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Yum Cha 飲茶 July 9, 2018

INDICES Closing DoD%

Hang Seng Index 28315.6 0.5

HSCEI 10622.6 0.1

Shanghai COMP 2747.2 0.5

Shenzhen COMP 1536.0 0.5

Gold 1255.2 (0.2)

BDIY 1622.0 0.6

Crude Oil, WTI(US$/BBL) 73.8 1.2

Crude Oil, BRENT(US$/BBL) 77.1 (0.4)

HIBOR, 3-M 2.0 (4.7)

SHIBOR, 3-M 3.7 (2.0)

RMB/USD 6.6 0.1

RESEARCH NOTES

DATA RELEASES DUE THIS WEEK

Jul 9 PPI YoY

Jul 9 CPI YoY

Jul 9-15 New Yuan Loans CNY

Jul 12-13 Money Supply M2 YoY

Jul 12-13 Trade Balance CNY

Jul 12-13 Exports YoY

Jul 12-13 Imports YoY

Jul 15 GDP YOY

Jul 15 Retail Sales YoY

Jul 15 Industrial Production YoY

Jul 15 Fixed Assets Ex Rural YTD

Source: Bloomberg

CHINA SPORTING GOODS SECTOR - The sporting goods industry entered a downturn in

2011 and bottomed out in 2014. We expect the current recovery cycle will last for at least few

years. According to Euromonitor’s forecast, the China sportswear market is expected to achieve

a CAGR of 8.7% between 2017 to 2021E. We believe the consumption level in China could

catch up with developed countries because (1) per capita income in China is still growing rapidly

from a low base; and (2) increasing health consciousness among Chinese residents. China’s per

capita consumption on sportswear was only equivalent to 6.25% of the US in 2016, showing the

growth phase of the industry is far from over. Although international brands continue to gain

market share, we see top local brands could still fight back for several reasons: (1) brands’ focus

on mass market; (2) huge size of mass market; (3) selective positioning on high growth sports;

(4) M&A as an additional growth driver and (5) improving product designs and promotion. Mean-

while, as a domestic consumption play, the sector should be largely immune from the potential

risk of the trade war and the recent market correction offers a good entry point. Our preference

is Li Ning > Anta = Xtep in terms of upside potential from our TP.

LI NING [2331.HK; HK$8.45; INITIATE WITH BUY] - We believe Li Ning Company (LNC) will

be a recovery play in the coming years. This will allow investors to tap into the growing market

for Chinese sportswear, as well as the resiliency of LNC’s margin recovery. After the exit of TPG

in 2017, we expect 2018E to be the first year for LNC to experience a full recovery. LNC’s sales

momentum is showing good progress, as the Company has dedicated its efforts to improving

product design, channel management and marketing. At the same time, LNC has been cautious

about spending and inventory management, resulting in a number of healthy indicators. Initiate

with BUY. Our target price of HK$11.00 is based on 23.0x 2019E PER. Our EPS estimate im-

plies that LNC’s EPS will grow at a CAGR of 32.8% in FY2017-FY2020E, so a 23.0x target mul-

tiple still implies a PEG <0.8x. We also expect LNC to resume dividend payments in 2018E after

years of internal reforms, which will be another milestone in the Company’s solid recovery.

ANTA [2020.HK; HK$39.85; INITIATE WITH BUY] - Anta Sports has been the no.1 domestic

sportswear company in China. The driver comes from Anta Sports is the no.1 domestic sports-

wear company in China, driven by its core ANTA brand and acquired FILA brand. We expect the

ANTA brand will continue to capture growing demand in the sportswear market, while the high-

end FILA sports fashion brand should benefit from the increasing wealth in Tier 1 & 2 cities. In

general, we expect Anta’s unrivalled scale to create a virtuous cycle, offering a multi-year growth

story. In 2018E/2019E, we expect Anta Sports to maintain a ~20% YoY net profit growth rate.

Initiate with BUY. Our target price of HK$49.16 is based on 24.0x 2019E PER. We believe the

Company will continue to trade at a premium because of its industry-leading status, as well as

its consistent track record of paying steady dividends. We believe the recent correction caused

by some accusations offer a good entry point.

XTEP [1368.HK; HK$5.15; INITIATE WITH BUY] - We believe that the fruits of Xtep’s business

reforms will be more visible this year and that the Company will benefit from the growing market

in China for sporting goods. Xtep implemented reforms that transformed it into a professional

running products brand. The Company radically reformed its products, marketing strategies and

channels, so it is likely to capture the fast-growing demand related to the sport of running in

China. Because of the transformation, its financials have suffered, and 2017 was hit hardest

because of one-off items. However, we believe the worst will be over in 2018E. With positive

sales momentum and improving profitability per store, we expect Xtep’s EPS to achieve a CAGR

of 24.4% in FY2017-FY2020E. This is a significant improvement over previous years. We be-

lieve a re-rating is justified by the earnings recovery. Initiate with BUY. Our target price of

HK$6.30 is based on 16x 2019E PER.

(Please refer to the full version released separately today.)

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RESEARCH NOTES

CHINA CEMENT WEEKLY - The average cement price (nationwide) dropped slightly by 0.34% to RMB413/tonne from the

price in the previous week. No major region recorded an increase in average cement prices. There was a decline in cement

prices of RMB20-30/tonne in Zhejiang, Jiangsu, Fujian and Guangxi. Cement demand weakened due to the rainy weather

in July. The inventory level increased moderately and shipment volume fell to 70-80% of the normal level. Some regions

recorded a decline in cement prices. Overall, the seasonal weakness in cement prices in July was well-expected. However,

a sharp decline seems unlikely, given the relatively healthy inventory level. The average inventory level (nationwide) rose

from 56.8% to 58.38% WoW.

