SUMMARY. Maintain BUY and raised TP to HK$ 71.46, based on 25x FY20E P/E (rolled over from FY19E). We believe sales momentum to remain strong and NP growth to be even faster in 2H19E. The counter trades only at 21x FY20E P/E and 1.0x 3 year PEG, which is attractive, vs intl. peers’ avg. of 22x and 1.4x.
- 1H19 results inline. Net profit grew by 27% YoY to RMB 2,483mn, inline with CMBI’s est. and the 25%+ pre-announced growth in its profit alert.
- …but operating income was impressive. However, excluding effects of JV for Amer sports (losses of ~RMB 492mn consolidated since 2Q19 as second quarters are always loss-making seasonally), operating profit actually rocketed by 58% YoY, boosted by: 1) rapid sales growth (Anta/ FILA/ other brands jumped by 18%/ 80%/ 36%), 2) higher government grants (skewed more to 1H in FY19E), 3) lower-than-expected A&P expenses (fell to 10% in 1H19, vs 11.7% in 1H18), as quite a lot of marketing fees were saved due to the cancellation of Klay Thompson China tour after his knee injury.
- Robust sales growth guided for both Anta & FILA in 2H19E. Following stunning growth of FILA (65%/ 75-80%/ 30x/ 100% for Classic/ Kids/ Fusion/ E-commerce) and Anta (low teens/ 35-40%/ high teens for Adult/ Kids/ E-commerce) in 1H19, management now expects a 50%+/ accelerating (CMBI est.: 19%) sales growth for FILA/ Anta in 2H19E, thanks to 1) excellent growth momentum in Jul-Aug 2019, 2) buying back stores previously owned by FILA’s distributors, and 3) further store expansion (FILA to 1,900-2,000 and Anta to 10,300-10,400, or +18% and +2% YoY).
- ... while OP margin in 2H19E should at least be stable. We expect OP margin to at least remain stable at 22.1% in 2H19E, vs 22.2% in 2H18, despite a 3.3ppt jump to 28.7% in 1H19, because: 1) series of marketing campaigns will soon be rolled out, such as FILA and Anta kids’ fashion shows, Tokyo Olympics, etc., 2) Anta’s Shanghai office is still ramping up and more staffs will be hired, also 3) less government grants should be expected. If sales growth beat again, OP margin will improve accordingly. We expect NP growth to even speed up (CMBI est.: 36%), as drag from JV will reverse and Descente will begin to contribute higher profit in 2H19E.
- Maintain BUY and raised TP to HK$ 71.46. We maintain BUY and raised TP to HK$ 71.46, based on 25x FY20E P/E (rolled over), implying a 1.2x 3 years PEG. The counter is attractive, at 21x P/E or 1.0x PEG. We lifted our FY19E/20E/21E EPS estimates by 2.8%/2.2%/4.8%, to factor in 1) stronger-than-expected FILA and Anta sales growth, and 2) greater-than-expected economies of scale and operating leverage.
