Deutsche Bank Research Rating Company Date Buy Anta 14 June 2018 Company Update Asia China Reuters Bloomberg Exchange Ticker Price at 14 Jun 2018 (HKD) 45.15 Consumer 2020.HK 2020 HK HSI 2020 Price target - 12mth (HKD) 47.00 Textiles & Apparel ADR Ticker ISIN 52-week range (HKD) 49.00 - 22.80 ANPDY US03662P1075 HANG SENG INDEX 30,725 O ur takes on the short-seller report John Chou Anne Ling Research Analyst Research Analyst (+852) 2203 6196 (+852 ) 2203 6177 Concerns on (1) Profitability, (2) Cash, and (3) Fila by a short-seller [email protected] [email protected] On June 12 2018, a short-seller published a report questioning Anta’s accounting quality. It raised concerns on (1) Anta’s higher profitability vs. peers, (2) large amount of cash in hand, and (3) Fila Korea’s slower royalty Price/price relative revenue growth vs. Fila China (which is operated by Anta) retail sales growth. 50 We use this opportunity to provide our takes on these recurring questions and 40 recommend investors to focus on Anta’s retail sales growth. 30 Short-sellers’ questions and our takes 20  Why Anta is so profitable: (1) Nike China and Adidas China are actually more profitable than Anta. We believe it is Nike and Adidas’ global 10 6/16 12/16 6/17 12/17 management team (demand planning, global sourcing coordination…etc.) Anta that led to higher expenses such that their consolidated EBIT margins are HANG SENG INDEX (Rebased) lower than Anta’s (Figure 1). (2) Anta has in-house production (Figure 2). Performance (%) 1m 3m 12m (3) Li Ning is less profitable vs. Anta (in terms of EBIT margin) mainly due Absolute 4.9 17.1 114.4 to revenue scale and operating leverage (Figure 3). HANG SENG INDEX -1.3 -2.8 18.8  Is Anta’s cash real? (1) Anta earned a 2% interest income (cash inflow) on Source: Deutsche Bank its cash and deposits in 2017 (a mix of time deposit and cash deposits); we view the rate as fair. (2) Anta’s balance sheets suggest its cash management is not aggressive with most being bank deposits. (3) We Valuation and risks continue to believe Anta is holding excessive cash for M&As. We value Anta using DCF methodology as we expect investors to focus on  Fila China and Fila Korea: it is Fila Korea’s profit sharing that matters, not their long-term growth profile. Cost of the wholesale royalty revenue. We note that Fila Korea has two earnings equity of 10.6%: risk-free rate = 3.9% streams from Fila China (1) 15% profit sharing from Full Prospect (the (Deutsche Bank assumption), equity holding entity that holds Fila China; Figure 4), (2) 4.5% royalty on Fila risk premium= 5.6% (Deutsche Bank China’s wholesale revenue (which is insignificant as there are only c.20 assumption), beta of 1.3. We assume a wholesale stores out of 1,086 in China). Fila Korea’s robust earnings perpetual growth rate of 2%, in line growth has been driven by the 15% profit sharing instead of the royalty with Hong Kong & China consumer revenue, based on Fila Korea’s financial reports. discretionary space of 1-2%. Downside risks to our view: (1) intense What will worry us? Decelerating retail sales growth competition and any increase in We continue to recommend that investors focus on Anta’s off-line retail sales industry