Anta Sports:Improving ecosystem

Sustainable growth deserves valuation premium, BUY.

Anta’s 24% YoY growth of net profit in 1H15 is about 5% ahead of ourestimate. The share price has been doing well year-to-date (up 42%), butwe continue to see upside given a strong growth outlook. Moreimportantly, we are positive on the improving ecosystem for Anta, whichimplies healthier margins for distributors and retailers. We assumecoverage and raise our 2015-17CL EPS by 2-3%. We also lift our targetprice from HK$19.25 to HK$22.60; maintain BUY.

Sustainable sportswear demand growth in China.

Anta reported low-teens pre-order growth for 1Q16, the 9th quarter with at leasthigh-single-digit growth since 1Q14, implying the demand recovery is more thanjust channel re-stocking, in our view. We see demand upside from higher percapitaconsumption (China is c.6-15% of developed markets), marketconsolidation and consumers’ rising preferences for a healthier lifestyle.

The improving ecosystem.

The strong sales growth combined with reduced store count implies significantlyimproved sales efficiency for the Anta brand at the store level. We estimate Anta’ssales per store in 2015 could exceed the peak level achieved in 2011, implying animproving ecosystem with healthier margins for distributors and retailers. Thecontinued investments in branding and product innovation also bode well for theAnta brand’s long-term competitiveness.

Multiple growth drivers for Anta.

We see multiple growth drivers for Anta looking forward. We expect Fila, Anta kidsand ecommerce to contribute 6%, 3%, 2% of total sales growth in 2015,respectively. Anta’s partnership with the NBA last year has already started tocontribute to the sales growth of the basketball shoes in 1H15. Anta also plans tointroduce new football products in 2H15 with coordinated marketing campaigns,which could be a new growth driver in the outer years.

Premium valuation, but well deserved; maintain BUY.

We forecast Anta to achieve an 18% sales Cagr in 2015-16, riding on the favorableindustry uptrend, the improving ecosystem and multiple growth drivers. This rateof sales expansion is stronger than that of most of the China consumer stocks wecover with US$5bn-plus market cap. Anta has also been consistently generatingstrong operating and free cashflow. Our target price is set on 20x 16CL EPS, a25% discount to Nike and Adidas; it also offers a 3% dividend yield; BUY.