EUR 850.00 For Business Accounts Only

Morningstar | Anta's Proposed Amer Acquisition Is Valuation-Neutral; Market Missing Long-Term Picture. See Updated Analyst Note from 13 Sep 2018

We have updated our valuation model to account for Anta’s nonbinding proposal to acquire Amber Sports. Our latest model assumes the acquisition is completed at the start of 2019. Anta’s intent to purchase Amer is strategically sound, and given potential synergies between the two businesses, we think its buyout offer is valuation-neutral. We reiterate our fair value estimate of HKD 55.00 on Anta Sports and encourage investors to focus on the long-term positives coming out of the acquisition.

We are modeling Anta to pay CNY 18.7 billion in cash to obtain 50% of Amer. The company is expected to pick up roughly CNY 12 billion in debt that will carry an interest rate of between 3% and 4%.  If the acquisition is successful, we assume a permanent change in Anta’s capital structure from 100% to 90% equity, lowering the weighted average cost of capital to 9.5% from 10.0%. Amber Sports will add roughly CNY 24 billion to Anta’s top line in 2019 (45% of the combined firm’s total) and about CNY 1.4 billion in operating income (17% of consolidated total).

The acquisition of Amer will give Anta a meaningful presence in the global premium sports equipment market. We expect 13 of Amer’s brands, which have mainly been mainly U.S. and Europe-centric, to see significant growth from the Asia-Pacific region, especially Greater China. In comparison with Anta’s acquisition of Fila back in 2009, brands under Amer are slightly more recognizable for Chinese consumers, as shown by their sales CAGR of 29% over the past five years. With Anta’s distribution strengths, we see sales of Amer growing at 9.1% annually over the next five years, in line with Fila China’s performance after Anta’s takeover. Underlying our revenue growth assumption for Amer is an even stronger sales expansion in Greater China. We see 48% of Amer’s top line coming from China by 2028, up from less than 5% in 2017.

Amer brands will further benefit from Anta’s scale in raw material sourcing and manufacturing, which should help lift gross margin from 45% to 50%. On the flip side, however, we expect the operating margin for the combined firm will drop to 16% (from 24% in 2017) immediately following the acquisition, before returning to 18% at the end of our 10-year forecast. The purchase does not change our narrow economic moat rating on Anta, as we believe the company’s return on invested capital will remain above the weighted average cost of capital in the next fifteen years.

Despite taking out CNY 12 billion in debt to fund the acquisition, Anta will remain in good financial standing. We project the company’s EBIT/interest expense to run at 20-40 times over the next five years, assuming the company keeps the debt on its balance sheet.