Anta Sports (2020 HK, Buy)
1H17 retail sales and GPM beat; upgrade from Hold to Buy
Upgrade to Buy1H17 net profit rose 29% YoY, coming in 10% above Bloomberg consensus, led by a higher-than-expected GPM and fall in A&P expenses ratio. We estimate Anta-branded products had mid-teen to low-twenties retail sales growth in 1H17, stronger than Li Ning’s (2331 HK, Hold) 9%. Anta’s 19% revenue growth in 1H17 surpassed Nike’s 15-16% growth in Greater China in 3Q/4QFY17. We expect Anta to narrow the market share gap between itself and Nike, driven by solid execution of its multi-brand strategy. Management is confident and optimistic about 2H17, expecting 2H17 revenue growth of not less than that in 1H17. Optimal A&P expenses ratio is lowered from 12-14% to 10-12% beginning FY18. We revise up our FY17/18/19 net profit estimates by 8%/7%/7% to reflect stronger GPM and lower A&P expenses ratio assumptions. We raise our target price from HK$25.20 to HK$33.20, based on 21.7x FY18E P/E, at +2SD, (vs 18x previously). This valuation is close to Nike’s 22.5x FY18E P/E (on blended FY17/18 EPS) and above Li Ning’s 17.4x FY18E P/E. We believe our valuation basis is justified by Anta’s stronger revenue growth in China and similar two-year EPS CAGR outlook for FY18-19 (16-17%) compared to Nike.
Cutting into Nike’s market share lead Anta’s 19% YoY revenue growth in 1H17 surpassed Nike‘s 15-16% growth in Greater China in 3Q/4QFY17, reversing the underperforming trend in the previous three half-year periods (Figure 4). Nike, the leading sportswear brand in China in terms of market share, targets a mid-teen CAGR for revenue in Greater China during FY15-20. We expect Anta to narrow the market share gap between itself and Nike, driven by solid execution of its multi-brand strategy, assuming a 20% CAGR for revenue in FY17-19, compared to Nike’s mid-teen growth target in Greater China.
Strong 2Q17 retail sales performance Retail sales growth for Anta-branded products accelerated from low-teen growth in 1Q17 to 20-30% YoY in 2Q17, the highest level since the company changed its reporting from SSSG to retail sales growth in 1Q16. Management attributed the strong growth to the overall improvement of the company’s capabilities in brand, product and retail management, which we think is more sustainable as the company continues to invest in R&D, marketing and omni-channel strategies. We estimate Anta-branded products had mid-teen to low-twenties retail sales growth in 1H17, which was stronger than Li Ning’s 9% growth. Retail sales of non-Anta-branded products also improved from 40-50% YoY in 1Q17 to 50-60%, led by FILA.
FY17 guidance1) A&P expenses ratio may be less than 10% of revenue in FY17 as the COC sponsorship might be renewed in 4Q17. Going forward, optimal A&P expenses ratio will be around 10-12%, less than previous guidance of 12-14% due to FILA’s rapid revenue growth, whose A&P expenses ratio is much lower than for the Anta brand. 2) Management targets >60% growth in 2017 Singles’ Day sales. The e-commerce revenue mix is expected to reach 15-16% in FY17 and 20% in FY18. 3) Management is still actively looking for M&A opportunities, but has not given any timetable. 4) Retail sales momentum was satisfactory in July and Aug. Management expects 2H17 revenue growth of not less than that in 1H17.
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