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China Consumer Sector

July 9, 2018

Tony Li, CFA—Analyst

(852) 3698 6392

[email protected]

Wong Chi Man, CFA—Head of Research

(852) 3698 6317

[email protected]

China Sporting Goods – A Multi-year Growth Story

Initiate BUY on Li Ning, Anta and Xtep

Valuation of the sector

Sporting Goods Market in China: Enormous Room to Catch Up. The sporting goods industry

entered a downturn in 2011 and bottomed out in 2014. We expect the current recovery cycle to

last for at least a few years. According to Euromonitor’s forecast, the China sportswear market is

expected to achieve a CAGR of 8.7% from 2017 to 2021E. We believe the consumption level in

China will catch up with developed countries because (1) per-capita income in China is still

growing rapidly from a low base; and (2) there is increasing health consciousness among

Chinese residents. China’s per-capita consumption on sportswear was equivalent to only 6.25%

of that in the US in 2016, showing the growth phase of the industry is far from over.

Picking the Right Sports Leads to Better Growth. According to a JD, over 63% of shoppers

participate in running, making it the most popular sport in China. We believe it is important to

differentiate what the popular products will be. We expect some companies to outperform in

terms of earnings growth if they can capture opportunities in certain sports. Meanwhile new

M&As are betting on an increasing participation rate in certain sports, such as skiing, which is

promoted by Chinese government due to the 2022 Winter Olympics, which will be hosted by

Beijing.

International Brands Crowding Out Smaller Brands. In 2017, foreign brands continued to

enjoy market share expansion, with Nike and Adidas continuing to dominate the market. Anta is

an exceptional company, which could gain significant market share, but this has been driven by

FILA, a foreign brand it acquired in 2009. We expect the market to become more concentrated

as smaller local brands get forced out of the market.

But Major Domestic Brands Can Still Fight Back. Local brands are losing market share in

general, but we believe top local brands can still fight back for several reasons: (1) brand focus

on the mass market; (2) the huge size of the mass market; (3) selective positioning in high

growth sports; (4) M&A as an additional growth driver; and (5) improving product design and

promotion. Meanwhile, as a domestic consumption play, the sector should be largely immune

from the potential risk of a trade war, and the recent market correction offers a good entry point.

Investment Recommendation We believe selective domestic companies listed in Hong Kong will

be outperformers in the sector. There are two themes for the sector at this moment:

(1) BUY Anta [2020.HK] for its consistent track record on expansion and shareholders’ return;

Our target price of HK$49.16 is based on 24.0x 2019E PER.

(2) BUY Li Ning [2331.HK] and Xtep [1368.HK] for turning around stories likely to present

strong earnings recovery. Our TP for Li Ning & Xtep is HK$11.00 & HK$6.30 respectively,

based on their 2019E PER (23x for Li Ning ; 16x for Xtep)

Our preference is Li Ning > Anta = Xtep in terms of upside potential from our TP.

China Sporting Goods Sector

Sources: Bloomberg, CGIS Research estimates

Company TickerLast Price

(HK$)

TP

(HK$)Rating

Anta Sports 2020 HK 39.85 49.16 BUY

Li Ning 2331 HK 8.45 11.00 BUY

Xtep 1368 HK 5.15 6.30 BUY

Company Ticker Rating Price 2017-2019E

HK$ 2017 2018E 2019E 2018E 2019E CAGR (%) 2018E 2019E

Anta Sports 2020 HK BUY 39.85 28.9 23.4 19.4 19.48 20.27 19.88 5.82 5.26

Li Ning Company 2331 HK BUY 8.45 33.4 23.4 17.7 41.04 32.42 36.67 2.94 2.63

Xtep International 1368 HK BUY 5.15 23.4 16.0 13.1 39.31 21.98 30.36 1.73 1.62

EPS Growth (%)PER(x) PBR(x)

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Comparison of Major Sportswear Companies Listed in Hong Kong

Sources: Company, Capital IQ, CGIS Research (Note: Capital IQ consensus figures are used for non-rated companies)

Peers Comparison

Sources: Bloomberg, CGIS Reseach for covered companies (Note: we exclude Under Armour for comparison because of its extreme value)

Company Ticker Trading Price Mkt Cap

Currency US$m 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E

Our Coverage

Anta Sports Products Ltd 2020 HK HKD 39.85 13,632 28.85 23.37 19.43 6.61 5.82 5.26 26.56 26.96 29.96 2.06 3.00 3.61

Li Ning Co Ltd 2331 HK HKD 8.45 2,353 33.36 23.39 17.67 3.05 2.94 2.63 11.36 14.15 16.58 - 1.28 1.70

Xtep International Holdings 1368 HK HKD 5.15 1,471 23.45 15.95 13.08 1.86 1.73 1.62 8.02 11.00 12.95 2.52 3.76 4.59

Simple Average 28.55 20.91 16.73 3.84 3.50 3.17 15.31 17.37 19.83 2.29 2.68 3.30

Peers Listed in Hong Kong

Pou Sheng Intl Holdings Ltd 3813 HK HKD 1.52 1,034 15.40 15.32 11.70 1.07 1.00 0.93 6.31 6.55 8.19 1.32 1.71 1.94

China Dongxiang Group Co 3818 HK HKD 1.33 997 7.75 8.16 7.87 0.67 0.65 0.63 8.36 8.10 8.27 3.90 7.73 7.91

Bestw ay Global Holding Inc 3358 HK HKD 4.43 597 9.83 9.90 7.73 1.49 1.25 1.10 15.68 13.53 15.43 2.40 3.19 3.90

361 Degrees International 1361 HK HKD 2.16 569 8.27 7.40 6.85 0.66 0.64 0.61 8.30 8.59 8.97 5.05 5.42 5.74

Simple Average 10.31 10.19 8.54 0.97 0.89 0.82 9.66 9.19 10.22 3.17 4.51 4.87

International Peers

Nike Inc -Cl B NKE US USD 76.48 123,267 32.03 28.80 24.54 12.56 12.87 10.76 17.40 41.80 50.11 1.05 1.11 1.23

