Maintain BUY and raised TP to HK$ 101.84, based on 32x FY21E P/E (up from 30x given a promising outlook). We are highly confident for a post pandemic turnaround following a an impressive GP and OP margin 1H20 and a more encouraging sales and inventory guidance in 2H20E. Investors might be skeptical, but we believe the fact that Anta is ready to take on the more challenging direct retail business is a midterm positive sign. Therefore we believe current valuation of 27x FY21E P/E is still attractive, vs Li Ning/ Nike/ Adidas’s 35x/ 34x/ 29x.
- Solid GP margin and operating income in 1H20. Even though the 27% net profit drop was in line with profit warning, Anta group (mainly Anta, FILA and Descente) delivered a solid beat on GP margin (up 0.7ppt YoY to 56.8%, beat CMBI est. by 5.8ppt) and operating profit (fell only by 15% YoY, beat CMBI est. by 20%) plus slightly higher-than-expected losses from Amer.
- Retail sales improved in Jul- Aug 2020 and guidance (on both retail sales and inventory) turned more positive. Mgmt. mentioned retail sales growth in Jul-Aug 2020 is slightly better than 2Q20 and is confident on achieving 20%+/ 5% growth for FILA/ Anta in 2H20E. Provided no virus outbreak again, a faster growth in FY21E is highly likely. Moreover, since the primary KPI is now “healthiness” of the brands, mgmt. is now targeting its whole channel inventory to reach a lower than FY19’s level by FY20E.
- Launched the Direct to Customer (“DTC”) transformation. As part of the plan to grow its DTC business to ~70% of group sales by 2025, the Group is now restructuring the ownership of 3,500 Anta branded offline stores, located in 11 regions in China (Shanghai, Guangdong, Zhejiang, Chongqing, etc). ~2,100 (60% of those) distributor stores will be sold to the Group for a consideration of RMB 2.0bn, while ~1,400 franchised stores will remain largely unchanged. As a result, ~RMB 1.0bn of sales and ~RMB 200mn operating profit will be cancelled in FY20E, but would become accretive for FY21E given more direct sales and profit. Also, thanks to this flattening, Anta’s wholesale discount can be reduced and hence benefiting its GP margin in FY21E-22E.
- Amer performance in 1H20 was also resilient. Despite a slightly greater JV losses vs 1H19, Amer’s sales in 1H20 only fell by ~20%, better than mgmt.’s expectation of ~30%, while the cost control was also effective. Moreover, mgmt. is optimistic on the turnaround given an earlier-than-expected re-opening of offline stores and hence forecasting at least a breakeven for 2H20E.
Maintain BUY and raised TP to HK$ 101.84. We revised up our FY20E/ 21E/ 22E diluted EPS estimates by 3%/ 3%/ 4%, to factor in: 1) DTC transformation and 2) robust profitability. We maintain BUY and lifted TP to HK$ 101.84, based on 32x FY21E P/E (up from 30x). The valuation is justifiable at 27x FY21E P/E, given a 22% NP CAGR during FY19-22E.