discounting; (2) weaker-than- YoY. Our channel checks covering April-1 to May-10 suggest decelerating expected macro conditions that would growth vs. that in 1Q18. We will have more updates. dampen demand; (3) higher-than- Forecasts And Ratios expected channel inventory; and (4) Fila Year End Dec 31 2016A 2017A 2018E 2019E 2020E failing to drive sustainable growth. Sales (CNYm) 13,345.8 16,692.5 21,129.2 25,671.3 30,281.3 DB EPS FD(CNY) 0.95 1.17 1.42 1.77 2.11 DB EPS growth (%) 16.5 23.6 21.1 24.5 19.2 PER (x) 17.4 20.3 26.0 20.9 17.5 Yield (net) (%) 4.2 3.4 2.7 3.4 4.0 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses th_e _ye_a_r e_n_d _clo_s_e _______________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Distributed on: 14/06/2018 09:45:46 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa 14 June 2018 Textiles & Apparel Anta Model updated:05 April 2018 Fiscal year end 31-Dec 2015 2016 2017 2018E 2019E 2020E Running the numbers Financial Summary Asia DB EPS (CNY) 0.81 0.95 1.17 1.42 1.77 2.11 Reported EPS (CNY) 0.81 0.95 1.17 1.42 1.77 2.11 China DPS (CNY) 0.57 0.70 0.81 0.99 1.24 1.47 Textiles & Apparel BVPS (CNY) 3.4 3.8 5.1 5.5 6.1 6.7 Weighted average shares (m) 2,499 2,508 2,634 2,678 2,678 2,678 Anta Average market cap (CNYm) 36,961 41,415 62,671 92,159 92,159 92,159 Enterprise value (CNYm) 31,358 34,835 53,265 81,996 80,823 79,207 Reuters: 2020.HK Bloomberg: 2020 HK Valuation Metrics Buy P/E (DB) (x) 18.2 17.4 20.3 26.0 20.9 17.5 P/E (Reported) (x) 18.2 17.4 20.3 26.0 20.9 17.5 Price (14 Jun 18) HKD 45.15 P/BV (x) 5.03 5.19 6.01 6.65 6.07 5.49 Target Price HKD 47.00 FCF Yield (%) 4.8 6.2 3.2 3.2 4.5 5.6 Dividend Yield (%) 3.8 4.2 3.4 2.7 3.4 4.0 52 Week range HKD 22.80 - 49.00 EV/Sales (x) 2.8 2.6 3.2 3.9 3.1 2.6 Market Cap (m) HKDm 112,926 EV/EBITDA (x) 10.9 10.2 12.6 15.1 12.0 9.9 EV/EBIT (x) 11.6 10.9 13.4 16.1 12.7 10.5 USDm 14,389 Income Statement (CNYm) Company Profile Sales revenue 11,126 13,346 16,692 21,129 25,671 30,281 Anta Sports Products Limited designs, develops, Gross profit 5,185 6,459 8,241 10,783 13,416 16,074 manufactures, and markets sportswear, including sports EBITDA 2,885 3,429 4,239 5,434 6,729 7,969 footwear and apparel for professionals and the general Depreciation 188 226 250 344 382 402 public. Amortisation 0 0 0 0 0 0 EBIT 2,697 3,203 3,989 5,090 6,347 7,566 Net interest income(expense) 133 108 322 201 218 243 Associates/affiliates 0 0 0 0 0 0 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 0 0 0 0 0 0 Profit before tax 2,829 3,311 4,311 5,291 6,565 7,810 Price Performance Income tax expense 741 866 1,152 1,413 1,753 2,085 Minorities 48 59 71 78 82 86 50 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 2,041 2,386 3,088 3,800 4,730 5,638 40 DB adjustments (including dilution) 0 0 0 0 0 0 30 DB Net profit 2,041 2,386 3,088 3,800 4,730 5,638 20 Cash Flow (CNYm) 10 Jun 16Sep 16Dec 16Mar 17Jun 17Sep 17Dec 17Mar 18 Cash flow from operations 2,228 2,994 2,856 3,996 5,189 6,105 Net Capex -463 -421 -861 -845 -770 -606 Anta HANG SENG INDEX (Rebased) Free cash flow 1,766 2,573 1,995 3,151 4,419 5,499 Equity raised/(bought back) 0 0 2,932 0 0 0 Margin Trends Dividends paid -1,424 -1,746 -2,178 -2,394 -3,246 -3,883 Net inc/(dec) in borrowings -18 -392 -790 0 0 0 26.4 Other investing/financing cash flows -170 78 78 0 0 0 26.0 25.6 Net cash flow 154 512 2,037 757 1,173 1,616 25.2 Change in working capital -106 291 -640 -1,285 -345 -354 24.8 24.4 Balance Sheet (CNYm) 24.0 Cash and other liquid assets 6,933 7,517 9,554 10,311 11,484 13,100 23.6 Tangible fixed assets 2,214 2,595 3,302 3,804 4,192 4,395 15 16 17 18E 19E 20E Goodwill/intangible assets 0 0 0 0 0 0 EBITDA Margin EBIT Margin Associates/investments 0 0 0 0 0 0 Other assets 3,355 4,111 6,218 7,376 8,553 9,751 Growth & Profitability Total assets 12,502 14,224 19,074 21,490 24,228 27,246 Interest bearing debt 1,330 938 148 148 148 148 30 35 Other liabilities 2,358 3,390 4,566 5,764 7,001 8,241 25 30 Total liabilities 3,688 4,327 4,714 5,912 7,149 8,389 20 25 Shareholders' equity 8,580 9,549 13,706 14,846 16,266 17,957 20 15 15 Minorities 235 348 654 732 814 901 10 10 Total shareholders' equity 8,814 9,896 14,361 15,579 17,080 18,858 5 5 Net debt -5,603 -6,579 -9,406 -10,163 -11,336 -12,952 0 0 15 16 17 18E 19E 20E Key Company Metrics Sales growth (%) 24.7 20.0 25.1 26.6 21.5 18.0 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 19.5 16.5 23.6 21.1 24.5 19.2 Solvency EBITDA Margin (%) 25.9 25.7 25.4 25.7 26.2 26.3 EBIT Margin (%) 24.2 24.0 23.9 24.1 24.7 25.0 -60 Payout ratio (%) 69.7 73.4 69.4 70.0 70.0 70.0 -62 ROE (%) 24.9 26.3 26.6 26.6 30.4 33.0 Capex/sales (%) 4.2 3.2 5.2 4.0 3.0 2.0 -64 Capex/depreciation (x) 2.5 1.9 3.4 2.5 2.0 1.5 -66 Net debt/equity (%) -63.6 -66.5 -65.5 -65.2 -66.4 -68.7 -68 Net interest cover (x) nm nm nm nm nm nm -70 Source: Company data, Deutsche Bank estimates 15 16 17 18E 19E 20E Net debt/equity (LHS) Net interest cover (RHS) John Chou +852 2203 6196 [email protected] P age 2 Deutsche Bank AG/Hong Kong 14 June 2018 Textiles & Apparel Anta Figure 1: (A) indeed Anta’s consolidated operating margin is higher, but (B) such is driven by lower other expenses, (C) Nike and Adidas recognize higher headquarter expenses, while Xtep had extraordinary provisions in 2016 and 2017,;stripping such, their expenses-to-revenue ratios are actually at par vs. Anta’s. (D) Nike and Adidas’ China EBIT margin much higher than that of Anta and Xtep’s. Analysis 1. Common-size analysis Anta Xtep Nike Adidas 2015 2016 2017 2015 2016 2017 FY15 FY16 FY17 2015 2016 2017 Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% COGS -53% -52% -51% -58% -57% -56% -54% -54% -55% -52% -51% -50% Gross Profit 47% 48% 49% 42% 43% 44% 46% 46% 45% 48% 49% 50% Promotion (demand creation) -12% -11% -11% -15% -12% -13% -10% -10% -10% -14% -13% n.a. (B) Other overhead expenses -11% -13% -16% -12% -21% -23% -22% -22% -21% -29% -30% n.a. Total OPEX -23% -25% -27% -27% -32% -36% -32% -32% -31% -43% -43% -42% D&A -2% -2% -1% -1% -1% -1% (A) Operating Income 22% 22% 21% 15% 10% 7% 14% 14% 14% 5% 6% 9% Other income 2% 2% 3% 3% 2% 3% 0% 0% 1% 1% 2% 1% EBIT 24% 24% 24% 17% 12% 10% 14% 14% 14% 6% 8% 10% Net interest income (expense) 1% 1% 2% -1% -1% -1% 0% 0% 0% 0% 0% 0% Pre-tax 25% 25% 26% 17% 11% 9% 14% 14% 14% 6% 7% 10% Discontinued 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% -1% Income tax -7% -6% -7% -5% -5% -4% -3% -3% -2% -2% -2% -3% Minority 