Adidas Ag ADS GY EUR 181.50 44,603 25.64 22.24 19.01 5.43 5.22 4.66 17.47 23.50 25.01 1.43 1.71 2.03

Lululemon Athletica Inc LULU US USD 128.54 17,442 46.05 39.62 34.48 10.66 9.80 7.84 20.28 27.56 23.76 - 0.00 0.00

Under Armour Inc-Class A UAA US USD 22.26 9,562 117.12 126.48 75.20 4.90 4.69 4.43 -3.78 4.44 6.46 - 0.00 0.00

Puma Se PUM GY EUR 484.00 8,574 47.09 36.81 28.39 4.30 4.44 3.81 8.92 12.22 14.68 - 0.62 0.82

Columbia Sportsw ear Co COLM US USD 91.22 6,386 28.00 27.24 24.30 3.86 3.55 3.19 7.08 13.61 13.70 0.96 0.96 0.99

Skechers Usa Inc-Cl A SKX US USD 31.00 4,964 16.16 14.64 12.38 2.49 2.24 1.93 11.10 18.00 18.07 - 0.00 0.00

Asics Corp 7936 JP JPY 1813.00 3,280 38.52 25.30 22.58 1.83 1.59 1.53 4.65 6.82 7.30 1.32 1.32 1.58

Mizuno Corp 8022 JP JPY 3805.00 915 19.71 17.52 15.77 1.05 1.10 1.08 5.42 6.13 6.94 1.31 1.31 1.31

Simple Average 41.15 37.63 28.52 5.23 5.06 4.36 9.84 17.12 18.45 1.22 0.78 0.89

Average - Excluding Under Armour 31.65 26.52 22.68 5.27 5.10 4.35 11.54 18.71 19.95 1.22 0.88 1.00

Div YIeld(%)PER(x) PBR(x) ROE(%)

Anta Sports

[2020.HK]

Li Ning

[2331.HK]

Xtep

[1368.HK]

361 Degrees

[1361.HK]

China Dongxiang

[3818.HK]

Major BrandsANTA

FILALi Ning Xtep 361 Degrees

Kappa

Phenix

Market PositioningANTA: Mass Market

FILA: Mid-high EndMass Market Mass Market Mass Market Mid-high End

Business Focus

ANTA: Basketball,

running, cross-training

FILA: Sports-fashion

Basketball, running,

cross-training, sports-

fashion

Running, cross-training,

sports-fashion

Running, cross-training,

sports-fashion

Kappa: Sports-fashion

Group Level:

Sportswear +

Investment

Business ModelANTA: Wholesale

FILA: RetailWholesale + Retail Wholesale Wholesale Wholesale + Retail

Revenue in 2017 (RMB m) 16,692 8,874 5,113 5,158 1,353

Net Profit in 2017 (RMB m) 3,088 515 408 457 350

Gross Margin (2017, %) 49.37 47.06 43.89 41.80 55.70

Net Margin (2017) 18.50 5.81 7.98 8.85 25.88

EPS CAGR (%, 2017A-2019E) 19.88 36.67 30.36 12.82 -3.39

Number of Stores (End-2017)ANTA: 9,467

FILA: 1,0866,262 ~6,000 7,651 Kappa: 1,487

Contribution from e-commerce (2017) 15% 19% 21% 8% 15%

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BUY

Close: HK$8.45 (July 6, 2018)

Target Price: HK$11.00 (+30.2%)

Price Performance

Market Cap US$2,354m

Shares Outstanding 2,158.3m

Auditor PwC

Free Float 82.6%

52W range HK$5.48-9.90

3M average daily T/O US$15.7m

Major Shareholding Viva China (14.93%)

Sources: Company, Bloomberg

Sources: Company, CGIS Research


Sporting Goods We believe Li Ning Company (LNC) will be a recovery play in the coming years. This will allow

investors to tap into the growing market for Chinese sportswear, as well as the resiliency of

LNC’s margin recovery. After the exit of TPG in 2017, we expect 2018E to be the first year for

LNC to experience a full recovery. LNC’s sales momentum is showing good progress, as the

Company has dedicated its efforts to improving product design, channel management and

marketing. At the same time, LNC has been cautious about spending and inventory manage-

ment, resulting in a number of healthy indicators. Initiate with BUY. Our target price of

HK$11.00 is based on 23.0x 2019E PER. Our EPS estimate implies that LNC’s EPS will grow

at a CAGR of 32.8% in FY2017-FY2020E, so a 23.0x target multiple still implies a PEG <0.8x.

We also expect LNC to resume dividend payments in 2018E after years of internal reforms,

which will be another milestone in the Company’s solid recovery.

Investment Highlights

2018E is the First Year of Full Recovery. LNC has been a turnaround story since its

eponymous founder Mr. Li Ning returned as Chairman in 2014. We expect the recovery

story to continue in the years ahead, as most of the indicators are encouraging. We be-

lieve the Company structure is now stable, providing a foundation for continued recovery.

We believe 2018 will be the first year of a full recovery for two reasons: stabilized corpo-

rate structure and normalized advertising and promotional spend (A&P).

Sales Continue to Show Resiliency. Despite facing struggles in its inventory and chan-

nels, LNC has still managed to increase overall sales since 2014. Various indicators show

that LNC’s sales have become healthier, and almost all of the legacy problems of the

Company have been dealt with (e.g. new products in the sell-through mix accounted for

78% in 2017 compared to 57% in 2013). We expect overall sales to continue to grow

moderately. Same store sales growth (SSSG) has remained in positive territory (2017:

mid single-digit growth at the group level).

Still Huge Room to Raise EBIT Margin. LNC’s efforts are reflected in various major key

performance indicators, which should help the Company return to normal margins. Going

forward, because of the improving operating performance, we expect the EBIT margin to

continue to improve. The EBIT margin in FY2018E should see a sharper improvement to

8.3%, thanks to better operating leverage. (2017: 5.0%) There is still a lot of room for

improvement compared with Anta’s 23.77%.

