share price has fallen 75% since its peak in 2013. This reflects its deteriorating
fundamentals and investor concerns over its future outlook. The counter is trading at c.9x
FY17F P/E and about 1.1xx book, which is a significant discount to its historical 3-year
3
average.
based HKD3.90 valuation assumes future topline shrinkage and margins
Our DCF-based
compression, and translates into an implied 8x FY17F P/E. We deem this as apt for a
company with a negative net profit growth outlook despite its high market liquidity nature
as an index stock.
Key risks. Upside risks include:
i. Hit products from Nike and Adidas;
ii. Reduced competition amongst footwear competitors.
Downside risks include:
i. Increased discounting from peers;
ii. Channel inventory stuffing by traditional sportswear stores.
Structural decline in footwear. We believe the main reasons are due to product
competition and location issues:
i. Emergence of e-commerce has empowered copycat players to sell similar quality
goods at a fraction of Belle’s price. From RHB’s recently hosted expert-speaker
expert
series, we learnt that the rise of Internet celebrities on social media is one of the key
reasons for rapidly increasing e-commerce
commerce apparel and footwear sales. A common
scenario involves a non-descript
descript domestic brand working with such a celebrity to
push news posts to over hundreds of thousands of WeChat fans. The sales are
transacted
ed on Alibaba and/or chat platforms. The products’ ASPs are also without a
major retail mark-up.
Figure 1: Purchases initiated from WeChat have doubled
Figure 2:: Example of an Internet celebrity promoting her
brand
1
Note: Refers to those who have made purchases through WeChat’s JD.com
entrance, public accounts, Moments, group chats or links to other apps
Source: McKinsey iConsumer China 2016 survey
Source: RHB’s Expert Speaker Series
50
11 July 2016
ii. Decline in shopper traffic in department stores has significantly exposed Belle’s
weakness in relying on such outlets as its core distribution channel. Furthermore, we
agree with company CEO Mr Sheng Baijiao who stated that demand for formal shoes
is “on a downtrend”. Belle’ss extensive department store distribution network had been
its key of competitive advantage and reason for past successes, but this will no
longer be the case going forward. This is on consumers’ lifestyle changes, which has
witnessed a preference for the shopping mall format, which offers a holistic
consumption experience (eg food, entertainment, leisure, etc) vs the shopping-only
shopping
aspects of a department store. For footwear, the majority of stores (90%) are in
department stores, while for sportswear, this ratio is only around half (50-60%).
Figure 3: GPMs – footwear margins are contracting.
Sportswear have structurally lower GPM due to the
distribution only model
Figure 4: EBIT margins – footwear vs sportswear. Footwear
remains the core and more profitable part of Belle’s product
mix
80.0%
68.5%
70.0%
EBIT Margins - FY16
67.3%
4,500
60.0%
50.0%
20.0%
3,500
44.5%
42.6%
25.0%
3,944
4,000
CNY (m)
2015
40.0%
2016
30.0%
19.3%
3,000
15.0%
2,500
2,000
10.0%
1,500
20.0%
EBIT (LHS)
1,742
1,000
10.0%
EBIT Margin (RHS)
10.5%
5.0%
500
0.0%
0
Footwear
0.0%
Sportswear
Footwear
Source: RHB
Sportswear
Source: RHB
Figure 5: SSSG comparison – footwear experiencing massive declines
20.0%
15.3%
14.4%
15.0%
11.0%
10.9%
10.0%
%
7.0%
4.5%
6.0%
6.2%
Footwear
4.5%
-2.8%
-10.4%
-4.2%
-5.6%
-15.0%
-7.8%
-16.5%
-20.0%
-7.7%
%
4QFY16
2QFY15
-1.8%
3QFY16
1QFY15
-2.7%
%
2QFY16
4QFY14
1.3%
1QFY16
4Q13
1.3%
4QFY15
3Q13
0.5%
-10.0%
3QFY15
2Q13
1Q13
-5.0%
6.5%
%
5.3%
5.0%
2.5%
5.0%
0.0%
12.4%
51
Sportswear
11 July 2016
16,000
24%
14,000
23%
10,000
8,000
10%
12%
6,000
9%
7%
4,000
0%
2,000
0
5%
Number of Outlets
15%
Footwear Outlets
-5%
20%
6,000
17%
10%
4,000
9%
8%
3,000
11%
-8%
-15%
Sportswear Outlets
Source: RHB
Sportswear cannot save the ship. It remains a common debate whether sportswear
alleviates the drag from footwear, especially as Belle’s suppliers – Nike and Adidas – are
each posting around +30% YoY growth in China.
China This is being driven by the country’s
sportswear growth. We attempt to answer
swer this question in two ways:
i. GP and EBIT margins to further contract. We think management has made the
right decision to continue growing the sportswear segment, in the face of the tailwinds
faced by the footwear business. However, based on our analysis above, sportswear
has inherently lower GP and EBIT margins vs footwear. This is because Belle
captures only the distribution part of the value chain for sportswear, which is
generally capped at c.10% margins. This is because such sportswear is designed by
the international brand owners;
ii. Footwear EBIT represents a lion’s share. Even though footwear represents 50% of
group revenue, it represents the lion’s share of EBIT (70% in FY16). We believe
footwear sales will continue to decline between 5-10%
5
in the foreseeable future,
which is in line with the current run rate. Even if sportswear sales increase by 10%
YoY, which implies single-digit
digit POS growth as sportswear SSSG is only in the mid
single-digits,
digits, both the dollar value of sales and EBIT of the company will decline;
iii. Nike and Adidas’s growth is primarily fuelled by direct retail. Nike’s FY15 sales
in Greater China increased by 18% YoY to USD3.1bn. By segment, direct retail
surged 49% to USD800m, while wholesale (eg to distributors like Belle, Pou Sheng)
increased
ncreased only 9% to USD2.2bn. There is a clear disparity in the respective growth
rates, due to the following:
a. Exclusive products: Nike reserves the best and the hottest items (such as
limited editions) in its self-operated
operated flagship stores;
b. Right place, right people: Direct retail stores are located primarily in Tier 1 and
Tier 2 cities, catering to the demographics that can afford the best in class
sporting equipment. As Nike’s management aptly puts it, “Consumers in
Shanghai… have incredibly high expectations
expect
of premium and personal products
and services and, in many ways, are ahead of the curve in terms of sports
participation and activity in Greater China”. By contrast, Belle’s sportswear stores
are located in Tier 3 and Tier 4 areas, so customers there
ther are less able to afford
Nike’s premium goods and are likely to be less sophisticated in their sporting
lifestyle requirements;
c. Stronger retailing talent. Self-owned
owned retail stores employ their own employees
with better product training and retailing expertise.
expe
This enhances the customers’
shopping experience and improves the stores’ sales efficiency.
52
-5%
-10%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: RHB
5%
0%
1%
2,000
YoY
15%
5,000
0
30%
25%
28%
1,000
1%
-3%
2008 2009 2010 2011 2012 2013 2014 2015 2016
7,111
7,000
20%
18%
12,000
28%
8,000
13,762
YoY Change
Number of Outlets
Figure 7:: Sportswear outlets growing
25%
YoY
YoY Change
Figure 6: Footwear outlets closing down
11 July 2016
Figure 8:: Bulk of Nike’s Greater China growth came from
DTC sales…
Figure 9:: …which were driven by both fashionable and/or
high-tech shoes
FYE Jun (USDm)
FYE Jun (USDm)
FY14
FY15
YoY Chg
Nike Greater China Revenue:
Wholesale customers
Direct to consumer
Total revenue
FY14
FY15
YoY Chg
1,600
2,016
26.0%
Apparel
876
925
5.6%
Equipment
126
126
0.0%
2,602
3,067
17.9%
Nike Greater China Revenue:
2,041
2,233
9.4%
561
834
48.7%
2,602
3,067
Footwear
17.9%
Total revenue
No rebound expected. We believe the decline is not yet over and Belle is set to report flat
NP in FY17. We also expect GPM erosion to 52% by FY19, from 56% in FY16. We see
three major obstacles in the coming years:
i. International brands going retail. Nike and Adidas announced that they will
increase the number of their self-operated
operated stores in China, with the latest focus to
penetrate further into Tier 3 cities. We see risk that Nike and Adidas’ new stores may
encroach on Belle’s “turf”. As Nike and Adidas gain more on-the-ground
on
experience
in China, the less they need wholesale distributors like Belle, which offers local
retailing expertise. The company is only a non-exclusive
no
distributor with a c.25%
share of these brands’ store network and we believe its market share could very well
be diluted in the medium to long term;
ii. Footwear a structurally challenging business.
