Maintain BUY but cut TP to HK$ 62.26, based on 26x FY20E P/E (revised down from 30x due to sector de-rating). We believe Anta could outperform the industry and recover quickly in 2H20E. Also, drags by virus outbreak on Amer sports could be less thanks to its focus in winter sports products. All in All, we think its valuation is not demanding at 22x FY20E P/E, vs international peers’ average of 25x.
- FY19 result roughly inline. FY19 net profit grew by 30% YoY to RMB 5.3bn, 1%/2% below CMBI/ BBG’s est., while sales was 2% above CMBI est. but offset by higher-than-expected labour costs and minority interest.
- Management expects healthy recovery in 2Q20E and normalize in 2H20E. Retail sales recovery in Mar 20 was better than management’s expectation, thanks to timely change in strategy amid virus outbreak (e.g. more e-commerce innovations and pro-active community marketing). They foresee decline of 20-30%/ 10%-20% in retail sales growth for Anta/ FILA in 1Q20E and double-digit/ 30%+ in 2H20E, resulting in mid-single digit drop/ 20%+ growth in FY20E. They also aim for 50% e-commerce sales growth in FY20E.
- Supportive measures to distributors are needed but will affect profitability in 1H20E. In order to ease cash flow and inventory pressure of its distributors, Anta allowed: 1) up to 10-15% orders cut and 10-15% SKU buybacks for 2Q-3Q20E, 2) shift of SKUs in 1Q-2Q20E to 3Q-4Q20E and 3) lengthening credit period for distributors (target to lower inventory to sales ratio back to 5.5-6 months by 1H20E). We do expect Anta and FILA’s GP margins to be hurt, due to the above measures and greater retail discounts.
- Cost savings mode is now on. The Company is actively limiting operating expenses in FY20E, such as reducing travelling expenses by RMB 60mn vs last year, and they are more cautious on A&P budgeting and staff hiring.
- Amer is not affected much due to its focus in winter sports products. According to management, since Amer sports is highly skewed to winter sports. Therefore as long as the virus impact does not last later than Jul 2020, the sales and delivery of its product shall not be affected meaningfully.
- Maintain BUY but cut TP to HK$ 62.26. We cut our FY20E/ 21E diluted EPS estimates by 20%/ 6%, to factor in 1) cut in sales, 2) greater retail discounts, 3) more cost savings and 4) slowdown of store expansions in FY20E. We maintain BUY and cut TP to HK$ 62.26, based on 26x FY20E P/E (down from 30x). The valuation is undemanding at 22x FY20E P/E.