Initiate with BUY. Currently, we forecast that LNC’s EPS for 2018E/2019E/2020E will be

RMB0.30/0.39/0.50, suggesting 39.3%/33.7%/29.3% YoY growth. This implies earnings

growth acceleration over previous years. Our target price of HK$11.00 is based on 23.0x

2019E PER. We think 23.0x PER is reasonable when PEG is considered. Our EPS esti-

mate suggests that LNC’s EPS will grow at a CAGR of 32.8% between FY2017-

FY2020E, so a 23.0x target multiple still suggests a PEG <0.8x. We also expect LNC to

resume distributing dividends in the near term, which should be another milestone in its

business recovery.

July 09, 2018


(852) 3698 6392

[email protected]


(852) 3698 6317

[email protected]

Source: Bloomberg

Li Ning Company [2331.HK] Still on the Way to Recovery. Initiate with BUY.

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(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Key Financials (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E

Revenue 8,015 8,874 10,133 11,408 12,887

YoY Change 13.1% 10.7% 14.2% 12.6% 13.0%

Net Profit After Tax 643 515 718 960 1,242

YoY Change 4395.5% -19.9% 39.3% 33.7% 29.3%

EPS (RMB) 0.12 0.21 0.30 0.39 0.50

YoY Change -676.5% 86.2% 38.0% 32.4% 28.1%

ROE 20.2% 12.9% 14.2% 16.6% 19.0%

P/E 60.1x 32.3x 23.4x 17.7x 13.8x

Dividend Yield 0.0% 0.0% 1.3% 1.7% 2.2%

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Key financials

Sources: Company, Capital IQ, CGIS Research estimates

Income Statement (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Balance Sheet (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E

Revenue 8,015 8,874 10,133 11,408 12,887 Bank Balances and Cash 1,954 2,529 3,208 3,519 4,650

COGS (4,310) (4,697) (5,260) (5,921) (6,688) Restricted Bank Deposits 1 1 1 1 1

Gross Profit 3,705 4,176 4,873 5,488 6,200 Trade Receivables 1,370 1,138 1,275 1,402 1,542

SG&A (3,393) (3,774) (4,177) (4,530) (4,930) Inventories 965 1,103 1,257 1,638 1,632

Other Operating Items 74 44 49 55 62 Other Current Assets 360 340 493 445 615

Operating Profit 386 446 745 1,013 1,331 Total Current Assets 4,650 5,110 6,234 7,005 8,440

Finance Costs, Net (108) 18 18 27 31

Other Items 10 74 81 89 98 PP&E 828 838 952 1,022 1,040

Net Profit Before Tax 288 538 844 1,129 1,461 Goodwill & Intangible Assets 283 258 210 162 115

Income Tax (32) (22) (127) (169) (219) Other Non Current Assets 1,020 1,115 1,271 1,425 1,601

Net Profit After Tax 643 515 718 960 1,242 Total Non Current Assets 2,130 2,211 2,434 2,609 2,755

Minority Interest (After Tax) - - - - - Total Assets 6,780 7,321 8,667 9,614 11,195

EPS (RMB) 0.12 0.21 0.30 0.39 0.50

DPS (RMB) - - 0.09 0.12 0.15 Trade Payables 1,047 1,145 1,383 1,463 1,751

Short-term Borrowings 200 - - - -

EBITDA 707 926 1,255 1,584 1,967 Convertible Bonds 568 - - - -

EBIT 403 563 859 1,144 1,475 Other Current Liabilities 859 983 1,288 1,375 1,673

Total Current Liabilities 2,674 2,128 2,671 2,837 3,424

Revenue Growth 13.1% 10.7% 14.2% 12.6% 13.0% Long-term Borrowings - - - - -

Operating Profit Growth 145.6% 15.5% 67.1% 36.0% 31.4% Convertible Bonds - - - - -

Net Profit Growth 4395.5% -19.9% 39.3% 33.7% 29.3% Other Non-current Liabilities 109 120 205 240 281

EPS Growth -676.5% 86.2% 38.0% 32.4% 28.1% Total Non-current Liabilities 109 120 205 240 281

Total Liabilities 2,783 2,248 2,876 3,078 3,705

Gross Margin 46.2% 47.1% 48.1% 48.1% 48.1%

Operating Margin 4.8% 5.0% 7.3% 8.9% 10.3% Total Common Equity 3,995 5,071 5,789 6,533 7,487

Net Profit Margin 8.0% 5.8% 7.1% 8.4% 9.6% Minority Interest 3 3 3 3 3

Total Equity 3,997 5,074 5,791 6,536 7,490

Total Equity & Liabilities 6,780 7,321 8,667 9,614 11,195

Cash Flow Statement (RMB m) FY2016 FY2017 FY2018E FY2019E FY2020E Ratios FY2016 FY2017 FY2018E FY2019E FY2020E

Net Profit After Tax 643 515 718 960 1,242 ROE 20.2% 12.9% 14.2% 16.6% 19.0%

D&A Add-back 304 363 396 441 492 ROA 9.3% 7.6% 9.8% 11.1% 12.9%

Net Change in Working Capital 246 351 85 (361) 205

Other Operating Items (198) (70) (127) (136) (153) Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash

CFO 995 1,159 1,071 904 1,786 EBITDA Interest Coverage 6x 36x 87x 110x 136x

CAPEX (383) (389) (469) (469) (469) Rec. Turnover Days 64 52 43 45 38

Other Investing Items 63 47 91 106 116 Inventory Turnover Days 82 80 81 89 89

CFI (320) (343) (378) (363) (353) Payables Turnover Days 87 85 88 88 88

Other Payables Turnover Days 64 67 72 72 72

Dividends Paid - - - (215) (288)