business Another common investor question
is what can Belle do to save its business? As mentioned before, its problems are in
channel location and product positioning. First, it will need to relocate its stores in
shopping malls and/or themed malls, which are part of China’s new consumption
trend. Second, it will need to move upmarket to avoid the red sea competition
common in Tmall/Taobao.. This may mean an increase in research & development
(R&D) as well as advertising & promotions
promotion (A&P) spending. However, management
would first have to devise a plan about which brands to keep and which to jettison in
order to make the most use of its R&D and A&P dollars. We feel this is a tall order
with execution risks;
iii. Hints of major restructuring. As mentioned in its FY16 results
resul analyst meeting,
CEO Mr Sheng had guided down consensus expectations of a recovery – a recovery
may not occur in the “next 1-3
3 years”. He is also considering a major structural
change to the footwear business. If the restructuring takes place, it would entail a
“significant impact” on the P&L for at least “1-2
“1 years”. The scope of the reform could
include:
a. Improving product quality without raising prices, which would be at the expense
of GP profitability;
b. Improving supply chain.
Even though EBIT margins for footwear are slated to trend down, going forward, we
believe the financial impact from any impending restructuring will be significant and
would act as a catalyst to further de-rate
rate the stock.
53
11 July 2016
Based on our past coverage of Esprit Holdings (Esprit) (330 HK, NR) and current
coverage of Trinity (891 HK, SELL, TP: HKD0.50), we note that restructuring plans
are hard to formulate and even harder to execute. This is because both companies
face structural challenges that cannot be solved easily. Executives
E
typically are able
make progress by cutting the low hanging fruit (ie cutting costs) in the first year, but
to grow topline again requires a paradigm shift – perhaps a fundamental change in
the business model. Both Esprit and Trinity share striking
striki
similarity with Belle’s,
namely:
a. Challenged distribution channels. Surprisingly enough, all three names rely on
department stores as their primary retail distribution channel, which has suffered
a structural decline due to a shift in consumer shopping patterns to shopping
malls, etc;
b. Poor value-for-product. Trinity charged too high a price for its products, which
had no market when customers had to start paying out-of-pocket,
out
instead of
receiving them as gifts. Meanwhile, Esprit’s products were highly priced and
missed fashion trends when compared to its fast-fashion
fast
competitors (namely
brands like Zara and H&M).
). In Belle’s case, its competitors are e-commerce
brands that provide similar quality but at less than half its prices.
prices This is due to a
lack of retail overhead;
c. Down-trending macroeconomic
ic situation. During good times, the company’s
problems were not as noticeable as during the difficult times, as super investor
Warren Buffet puts it, “Only when the tide goes out, you discover who’s
w
been
swimming naked”.
54
11 July 2016
Valuation
Belle’s outlook is unlikely to improve in the foreseeable future, in our view. We see no
positive catalysts to reverse the downward trend in footwear. Despite growth in the
sportswear business, its distribution business has lower margins and is insufficient to
offset a decline in the footwear segment.
The company trades at a 20-30%
30% discount to the average of its sportswear peers,
primarily a reflection of the poor outlook for footwear. On the other hand, it is in line with its
footwear peers such as Daphne, which makes sense,
sense as c.70% of Belle’s EBIT comes
from footwear. However, for our coverage purposes, we choose to include Belle in our
sportswear sector, as most investors focus on the potential of the company’s
company’ sportswear
business.
We believe Belle’s current share price is overvalued,
overvalued given its deteriorating product mix
and outlook. We value the company based on the DCF methodology to arrive at a TP of
HKD3.90, implying 8x FY17F P/E.
Figure 10: Belle’s DCF valuation
(CNYm)
Time Period
Adj Time Period
EBIT
FY17F
FY18F
FY19F
FY20F
FY21F
FY22F
FY23F
FY24F
FY25F
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-22
Feb-23
Feb-24
Feb-25
FY26F Term Val.
Feb-26
1
2
3
4
5
6
7
8
9
10
0.68
1.68
2.68
3.68
4.68
5.68
6.68
7.68
8.69
9.69
3,522
4,441
4,058
3,898
3,742
3,630
3,558
3,522
3,522
3,522
-8.6%
-3.9%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
0.0%
0.0%
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
3,197
2,921
2,807
2,695
2,614
2,561
2,536
2,536
2,536
2,536
961
961
923
886
860
843
834
834
834
834
-1,050
-1,050
-1,016
-975
-946
-927
-918
-918
-918
-918
-403
-418
-401
-385
-374
-366
-362
-362
-362
-362
0
0
0
0
0
0
0
0
0
0
2,706
2,415
2,313
2,221
2,154
2,111
2,090
2,090
2,090
2,090
2,090
NPV*
2,502
1,991
1,700
1,455
1,258
1,099
970
865
771
687
5,650
Tax Rate
Depreciation
∆CapEx
Others
Term inal Value
DCF Valuation
Firm Value
Equity Value (CNY)
CNYHKD
13,299
49.7%
5,650
21.1%
WACC
18,948
70.9%
Terminal Value FCF
7,782
29.1%
11
0.0%
26,741
100.0%
0.0%
12.2%
2,090
17,180
865
0.84
Equity Value (HKD)
31,834
Shares Outstanding
8,181
3.90
Source: RHB
Figure 11: Belle’s forward P/E band
Figure 12:: Belle’s forward P/BV band
18.00
20.00
16.00
18.00
16.00
14.00
+2SD @21.3x
10.00
+1SD @18.0x
+1SD @3.5x
14.00
Share Price (HKD)
12.00
Share Price (HKD)
+2SD @4.4x
12.00
Mean @2.7x
10.00
8.00
Mean @14.7x
6.00
-1SD @11.4x
4.00
-1SD @1.8x
6.00
-2SD @1.0x
4.00
-2SD @8.1x
2.00
0.00
Jun-11
8.00
2.00
Jun-12
Jun-13
Jun-14
0.00
Jun-11
Jun--15
Caption: Progressive de-rating as outlook deteriorates
Source: RHB
Source: RHB
55
Jun-12
Jun-13
Jun-14
Jun-15
11 July 2016
Financials
Key assumptions. We are projecting group revenue growth of 2-4%
2
for FY16-18,
primarily driven by sportswear POS growth. In the footwear business, we expect a 6-8%
6
sales decline for FY16-18,
18, weighed by negative SSSG growth and no additions in store
growth.
We project footwear as a proportion of sales to decline 14ppts to 38% in FY19, from 52%
in FY16. We note that the deceleration in footwear growth
gro
started in 2012, with growth
tapering to only +3% in FY15 from +27% in FY11. We believe the decline is structural and
will continue in the foreseeable future.
For the sportswear business, we estimate 14--17% sales growth in FY16-18. We expect
growth to remain strong as sportswear brands increase their A&P to capture consumer
interest as China prepares for the 2022
2 Winter Olympics. Belle’s Tier 1 brands (Nike
(
and
Adidas)) have historically accounted for over 90% of sportswear revenue, and we believe
this ratio will extend in the future.
