Thesis

Anta Sports (OTCPK:ANPDY) is China’s largest domestic sportswear company and has, in recent years, outperformed domestic peers through its prudent strategies and effective product positioning in a tough market. Multiple secular and company-specific factors bode well for its long-term growth including China’s shift towards a consumption-driven economy, government-led policy initiatives to promote sports, and Anta’s timely brand acquisitions. Its projected long-term growth is above domestic peers, but relative valuations suggest that the stock is likely fully valued at current levels. I recommend buying it on weakness as it is a winner in the long run and an excellent play on China’s ascendancy to a high-income economy.

Company Profile

Anta started its operations in 1991, engaged in the business of designing, developing, manufacturing, and marketing of its own ANTA sportswear brands. Since 2009 it has employed a multiple-brand strategy that allows Anta to expand its outreach and appeal in China by catering to both mass and high-end sportswear markets (figure 1 and table 1). As of Dec. 2017, Anta had 10,617 stores in Greater China, of which 1,086 were Fila stores and 64 were Descente stores. In terms of product category, apparel and footwear accounted for 55% and 42% of total revenue, respectively, while in terms of brands, ANTA and Fila represented 70% and >29% of total revenue in FY2017, respectively.

Figure 1

Source: Company Disclosures

Table 1

Brand

Target Market

ANTA

Functional sportswear for running, cross-training, basketball, and soccer

ANTA Kids

Kid’s sportswear

Fila

Sports fashion clothing

Fila Kids

Kid’s sports fashion clothing

NBA

Functional and casual basketball sportswear products

Descente

Functional sportswear for skiing, cross-training and running

Kingkow

Kid’s fashion products

Kolon Sport

Outdoor sportswear products

Sprandi

Leisure footwear

Source: Company Disclosures

Secular Trends

The global sportswear industry has grown (figure 2) at a CAGR of 7.8% over the last five years, bolstered by a robust macroeconomic backdrop and a shift in consumer preferences towards a healthier lifestyle, leading to increased participation in sports and other fitness related activities. U.S. and China are the top two markets (figure 3) but judging by total per capita spending on sportswear, the difference between the two markets is enormous. In 2016, Americans spent over $300 on sportswear while the Chinese spent just slightly above $20. As China’s income level continues to climb, this gap represents a substantial long-term growth potential for the domestic sportswear industry. China’s market has been on a sound footing, growing by a CAGR of 10% over the last four years (figure 4).

Figure 2

Source: Statista

Figure 3

Source: Euromonitor

Figure 4

Source: Statista and Author’s Calculations

The sportswear industry in China has two major forces working in its favor. Firstly, a rapidly improving macroeconomic environment and secondly, government-led efforts to encourage sports and exercise in China. As China’s economy continues to modernize, the share of private consumption in total national income will increase. Private consumption is on a solid path (figure 5), and it currently accounts for 39.2% of total GDP compared to U.S.’s 69%. Supporting the steady rise in private consumption is the encouraging improvement in disposable income levels (figure 6). By some estimates, China will achieve high-income status by 2027. These trends, which will drive China’s shift towards a consumption-led economy, will invariably support growth in sportswear as well. Morningstar expects China’s sportswear market to grow at an annual rate of 10.1% and cross the USD80 billion mark by 2027.

Figure 5: Private Consumption % Nominal GDP

Source: CEIC

Figure 6

Source: Trading Economics

China views fitness as one of the building blocks of a prosperous society. Fitness and sports are so important to the country that the government has enacted the National Fitness Plan, which aims to boost national fitness levels and encourage sports participation. This plan and numerous other government incentives will help China double its sports industry to USD813 billion by 2025. Initiatives to achieve these ambitious targets include building 100 towns as dedicated sports centers, adding 700 million square meters of sports facilities, and increasing the number of people who exercise regularly to 500 million by 2025.

Competitive Analysis

Nike (NYSE:NKE) and adidas (OTCQX:ADDYY) dominate the global sportswear market and have successfully captured the lion’s share in the lucrative Chinese market as well, collectively accounting for over 40% of the local market (figure 7). Anta has fought well in this competitive environment and managed to increase its market share from 6% in 2008 to 11% by 2017. Anta has achieved this feat by staying focused on the middle segment of the domestic market by marketing its products at lower points than Nike and adidas. Consumers view Anta as a value-for-money brand in contrast to Nike and adidas, which are aspirational brands. Therefore, while Nike and adidas remain committed to the premium segment in first-tier cities, Anta has carved out a strong presence in second and third-tier cities. Anta’s presence in these lower-tier cities sets it on a high growth path as these regions are estimated to account for two-thirds of national consumption growth in the next decade.

Figure 7: Market Shares 2017

Source: Euromonitor

At the same time, Anta’s domestic peers such as Li-Ning (OTCPK:LNNGY), Xtep (OTCPK:XTEPY), and 361 Degrees have failed to come up with coherent strategies and innovative products to tap the nascent market in China early on. For example, Li-Ning’s attempt to reinvent itself as a premium brand only left its loyal, value-for-money minded customers confused. If consumers are looking for a premium brand, why shouldn’t they upgrade to Nike or adidas instead? Such debacles have weighed heavily on Li-Ning’s stock price, which sits at almost 70% below its all-time highs.

