20230508-招银国际-5-1_sales_beat_but_competition_intensified_5页_791kb

China Sportswear Sector Analysis Summary

Overview

The China sportswear sector experienced a strong performance during the 5-1 Golden Week 2023, with retail sales growth accelerating and surpassing expectations despite a slowdown in the Q1-Q2 2023 period. Sales momentum improved due to warmer weather and increased sports events, while competition intensified through aggressive de-stocking and promotions by key brands like Adidas and Li Ning. Overall fundamentals are positive for the H2 2023E and set up for a robust FY24E, but end demand and competition intensity remain key risks. Our analysis recommends focusing on companies with better-than-expected performance and operating leverage.

Key Findings

• Retail sales growth accelerated significantly in April and May 2023, with brands like Xtep and Nike achieving sales increases of 35%+ and 30%+, respectively. The average retail sales growth improved from 10%+ in Q1 2023 to 20%-25%+ in April-May, driven by store traffic exceeding 2019 levels offline and e-commerce sales turning positive but lagging by 10-20%.
• Discounts widened in Q2 2023E compared to Q1 2023, primarily from de-stocking efforts by brands such as Adidas and Li Ning, but this is expected to ease by Q3-Q4 2023E as inventories normalize after heavy CNY promotions.
• Trade fair sales may lag retail growth due to excess channel inventory from prior years, slowing re-order contributions in FY23E to only 5%, versus the norm of 5-10%.

Company Analysis

• Xtep (1368 HK): Recommended as the top pick due to its fastest retail sales growth amid intense competition in the running segment. It shows strong positive surprises potential, with room for ASP hikes, unlike rivals like Li Ning. BUY rating.
• Topsports (6110 HK): Positive turnaround for international brands, with Nike and Adidas sales growing impressively during Golden Week 2023. Discounts improving YoY for Adidas, supported by localization strategies. No Rating.
• Anta (2020 HK): Turnaround expected in FY23E, driven by basketball line investments, FILA reforms, and strong performance from Kolon and Descente. BUY rating.
• Li Ning (2331 HK): Facing slower trade fair growth and higher discount pressure, limiting its appeal. BUY rating but with caveats.

Recommendations and Valuation

• BUY Recommendations: Xtep for its leadership in sales growth and market share gains; Anta for its turnaround potential.
• No Rating: Topsports due to international focus uncertainties.
• Valuation:
  • Xtep: Mkt cap 24.1 billion HK, target price 11.80 HK, PE 19.3-15.6, PB 2.3, ROE 11.4%.
  • Anta: Mkt cap 272.4 billion HK, target price 130.72 HK, PE 24.2-20.1, PB 5.5, ROE 24.0%.
  • Li Ning: Mkt cap 147.1 billion HK, target price 66.72 HK, PE 26.4-21.5, PB 4.6, ROE 17.9%.
• Valuations suggest upside for growth-focused stocks.

Outlook

We expect retail sales growth to accelerate from ~15% in H1 2023E to ~20% in H2 2023E, supported by lower base effects and reduced discounts. Key drivers include expansion in store openings and revamps delayed from COVID-19, quickening trade fair sales as inventories normalize by FY24E, and resumption of e-commerce growth. Overall, the FY24E outlook is bright, with margin improvements and structural changes providing positive surprises.

Risks and Considerations

• End demand volatility and ongoing competition could pressure margins.
• Excess channel inventory may hinder trade fair sales contributions.
• Macro factors like economic slowdown or US-China tensions could impact consumer spending.