Figure 13:: Belle’s sales revenue assumptions
Footw ear
2014
2015
2016
2017F
2018F
2019F
Self-Ow ned brands
20,276
20,578
18,652
16,529
15,206
14,294
Distribution brands
1,706
2,099
2,106
1,914
1,761
1,655
331
360
316
300
285
271
22,312
23,037
21,074
18,743
17,253
16,220
2014
2015
2016
2017F
2018F
2019F
12,839
14,882
16,945
18,807
20,467
22,250
2nd tier brands (Reebok, Li Ning, Kappa, Puma,
1,468
Mizuno) 1,598
1,954
2,396
2,729
3,108
OEM
Total Footw ear
Sportsw ear
First-tier brands (Nike, Adidas)
176
491
817
1,143
1,217
1,292
Total Sportsw ear
14,482
16,971
19,716
22,346
24,414
26,649
Group Revenue
36,794
40,008
40,790
41,089
41,667
42,870
Other sportsw ear biz
Source: RHB
Figure 14: Belle’s SSSG
Change in revenue per store
2014
2015
2016
2017F
2018F
2019F
Owned brands
-4%
4%
-2%
-11%
-10%
-8%
-6%
Licensed brands
-7%
7%
17%
-5%
-10%
-8%
-6%
Tier 1 brands
-4%
4%
11%
5%
5%
5%
5%
Tier 2 brands
13%
9%
12%
12%
12%
12%
-46%
0%
0%
0%
Apparel
Note: Numbers calculated by total stores regardless of store age, so may differ from reported SSSG
Source: RHB
56
11 July 2016
Figure 15: Belle’s store assumptions
Store Count
2014
2015
2016
2017F
2018F
2019F
12,134
12,896
12,505
12,505
12,505
12,505
1,118
1,232
1,257
1,257
1,257
1,257
13,252
14,128
13,762
13,762
13,762
13,762
Tier 1 brands
4,878
5,311
5,716
5,916
6,116
6,316
Tier 2 brands
1,047
1,047
1,246
1,271
1,296
1,321
0
71
149
159
169
179
5,925
6,429
7,111
7,346
7,581
7,816
156
158
144
144
144
144
19,333
20,715
21,017
21,252
21,487
21,722
Footw ear
Ow ned brands
Licensed brands
Total footw ear
Sportsw ear
Apparel
Total sportsw ear
Hong Kong/Macau retail outlets
Group Total
Source: RHB
We expect the group’s GPM to be on a downtrend, driven by:
i. Lower proportion of footwear sales, which command relatively higher GPMs;
ii. Footwear GPM contraction as women’s shoes turn into more of a homogenised
commodity.
We assume raw material costs to be largely stable and that raw material price hikes, if any,
can be passed on to consumers.
The majority of the company’s overhead expenses, eg rent and employee salaries,
salaries are
variable in nature. This is as concessionaire rental in department stores is based on gross
sales proceeds, while a component of a salesperson’s pay is based on commissions.
We assume a slight increase in general & administrative (G&A) expenses
expense and no major
brand/R&D investments. As such, sales,, general and administrative (SG&A) expenses
e
as
a percentage of sales will be largely stable in FY16-18.
FY16
EBIT margins will likely contract to 7% by FY19 (from 13% currently), as a direct result of
GPM dilution from lower footwear contributions.
contribution Our forecasts indicate that NP would
decline by an 11% CAGR over the next three years.
Balance sheet, cash flow and dividend policy
Net cash and capex. Belle has a strong net cash position of CNY6,921m as at end-FY16,
end
equal to CNY0.85 per share. Cash flow generated from operations is more than sufficient
sufficie
to meet capex needs of approximately CNY500m per year in maintenance capex and
CNY500m pa in expansionary capex.
Dividend payout ratio. Belle paid only 46% of its reported NP in FY16 (only 31% of
recurring NP). This was a marked contrast to the 105%
105 payout in FY15, of which
CNY2,109m, or 44%, was paid as special dividends during the interim.
Going forward, even though Belle has a strong cash balance and positive operating cash
flow, there is a risk of a dividend cut. This is as CEO Mr Sheng said that the company
prefers to shore up capital to prepare for financial volatility if and when Belle’s structural
reform takes place. Should the reform be a long and drawn out affair, the existing payout
ratio may not be sustainable.
Leverage ratio (ie total debt/total
bt/total equity) is 3.4% as of end-FY16.
end
This is as the average
interest income return is 4.9% while interest expenses are only 3%.
Inventory turnover days will be stable at around 140 days. This is as the drag from the
slower turn from the footwear segmentt is balanced by both the benefits of a faster turn
and higher proportion of sales from the sportswear business.
57
11 July 2016
Management Profile
Mr Tang Yiu, 80. Founder and chairman. With over 40 years of experience in the
footwear manufacturing industry, Mr Tang is currently the chairman of The Federation of
Hong Kong Footwear Ltd. He was a committee member of the Chinese People’s Political
Consultative Conference in the Sanshui District
rict of Foshan in China in 2005-2012
2005
and a
committee member of the China Trade Advisory Committee of Hong Kong Trade
Development Council in 2007-2011.
2011. Mr Tang is the father of Mr Tang King Loy, a Belle
ED.
Mr Sheng Baijiao, 63. CEO and ED. Mr Sheng has been
b
with Belle and has 25 years of
experience in the footwear industry. He is primarily responsible for the company’s overall
strategic planning and business management. Mr Sheng is currently the vice chairman of
the China Leather Industry Association, and chairman of the Shenzhen Leather
Association. He is the uncle of Belle ED Mr Sheng Fang.
Mr Tang King Loy, 44. ED and senior VP. Mr Tang King Loy joined Belle in 1999 and
has over 15 years of experience in the footwear industry. He is primarily responsible for
the implementation of decisions and policies with regards to the company’s overall
business plan and management of the footwear business. Mr Tang King Loy is currently is
the vice president of The Federation of Hong Kong Footwear
Footw
Ltd. He graduated from
Hong Kong University with a Bachelor’s degree in science and a Master’s degree in
physics. Mr Tang King Loy is the son of Mr Tang Yiu, Belle’s chairman
c
and non-executive
director.
Mr Sheng Fang, 43. ED and senior VP. Mr Sheng Fang oversees the operations
management of Belle’s footwear retail business. He joined the company in 2005 and has
over 15 years of experience in footwear retail management. Mr Sheng Fang studied at
Tongji University in 1989-1993, specialising
ing in electrical engineering. He is the nephew of
Belle CEO Mr Sheng Baijiao.
Mr Leung Kam Kwan, 51. Company secretary and chief financial manager. Mr Leung
joined Belle in Sep 2004.
Auditor
PricewaterhouseCoopers is currently Belle’s auditor
Timeline
•
2013 – Invested in Baroque Japan and acquired
a
Longhao Tiandi, which owns the
SKAP brand.
•
2008 – Acquired Mirabell International Holdings’ (Mirabell) businesses, which
included brands like Mirabell and Joy & Peace, as well as the distribution rights to
names like Timberland and Merrell.
•
2007 – Listed on the HK Stock Exchange.
Exchange
•
2006 – Signed (non-exclusive)
exclusive) distribution rights
right for the Nike and adidas brands
in China, excluding HK and Macau.
•
1991 – Founded in Shenzhen, China.
58
11 July 2016
Appendix
Figure 16: Footwear I (own brands) – this division accounts
for c.90% of Belle’s footwear revenue
Figure 17: Footwear II (distribution/licensed
(distribution/l
brands) – this
business accounts for c.10% of footwear revenue
Source: Company
Source: Company
Figure 18: Sportswear – Tier 1 Brands
Figure 19: Sportswear – Tier 2 brands and apparel
Source: Company
Source: Company
Figure 20: Product positioning (footwear) – higher end
brands are mostly distribution brands (denoted by dotted
circles)
Figure 21: Self-managed store
tore network – Belle’s has 20,228
retail outlets as at 1H16, of which c.68%
c
are footwear and
c.32%
32% are sportswear/apparel outlets
Source: Company Presentation
Source: Company
59
11 July 2016
Figure 22: Belle’s value chain illustration
Source: Company
60
11 July 2016
SWOT Analysis
• Experienced management – in the industry for >25
>
years
• Captures the full value chain for the footwear
business
• Long-term working relationships with Nike and Adidas
• Government’s
pro-sports
policies to drive
demand for
sportswear
• Online ecommerce stores
selling similar
footwear at much
lower prices
• Traditional
apparel brands
diversifying into
footwear
categories pose
a competition risk
• Olympics 2022
will be a
catalyst and a
driver for the
sportswear
business (as
seen during the
2008 Olympics)
• Footwear same-store
store sales growth (SSSG)
(
declines
for eight consecutive quarters
• Footwear is increasingly homogenised
homogeni
• 90% point of sales (POS)
(
in department stores
• Sportswear distribution is not exclusive
Price Close
19
17
15
13
11
9
7
5
3
Jul-11
Oct-12
Jan-14
14
May-15
61
11 July 2016
Neutral
Li Ning Co Ltd
Target Price:
Price:
Market Cap:
Bloomberg Ticker:
Road To Recovery Rather Remote
We initiate coverage on Li Ning with a NEUTRAL and HKD3.80 TP (3%
downside). Although it is turning around from being loss-making, with
significant NP growth due to a low base and cost-cutting
cost
efforts, its
various operating metrics remain sub-par
par with a low likelihood of
restoring profitability to peers’ levels. We
e are also doubtful of its strategy
to re-focus on sports casualwear – a hotly-contested
hotly
space – especially
considering its category expansion from fashion apparel. Nonetheless, we
believe that these challenges have already been priced in.
