Maintain BUY but cut TP to HK$ 92.78, based on 30x FY21E P/E (unchanged). Guidance for 2H20E was revised down, and inventory and retail discounts level remained bumpy. However, we are still confident that turnaround is in sight and Anta/ Amer will outperform their peers. Therefore we believe current valuation of 24x FY21E P/E is still attractive, vs Li Ning/ Nike/ Adidas’s 26x/ 30x/ 28x.
- 1H20E profit warning announced. Management expect sales to be flattish or drop less than 5%, and net profit (before/ including Amer JV) to drop less than 25%/ 35% in 1H20E. The drop was due to: 1) inventory buybacks, 2) lower GP margin led by lower margins for resales of Anta’s buybacks and higher discounts for FILA, 3) greater receivable provisions and and 4) higher staff costs (including equity based incentives). If we exclude the losses from Amer JV and the equity based staff costs, adjusted net profit would have dropped by only mid-teens YoY in 1H20E.
- 1H20E retail sales was better than guidance but slightly below CMBIS est.. Anta/ FILA achieved -ve low-teens/ +ve MSD YoY growth in 1H20E, beating management’s guidance of 15-20% decline/ flat but slightly weak than CMBIS est. of -9%/ +5%, driven by robust e-commerce growth of 40%+/ 80%+ in 2Q20, better than CMBIS est. of 40%/ 60%. Other brands also did well, with growth at 25-30%, where Descente (60%) and Kolon (+ve) outperformed.
- But inventory level is still relatively high, esp. for FILA. By 2H20E, inventory level for Anta was at 5-6 months (vs 5.5-6 months in 1Q20 and similar to target), but that for FILA was still high at 8 months (vs 8.5 months in 1Q20 and worse than our expectation of 6-7 months).
- Retail discounts remained high and may last into 2H20E. Retail discounts for Anta improved slightly to 30% off in 2Q20 (vs 32% off in 1Q20 and 4ppt higher than 2Q19) while that for FILA stayed flattish at 28% off in 2Q20 (same as 1Q20 and 2-3ppt higher than 2Q19). Due to higher inventory level for FILA and perhaps the entire industry, we think 3Q20E is likely to remain promotional.
- A more prudent guidance for 2H20E. Retail sales growth guidance for Anta/ FILA in 2H20E was also revised from double digit/ 30%+ to 5%/ 20%+. Management explained that was mostly based on a lower ASP assumption, driven by greater retail discounts level with volume unchanged.
- Maintain BUY and fine-tuned TP to HK$ 92.78. We cut our FY20E/ 21E/ 22E diluted EPS estimates by 4%/ 3%/ 3%, to factor in the slightly slower Anta/ FILA sales growth in 2H20E. We maintain BUY and cut TP to HK$ 92.78, based on 30x FY21E P/E (changed). The valuation is still undemanding at 24x FY21E P/E, given a 21% NP CAGR during FY19-22E.
