20131031-美银美林-2Q14_trade_fair_orders_in-line_industry_continues_to_improve_12页_642kb

2Q14 Trade Fair Orders and Industry Outlook Summary

Core Content

Anta Sports, a leading domestic sportswear brand, reported high-single-digit order growth at the 2Q14 trade fair, aligning with expectations. The firm's 3Q13 sales and sales to stockists and general (SSSG) remained flat, consistent with 2Q13. This performance reflects the company's continued improvement in the retail sector, which is expected to trend better in 2014.

Main Points

• Trade Fair Orders:

  • 2Q14 orders showed high-single-digit growth, driven by volume, despite a higher base compared to previous periods.
  • Management noted that order placement was conservative and that Anta is likely to see replenishment orders in 2014, with 1H13 showing 10% replenishment.

• Inventory and Retail Profitability:

  • Channel inventory is at a healthy level of 4.5-5 months.
  • 2-3Q13 retail sell-through rates were high, at 70%.
  • Retail discounts have reduced from 32-35% in previous years to 30% in 3Q13, contributing to improved distributor profitability.
  • SSSG was flat in 3Q13, but the company expects 4Q13 SSSG to turn positive due to improving retail momentum in October.

• Industry Outlook:

  • Discussions with key players like Xstep, Peak, and 361 Degrees suggest a better outlook for the sportswear industry.
  • Channel inventories are returning to healthy levels, and retail discounts are narrowing.
  • Retail sales are stabilizing, which is expected to lead to sequential improvements in trade fair orders for these companies.

Key Financials and Valuation

• Valuation Metrics:

  • Anta's valuation is considered undemanding at 12x ex-cash 2014E P/E.
  • The dividend yield is at 4.5%.

• Financial Performance:

  • Anta is expected to show positive earnings growth in 2H13.
  • The company has a strong dividend yield and is anticipated to report a special dividend.

• Financial Ratios:

  • Return on Equity (ROE) is expected to be 18.3% for 2013E and 20.1% for 2014E.
  • Operating margin is expected to increase to 23.6% in 2014E.
  • EBITDA margin is projected to be 24.8% in 2014E.

Investment Thesis

• Anta is positioned as a clear market share taker in the medium term due to its leadership in the sportswear industry.
• The company is the top pick among sportswear brands.
• Catalysts for growth include the 2Q14 trade fair announcement, positive earnings growth, and a potential special dividend.

Stock Data

• Price: HK$11.12
• Price Objective: HK$13.00
• Investment Opinion: C-1-7
• Volatility Risk: HIGH
• 52-Week Range: HK$5.34-HK$11.70
• Market Value (mn): HK$27,733
• Average Daily Volume: 5,898,126
• ROE (2013E): 18.3%
• Net Debt to Equity (Dec-2011A): -43.4%
• Est. 5-Yr EPS / DPS Growth: -10.7% / -10.7%
• Free Float: 31.0%

Company Description

• Anta is listed on the Hong Kong Stock Exchange since July 2007.
• It is the second-largest domestic sportswear brand and the fourth-largest in China.
• The company is vertically integrated, covering design, R&D, manufacturing, brand management, and wholesale.
• It operates through 50 distributors, which either wholesale to sub-distributors or sell directly to end-consumers through over 6,600 stores nationwide.

Key Takeaways from Analyst Briefing

• Retail: SSSG was flat in 3Q13, but retail discounts have decreased to 30%.
• Store Closure: Anta plans to close 100 stores in 2H13 as part of its network optimization strategy.
• GPM: 4Q13 GPM may face slight pressure due to higher production costs for down jackets, but management is confident in achieving better YoY margin in 2H13.
• A&P: Advertising and promotion expenses are expected to rise in 2H13 and 2014 due to the New Generation NBA star campaign, the Asia Olympics, and the Winter Olympics.
• Online Strategy: Anta's online sales, which make up 5% of total sales, include Taobao, T-mall, and other online stores, with a strategy to offer similar discounts to offline stores and focus on off-season products.

Valuation Comparison

• Valuation Comp:
  • Dongxiang: P/E of 25.8x in 2013, 27.8% market cap growth.
  • Anta: P/E of 14.9x in 2014, with a 13% market cap.
  • Li Ning: P/E of 10.4x, with a 5% market cap.
  • Xstep: P/E of 6.9x, with a 1.4% market cap.
  • 361 Degrees: P/E of 6.4x, with a 3.8% market cap.
  • Peak: P/E of 4.7x, with a 5.6% market cap.

Financial Highlights

• Income Statement:

  • Sales are expected to grow from 6,714 million in 2013E to 8,347 million in 2015E.
  • Gross profit is projected to increase from 2,659 million in 2013E to 3,431 million in 2015E.
  • Operating profit is expected to rise from 1,497 million in 2013E to 2,007 million in 2015E.
  • Net profit is anticipated to grow from 1,262 million in 2013E to 1,610 million in 2015E.
  • Dividends are expected to increase from 380 million in 2013E to 430 million in 2015E.

• Balance Sheet:

  • Total assets are projected to increase from 10,017 million in 2013E to 11,326 million in 2015E.
  • Total equity is expected to grow from 7,244 million in 2013E to 8,246 million in 2015E.
  • Total liabilities are anticipated to rise from 2,774 million in 2013E to 3,080 million in 2015E.

• Cash Flow Statement:

  • Free cash flow is expected to increase from 837 million in 2013E to 1,248 million in 2015E.
  • Net operating cash flow is projected to rise from 1,139 million in 2013E to 1,540 million in 2015E.
  • Capital expenditures are expected to decrease from 302 million in 2013E to 292 million in 2015E.

Conclusion

Anta is well-positioned to continue its growth trajectory, supported by improved retail performance, healthy inventory levels, and a strong financial position. The company is a top pick in the sportswear industry due to its leadership, market share expansion potential, and positive outlook for the coming quarters. Investors are advised to consider the report as a single factor in their investment decision, given the potential for conflict of interest.