in
HKD3.80
HKD3.91
USD950m
2331 HK
Share Data
HKD/USD)
32.2m/4.15m
52-wk
(
3.12 - 4.45
Free Float (%)
84
1,885
Estimated Return
-3%
Shareholders (%)
Dec-14
Dec-15
Dec-16F
Dec-17F
Dec-18F
6,047
7,089
7,938
8,749
9,566
(781)
14
179
240
432
(781)
14
179
240
432
99.6
0.0
1153.9
33.9
80.0
(0.50)
0.01
0.08
0.11
0.20
Recurring EPS (CNY)
DPS (CNY)
na
Recurring P/E (x)
na
P/B (x)
2.70
P/CF (x)
na
Dividend Yield
na
EV/EBITDA (x)
na
Net debt to equity (%)
(33.7)
22.7
na
na
na
41
30
17
2.29
2.16
2.02
1.80
13.5
17.5
14.5
10.3
16.9
0.6
net cash
na
11.6
5.5
na
10.0
6.9
net cash
net cash
(49.9)
(55.1)
62
15.9
Blackrock
6.8
FIL
6.0
YTD
1m
3m
6m
12m
Absolute
(6.9)
18.5
9.5
(7.4)
39.6
Relative
(0.7)
22.0
8.5
(7.9)
52.2
Source: Bloomberg
Li Ning Co Ltd (2331 HK)
Price Close
4.4
151
3.9
132
3.4
112
2.9
120
93
100
80
60
40
Source: Bloomberg
na
6.9
11.3
net cash
(34.3)
Analyst
Robin Yuen, CFA
+852 2103 9202
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
20
na
508
na
Viva China
Vol m
Premium no more. As domestic brands’ (eg Anta, XTEP) quality and brand
image have improved significantly, customers find it difficult to pay a c.20%
premium for just another local brand. International brands are able to command
c.40% ASP premium on superior brand equity, as consumers pay more for
fo the
prestige factor. Understanding this, new management (post-former
(post
CEO JinGoon Kim) has been lowering ASPs to increase value-for-product,
value
in a bid to
boost the proportion of its in-season
season product sales and inventory turnover rates.
Red Ocean strategy questionable. We remain sceptical of Li Ning’s renewed
push into the sports-lifestyle
lifestyle category. Not only does it face competition in the
casualwear market from international brands like Nike, Adidas, Lululemon, and
even H&M and Zara, but Li Ning also does not have manufacturing capabilities
and has to rely on original equipment manufacturers (OEM) for all its products.
Thus, its supply chain is unable to adapt swiftly to changing fashion trends.
Operating metrics significantly lag behind peers’. We believe Li Ning has
yet to adopt the best retailing practices used by its more successful peers.
Channel
hannel inventory stayed high at 7.1 months as at FY15. Although this is an
improvement from 7.6 months in FY14 (vs 8.8 months in FY11), it is still
significantly higher than the normal 4-5
5 months for its domestic sportswear
peers such as ANTA Sports Products and XTEP International.
NEUTRAL with HK3.80 TP, based on 1.9x FY16F P/BV (-1SD
(
below its past3-year mean), due to:
i. Its lower-than-sector margins;
ii. The difficulty in estimating a recovery date as management has
consistently missed operational milestones;
iii. Difficult casualwear retail conditions.
We use P/BV as P/E is ineffective for companies with compressed profitability.
Although Li Ning’s net profit (NP) may double in FY18 from a low base, its
NPMs (c.5%) are still significantly below peers’
peers c.+10%. The stock trades at
2.2x FY16F P/BV, c.35%
35% higher than peers. We believe consensus is too
optimistic, given execution risks ahead.
sa
sales growth (SSSG),
Key risks. Upside risks include improving same-store
sports lifestyle becoming a fashionable hit, and faster-than-expected
faster
operating
efficiency improvements. Downside risks would be SSSG deceleration and
accelerated store closures from franchise partners.
partners
Li Ning Co Ltd
11 July 2016
Financial Exhibits
Asia
Hong Kong
Consumer Cyclical
Li Ning Co Ltd
Bloomberg
2331 HK
Neutral
Valuation basis
P/B ratio
Key drivers
i. Trade Fair Orders, SSSG, POS expansion.
Financial summary
Recurring EPS (CNY)
EPS (CNY)
BVPS (CNY)
Dec-14
(0.50)
(0.50)
1.25
1,564
Dec-15
0.01
0.01
1.47
2,159
Dec-16F
0.08
0.08
1.56
2,159
Dec-17F
0.11
0.11
1.67
2,159
Dec-18F
0.20
0.20
1.87
2,159
Valuation metrics
Recurring P/E (x)
P/E (x)
P/B (x)
FCF Yield (%)
EV/EBITDA (x)
EV/EBIT (x)
Dec-14
na
na
2.70
(14.2)
na
na
Dec-15
508
508
2.29
3.1
16.9
44.3
Dec-16F
41
41
2.16
2.3
11.6
20.7
Dec-17F
30
30
2.02
3.5
10.0
16.5
Dec-18F
17
17
1.80
6.3
6.9
9.7
Total turnover
Gross profit
EBITDA
Operating profit
Net interest
Income from associates & JVs
Pre-tax profit
Taxation
Minority interests
Dec-14
6,047
2,718
(445)
(198)
(643)
(88)
7
(691)
(52)
(38)
(781)
Dec-15
7,089
3,193
411
(254)
157
(87)
7
135
(74)
(47)
14
Dec-16F
7,938
3,685
598
(263)
336
(87)
45
247
(68)
0
179
Dec-17F
8,749
4,105
688
(271)
417
(87)
48
331
(91)
0
240
Dec-18F
9,566
4,536
959
(280)
679
(87)
50
597
(164)
0
432
Cash flow (CNYm)
Capex
Dividends paid
Dec-14
(1)
(505)
(242)
(334)
3
(28)
475
Dec-15
352
538
(311)
(363)
0
(34)
638
Dec-16F
(113)
417
(250)
(461)
0
0
0
Dec-17F
(97)
501
(250)
(461)
0
0
(750)
Dec-18F
(94)
704
(250)
(461)
0
0
0
Intangible assets
Total other assets
Total assets
Short-term debt
Other liabilities
Total liabilities
Minority interests
Total equity
Net debt
Dec-14
1,034
861
446
770
6,040
551
77
3,870
1,952
218
2,169
491
6,040
Dec-15
1,813
740
266
408
6,897
366
28
3,487
3,180
231
3,411
(537)
6,897
Dec-16F
1,814
784
287
408
7,150
366
28
3,560
3,359
231
3,590
(537)
7,150
Dec-17F
1,152
815
312
408
6,715
366
28
2,884
3,600
231
3,830
(625)
6,715
Dec-18F
1,446
834
341
408
7,207
366
28
2,945
4,032
231
4,263
(920)
7,207
Key metrics
Revenue growth (%)
Gross margin (%)
Capex/sales (%)
Interest cover (x)
Dec-14
3.8
59.6
44.9
(7.4)
(12.9)
4.0
(6.56)
Dec-15
17.2
0.0
45.0
5.8
0.2
4.4
1.67
Dec-16F
12.0
1153.9
46.4
7.5
2.3
3.1
3.58
Dec-17F
10.2
33.9
46.9
7.9
2.7
2.9
4.45
Dec-18F
9.3
80.0
47.4
10.0
4.5
2.6
7.24
Key risks
i. Higher-than expected improvement in sales,
reduction in competitive environment for
sportswear in China.
Company Profile
Li Ning is a sportswear brand owner that designs,
manufactures and distributes sporting goods. It relies
on OEM for product manufacturing and retails via both
its self-owned stores and franchisee partners.