0% 0% 0% 0% -1% -1% 0% 0% 0% 0% 0% 0% Net Income 18% 18% 18% 12% 4% 4% 11% 12% 12% 4% 5% 5% Anta Xtep Nike Adidas 2015 2016 2017 2015 2016 2017 FY15 FY16 FY17 2015 2016 2017 2. What is in overhead? Other overhead + D&A as a % of sales -13% -15% -18% -13% -22% -24% -22% -22% -21% -29% -30% n.a. (C) strip-off: global brand & headquarter expenses -9% -2% -11% -12% -10% -11% -11% -12% Adjusted Overhead to Sales -13% -15% -18% -13% -12% -22% -11% -11% -11% -18% -19% n.a. 3. China (D) China EBIT margin 24% 24% 24% 17% 12% 10% 32% 36% 36% 35% 35% 35% Financial Anta Xtep Nike Adidias 2015 2016 2017 2015 2016 2017 FY15 FY16 FY17 2015 2016 2017 Revenue 1 1,126 1 3,346 1 6,692 5,295 5,397 5,113 3 0,601 3 2,376 3 4,350 1 6,915 1 9,290 2 1,218 COGS (5,941) (6,887) (8,451) (3,058) (3,065) (2,869) ( 16,534) ( 17,405) ( 19,038) (8,747) (9,911) ( 10,514) Gross Profit 5,185 6,459 8,241 2,237 2,331 2,244 1 4,067 1 4,971 1 5,312 8,168 9,379 1 0,704 Promotion (demand creation) (1,279) (1,521) (1,769) (781) (637) (658) (3,213) (3,278) (3,341) (2,348) (2,521) na Other overhead expenses (1,248) (1,768) (2,691) (623) (1,115) (1,186) (6,679) (7,191) (7,222) (4,942) (5,742) na Total OPEX (2,528) (3,289) (4,460) (1,403) (1,753) (1,844) (9,892) ( 10,469) ( 10,563) (7,290) (8,263) (8,883) D&A (188) (226) (250) (57) (53) (58) Operating Income 2,470 2,944 3,531 776 526 342 4,175 4,502 4,749 878 1,116 1,821 Other income 227 260 458 145 99 158 58 140 196 182 374 248 EBIT 2,697 3,203 3,989 921 624 500 4,233 4,642 4,945 1,060 1,490 2,069 Supplement Data Note: D&A- Nike & Adidas (649) (662) (716) (393) (396) (443) Nike_EBIT breakdown North America 3,645 3,763 3,875 Western Europe 1,275 1,434 1,203 Central & Eastern Europe 249 289 244 Greater China 993 1,372 1,507 Japan 100 174 224 Emerging Markets 818 892 818 Global Brand Divisions (2,266) (2,596) (2,677) Total NIKE Brand EBIT 4,814 5,328 5,194 Other Businesses (Continuing: Converse, Hurley, NIKE Golf) 517 487 477 Other Businesses (Discontinued: Cole Haan and Umbro) Corporate (1,097) (1,173) (724) Total NIKE Inc. EBIT (GAAP) (NC to other firms) 4,234 4,642 4,947 Adidas_EBIT breakdown Western Europe 909 951 1,178 North America 69 213 468 Greater China 866 1,059 1,342 Russia/CIS 85 106 136 Latin America 235 227 267 Japan 147 207 266 MEAA 664 721 847 Other Businesses (89) (14) 68 HQ/Consolidation (1,827) (1,980) (2,503) Total 1,059 1,490 2,069 Source: Deutsche Bank, company data Deutsche Bank AG/Hong Kong Page 3 14 June 2018 Textiles & Apparel Anta Figure 2: Value breakdown of a pair of regular running shoes: if brands decide to produce the products 100% in-house, the brands can increase profit by c.40% (assuming manufacturers make only 7% operating margin, which is conservative) Base case Factory FoB Costs 25.0 ODM labor costs 7.0 ODM material costs 12.2 ODM expenses 3.8 ODM tax 0.3 ODM profit 1.7 Sea Freight & Insurance 1.0 Duty (assume 20% of FoB) 5.0 Land Cost 31.0 Brand expenses 15.0 Brand tax 2.0 Brand profit 4.5 Brand mark-up 21.5 Wholesale price 52.5 Retail discount 22.0 Retail expenses 17.0 Retail tax 3.0 Retailer profit 5.5 Retailer mark-up & retail discount 47.5 Tag price 1 00.0 Actual retail price 78.0 Profit margins