Net Change in Debt (365) (200) - - - Current Ratio 1.74x 2.40x 2.33x 2.47x 2.46x

Issue of Shares 7 17 - - - Quick Ratio 1.38x 1.88x 1.86x 1.89x 1.99x

Other Financing Items (144) (32) (14) (14) (14) Valuation FY2016 FY2017 FY2018E FY2019E FY2020E

CFF (509) (232) (14) (230) (302) P/E 60.1x 32.3x 23.4x 17.7x 13.8x

Total Cash Flow 166 584 679 311 1,131 P/B 3.9x 3.3x 2.9x 2.6x 2.3x

Free Cash Flow 469 747 656 469 1,335 Dividend Yield 0.0% 0.0% 1.3% 1.7% 2.2%

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BUY

Close: HK$39.85 (July 6, 2018)


Price Performance



Auditor KPMG

Free Float 48.4%

52W range HK$24.72-49.30


Major Shareholding Chairman Ding Shi-

zhong (61.81%)




Sporting Goods Anta Sports has been the no.1 domestic sportswear company in China. The driver comes from Anta Sports is the no.1 domestic sportswear company in China, driven by its core ANTA brand and acquired FILA brand. We expect the ANTA brand will continue to capture growing de-mand in the sportswear market, while the high-end FILA sports fashion brand should benefit from the increasing wealth in Tier 1 & 2 cities. In general, we expect Anta’s unrivalled scale to create a virtuous cycle, offering a multi-year growth story. In 2018E/2019E, we expect Anta Sports to maintain a ~20% YoY net profit growth rate. Initiate with BUY. Our target price of HK$49.16 is based on 24.0x 2019E PER. We believe the Company will continue to trade at a premium because of its industry-leading status, as well as its consistent track record of paying steady dividends. We believe the recent correction caused by some accusations offer a good entry point.


ANTA – The King of Domestic Sportswear. We believe Anta Sports will be a multi-year

growth story. One of the early entrants in the industry, Anta Sports has been a leading domestic sportswear company for years. The core ANTA brand, which we estimate ac-counted for ~75% of revenue in 2017, has maintained steady growth amid intensified competition. We believe ANTA is likely to maintain its growth momentum. The Company is the largest domestic sportswear company in terms of revenue, and therefore, its spend-ing on advertising and marketing is also the largest. We believe this will create a virtuous cycle for ANTA, allowing it to capture more market share from smaller players.

FILA & Foreign Brands – Engine of High Growth. Another growth engine for Anta

Sports is the significant contribution from the FILA brand, which we estimate accounted for ~25% of revenue in 2017. As a high-end sports fashion brand, it complements the ANTA brand, and has helped the Company increase its share of the overall sportswear market. We expect the FILA brand to continue to be a key driver for the Company. It is likely to maintain strong growth (top line: >30% YoY) in the future. The GPM of FILA, which we estimate to be 60%-70%, is also notably higher than that of ANTA so it raises the overall GPM.

Consistent Track Record. Thanks to steady growth from the ANTA and FILA brands, as

well as well-controlled operating costs, we expect in annual net profit in 2018E and 2019E to achieve ~20% YoY growth. We acknowledge that Anta Sports has been a uniquely successful sporting goods company in China and has delivered superior returns com-pared to its peers. However, its EBIT margin is still lower than that of the China opera-tions of Nike and Adidas, so the criticism of abnormally high margins is unfounded, in our view.

Initiate with BUY. Our EPS forecast for 2018E/2019E is RMB1.40/1.68 respectively,

implying 19.6%/20.2% growth. This earnings growth is in line with the previous growth rate. The Company is the industry leader and is likely to enjoy a virtuous cycle in terms of earnings growth. Therefore, we believe a longer horizon should be considered. Initiate with BUY. Our TP of HK$49.16 is based on 24x 2019E PER. Our target multiple of 24x takes into consideration earnings growth (19.1% CAGR for EPS between 2017 to 2020E) and a premium for its status as the industry leader. Also, the Company has a good track record of paying dividends at a 70% payout ratio, which warrants a premium.

July 09, 2018


(852) 3698 6392

[email protected]


(852) 3698 6317

[email protected]

Source: Bloomberg

Anta Sports Products [2020.HK] Industry Leader Offering Multi-year Growth Story. Initiate with BUY

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(HK$ million)(HK$)



Revenue 13,346 16,692 20,613 24,615 28,610

YoY Change 20.0% 25.1% 23.5% 19.4% 16.2%

Net Profit After Tax 2,386 3,088 3,695 4,444 5,204

YoY Change 16.9% 29.4% 19.6% 20.3% 17.1%

EPS (RMB) 0.95 1.17 1.40 1.68 1.97

YoY Change 16.8% 22.8% 19.6% 20.3% 17.1%

ROE 25.0% 32.3% 27.0% 30.0% 31.7%

P/E 34.3x 28.0x 23.4x 19.4x 16.6x

Dividend Yield 2.0% 2.5% 3.0% 3.6% 4.2%

2

Key financials




COGS (6,887) (8,451) (9,964) (11,648) (13,367) Restricted Bank Deposits 1,687 2,586 2,586 2,586 2,586


SG&A (3,515) (4,710) (6,234) (7,657) (9,019) Inventories 1,295 2,155 1,368 2,539 1,945

Other Operating Items 260 458 515 615 715 Other Current Assets - - - 0 -

Operating Profit 3,203 3,989 4,930 5,925 6,940 Total Current Assets 11,453 15,442 16,198 20,066 21,492

Finance Income, Net 108 322 186 214 239

Other Items - - - - - PP&E 1,170 1,203 1,690 1,534 1,427

Net Profit Before Tax 3,311 4,311 5,116 6,139 7,179 Goodwill & Intangible Assets 478 705 705 705 705

Income Tax (866) (1,152) (1,345) (1,614) (1,887) Other Non Current Assets 1,123 1,724 1,065 1,134 1,203

