EUR 850.00 For Business Accounts Only

Morningstar | Anta's Second-Half Results Ahead of Estimates, Cash Flows Normalized; Shares Remain Attractive. See Updated Analyst Note from 27 Feb 2019

Best Idea Anta reported full-year 2018 results ahead of both Morningstar and the Street’s estimates. Operating cash flow comes in at 95% of net income, a significant improvement from the interim, helping ease concerns over the firm’s accounting practices. We keep much of our 2019 forecasts in place despite management’s tepid guidance, as the firm is known for setting conservative goals to manage expectations and surpassing them to the delight of investors. While Anta's share price has risen by more than 50% since the recent bottom and is no longer a 5-star stock, we continue to think the company undervalued. We reiterate our fair value estimate of HKD 55 on narrow-moat Anta and see a potential 24% upside in share price.

For the second half of 2018, Anta’s revenue and net income, as reported, come in at CNY 13.5 billion and CNY 2.5 billion, respectively, beating Morningstar’s estimates by 11% and 9%. Stripping out government grants and nonrecurring items, the firm’s second-half earnings are 4% ahead of our expectations. The beat was primarily driven by 85% sales jump from Fila (~35% of revenue), which we expect will remain a key growth area in 2019. Sales of the core Anta brand (~60% of revenue) booked a growth rate of roughly 15%, reaffirming our belief that the segment will perform relatively in line with the expansion of overall sportswear sales in China.

The remaining four brands together posted sales more than double that of last year and are now contributing to 5% of the group’s top line. Within this portfolio, all eyes will be on Descente over the next few years. We are impressed by this super-premium brand booking over 200% sales growth in the past year but are more excited by the prospects of Anta breaking into the luxury sportswear realm. Although Descente currently carries a lower gross margin (50%-60%) compared with Fila (~70%), the roughly two to three times higher item price can potentially be a substantial boost to the top line. Over the longer term, Descente is set to benefit from Chinese’ rising interests in winter sports and the upcoming 2022 Beijing Winter Olympics.

Admittedly, other revenue, which mainly composed of government grants, surged 80% year over year to CNY 515 million for the second half, or 17% of the group’s earnings before tax. Majority of these subsidies are granted by Fujian provincial government (where Anta is headquartered). These grants are made up of various forms of tax rebates, along with incentives for hiring and developing locally. Our valuation for the firm assumes government grants to diminish as a percentage of the top line and eventually zero out. Over the next five years, we expect Anta’s top line to grow at a CAGR of 18%, and operating income at 16%.

Lastly, the proposed acquisition of Amer has already been approved by a majority of overseas regulators. Anta’s EUR 40 per share offer has been presented to Amer’s shareholders, and the preliminary outcome will be released on March 8. We continue to expect the buyout to go through, and factored both expected acquisition cost and Amer’s future contributions to Anta’s earnings into our forecasts