These factors mentioned above have allowed Anta to remain relevant in a tough market and achieve above-average sales growth rate (figure 8). During a period when Anta’s domestic peers were closing stores, Anta expanded its outreach and increased its market share at its competitors’ expense. As a result, it has developed a strong brand image which allows it to maintain pricing power and consequently healthy margins (table 2).

Figure 8

Source: Company Disclosures

Table 2: Margins FY2017

Adidas China

Anta

Li-Ning

Xtep

361 Degrees

Gross Margin

57%

49%

47%

44%

42%

Operating Margin

35%

24%

5.02%

13%

17%

Source: Company Disclosures (note: Nike doesn’t disclose margins for China business)

While Anta has stayed true to its roots, it has implemented prudent strategies to break into new product categories and the premium segment. It hasn’t done so by carelessly attempting to rebrand itself overnight but by acquiring strong brands, such as higher-end Fila, and then utilizing its expansive domestic network and local expertise to effectively market its product portfolio. It acquired the loss-making Fila in 2009 and turned it around, growing the brand’s sales by a CAGR of 60% during FY13-17. Since then it has acquired various brands such as ski-wear brand Descente in 2016 and outdoor-gear brand Kolon in 2017 to diversify its portfolio and cater to an increasingly sophisticated consumer base. Apart from Fila, these brands have a negligible impact on the top line for now but are potentially high growth drivers in the long-term. Ski sports, for example, is taking off in China and riding the wave leading to the 2022 Winter Olympics. The Chinese government plans to build 650 skating rinks and 800 ski resorts by 2022. Outdoor gear is another high potential segment entering a strong growth phase in China, projected to grow at a CAGR of almost 20% through 2021.

I forecast improvement in Anta’s margins as the contribution from these recently acquired high margin premium brands kicks in over time. I believe Anta has skillfully positioned itself in the mass-market segment and its acquired premium brands would make sure that it retains its customers once they trade up to higher-end brands.

Valuations and Conclusion

Anta’s domestic peers have lagged the sector and are projected to recover from such low bases that it makes relative performance assessment based on multiples difficult. Its long-term growth is above domestic averages and trades at richer multiples (table 3). It is, however, trading in line with international peers’ median forward PE of 27x and at similar long-term growth estimates.

Table 3: Peer Table

PE Ratio

EPS Growth

LT-Growth

Current PEG

Domestic Peers

FY2018

FY2019

FY2020

FY2018

FY2019

FY2020

Anta

27.0x

22.4x

18.5x

27%

21%

21%

18%

1.5x

Li Ning

24.7x

18.9x

15.6x

46%

31%

21%

6%

4.0x

Xtep

14.2x

12.3x

11.4x

53%

13%

9%

14%

1.0x

361 Degrees

7.8x

7.4x

6.9x

25%

8%

8%

8%

1.0x

Pou Sheng Intl

15.0x

11.5x

10.0x

12%

36%

16%

N/A

N/A

China Dongxiang (OTCPK:CDGXY)

8.1x

8.1x

8.6x

1%

3%

-7%

N/A

N/A

Mean

16.1x

13.4x

11.8x

27%

19%

11%

11%

1.9x

Median

14.6x

11.9x

10.7x

26%

17%

13%

11%

1.3x

PE Ratio

EPS Growth

LT-Growth

Current PEG

International Peers

FY2018

FY2019

FY2020

FY2018

FY2019

FY2020

Nike

29.7x

25.7x

22.1x

-7%

16%

16%

11%

2.7x

Adidas

23.1x

19.7x

17.0x

23%

17%

16%

16%

1.4x

Puma (OTCPK:PUMSY)

31.1x

24.1x

19.8x

44%

29%

22%

39%

0.8x

Skechers (NYSE:SKX)

13.6x

11.6x

10.0x

19%

18%

16%

18%

0.8x

Lululemon (NASDAQ:LULU)

31.9x

27.9x

26.9x

19%

14%

4%

16%

2.0x

Columbia Sportswear (NASDAQ:COLM)

24.6x

22.0x

20.3x

12%

12%

9%

11%

2.2x

Mean

25.7x

21.8x

19.3x

18%

18%

14%

18%

1.7x

Median

27.2x

23.1x

20.0x

19%

17%

16%

16%

1.7x

Source: Bloomberg

Anta is also trading near the upper band (+2 standard deviation) of its historical forward PE range (figure 9). While the long-term story is intact and promising, relative valuations suggest that the stock is likely fully valued here and investors should accumulate on weakness instead.

Figure 9: Forward PE and Standard Deviations (SD)

Source: Bloomberg

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ANPDF over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Looking for a lower entry point in Anta Sports through its Hong Kong listed shares (2020 HK). I’m looking for HKD 40 or below.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Source

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