Net Profit After Tax 2,386 3,088 3,695 4,444 5,204 Total Non Current Assets 2,770 3,632 3,461 3,373 3,336

Minority Interest (After Tax) 59 71 77 82 88 Total Assets 14,224 19,074 19,659 23,440 24,828

EPS (RMB) 0.95 1.17 1.40 1.68 1.97

DPS (RMB) 0.65 0.83 0.98 1.18 1.38 Trade Payables 3,060 3,978 3,261 5,201 4,509

Short-term Borrowings 938 148 174 204 234

EBITDA 3,472 4,545 5,425 6,413 7,426 Other Current Liabilities 275 373 413 495 579

EBIT 3,246 4,295 5,111 6,134 7,172 Total Current Liabilities 4,273 4,498 3,848 5,900 5,322

Revenue Growth 20.0% 25.1% 23.5% 19.4% 16.2% Long-term Borrowings - - - - -

Operating Profit Growth 18.8% 24.5% 23.6% 20.2% 17.1% Other Non-current Liabilities 14,224 19,074 19,659 23,440 24,828

Net Profit Growth 16.9% 29.4% 19.6% 20.3% 17.1% Total Non-current Liabilities 14,224 19,074 19,659 23,440 24,828

EPS Growth 16.8% 22.8% 19.6% 20.3% 17.1% Total Liabilities 18,496 23,573 23,507 29,340 30,150

Gross Margin 48.4% 49.4% 51.7% 52.7% 53.3% Total Common Equity 9,549 13,706 14,829 16,425 18,252

Operating Margin 24.0% 23.9% 23.9% 24.1% 24.3% Minority Interest 348 654 731 813 901

Net Profit Margin 17.9% 18.5% 17.9% 18.1% 18.2% Total Equity 9,896 14,361 15,560 17,237 19,153

Total Equity & Liabilities 28,392 37,933 39,067 46,577 49,303


Net Profit After Tax 2,386 3,088 3,695 4,444 5,204 ROE 25.0% 32.3% 27.0% 30.0% 31.7%

D&A Add-back 226 250 314 279 254 ROA 16.8% 10.9% 9.7% 11.4% 11.2%

Net Change in Working Capital (216) (381) 23 (569) (106)

Other Operating Items 72 224 77 82 88 Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash

CFO 2,468 3,181 4,108 4,235 5,440 EBITDA Interest Coverage 54x 293x 1134x 1137x 1127x


Other Investing Items 111 (990) - - - Inventory Turnover Days 61 75 65 61 61

CFI (515) (1,579) (87) (114) (139) Payables Turnover Days 134 152 133 133 133


Dividends Paid (1,541) (1,937) (2,572) (2,848) (3,377)

Net Change in Debt (392) (827) 26 29 30 Current Ratio 2.68x 3.43x 4.21x 3.40x 4.04x

Issue of Shares 15 3,435 - - - Quick Ratio 2.38x 2.95x 3.85x 2.97x 3.67x

Other Financing Items 535 2,762 0 0 0 Valuation FY2016 FY2017 FY2018E FY2019E FY2020E

CFF (1,398) (2) (2,545) (2,819) (3,347) P/E 34.3x 28.0x 23.4x 19.4x 16.6x

Total Cash Flow 555 1,601 1,476 1,302 1,955 P/B 8.6x 6.3x 5.8x 5.3x 4.7x

Free Cash Flow 1,819 2,502 4,083 4,196 5,388 Dividend Yield 2.0% 2.5% 3.0% 3.6% 4.2%

1

BUY

Close: HK$5.15 (July 6, 2018)


Price Performance



Auditor EY

Free Float 39.5%

52W range HK$2.395-6.140


Major Shareholding Chairman Ding Shui

Po (60.06%)




Sporting Goods We believe that the fruits of Xtep’s business reforms will be more visible this year and that the Company will benefit from the growing market in China for sporting goods. Xtep implemented reforms that transformed it into a professional running products brand. The Company radically reformed its products, marketing strategies and channels, so it is likely to capture the fast-growing demand related to the sport of running in China. Because of the transformation, its financials have suffered, and 2017 was hit hardest because of one-off items. However, we believe the worst will be over in 2018E. With positive sales momentum and improving profita-bility per store, we expect Xtep’s EPS to achieve a CAGR of 24.4% in FY2017-FY2020E. This is a significant improvement over previous years. We believe a re-rating is justified by the earnings recovery. Initiate with BUY. Our target price of HK$6.30 is based on 16x 2019E PER.


Transformed into a Professional Brand. Xtep initiated a three year reform program,

called “3+ Revolution”, in 2015; 2018 will be the final year. The “3+” framework refers to Products+, Sports+ and Internet+. So far, Xtep has successfully followed the “3+ Revolu-tion”, and this has helped it gain traction in the professional sportswear market. Currently, around 50% of the product mix is professional sportswear, and the Company is targeting professional runners. We believe the Company will benefit from the increasing participa-tion in running competitions in China, as running is now the most popular sport in China, according to a study conducted by JD & Nielsen.

Healthier Physical Distributors after Channel Reforms. In addition to the strong initia-

tives seen in online channels, another noteworthy Xtep reform was channel reforms, the most notable of which was network reform. Xtep flattened its distribution channel to a much simpler structure. Another aspect of the reforms is improving per-store profitability, which has resulted in improvement over time. Over the past few years, the Company has reduced the number of Xtep stores to optimize store performance. We estimate that Xtep’s store count will increase by around 6% to 6,350, while we expect per store produc-tivity on a wholesale basis to improve by 7% in 2018E.

Earnings Show Resiliency from 2018E Onwards. Although Xtep has introduced re-

forms since 2015, their impact cannot be directly seen in the overall financials. The main reason is that the newly introduced products sold well, but the Company also had to deal with its legacy problems: (1) the 2017 results were greatly impacted by a one-off invento-ry buy back; and (2) Xtep Kids dragged down the performance in the past. After dealing with these problems, the Company should see the positive influence of the reforms re-flected in the financials.