ODM 6.6% Brand 8.6% Retailer 7.1% Source: Deutsche Bank estimates Page 4 Deutsche Bank AG/Hong Kong 14 June 2018 Textiles & Apparel Anta Figure 3: Anta vs. Li Ning: it’s all about operating leverage Source: Deutsche Bank estimates, company data, for full analysis please refer to “FY17 preview: Best shape in five years to trigger laggard catch-ups” dated 2018 Feb 23 Deutsche Bank AG/Hong Kong Page 5 14 June 2018 Textiles & Apparel Anta Figure 4: Fila China and Fila Korea’s profit sharing via “Full Prospect” (LHS: a snapshot from Anta’s 2017 annual report: Anta holds 85% in Full Prospect that holds Fila China. RHS: a snapshot from Fila Korea’s 2017 investor presentation, it holds the rest 15% in Full Prospect) Source: Deutsche Bank, company data Link to Fila Korea’s investor presentation: http://info.fila.co.kr/ir/ENG/DATA/FILA%20Korea%202017%204Q%20IR%20material.pdf Page 6 Deutsche Bank AG/Hong Kong 14 June 2018 Textiles & Apparel Anta Appendix 1 Important Disclosures *Other information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Anta 2020.HK 45.15 (HKD) 14 Jun 18 14,15 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch. Aside from within this report, important conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?topicId=RB0002 under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information b efore investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/Company?ric=2020.HK Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. John Chou Deutsche Bank AG/Hong Kong Page 7 14 June 2018 Textiles & Apparel Anta Historical recommendations and target price: Anta (2020.HK) (as of 6/13/2018) 60.00 Previous Recommendations Strong Buy Buy 50.00 Market Perform Underperform 1101 12 Not Rated 40.00 9 Suspended Rating e 8 c irP 7 Current Recommendations ytiru30.00 45 6 Buy ce 2 3 Hold S 1 Sell 20.00 Not Rated Suspended Rating 10.00 *New Recommendation Structure as of September 9,2002 **Analyst is no longer at Deutsche 0.00 Bank Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Date 1. 28/07/2016: Buy, Target Price Change HKD20.50 John Chou 7. 12/09/2017: Buy, Target Price Change HKD35.00 John Chou 2. 29/08/2016: Buy, Target Price Change HKD23.00 John Chou 8. 10/10/2017: Buy, Target Price Change HKD37.00 John Chou 3. 26/09/2016: Buy, Target Price Change HKD24.00 John Chou 9. 04/01/2018: Buy, Target Price Change HKD40.00 John Chou 4. 20/02/2017: Downgrade to Hold, Target Price Change HKD26.50 10. 22/02/2018: Buy, Target Price Change HKD43.50 John Chou John Chou 5. 22/02/2017: Hold, Target Price Change HKD25.00 John Chou 11. 01/03/2018: Buy, Target Price Change HKD44.80 John Chou 6. 05/07/2017: Upgrade to Buy, Target Price Change HKD29.50 John 12. 05/04/2018: Buy, Target Price Change HKD47.00 John Chou C hou Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 600 share-holder return (TSR = percentage change in 58 % 500 share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that 400 34 % investors buy the stock. 300 200 Sell: Based on a current 12-month view of total share- 19 % 9 % 100 13 % 12 % holder return, we recommend that investors sell the stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. 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