Growth was weak in the first quarter of 2024, but we expect sales to accelerate as the high base effect weakens from the second quarter: Anta's sales growth in the first quarter of 2024 may be disappointing at first glance (Anta brand: middle single digit of year-over-year growth; FILA: high single digit; Descente+Kolon: 25-30%) because it falls short of the annual guidance target (Anta and FILA increased 10-15% year over year; Descente > 20%; Kolon > 30%), but was updated 3 weeks ago with management Consistent. At the time, management warned that there would be a high base effect in the first quarter. We think this reason is valid, especially for a more mature brand like Anta. The Anta brand's compound annual sales growth rate for the past two years (2023-23) was 11% in the first quarter, while the next three quarters (2Q-4) will be 1%/6%/4%, respectively. This is due to the Winter Olympics in the first quarter of 2022 and the reopening of the channel in the first quarter of 2023. A low base starting in the second quarter will also help accelerate sales growth again. In particular, the Paris Olympics contributed to Anta's promotion, the initial success of Kyrie Irving products, and Anta's various new retail formats (such as SneakerVerse). Anta's discounts and inventory (<5 times) for the 1st quarter of 2024 remain healthy.
The differentiation in the FILA brand's internal performance indicates the demand for brand refurbishment: FILA's high unit growth is also below the guideline, probably due to weak spending capacity in high-tier cities (similar to the situation of other consumer companies such as Budweiser Asia Pacific), and there also seem to be brand-specific issues, such as differences between different series.
FILA's bulk sales increased by double digits (around 15%), but the more fashionable FILA brand declined, while FILA children's clothing remained flat. The decline in the number of latter stores (10% of stores are being renovated) was blamed for weak sales. This shows that trendy brands and children's clothing have higher fashion risks than big brands, and also require continuous brand renewal and investment.
China's sporting goods market is fragmented, and lower-tier brands in lower-tier cities seem more resilient: Anta's performance pales in comparison to 361 degrees, but is superior to international brands. According to 361's report for the 1st quarter of 2024 released earlier, retail sales of its core brands (offline) achieved “high double-digit” growth, 361 children's clothing (offline) achieved “20-25% year-on-year growth”, e-commerce achieved 20-25% year-on-year growth, and Nike/Adidas dealer Baosheng's first quarter sales fell -7% year over year. Special Step will release earnings on April 18, while Li Ning will release earnings on April 22. Given Li Ning's large presence in first-tier cities, we expect its data for the first quarter of 2024 to be weak.
Taking advantage of low absorption; repeat purchase, target price of HK$135: Given Anta's strong core competitiveness (brand building+retail execution) and its entry into the rapidly growing winter sports/outdoor segment through Descente/Kolon, we remain optimistic about Anta in the long term. Reiterating the buying rating, the target price is HK$135, based on an average price-earnings ratio of 22 times 2024-25 and 1.0 times PEG, and a compound annual growth rate of 22% (2024-26E) in earnings per share.