Anta Sports Catching Up with Li Ning's Storefront Transformation Will Promote Sales

We believe that Anta Sports (2020) is catching up, and the gap with Li Ning (2331) is gradually narrowing, and it is committed to becoming the most popular sportswear brand in China. With the transformation of retail stores, improvement of profit margins and improvement of brand value, we expect that the annual average compound growth rate of earnings per share of ANTA Sports from 2008 to 2010 will reach 39.8%.

The valuation of the stock should be equivalent to that of Li Ning, so the revaluation of the upward valuation is expected. Anta is currently focusing on the development, production and promotion of Anta brand products in the low-end sportswear market. The company has a total of 39 distributors responsible for managing more than 4,000 retail outlets in the Mainland. Recently, the company also sells Adidas, Reebok and back-to-back brands through franchise stores.

Anta products are positioned to serve the mass market, mainly including families with a monthly income of RMB 2,000 and above. According to the National Bureau of Statistics data, we conservatively predict that Anta's target market covers more than 80% of the urban population and 10% of the rural population, totaling more than 500 million people. Although Adidas, Nike and Li Ning are competing for 10% to 15% of the total population of high-end customers, but Anta is still focused on developing the mass market. Anta sells about 22 million pairs of shoes each year through 4,600 points of sale. Management expects that ANTA’s revenue growth will maintain its highest level in the industry until 2011.

In the past few years, the retail price of Anta's products is about 30% lower than that of Li Ning's counterparts, and the ratio between ex-factory price and retail price is about 39%, while Li Ning is as much as 53%. In the coming years, the average selling price of ANTA products will increase by about 2%-3%. Consumers tend to buy more expensive goods, so we think the weighted average selling price will gradually increase. The ex-factory and retail price ratios in 2007, 2008 and 2009 will reach 41%, 43% and 45%, respectively. Assuming a 3%-5% increase in unit cost, we expect the gross margin of ANTA to increase to 33.5%, 38.6% and 41.2% respectively in 2007, 2008 and 2009.

Storefront renovation will drive sales

Anta is working with distributors to carry out store renovation projects. The area of ​​the store will also be increased from the current 80 square meters to 100 square meters. Dadian will exhibit more clothing products and life series products, which will help improve customers' shopping comfort. In addition, different stores in the same street will be selected for different themes, such as professional sports shop, lifestyle shop, etc. Each store will attract customers with individuality. We expect the sales revenue of Anta's stores to increase by 25% and 10% YoY in 2008 and 2009 respectively. Meanwhile, with the expansion of store expansion plans, revenue in 2008 and 2009 will increase by 42% and 26% respectively year-on-year.

According to the market's forecasted P/E of 2008, ANTA's current stock price is 25% discount to Li Ning. We believe that the discount rate will gradually decrease, mainly because: 1) Anta's low-end market competition is not fierce, and the market growth space is also relatively large, while Li Ning is positioned in the mid-range market, and upward price adjustment will be subject to Nike and Adidas. 2) Thanks to the effective use of marketing expenses and the pure wholesale model, Anta's operating profit margin is comparable to that of Li Ning; 3) Deducting idle cash from the initial public offering, Anta’s ROE is basically equivalent to that of Li Ning, even though ANTA takes vertical Integrated mode. If ANTA's expected earnings per share for 2008 is the same as Li Ning's 43-fold valuation, then ANTA's target price is HK$14.00 (yesterday, it will receive RMB10.84), and the stock currently has 29% upside. For the first time, we have rated ANTA Sports as better than the market. (BOC International Securities)