Maintain BUY and raised TP to HK$ 77.39, based on 33x FY20E P/E (raised from 26x as we are expecting a bottom out in 2Q20E). Slight/ strong beat from Anta/ FILA in 1Q20 and healthy recovery so far in Apr 2020 are signs of turnaround in 2Q20E, and hence we believe its current valuation of 26x FY20E P/E is still attractive, vs Li Ning/ Nike/ Adidas’s 35x/ 36x/ 28x.
- Slight beat for Anta in 1Q20, less than expected buybacks. Anta retail sales fell by 20-25% YoY in 1Q20, better than the Company’s guidance of 20-30% YoY decline. We attribute the beat to its robust e-commerce growth (+ve MSD), especially the boost from Anta.com and Wechat mini program (~20% online sales in 1Q20). Also its retail discounts was better than expected, which is only slightly more than 30% off and ~4ppt higher than normal. Inventory to sales ratio was 5.5x, slightly above its normal level of 4-5x. In fact, amount of buybacks YTD was only RMB 300-500mn (CMBIS est. 2-3% of 1H20E’s inventory), far better than planned level of 10-15%.
- Strong beat for FILA in 1Q20, temporary inventory surge should not be a worry. FILA retail sales fell by only MSD YoY in 1Q20, better than the Company’s guidance of 10-20% YoY decline (implying a strong rebound in Mar 2020). We believe the beat was also due to the ramp up of e-commerce growth (+ve 160%), partly due to low base. This speedy recovery, in our view, was driven by mid-high end buyers whose purchasing power is not much affected by COVID-19 outbreak. Retail discounts was ~28% off, ~2-3ppt higher than normal. Inventory to sales ratio was high at 8x, comparing to normal level of 5-6x, but we are not worried because this effectively indicated the rapid growth planned by the Company. Note that the management is highly confident on its 30% growth target in FY20E, aided by strong e-commerce.
- Not much pressure for Amer so far. Amer sports was dragged by the virus outbreak in 1H20E but impact should be limited, as the management pointed out that cash flow should not be distorted much, as long as: 1) virus situation can be stabilized by Jun 2020 and 2) overall sales is not dropping by more than 20% in FY20E. However, a recurring loss would still be likely in FY20E.
- Maintain BUY and lifted TP to HK$ 77.39. We cut our FY20E/ 21E/ 22E diluted EPS estimates by 2.1%/ 3.3%/ 3.1%, to factor in 1) slightly slower Anta’s offline sales, 2) slightly higher losses from Amer but 3) slightly faster FILA growth and 4) lower finance costs. We maintain BUY and lifted TP to HK$ 77.39, based on 33x FY20E P/E (up from 26x as we are expecting a turnaround in 2Q20E). The valuation is undemanding at 26x FY20E P/E.
