德银-中国-体育用品行业-2017财季前瞻：五年来后发追赶的最佳表现-20180223-50页_1mb

FY17 Preview: Best Shape in Five Years to Trigger Laggard Catch-Ups

Core Content

This document outlines Deutsche Bank's investment outlook for the Chinese sportswear and textile sector in FY17, with a focus on identifying laggard companies that are expected to catch up with industry leaders. The report highlights the potential for upside in the 2018 outlook for Eclat, Feng Tay (FT), and Li Ning (LN), while also noting that Anta and Shenzhen (SZ) are equally favored compared to previous preferences. The report suggests that investors should focus more on the outlook and long-term growth potential rather than the 2017 results, which are expected to be largely in line with expectations.

Main Viewpoints

• Laggard Catch-Up Strategy: Eclat, FT, and LN are highlighted as potential buy opportunities due to their expected performance improvements in 2018.
• Positive Drivers for Laggards:
  • Eclat: Benefiting from its client's global expansion and the ramp-up of its Vietnam garment plant and 2018 winter orders.
  • FT: EBIT margin improvements are expected due to automation in China and Indonesia, with a strong orderbook and growing capacity utilization.
  • LN: Retail sales performance is stabilizing, and its 2018 orderbook is robust, suggesting a potential margin recovery.
• Anta's Upside: Expected to benefit from a strong orderbook and Fila's optimization, which could drive EBIT margin improvements.
• SZ Uncertainties: Despite strong execution, there are concerns over its long-term capacity expansion plans, particularly the Vietnam garment plant and Flyknit equipment, and its exposure to key clients.

Key Information

• Upcoming Results: Expected to be largely in line with positive forecasts, with more focus on analyst meetings and 2018 outlooks.
• Market Catalysts:
  • Eclat and FT: March channel checks and 2018 winter orders.
  • LN: YTD retail sales performance and 2018 outlook.
  • Anta: Strong orderbook and Fila optimization.
• Valuation Tools: The report uses DCF (Discounted Cash Flow) for valuation, with an assumed terminal growth rate of 1-2%.
• Industry Valuation:
  • Brands like Nike, Lululemon, and Adidas are trading at higher PERs.
  • ODMs (Eclat, FT, SZ, YY) are currently at significant discounts compared to brands.
• Risks:
  • Downside Risks: Weaker cyclical recovery, weaker innovation, sports segmentation, e-commerce underperformance, and FX/RAW material volatility.
  • Upside Risks: Stronger demand in the US and EU, and favorable FX/RAW material changes for ODMs.
• Investment Picks:
  • Top Buys: Anta (2020.HK), Li Ning (2331.HK), Eclat (1476.TW), Feng Tay (9910.TW).
  • Target Prices:
    • Anta: HKD 39.65
    • Li Ning: HKD 6.32
    • Eclat: TWD 312.00
    • Feng Tay: TWD 133.00

Industry Themes

(1) Global Expansion

• Brands like Nike, Adidas, and Lululemon have successfully expanded globally, especially in China, which has boosted their share prices.
• Eclat and FT are expected to benefit from their clients' global expansion, with Eclat focusing on China, EU, and Japan and FT transforming into a global fast response shoe maker.

(2) Automation

• Automation is no longer seen as a threat but a driver for FT and YY.
• FT's automated production lines are expected to improve margins in 2018, while YY aims to reshape its business model through automation to increase ASP and margins.

(3) US Cycle Recovery

• The US sportswear cycle is showing signs of sustainable recovery.
• Taiwan's knitted stretchable fabric exports are growing, indicating strong demand for functional products.

Anta vs. LN: Margin Recovery Spotlight

• LN's retail sales performance and EBIT margin guidance cut have led to market uncertainties.
• Despite this, LN's share price is believed to have already factored in overly pessimistic scenarios.
• Anta is expected to outperform LN in 2018 due to its strong orderbook and Fila optimization, but LN is catching up in terms of margin recovery.

Summary of Key Figures

Key Uncertainties

• Shenzhen: Uncertainty around long-term capacity expansion plans and exposure to key clients.
• Yue Yuen: Potential M&A activity could drive growth, but retail operations remain a source of uncertainty.
• Currency and Raw Material: FX and raw material price volatility are risks for ODMs.

Conclusion

The report emphasizes the potential for laggard companies in the sportswear and textile sector to catch up with industry leaders in 2018, driven by global expansion, automation, and strong orderbooks. Anta and LN are highlighted as key investment opportunities, with the market needing to refocus on their margin recovery and operational improvements. The valuation of ODMs is currently at a discount, offering potential upside if their performance aligns with expectations.