Initiate with BUY. Our current EPS forecast for Xtep for FY2018E/19E/2020E is

RMB0.26/0.32/0.36, respectively, implying EPS growth of 40.7%/21.6%/12.6% over the three years, or an EPS CAGR of 24.4% in FY2017-FY2020E. Initiate with BUY. Our tar-get price of HK$6.67 is based on 17x 2019E PER. The target PER multiple is higher than its historical valuation range, but we believe the re-rating since late 2017 will be main-tained. Our 16x 2019E PER also implies a ~1x PEG ratio, based on the 17.0% EPS CAGR between FY2018E and FY2020E

July 09, 2018


(852) 3698 6392

[email protected]


(852) 3698 6317

[email protected]

Source: Bloomberg

Xtep International [1368.HK] Running Specialist. Initiate with BUY.

0

20

40

60

80

100

120

0

1

2

3

4

5

6

7

(HK$ million)(HK$)



Revenue 5,397 5,113 5,575 6,160 6,621

YoY Change 1.9% -5.2% 9.0% 10.5% 7.5%

Net Profit After Tax 528 408 574 701 787

YoY Change -15.2% -22.7% 40.7% 22.0% 12.3%

EPS (RMB) 0.24 0.19 0.26 0.32 0.36

YoY Change -17.5% -21.3% 40.7% 22.0% 12.3%

ROE 10.9% 8.2% 11.0% 12.9% 13.6%

P/E 17.7x 22.5x 16.0x 13.1x 11.6x

Dividend Yield 3.4% 4.5% 3.8% 4.6% 5.2%

2

Key financials




COGS (3,065) (2,869) (3,144) (3,474) (3,720) Restricted Bank Deposits 1,399 952 952 952 952


SG&A (1,513) (1,678) (1,598) (1,718) (1,800) Inventories 460 718 574 796 671

Other Operating Items 99 158 163 172 179 Other Current Assets 596 661 427 757 502

Operating Profit 917 725 996 1,139 1,280 Total Current Assets 7,217 7,882 7,405 8,057 8,560

Finance Costs, Net (51) (54) (70) (17) (23)

Other Items 99 158 163 172 179 PP&E 618 646 725 811 905

Net Profit Before Tax 866 671 926 1,123 1,257 Goodwill & Intangible Assets 5 8 8 8 8

Income Tax (293) (224) (310) (376) (421) Other Non Current Assets 334 398 390 382 374

Net Profit After Tax 528 408 574 701 787 Total Non Current Assets 957 1,052 1,122 1,201 1,286

Minority Interest (After Tax) 45 38 42 46 49 Total Assets 8,174 8,934 8,527 9,258 9,846

EPS (RMB) 0.24 0.19 0.26 0.32 0.36

DPS (RMB) 0.14 0.19 0.16 0.19 0.22 Trade Payables 896 1,028 1,081 1,249 1,246

Short-term Borrowings 1,502 831 510 1,073 149

EBITDA 976 793 1,060 1,209 1,354 Other Current Liabilities 632 630 732 801 859

EBIT 917 725 996 1,139 1,280 Total Current Liabilities 3,029 2,489 2,323 3,122 2,253

Long-term Borrowings - 1,019 510 - 1,000

Revenue Growth 1.9% -5.2% 9.0% 10.5% 7.5% Other Non-current Liabilities 122 97 134 163 182

Operating Profit Growth -0.4% -21.0% 37.4% 14.4% 12.3% Total Non-current Liabilities 122 1,116 644 163 1,182

Net Profit Growth -15.2% -22.7% 40.7% 22.0% 12.3% Total Liabilities 3,151 3,605 2,966 3,285 3,435

EPS Growth -17.5% -21.3% 40.7% 22.0% 12.3%

Total Common Equity 4,953 5,221 5,411 5,777 6,166

Gross Margin 43.2% 43.9% 43.6% 43.6% 43.8% Minority Interest 69 108 149 195 245

Operating Margin 17.0% 14.2% 17.9% 18.5% 19.3% Total Equity 5,023 5,329 5,561 5,973 6,411

Net Profit Margin 9.8% 8.0% 10.3% 11.4% 11.9% Total Equity & Liabilities 8,174 8,934 8,527 9,258 9,846


Net Profit After Tax 528 408 574 701 787 ROE 10.9% 8.2% 11.0% 12.9% 13.6%

D&A Add-back 59 68 64 70 74 ROA 6.5% 5.0% 6.4% 8.2% 8.5%

Net Change in Working Capital (510) (119) 480 (566) 441

Other Operating Items 268 201 24 30 34 Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash

CFO 346 558 1,142 235 1,336 EBITDA Interest Coverage 19x 15x 15x 73x 60x


Other Investing Items (472) 398 64 66 64 Inventory Turnover Days 51 75 75 72 72

CFI (567) 275 (71) (85) (96) Payables Turnover Days 107 122 122 122 122


Dividends Paid (394) (271) (430) (383) (446)

Net Change in Debt (228) 421 (831) 53 76 Current Ratio 2.38x 3.17x 3.19x 2.58x 3.80x

Issue of Shares 62 7 - - - Quick Ratio 2.23x 2.88x 2.94x 2.33x 3.50x

Other Financing Items 79 4 - - - Valuation FY2016 FY2017 FY2018E FY2019E FY2020E

CFF (542) 154 (1,261) (329) (370) P/E 17.7x 22.5x 16.0x 13.1x 11.6x

Total Cash Flow (764) 987 (190) (179) 870 P/B 1.9x 1.8x 1.7x 1.6x 1.5x

Free Cash Flow 142 369 1,156 208 1,316 Dividend Yield 3.4% 4.5% 3.8% 4.6% 5.2%

1

China Cement Weekly

July 9, 2018

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

Mark Lau—Research Analyst

(852) 3698-6393

[email protected]

7.19m tonnes of clinker capacity added in 1H19; Ce-ment prices continued to drop mildly in rainy season The average cement price (nationwide) dropped slightly by 0.34% to RMB413/tonne from

the price in the previous week. No major region recorded an increase in average cement

prices. There was a decline in cement prices of RMB20-30/tonne in Zhejiang, Jiangsu,

Fujian and Guangxi. Cement demand weakened due to the rainy weather in July. The

inventory level increased moderately and shipment volume fell to 70-80% of the normal

level. Some regions recorded a decline in cement prices. Overall, the seasonal weakness

in cement prices in July was well-expected. However, a sharp decline seems unlikely,

given the relatively healthy inventory level. The average inventory level (nationwide)

rose from 56.8% to 58.38% WoW.

