Maintain BUY and raised TP to HK$ 91.46, based on 30x FY20E P/E (up from 25x due to faster NP growth in 2H19E). We believe FILA did not slow down as fast as market originally expected, hence enjoyed better leverage. The counter is trading at 25x P/E & 1.1x 3 years PEG, vs intl. peers’ avg. of 25x & 1.5x.
- 3Q retail sales slight beat. Anta/ FILA/ other brands’ retail sales growth were mid-teens/ 50-55%/ 30-35% in 3Q19, slightly better than CMBI est. of mid-teens/ 40% for Anta/ FILA & others, vs mid-teens/ 55-60% in 2Q19.
- A bumpy quarter for Anta. According to mgmt., Anta’s retail sales growth accelerated in Jul-Aug 2019 (vs 2Q19) but slightly slowed down in Sep 2019, due to warmer weather (lackluster sales for thick clothes), hence greater retail discount was offered, at 28% off in3Q19 (vs 26% off in 3Q18). But inventory to sales ratio remained healthy at 4-5 months (close to normal level). We expect margin expansion for Anta (on top of robust sales growth) in 4Q19E, thanks to more conservative retail discount (esp. for online).
- A solid quarter for FILA. FILA brand retail sales growth was 50% in 3Q19, mild slowdown from 60% in 2Q19, but not surprising given the higher base (90%/ 80% in 3Q18/ 2Q18). Retail discount was at ~25% off in 3Q19 (unchanged vs 3Q18) while inventory to sales ratio was 5-6 months (vs normal level of 6-7 months). We remain confident on FILA in 4Q19E.
- More positives from FILA in 2H19E. Thanks to acquisition of 179 franchise stores in 1H19, FILA sales managed to grow by 80%, on top of its ~65% retail sales growth. We believe there will still be more stores acquired in 2H19E (CMBI est. of ~40 in 3Q19 and ~20 in 4Q19), thus we now expect a 54% FILA sales growth in 2H19E. Also noted that no. of FILA’s new stores will reduce in FY19E, CMBI est. of ~300 (vs 566 in FY18), growth drivers should likely be store productivity improvement and e-commerce, which should lead to a higher OP margin of ~30% in 2H19E (vs 29% in 1H19).
- We believe expectation for FILA in FY20E is not high and OP margin can still expand. In our view, market estimates of ~30% FILA sales growth in FY20E is not aggressive (CMBI est: 35%), because that could be done by reaching ~10%/ ~15%/ 50%+ store/ sales per store/ e-commerce growth. FILA’s OP margin of ~30% is still low, compared to Nike/ Adidas’s 35%+.
- Maintain BUY and raised TP to HK$ 91.46. We maintain BUY and raised TP to HK$ 91.46, based on 30x FY20E P/E (up from 25x, due to faster NP growth in 2H19E), implying a 1.4x 3 years PEG. Even though the counter is trading at 25x P/E, about 2 s.d. over its 5 years avg. of 17.5x, but is still cheap due to 1.1x PEG. We lifted our FY19E/ 20E/ 21E EPS estimates by 4.9%/ 6.7%/ 7.3%, to factor in 1) stronger-than-expected FILA sales growth, and 2) greater-than-expected economies of scale and operating leverage.
