3Q24 Anta/FILA's operating performance fell short of expectations, and Descente/Kolon continued to grow rapidly;

Anta is expected to achieve the guidelines at the beginning of the year, but FILA's annual target is challenging. We expect Anta Sports' revenue to increase by 12.4% year-on-year in 2024;

Maintain the buy rating and raise the target price by 4% to HK$108.40, corresponding 20 times the 2025 P/E.

3Q24 business performance fell short of expectations: Anta Sports released 3Q24 operating data, 1) Anta Brand: The number of units in large goods/children's sales increased, and the number of units in online sales continued to exceed 20%. However, offline street store turnover remained basically the same year over year, and the number of units in shopping center stores was low. Inventory sales increased slightly to 4.5-5 times compared to the previous month due to early preparation for the National Day, but they are still at a healthy level. Offline discounts remained the same year over year, but there was a slight improvement online. 2) FILA brand: Under environmental pressure, FILA's volume of goods remained flat year on year, but both KIDS and FUSION declined slightly, so FILA's overall flow rate declined slightly year over year. Inventory sales increased slightly to 5 times, and retail discounts remained flat year over year. 3) Other brands: Turnover increased by 45%-50% year on year, continuing the rapid expansion since 1H24. Descente's logistics increased by 35%-40% year on year; after expanding its spring and summer product lines, KOLON gradually expanded to the southern market, compounding the rapid growth in store efficiency, driving a sharp increase of 65% + in omnichannel logistics. Retail discounts for both are also continuing to improve.

Anta is expected to achieve the guidelines at the beginning of the year, but FILA's annual goal is challenging: 1) Anta piloted the launch of an 800/1,000/2,000 square meter “Super Anta” store focusing on cost performance, and reorganized the products to further differentiate the store types to meet the consumer needs of different consumer groups. Although the 3Q24 turnover growth rate was slightly lower than expected, the difference of 1-2 pcts was estimated to have limited impact throughout the year, and the revenue side still contributed to DTC transformation (1H24 Anta brand revenue growth rate 13.5% vs. revenue growth rate ~ 6%). We believe that the Anta brand is expected to achieve the guidelines at the beginning of the year. Under the forecast of 8%-10% year-on-year increase in 4Q24 and ~ 7% year-on-year turnover growth, assuming a revenue increase of ~0.8 billion yuan due to direct management transformation, we expect the Anta brand's revenue to increase 11.8% year-on-year in 2024. 2) Although FILA's fourth quarter base was relatively low (4Q20-4Q23 CAGR = 9%) and performed well during the National Day, if it were to meet the annual high revenue unit growth guidelines, it would be necessary to achieve 13%-20% growth in 4Q24. Compared with 1H24 and 3Q24 revenue growth rates of +7%/-1%, we believe that FILA's annual revenue growth target for a high number of units is challenging. Assuming FILA's revenue for the fourth quarter increased by 5%-7% year-on-year, we estimate that FILA's annual revenue growth rate will be between 4.6% and 5.2%. Combined with recent high-frequency data tracking, we temporarily expect the FILA brand's revenue growth rate in 2024 to be at the upper end of the range (5.2% year-on-year increase). It is important to note that even if FILA's revenue in the fourth quarter increased by only 3%, the impact on the whole year was only ~1pct, but under a relatively low base, it may indicate that FILA is once again experiencing growth bottlenecks. Considering that the revenue growth rate of the Anta brand next year is likely to converge with the turnover, it may lead to a further slowdown in overall revenue. 3) Combined with the annual revenue growth of other brands ~ 41% year-on-year, we expect Anta Sports' revenue to increase 12.4% year-on-year to 70.1 billion yuan in 2024; based on AS US one-time listing revenue and its 24-year EPS guidelines, we expect Anta Sports' net profit to increase 38.0% year-on-year to 14.12 billion yuan in 2024.

Profit forecast and valuation: Anta Sports' 3Q24 turnover performance fell short of our expectations. We lowered 2024-26 revenue by 0.9%/1.7%/2.4% to 701.0/ 777.7/ 85.66 billion yuan, up 12.4%/10.2% year-on-year respectively; reduced net profit to mother by 1.5%/2.4%/3.0% to 141.2/ 139.6/ 15.41 billion yuan, respectively, +38.0%/-1.2% /+ 10.4% Recently, the overall valuation of the consumer sector has increased. We have given Anta Sports 20 times the 2025 P/E (previously 19 times), corresponding to the new target price of HK$108.40, an increase of 4% from the old target price. There is still room for a 19% increase from the current target price.

Risk warning: macroeconomic downturn; industry competition intensifies.