Coal prices were stable last week. The comprehensive average price index for Bohai-

Rim Steam Coal (Q5500K) was stable at RMB570/tonne last week. The index decreased

1.7% on a year-on-year basis.

Very limited addition of new clinker capacity in 1H18. Only four new clinker

production lines with total annual capacity of 7.19m tonnes commenced operations in

1H18, according to Digital Cement. This implies addition of less than 0.4%. The new lines

are located in Guizhou, Jiangxi and Heilongjiang. Based on the estimate of Digital

Cement, full-year new capacity should be about 15-20m tonnes, implying less than 1%

addition to the existing capacity.

Cement stocks under coverage dropped 8.1% on average last week. The share price

performance of the sector was still lacklustre last week, as overall market sentiment

remained weak. Best performer Conch Cement [0914.HK; BUY] recorded a WoW drop

of 6.3% in its share price last week. BBMG [2009.HK; BUY], the weakest among our

coverage stocks, fell 10.0% WoW.

China Cement Sector

Sources: Company, Bloomberg, CGIS Research estimates

Valuation Table

Net debt/equity (%)

Company Ticker Rating Price (HK$) Market cap (US$m) 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2018E

Conch Cement 914 HK Equity BUY 42.15 26,069 13.1 8.4 8.3 2.12 1.77 1.59 7.4 5.0 5.0 Net cash

CNBM 3323 HK Equity BUY 7.11 5,823 9.5 5.5 5.5 0.72 0.63 0.58 8.8 7.2 7.2 169

BBMG 2009 HK Equity BUY 2.61 4,887 9.3 6.4 5.9 0.48 0.43 0.40 10.7 8.7 8.0 95

CR Cement 1313 HK Equity HOLD 7.35 6,580 13.5 6.2 6.1 1.58 1.36 1.23 8.3 4.6 4.6 16

Simple average 11.3 6.6 6.5 1.23 1.05 0.95 8.8 6.4 6.2 93

Weighted average 12.2 7.4 7.3 1.67 1.41 1.26 8.1 5.6 5.6 36

PER (x) PBR (x) EV/EBITDA(x)

2017 -2019E PEG(x)

Company Ticker 2018E 2019E CAGR (%) 2018E 2017 2018E 2019E 2017 2018E 2019E

Conch Cement 914 HK Equity 54.0 0.5 24.4 0.3 17.49 22.94 20.12 3.4 5.4 6.0

CNBM 3323 HK Equity 69.3 1.2 30.9 0.2 7.86 12.10 11.10 1.7 3.6 3.7

CR Cement 1313 HK Equity 118.7 0.5 48.2 0.1 12.67 27.70 23.92 3.7 8.2 8.2

BBMG 2009 HK Equity 44.2 7.1 24.2 0.3 5.32 6.93 7.00 2.6 3.4 3.6

Simple average 71.5 2.3 31.9 0.2 10.83 17.42 15.53 2.8 5.2 5.4

Weighted average 64.7 1.3 28.9 0.3 14.09 20.41 18.01 3.1 5.4 5.8

EPS Grow th (%) ROE (%) Dividend yield (%)

2

1-Year Relative Performance

Sources: Bloomberg, CGIS Research

Peer Comparison

Sources: Bloomberg, CGIS Research

Market cap

Company Ticker Rating Price (LC) (US$m) 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E

Conch Cement 914 HK Equity BUY 42.15 26,069 13.1 8.4 8.3 2.12 1.77 1.59 7.4 5.0 5.0

CNBM 3323 HK Equity BUY 7.11 5,823 9.5 5.5 5.5 0.72 0.63 0.58 8.8 7.2 7.2

BBMG 2009 HK Equity BUY 2.61 4,887 9.3 6.4 5.9 0.48 0.43 0.40 10.7 8.7 8.0

CR Cement 1313 HK Equity HOLD 7.35 6,580 13.5 6.2 6.1 1.58 1.36 1.23 8.3 4.6 4.6

Asia Cement 743 HK Equity NR 4.55 914 6.2 4.1 3.9 0.59 0.53 0.47 4.7 3.3 3.2

West China Cement 2233 HK Equity NR 1.19 829 7.7 4.7 4.5 0.83 0.69 0.62 4.1 3.1 3.1

Tianrui Cement 1252 HK Equity NR 6.80 2,562 15.3 n.a. n.a. 1.72 n.a. n.a. 9.1 n.a. n.a.

Simple average 10.6 5.9 5.7 1.15 0.90 0.82 7.6 5.3 5.2

Weighted average 12.2 6.9 6.8 1.64 1.30 1.17 8.0 5.2 5.2

PER (x) PBR (x) EV/EBITDA(x)

3

Figure 1: Regional Cement Price

Sources: Digital Cement, CGIS Research

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National Average (P.O. 42.5)

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3

Disclaimer

This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing requirement within such jurisdiction.

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Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries (“China Galaxy International”), directors, officers, agents and employees (“the Relevant Parties”).

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Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies cov-ered in this report.

Explanation on Equity Ratings

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No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.

China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

20/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :

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