Anta Sports (2020.HK)          BUY (TP: HK$14.84 (from HK$14.70))

Expect profits to grow by 24% pa for FY10-12

Anta delivered a 40% profit growth in FY09, achieved Rmb1,251m that is 2.5% more than we expected, and beat market consensus by about 12%. In fact, the FY09 balance sheet shows Anta had raised its “accrual” by Rmb276m, from Rmb98m to Rmb374m. This item represents unpaid expenses charged to the p&l, and it being drastically raised means profits are shifted to the coming year. Management admits this deliberate feat will reduce FY10e’s reported expenses. As such, even the Q1-Q3 trade fairs indicated about 18% order growth, we are confident Anta would increase profits by about 23.5% in FY10e. Furthermore, given the profit contributions from Fila, we estimate Anta should maintain profit growths at 22-24% in FY11e and FY12e. The shares are now trading at 16.5x FY10e eps. We set our HK$14.8 price target at the sum of 20x FY10e eps, and 80% of its net cash of HK$1.57/share.  We maintain our Buy rating.

Results in line. All the key reported figures including top line, gross profits and net profits are basically in line with our forecasts. As such, we are not surprised to see both the gross and net margins rose by about 2ppt to 42.1% and 21.3% respectively.  Anta managed to raise ASP of footwear and apparels by 1.8% and 6.1%, while their unit costs were down by 3.6% and up by 4.5%, resulting in net unit gain of 5.4% and 1.6%, respectively. We don’t see cost pressure being high in FY10e, and operating margin should improve with some costs already charged to 2009’s p/l.

Expansion plan focusing on Fila and lifestyle outlets. Total number of outlets rose by 924 to 6,591 in 2009, excluding some 60 Fila outlets. Number of Lifestyle outlets increased from 33 to 343 in 2009, and will further increase to 600 in 2010. Fila shops will also increase to 200 by end 2010. Fila should breakeven in 2010 and we are confident of its maiden profit contribution in 2011, when its share of total sales should raise to about 7%.

Probably the best sportswear company among the top tier local brands. Anta’s share price went up 280% in the past 12 months as investors finally realized Anta has become the best top tier domestic brand, in terms of sales and brand image. We believe the stock will continue to outperform, and the latest consensus earnings of about Rmb1,440m (15% implied growth) is far too low, in our view.