63
Li Ning Co Ltd
11 July 2016
Investment Thesis
A turnaround play on sportswear with renowned heritage in China.
China Li Ning is a
sportswear brand company with its corporate headquarters located in Beijing. Unlike most
domestic sportswear peers, it does not have its own manufacturing facilities, instead
relying on long-time
time OEM partners. The company, founded in 1989 by its namesake
name
chairman Mr Li Ning, had witnessed an impressive growth from its IPO up to the 2008
Beijing Olympics. Subsequently, competition from both low-priced
low
domestic brands and
higher-end
end international names has squeezed out Li Ning, raising questions about its
i
market positioning strategy. The company underwent a channel transformation from 20112011
2015, initially led by the private equity (PE) group, TPG Capital (TPG) to restructure the
company’s operations in 2012. However, the restructuring process has been marked by
incessant delays and disappointments.
♦ The progress of its restructuring
r
since
Consensus too optimistic. Today, Li Ning appears to be on track for recovery with its
latest FY15 reporting a positive NP at the group
grou level, led by positive trade fair growth
since 1Q15. Nevertheless, we believe consensus numbers are too optimistic, with implied
valuations getting ahead of fundamentals – especially following a string of topline and
operational improvements from a low base.
ase. We believe the company will generate belowbelow
industry EBIT margins in the foreseeable future. Furthermore, Li Ning’s core brand was
still loss-making
making in FY15, after factoring out contribution from the discontinued business of
Double Happiness. In our view,
ew, the company’s transformation into hybrid-retailing
hybrid
is facing
execution risks and potential delays, as evidenced by its spotty track record in 2012-2014.
2012
♦ Execution risks and delays are likely,
Structural problems ahead. Li Ning could be facing
facin even more structural problems (eg
hollowing out of talent in operations management), while its former advantage of legacy
brand name is fading. The company may never restore its lost market share and catch up
with the current industry leader Anta.
♦ Hidden structural problems are
2011 has been slow
give its spotty track record
difficult to solve
Initiate coverage with NEUTRAL and HKD3.80
HKD3.
TP. We value Li Ning at HKD3.80 TP
based on 1.9x FY16 P/BV, which is -1SD
SD below its past-3-year
past
mean, as:
i. The company has lower-than-sector
sector margins;
ii. It is difficult to estimate a recovery date as management has consistently missed
operational milestones;
iii. The increasingly difficult casualwear retail conditions could hurt Li Ning’s strategic
expansion into the sports lifestyle category.
Even though we expect NP to more than double by FY18 from a low base, its NP margins
(c.5%) would still be significantly below peers’ c.+10%.
Premium no more
Even before the sportswear slowdown in 2010--2013, Li Ning believed its value proposition
was to sell products at a premium (CNY450-600
(CNY450
per shoe) relative to local brands
(CNY300-450)
450) because of its brand heritage, albeit at prices below international brands
(+CNY800). In our view, Li Ning’s premium is no longer justified. The quality of domestic
brands (eg Anta, XTEP)) has improved significantly since five years ago, with these players
significantly investing in brand advertising and promotion (A&P). As such, sportswear
customers find it difficult to pay a c.20% premium
remium for just another domestic brand.
♦ Brand equity not what it used to be
We learned that Li Ning understands this dynamic and has actively reduced tagged retail
prices starting from its 1Q16 collection. It hopes to increase
increas value-for-product by reducing
initial retail prices. It also expects inventory turnover to improve as better prices may
encourage customers to buy its collections upon introduction, rather than withholding
purchases until sales discounts. As such, we believe
bel
wholesale ASPs would see some
pressure going forward, and it remains to be seen whether an increase in volume could
outweigh the ASP decreases.
♦ Cutting retail ASPs in hopes of turning
channel inventory faster
Red Ocean strategy
As partt of its diversification strategy to increase exposure to the mass market, Li Ning
revealed at its Mar 2015 analyst briefing that it would focus more on the fashionable
casual sportswear (sports lifestyle) market via its mass-market
mass
brand Blue Label and highend brand LNG. For Blue Label,, it attempted to adopt a fast-fashion
fast
model to cater to
fashion needs in tier-2&3
2&3 cities. It had 30 POS as at end-FY15,
end
and plans to add another
100 by FY16. For LNG, it targets the white-collar
collar executives with products designed
des
by a
Korean design team. It had 50 POS as at end-2015
end
in tier-1&2 cities and plans to add
another 40 by 2016.
64
♦ Li Ning is set to increase exposure to
the mass-market
mass
sports lifestyle
segment
Li Ning Co Ltd
11 July 2016
We remain highly sceptical about whether Li Ning’s
N
investment in both management and
cash resources would pay off. First, it faces stiff competition in the casualwear market
from international brands like Nike, Adidas, Lululemon,
Lululemon and even H&M and Zara. With low
brand equity in fashion, these fresh Li Ning brands will be at a disadvantage and require
tremendous A&P spending to gain customer recognition. Second, Li Ning does not have
manufacturing capabilities and has to rely on OEM for all its products. Thus, we do not
believe the fast-fashion’s gold standard
tandard of a 4-week
4
turnaround is viable for Li Ning’s
supply chain. Third, mass consumers in this segment are highly price-sensitive
price
and the
lack of major differentiation in Li Ning’s casual products poses an operational risk, in our
view.
♦ Li Ning may not have the competitive
advantage to grab a slice of this hotlyhotly
contested market
Management’s argument
rgument is that this sports casual segment is too large a market to ignore.
Still, we believe ignoring this market would be a wise choice, especially when the
company lacks recognisable competitive advantages.
Long way to go
Li Ning’s channel inventory remained high at 7.1 months as at FY15. Although this is an
improvement from 7.6 months in FY14 (vs 8.8 months in FY11), it is still significantly
higher than the normal 4-5
5 months for its domestic sportswear peers such as Anta and
XTEP.
Figure 1: Turnover months
high compared to that of its well-run
well
peers
Figure 2:: Sale of inventory by outdatedness
100%
Turnover Months
10
♦ Li Ning’s channel inventory is still too
90%
8.8
34%
80%
7.7
7.6
7.3
8
7.1
70%
47%
54%
57%
61%
60%
6
50%
4
6- months or less
27%
0%
7-12 Months
15%
40%
30%
2
20%
0
2011
2012
2013
2014
46%
39%
15%
24%
24%
2014
2015
Over 12 Months
38%
10%
2015
19%
0%
Turnover Months
2011
2012
Future trade fair orders for 4Q16 reported only “high single-digit”
single
growth. This represents
a deceleration from the double-digit
digit growth seen in the past nine quarters. We believe a
downward trend may persist in the near term as:
i. Distributors are inclined to purchase fewer highly-priced
highly
jackets to hedge against
erratic weather patterns;
ii. Li Ning may be pressed to introduce products with lower ASPs as retail sentiment
weakens amid China’s economic slowdown.
Figure 3: Trade fair order growth
Order Growth by Tagged Retail Price
25%
22%
18%
20%
15%
15%
12%
18%
15%
15%
12%
12%
8%
10%
Li Ning
5%
0%
-5%
2013
-5%
-5%
-10%
Note: Data points are approximations only as actual value is not provided
65
♦ Decelerating trade fair orders
Li Ning Co Ltd
11 July 2016
Unprofitable distributors.. Management commented that a small portion of wholesalers
remain in “trouble”. We believe Li Ning would step in and take over their operations.
Contrarian strategy. Li Ning is embarking on a “contrarian” strategy. First, it has planned
300-500
500 net store openings in FY16, most of which would be selling sports casualwear
brands LNG and Blue Label.. Meanwhile, its competitors Anta and XTEPS are focusing on
allocating greater gross
ss floor areas (GFA) for functional products. Li Ning’s management’s
rationale is that the company is already well-represented
represented in professional brands but lacks
footprint in casualwear. As mentioned above, we view its venture into the casual
sportswear sector
or as risky and unlikely to be significantly rewarding.
♦ Other domestic brands go functional
Second, we believe management intends to close down large and unprofitable street-side
street
stores while re-opening POS in department
ent store counters and smaller stores in shopping
malls, citing lesser capex requirements and lower fixed operating costs as key reasons.
