Even though Anta results were a miss in 3Q24, thanks to robust performance during the 10-1 National Day holidays and rollout of many government stimulus, we are positive about its 4Q24E outlook. We are still cautious about its FY24E sales growth but remain confident on the net profit margin. Maintain BUY and raise TP to HK$ 126.68, based on 23x FY25E P/E (revised up from 20x).
The Company has not revised down the FY24E sales growth guidance but we are more conservative now. Even though the 3Q24 performance was disappointing, we still expect their retail sales growth to turn around in 4Q24E (CMBI est.16%/ 10% for Anta/ FILA), supported by the strong growth during the 10-1 National Day holidays (CMBI est. 20% growth was achieved even with a high base for both Anta/ FILA); and we believe high-end segment may benefit more under the context of increasing monetary and fiscal stimulus. We are relatively more confident about the Anta brand, as its reforms have been successful, because: 1) Kyrie Irving products have been hot selling and sales volume may climb further as more supplies to come online in 2H24E, 2) more star products have been created (cut down the number of SKUs and sell more value-for-money products such as the running shoes PG7), 3) customer base has been enlarged by rolling out various store formats (e.g. Anta Champion stores for the middle-income group, Super Anta for those who are sensitive to the price-to-quality ratio), as well as 4) overseas expansion, with Kyrie Irving products to be placed in the sales channel of Foot Locker and Dick's Sporting Goods in the US and EU. Therefore, in our view, Anta should continue to yield faster growth onwards in 4Q24E and FY25E. There are some growth drivers also for FILA, like: 1) speed-up in store revamps (esp. in the core shopping malls), 2) new product series launches (such as the FILA+ series) and 3) increased efforts to acquire more young customers. However, due to the major miss in 3Q24, we are still very cautious about its outlook in 4Q24E. We are now forecasting a HSD/ MSD retail sales growth for Anta/ FILA in FY24E (vs the Company's guidance of 10%+/ HSD).
Maintain BUY and raise TP to HK$ 126.68, based on 23x FY25E P/E (re- rated from 20x), supported by the improved consumer and investor sentiment. We have raised the FY24E/ 25E/ 26E net profit by 5%/ 2%/ 1%, in order to factor in: 1) the miss in sales growth but 2) better cost control. The stock is trading at 18x FY25E P/E, not demanding in our view compared to its 5-year average of 25x.
Margin-wise, it should still be stable and unaffected by the operating deleverage. Despite the miss in sales growth, we do expect the margins in FY24E to stay healthy, because: 1) the GP margin should be quite resilient, as Anta has no pressure to provide more retail discounts (even though Nike/Adidas are providing aggressive discounts to clear its distributors' inventory); 2) the SSSG for Anta was still at least flattish or positive in 3Q24 while the retail sales growth was slower due to closures of those non- performing stores; 3) A&P expenses were revised down by the company according to the actual sales completion (amount of sponsorships for 2024 Olympics was lower vs the 2021 Olympics and the 2022 Winter Olympics); 4) rental contracts and expenses were refined actively (another RMB 100mn or more rents could be saved in FY24E vs last year); and 5) other brands' sales growth was still much faster than the group's and that part could drive the profit margin higher.
3Q24 retail sales growth fell short of our expectation. In 3Q24, Anta's retail sales growth was at MSD, similar to the MSD in 1H24, but missed CMBI est. of HSD, mainly due to the weak macro environment (boost from the Olympic events was limited), bad weather (e.g. many rainy days and typhoons), and slow growth in the basketball segment. In fact, the performance of Kyrie Irving product series and new format stores was great. On the other hand, FILA's retail sales dropped by a LSD, a severe slowdown vs HSD growth in 1H24 and also missed CMBI est. of MSD growth, because the high- end fashion and kids' wear segments, and higher-tier cities have all been hit hard under a weak macro and consumption trade-down environment. In terms of channels, online sales growth was resilient for the Anta brand while its offline sales growth slowed down QoQ, while both online and offline sales growth for the FILA brand worsened. Other brands were much more stable with retail sales growth of 45%-50% in 3Q24, driven mostly by: 1) its niche and fast-growing outdoor segment, 2) continual improvements in its brand equity and product quality and 3) rapid store expansion (esp. for Kolon as it has added many more SKUs for the stores in the southern region).
Retail discounts remained strong and inventory days stayed fairly healthy. In contrast to its retail sales growth, the retail discounts of all brands improved healthily. Online/ offline retail discounts improved YoY/ stayed flattish for the Anta brand, while both online/ offline of that were flattish for the FILA brand, and those for other brands (Kolon and Descente) all improved YoY. Anta/ FILA's inventory to sales ratio was reported to be at around 4.5x-5 months/ about 5months.
