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Summary of ANTA Sports Products Ltd. Report

• Report Date: July 8, 2019
• Company: ANTA Sports Products Ltd.
• Ticker: 2020.HK
• Industry: Sportswear
• Stock Price: HK$55.30
• Market Cap: HK$150 billion
• Float: 41.6%
• Average Daily Volume (90-day): HK$365.0 million

Main Points of the Report

• ANTA is accused of fraudulently inflating its financial performance through its control of Tier 1 distributors.
• The report claims that ANTA's operating margins are not due to superior operations, but rather due to manipulation of financials through controlled distributors.
• ANTA's senior executives are aware of this control and use terms like "subsidiaries" to describe the relationship, despite claiming independence.
• The report presents "Smoking Gun" evidence that ANTA controls 27 distributors, with at least 25 being Tier 1, collectively accounting for approximately 70% of ANTA brand sales.
• The control is achieved through proxy owners and by managing key positions (HR, finance, and management) in the distributors.
• Interviews with former executives confirm the existence of this control, with one source stating that ANTA has final say over the management of its subsidiaries.

Key Distributors and Evidence

The report lists the following distributors as being secretly controlled by ANTA:

Financial Indicators of Distributors

• 2017 COGS: Approximately RMB 5.5 billion, or about one-third of ANTA's total reported revenue.
• Gross Margins: Only 7% to 8%.
• Net Margins: Close to zero.
• These low margins suggest that ANTA is manipulating its financials to report higher profits.

Evidence of Control

• Yundong Business Consulting Co. Ltd. is a key entity in this network. It is nominally owned by Peng Qingyun, a proxy for Chairman Ding Shizhong.
• Wang Huayou is the General Manager of Yundong and is listed in ANTA's prospectus as a senior manager.
• Li Dan is the Supervisor of Yundong and has been associated with multiple FILA branches.
• The finance and HR departments of the distributors are controlled by ANTA, with salaries paid by the headquarters.
• ANTA's strategy of separating semi-subsidiaries from its public listing is to make its financial performance look better by recognizing revenue and excluding distributor costs.

Conclusion

The report presents a detailed analysis of ANTA's financial practices, suggesting that the company has been using a network of secretly controlled Tier 1 distributors to inflate its reported revenues and reduce its expenses. This manipulation is believed to have led to the apparent superiority of ANTA's operating margins compared to its Chinese competitors. The report is based on interviews with former ANTA executives and detailed financial records, and it is presented as a series of findings to evidence this fraud.