We think management is opting for arguably second-tier
second
locations (especially department
stores) because of limited capital
ital and a lack of talented retail personnel. Should Li Ning’s
existing balance sheet and retailing capability be stronger, it would have been able to
profitably operate bigger stores. Most sportswear and casualwear peers choose to open
large flagship stores
es to better showcase their brands and as consumers prefer a more
comfortable shopping experience.
♦ Li Ning plans to open stores in
while Li Ning pursues a reverse
direction
second-tier locations due to cost
second
concerns
Key Risks
Upside risks include:
i. Tailwind from growing sportswear demand that may boost Li Ning’s sales and store
productivity;
ii. Stronger-than-expected retailing ability from self-operated
self
stores to boost SSSG;
iii. Stronger-than-expected
expected GPM from a reduction in wholesale discount rates driven by
better distributor profitability;
iv. Securing a permanent CEO with a proven track record in international sportswear
brands.
Downside risks include:
i. Channel-stuffing
stuffing amongst sportswear peers leading to discounting pressure in the
industry;
ii. Lower-than-expected sell-through
through of products, leading to reduced GPMs and
subsequently operating deleveraging for self-operated
self
retail stores;
iii. Weaker-than-expected
expected customer adoption of its casual lifestyle brand Blue Label;
iv. Higher-than-expected marketing and branding expenses incurred to revive the Li
Ning brand.
Valuation
In our view, the P/BV ratio is the best methodology to value Li Ning as it has been lossloss
making since 2011, and we foresee compressed
ssed operating margins going forward as well.
We value Li Ning at HKD3.80 TP based on 1.9xx FY16F P/BV, which is -1SD below its past
3-year mean.
We believe the DCF methodology would be inappropriate to value Li Ning because:
i. It generates below-sector margins;
ii. It is difficult to estimate a recovery date as management has consistently missed
operational milestones;
iii. There are difficult retail conditions for casualwear;
iv. The company is in the midst of transforming into a hybrid retail/wholesale model.
66
♦ We value Li Ning on a P/BV basis due
to compressed NPMs
Li Ning Co Ltd
11 July 2016
Figure 4: P/BV ratio
Price to Book Ratio
8.00
+2SD @67.0x
3.5
7.00
3
6.00
Share Price (HKD)
+1SD @55.3x
Price to Book
2.5
2
1.5
Mean @43.6x
5.00
-1SD @32.0x
4.00
3.00
-2SD @20.3x
2.00
1.00
1
0.00
Jun-15
0.5
Aug-15
Oct-15
Dec
Dec-15
Feb-16
Apr-16
0
PX_TO_BOOK_RATIO
+2SD
+1SD
Mean
-1SD
-2SD
Source: RHB
Financials
We expect FY16’s net store openings to be at the lower end of management’s guidance of
300-500
500 stores, as the sportswear retail environment looks to be slowing down.
Furthermore, given the company’s strategic focus to open primarily sports lifestyle stores
coupled with a significant slowdown in the casualwear market in 1H16, we foresee that Li
Ning may miss its store opening target. Since most of its new stores would be directlydirectly
managed, we expect higher rental and staff costs to be reflected in the income statement.
♦ New store openings still positive, but
Revenue. We expect FY16 revenue to grow 11-12%,
11
underpinned by high single-digit
SSSG and low single-digit
digit POS expansion. Distributor confidence has only started to
recover and 80% of franchisees are said to be profitable based on our estimates. Store
growth will be via the company’ss direct retail strategy in which it will be taking over
unprofitable stores and building its footprint. We expect direct sales,
sales ie brick-and-mortar
and e-commerce
commerce to account for 45% of sales from
fro 42.4% (33.8% retail stores + 8.6% ecommerce) as at end-FY15.
♦ Topline to increase
GPM. We expect GPM to increase to 46.5% in FY18 from 45% in FY15, driven by:
♦ GPM to improve
likely to decelerate
i. An increasing
ncreasing proportion of direct retail sales, which command higher GPMs
GP
via
greater capture of the
e value chain, vs the wholesale to franchisee
franchise model;
ii. A greater proportion of sales of new products (as opposed to out-of-season
out
products).
We expect little impact from the product mix downgrade to a higher proportion of sports
lifestyle products (as opposed
ed to functional products), since we learned from the company
that this category offers similar GPMs.
We expect Li Ning’s wholesale discount to remain stable after staying at “mid-40%s”
“mid
over
the last three years. Finally, a reduction in inventory provisions
provisi
(as sell-through improves)
would further help GPMs.
A&P expenses. We expect A&P
P expenses (in USD terms) to be stable in FY16-17
FY16
after
its significant cost-cutting
cutting exercise in 2015, where high-cost
high
TV ads with low-efficiency
were axed. In the context of topline growth, A&P expenses as a percentage of sales would
further drop. We estimate that Li Ning’s 5--year sponsorship deal with the Chinese
Basketball Association costs CNY400m a year, and it would not opt to renew its
sponsorship upon expiry in Sep 2017. Therefore, we expect A&P expenses to further drop
in FY18 as the company pursuess other forms of advertising such as digital media and
event sponsorship.
♦ A&P expenses to be contained
NPM below average. While we
e forecast Li Ning to make positive earnings, we expect its
NPM to be below industry average – with FY18 NPM
NP at 4% vs the industry leader Anta’s
c.19%. Even though Li Ning has returned to profitability on a consolidated basis (including
the discontinued Double Happiness business), most of this improvement has been
achieved via clearing the low-hanging
hanging fruit. We believe the remaining problems may be
more structural in nature, and thus incremental improvements would be more difficult to
achieve.
♦ Despite incremental improvements, Li
67
Ning’s profitability is still below peers’
Li Ning Co Ltd
11 July 2016
For example, key operating metrics such as sell-through
sell
rates increased to only 69% in
FY15, from 67% in FY14, while product mix sold through sales channels improved
marginally to 61% FY15 (FY14: 57%), in terms of percentage of new products (on shelf for
six months or less) vs total sales.
Figure 6: Li Ning’s revenues
Group Revenue
Footwear
Apparel
Accessories
Revenue (Li-Ning brand)
Revenue (Other brands)
Group Revenue
Figure 7: Li Ning’s margins and cost ratios
2013
2014
2015
2016F
2017F
2018F
2,449
2,269
365
5,083
741
5,824
2,740
2,811
381
5,932
115
6,047
3,411
3,118
442
6,972
118
7,089
3,850
3,519
451
7,820
118
7,938
4,269
3,902
460
8,631
118
8,749
4,691
4,288
469
9,449
118
9,566
11.9%
23.9%
4.2%
16.7%
-84.5%
3.8%
24.5%
10.9%
16.1%
17.5%
2.2%
17.2%
12.9%
12.9%
2.0%
12.2%
0.0%
12.0%
10.9%
10.9%
2.0%
10.4%
0.0%
10.2%
9.9%
9.9%
2.0%
9.5%
0.0%
9.3%
YoY Change
Footwear
Apparel
Accessories
Revenue (Li-Ning brand)
Revenue (Other brands)
Group Revenue
Margins & Ratios
GP margin (Li Ning Brand)
GP margin (Other Brands)
2013
45.3%
35%
2014
45.0%
42%
2015
45.1%
41%
2016F
46.5%
41%
2017F
47.0%
41%
2018F
47.5%
41%
Sales and distribution exp.
Admin exp.
45.9%
4.0%
45.7%
10.4%
38.4%
4.9%
37.7%
4.9%
37.6%
4.9%
35.8%
4.9%
Figure 8: Li Ning’s POS network
Store POS (period end)
Franchised
Directly managed
Total Stores
YoY change
Wholesale Revenue
(CNYm) per store
YoY change (SSSG proxy)
2013
2014
2015
2016F
2017F
2018F
4,989
926
5,915
-8.1%
4,424
1,202
5,626
-4.9%
4,618
1,515
6,133
9.0%
4,718
1,715
6,433
4.9%
4,818
1,915
6,733
4.7%
4,918
2,115
7,033
4.5%
0.82
2.0%
1.03
24.9%
1.19
15.3%
1.24
5.0%
1.31
5.3%
1.37
4.7%
Balance sheet
♦ Net cash position due to recent quasi-
Net cash position. As at end-FY15,
FY15, Li Ning reported cash and cash equivalents of
CNY1,813m. Its net cash balance was CNY547m, after factoring in borrowings of
CNY566m and convertible bond liabilities of CNY723m. Because 56% of the bank
ba loans
are denominated in USD, the company is vulnerable to forex losses from CNY
depreciation.
rights offering
We note that Li Ning is in a decent cash position after raising HKD1,554m via a quasiquasi
rights offering in Jan 2015, where five new shares were issued at a 23% discount
(HKD2.60) for every 12 shares held.
