3Q22's operating performance is dragged down by the weak retail environment; pay attention to the progress of inventory removal in the future
3Q22 retail sales of Anta / Fila brand grew in the low range of / 10-20% year-on-year, slightly lower than expected compared with previous management guidance. The weak retail environment since September has been a drag on the retail performance of Anta's brands, superimposed by pre-season inventory factors, leading to an increase in 3Q22 inventory levels at the end of the quarter compared with the previous quarter. We expect retail discounts in the fourth quarter to deepen further to help inventories return to normal levels by the end of the year or to put pressure on gross margins. We downgrade 2022-24 basic EPS 5.0Universe 5.8Compact 5.4% to RMB 2.90Universe 3.71Universe 4.52.
Taking into account recent RMB exchange rate factors, we reduce our target price based on DCF valuation by 11% to HK $112 (WACC is 11.2%, with a sustainable growth rate of 3%). We expect the company's retail performance to recover from this year's low base growth next year, while improved inventory levels will lead to profit margin expansion. "Buy".
Online channels drive retail sales growth to improve month-on-month
3Q22 Anta brand / FILA brand retail sales growth returned to the low range of 10-20% year-on-year growth units (2Q22: year-on-year decline in the number of units / high units). Specifically, we estimate that Anta large goods offline / children's offline / e-commerce growth is low / high / high units year-on-year; FILA large goods offline slightly decline, while FILA children's offline / Chaopai offline / e-commerce growth is low / low units / 65-70%. E-commerce is growing faster than offline channels, mainly due to repeated epidemic situations in some cities since September, offline passenger traffic is still weak, the company has stepped up the expansion of online channels such as Little Red Book and Douyin. Benefiting from strong consumer demand for outdoor camping products, 3Q22 retail sales of other brands recorded year-on-year growth of 40-45 per cent, with Disante / KOLON exceeding 35MB by 55 per cent respectively.
Focus on inventory elimination in the fourth quarter; gross margin may be damaged in the short term
The channel inventory turnover days of 3Q22 Anta brand remained slightly higher than the healthy level of 5 months, and the retail discount rate of Anta goods / children was flat year on year / improved by 2-3 percentage points. The channel inventory turnover days of the FILA brand reached 7-8 months (more than 2Q22:7 months), and the retail discount rate increased slightly to 25-26% (2Q2225%), mainly due to the rapid growth of online channels with strong promotion efforts.
Considering that the channel inventory of Anta and FILA brands is still higher than normal, we expect the company to shift its focus to sales growth and increase discounts and promotions during the peak shopping season such as "Singles Day" in 4Q22 to help digest inventory, so gross profit margin or short-term pressure.
Profit forecast adjustment; valuation attraction
We have lowered our net profit forecast for 2022-2024 by 5.4% to RMB 780,000,000, mainly considering the challenging retail environment this year may continue into next year. At the same time, we reduce our gross margin forecast, taking into account the deepening of retail discounts and changes in the income structure. Our forecast corresponds to a three-year increase in the company's net profit of 1.5 pounds, 27.9 pounds, 22.1 percent. Anta's current share price corresponds to 20.5x 12-month forward PE, and we think the current valuation is attractive and maintains a "buy".
Risk tips: 1) recurrent outbreaks; 2) weaker-than-expected growth in Fila retail sales; 3) slower growth in new business; 4) deep retail discounts; and 5) deleveraging due to income growth pressure.