♦ CB likely to expire out-of-the-money,
out
Convertible bonds (CB) unlikely to be converted. We believe the company would have
to pay cash to redeem its CB upon maturity, as CB investors will have no incentive to
convert since the conversion price remains significantly higher than the current share price.
Recall that in Feb 2012, Li Ning issued CNY750m of CB with a 4% coupon rate to TPG
and Government of Singapore Investment Corp (GIC), with expiry in Feb 2017 and a
conversion price of HKD7.74. The conversion price was subsequently adjusted
downwards to HKD4.50 and finally HKD4.092, after the company partook in capital-raising
capital
exercises. Li Ning’s current net cash balance is sufficient to pay back its CB liabilities.
Figure 9: Li Ning’s cash flow statement
requiring cash outflows
Figure 10: Li Ning’s cash balance
2,000
1,500
1,813 1,813
813
1,800
1,000
638
1,600
1,400
0
292
-219
475
-394
685
-363
462
549
-461
-461
755
(CNYm)
(CNYm)
500
CF from financing
CF from investing
-461
CF from operations
-500
1,200
1,446
1,281
1,151
1,031
1,000
Cash Balance - ending
800
600
-334
-750
400
-1,000
200
0
-1,500
2013
2014
2013 2014 2015 2016F
2016 2017F 2018F
2015 2016F 2017F 2018F
68
Li Ning Co Ltd
11 July 2016
Cash flow.. Li Ning’s positive operating cash flow should meet its cash flow requirements
from investing activities, as we believe its operating efficiency will continue to improve
going forward. We see little pressure
ure in terms of cash flow requirements from financing
activities as the company is unlikely to issue dividends in the near term, and would roll
over existing bank loans. There would only be the repayment of CB liabilities amounting to
CNY750m, which we believe
ieve can be met by the company’s internal resources.
♦ Dividends are unlikely in the near
future
Appendix
Timeline
Figure 11:: Li Ning’s key events and achievements
Date
Event
1984
1989
2004
2005
2007
2008
2012
2014
2015
Mr Li Ning won six medals (three gold) in gymnastic categories during the 1984 Summer Olympics in Los Angeles
Mr Li Ning founded his namesake company
Publicly listed on HKEx in Jun 2004. At IPO price of HKD2.15, it was valued at 18x FY04 P/E, close to the top end of the IPO valuation range
50 joint venture (JV) with AIGLE to make and sell products in China for 50 years
Formed a 50-50
Acquired Double Happiness
Launched Z-DO brand
Mr Li Ning carried the Olympic torch, during the 2008 Beijing Summer Olympics opening ceremony, in an aerial stunt around the Bird’s Nest
Nes stadium.
Licencing agreement signed with Lotto for 20 years
TPG and GIC invested in Li Ning via CB, which was announced in Jan 2012
Channel revival plan was launched to accelerate inventory clearance and channel profitability
CEO Zhang Zhi Yong resigned in Jul 2012. Mr Jin-Goon
Jin
Kim of TPG stepped up as interim CEO
Became equipment sponsor
or for China Basketball Association (CBA) for five seasons
Signed NBA superstar Dwayne Wade in sponsorship agreement
Goon Kim resigned in Nov 2014. Mr Li Ning took over his place
Interim CEO Mr Jin-Goon
Partnered with Xiaomi to produce smart running shoes and utilise big data
Double Happiness
Double Happiness is a Shanghai-based
based company that manufactures, does R&D, markets
and sells table tennis and badminton equipment. As Li Ning currently holds a 47.5% stake
in Double Happiness, this
his company is no longer consolidated under
un
Li Ning group as at
end-FY15. Operation-wise,
wise, Double Happiness has always been run by its own
independent management team.
♦ Double Happiness is a renowned
Li Ning announced in Nov 2015 to sell a 10% stake of its 57.5% equity interest in Double
Happiness for CNY125m (representing 13.3x historical P/E) to Viva China Holdings
Limited (8032 HK, NR) – a company 66.5% owned by chairman Mr Li Ning. The reason for
the sale is to improve the company’s balance sheet. Li Ning listco expects to recognise a
CNY260m one-off gain, comprising:
♦ Listco sold a 10% stake to Viva
former state-owned
state
table tennis
equipment brand
China, a publicly-listed
publicly
holding
company controlled by chairman Mr Li
Ning
i. Net disposal gain of CNY45m from the sale of the 10% stake;
ii. Re-measurement
measurement gain of CNY215m on the remaining 47.5% equity interest.
Accounting treatment-wise,
wise, Li Ning ceases to consolidate revenue from Double
Happiness. We believe an alternative explanation may be that the deconsolidation makes
a spinoff easier in the future.
Under certain conditions, the listco has the call option to buy back the 10% stake
sta and Viva
China has the put option to sell after four years, for the original price plus compounded
interest of 6.5% less dividends paid (conditions: Should Double Happiness fail to go
public, the 42.5% remaining shareholders would waive their right of first
f
refusal).
Cooperation with Xiaomi
In Mar 2015, Li Ning announced a strategic partnership with Huami to jointly launch
“smart” running shoes using Xiaomi’s Mi technology band. The objective is to introduce
wearable technology to students at affordable prices and to highlight a new era of “Internet
+ sports life experience” for Li Ning brand. The products were launched in 2H15, with
300,000 pairs of shoes sold primarily via the e-commerce
e
channel, although this
represented an insignificant amount of sales.
69
♦ Xiaomi-cobranded
Xiaomi
smart stores
making inroads into e-commerce
e
and
the “sports + online-to-offline
online
(O2O)”
theme
Li Ning Co Ltd
11 July 2016
Figure 12:: Smart running shoes by Li Ning x Xiaomi
Figure 13:: Smart running shoes by Li Ning x Xiaomi
Caption: Requires use of Mi Fit application on mobile phone
Source: Li Ning presentation slides
Caption: Improved tracking steps with bracelet Mi Band
Source: xiaomi-mi.com
Management Profile
Mr Li Ning, aged 53, is the founder, chairman and interim CEO. He is primarily
responsible for formulating the group’s overall corporate strategies and planning. Mr Li is
one of the most celebrated athletes in China in the 20th century. In the 1984 Olympic
Games, he won three gold, two silver and one bronze medals, making him the athlete
winning the most medals at that Olympic Games. In 1989, Mr Li initiated the idea of the LINING brand, with the goal of creating the first national sports goods brand in China. He
also
o serves as chairman, CEO and executive director of Viva China. Mr Li holds a
Bachelor’s Degree in Law from the School of Law of Peking University (北京大學),
(
and an
executive MBA Degree from Guanghua School of Management of Peking University (北京
大學光華管理學院).
Mr Chen Yue, Scott, aged 39, is a non-executive
executive director, a member of the executive
committee and the remuneration committee of the company. He joined the group in Apr
2012. Mr Chen is a partner and managing director of TPG, which has interests in CB,
convertible securities and ordinary shares. He is head of TPG’s Beijing office and co-leads
investment opportunities for TPG in Greater China.
Mr Tsang, Terence Wah-Fung, aged 54, CFO,
CFO joined the group in Apr 2013, and is
responsible for finance, internal audit,
it, company secretary and investor relationship. Mr
Tsang has over 24 years of experience in the apparel industry. He previously held
positions at Guess Inc, Ashworth Inc and Levi Strauss Company. Mr Tsang had held
various management roles including CFO, COO
OO, Asia president and senior vice president
for various business units throughout his career. He is a certified public accountant.
70
Li Ning Co Ltd
11 July 2016
Shareholding Structure
Figure 14: List of shareholders
Shares
Ordinary shares
%
2013 convertible 2015 convertible Total after all %
(In million) as of 31 Dec 15
shareholding securities
securities
CS converted shareholding
Convertibles exercise price
HKD 3.183
HKD 2.60
Li Ning
306
16%
125
125
556
25%
TPG
53
3%
39
22
114
5%
GIC
10
0.50%
10
1%
Milestone
135
7%
135
6%
Others
1,381
73%
2
1,383
63%
Total
1,885
100%
166
147
2,198
100%
Source: Company data, HKEx
Founder Mr Li Ning is the biggest shareholder.
shareholder We note that Viva China is controlled
by Mr Li Ning via his ownership of a 94% beneficial stake. Following capital-raising
capital
exercises in 2013 and 2015, convertible securities (which functionally represent equity
equit
shares, but are not considered basic shares) had been issued to TPG and Viva China.
Assuming full conversion of convertible securities (but not out-of-money
out
CB), Viva China
and TPG would own 25% and 5% of Li Ning respectively. In our view, the reasoning
behind issuing convertible securities instead of basic equity shares could be to avoid
triggering a general takeover offer – as mandated by the Hong Kong Exchange (HKEx) –
should Mr Li Ning accumulate a stake of over 30%.
Auditor
PricewaterhouseCoopers has been Li Ning’s auditor since its IPO in 2004.
71
Li Ning Co Ltd
11 July 2016
SWOT Analysis
• Li Ning brand is renowned amongst Chinese
consumers due to Mr Li Ning’s Olympics
achievements
operated stores gives
• The hybrid model with directly-operated
Li Ning greater control over retailing practices and
channel inventory
• The casualwear segment is
hotly contested,
raising doubts
over the viability
of Li Ning’s
push for its
sports lifestyle
brands – Blue
Label and LNG
• Room for
operational
improvement as
its metrics (eg
inventory
turnover,
accounts
receivable
days) lag
behind those of
its peers
• Li Ning to take
over
unprofitable
distributors and
turn them to
directlyoperated stores
• The OEM model means Li Ning lacks manufacturing
capacity – it captures less of the value chain and is
less flexible with replenishment orders
Price Close
10
9
8
7
6
5
4
3
2
Jul-11
Oct-12
Jan-14
14
May-15
72
Sportswear
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term
longer term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
le
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
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Sportswear
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not be construed as an offer of securities in Indonesia. Any securities offered or sold, directly or indirectly, in Indonesia or to any Indonesian citizen or
corporation
n (wherever located) or to any Indonesian resident in a manner which constitutes a public offering under Indonesian laws and regulations must
comply with the prevailing Indonesian laws and regulations.
Singapore
This report is issued and distributed in Singapore
ngapore by RHB Research Institute Singapore Pte Ltd and it may only be distributed in Singapore to accredited
investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and
a Futures Act (Chapter 289), as
amended from time to time. By virtue of distribution to these categories of investors, RHB Research Institute Singapore Pte Ltd
L and its representatives are
not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section
(Section 36 relates to disclosure of RHB Research Institute Singapore
Pte Ltd ’s interest and/or its representative's interest in securities). Recipients of this report in Singapore may contact RHB
R
Research Institute Singapore
Pte Ltd in respect of any matter arising from or in connection with the report.
Hong Kong
This report is issued and distributed in Hong Kong by RHB Securities Hong Kong Limited (興業金融證券有限公司) (CE No.: ADU220) (“RHBSHK”) which is
licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact RHB Securities Hong
Ho Kong Limited.
United States
This report was prepared by RHB and is being distributed solely and directly to “major” U.S. institutional investors as defined
defin under, and pursuant to, the
requirements of Rule 15a-6
6 under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). RHB is not registered as a brokerbroker
dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein
that are listed on Bursa Malaysia Securities Berhad
d must be placed with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all
other securities discussed herein must be placed with and through such other registered U.S. broker-dealer
broker dealer as appointed by RHB from time to time as
required by the Exchange Act Rule 15a-6.
This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees,
employe
agents and advisors, as
applicable.
Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are
a not registered or qualified
as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such
such other registered U.S. broker-dealer
broker
as
appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory
R
Authority
(“FINRA”) rules on communications with a subject company, public appearances
app
and personal trading.
Investing in any non-U.S.
U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S.
issuers may not be registered with, or be subject to the regulations
regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S.
non
securities
or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory
re
requirements
comparable to those in the United States.
The financial instruments discussed in this report may not be suitable for all investors.
Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United
Uni
States.
OWNERSHIP
HIP AND MATERIAL CONFLICTS OF INTEREST
Malaysia
RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for:
a)
-
RHB and/or its subsidiaries are not liquidity providers or market makers for the subject
subject company (ies) covered in this report except for:
a)
-
RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered
c
in this report in the
last 12 months except for:
a)
-
RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for:
a)
-
75
Sportswear
Thailand
RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or
commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB
RH Securities (Thailand) PCL
may have, or have had, business relationships with the subject company(ies)
company(ies) mentioned in this report. As a result, investors should exercise their own
judgment carefully before making any investment decisions.
Indonesia
PT RHB Securities Indonesia is not affiliated with the subject company(ies) covered in this report both
both directly or indirectly as per the definitions of
affiliation above.
Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated
affil
parties are as follows:
1.
Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;
2.
Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;
3.
Affiliation between 2 companies whereby one or more member of the Board of Directors
Directors or the Commissioners are the same;
4.
Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;
5.
Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or
6.
Affiliation between the Company and the main Shareholders.
PT RHB Securities Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report
repo is not considered as insider
information prohibited by law.
Insider means:
a.
a commissioner, director or employee of an Issuer or Public Company;
b.
a substantial shareholder of an Issuer or Public Company;
c.
an individual, who because of his position or profession, or because of a business relationship with an Issuer or
o Public Company, has access to
inside information; and
d.
an individual who within the last six months was a Person defined in letters a, b or c, above.
Singapore
RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this
report, except for:
(a)
-
The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any
an board or trustee positions
of any issuer whose securities are covered in this report, except for:
(a)
-
RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within
wit
the last 12 months had
any corporate finance advisory relationship with
th the issuer of the securities covered in this report or any other relationship (including a shareholding of 1%
or more in the securities covered in this report) that may create a potential conflict of interest, except for:
(a)
-
Hong Kong
RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be)
b the securities
in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company’s market
capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered
Regi
with the Securities
and Futures Commission (the “Code of Conduct”); and/or (b) an amount
amount equal to or more than 1% of the subject company’s issued share capital, or issued
units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates
may have financial
inancial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed
revie
in the report.
76
Sportswear
RHBSHK or any of its group companies may make a market in the securities covered by this report.
RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its
i group
companies serving as an officer of the company or any of the companies covered by this report.
RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the
companies covered by this report within the past 12 months.
Note: The reference to “group companies” above refers to a group company of RHBSHK
RHBSHK that carries on a business in Hong Kong in (a) investment
banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock
S
Exchange of Hong Kong
Limited.
Kuala Lumpur
Hong Kong
Singapore
RHB Research Institute Sdn Bhd
Level 11, Tower One, RHB Centre
Jalan Tun Razak
Kuala Lumpur
Malaysia
Tel : +(60) 3 9280 2185
Fax : +(60) 3 9284 8693
RHB Securities Hong Kong Ltd.
th
12 Floor
World-Wide House
19 Des Voeux Road
Central, Hong Kong
Tel : +(852) 2525 1118
Fax : +(852) 2810 0908
RHB Research Institute Singapore
Pte Ltd.
10 Collyer Quay
#09-08 Ocean Financial Centre
Singapore 049315
Tel : +(65) 6533 1818
Fax : +(65) 6532 6211
Jakarta
Shanghai
Bangkok
PT RHB Securities Indonesia
Wisma Mulia, 20th Floor
Jl. Jenderal Gatot Subroto No. 42
Jakarta 12710, Indonesia
Tel : +(6221) 2783 0888
Fax : +(6221) 2783 0777
RHB (China) Investment Advisory Co. Ltd.
Suite 4005, CITIC Square
1168 Nanjing West Road
Shanghai 20041
China
Tel : +(8621) 6288 9611
Fax : +(8621) 6288 9633
RHB Securities (Thailand) PCL
10th Floor, Sathorn Square Office Tower
98, North Sathorn Road, Silom
Bangrak, Bangkok 10500
Thailand
Tel: +(66) 2 862 9999
Fax : +(66) 2 862 9799
5
77

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