HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>The new share placement of <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports Products (2020 HK)</a> has caught the market by surprise, but we think long-term story for the company should not be affected.</li>
<li>With proceeds to be used for repayment of outstanding debts, expansion in China and pursuing SE Asia markets, we should not overlook the benefits to be generated. </li>
<li>An IPO of Amer Sports is clearly brewing and this represents an important catalyst. Anta's 26.4x and 20.9x FY23 and FY24 PERs do not look stretched relative to earnings growth. </li>
</ul>


The new share placement of Anta Sports Products (2020 HK) has caught the market by surprise, but we think long-term story for the company should not be affected.
With proceeds to be used for repayment of outstanding debts, expansion in China and pursuing SE Asia markets, we should not overlook the benefits to be generated. 
An IPO of Amer Sports is clearly brewing and this represents an important catalyst. Anta's 26.4x and 20.9x FY23 and FY24 PERs do not look stretched relative to earnings growth. 


Anta Sports (2020 HK): Our View After Placement

External broker reports(aggregated public sources), CMB International

CMB International

External broker reports(aggregated public sources)

Incorporated in Hong Kong, supported by the mainland and targeting in global market, CMB International Capital Corporation Limited (“CMBI”) is an integrated financial institution providing comprehensive and professional services. As a wholly-owned subsidiary of China Merchants Bank ("CMB"), by leveraging on the Group’s synergy and coordination in domestic and overseas markets, as well as CMB’s strong resources and outstanding social reputation, CMBI and its subsidiaries have been actively implementing diversified business strategies and set up an overall layout of main business segments including Corporate Finance, Asset Management, Wealth Management, Global Markets and Structured Finance, etc. Adhering to the philosophy of “being clients oriented and increasing our own values by the way of creating value for clients”, CMBI endeavors to provide quality and integrated financial services to institutional, corporate and individual customers both domestic and overseas including Hong Kong IPO sponsorship and underwriting, share placement and rights issue for listed companies, financial advisors, bonds issuance services, asset management, direct investment, wealth management, equity sales and trading, etc.

Thematic (Sector/Industry)

<ul><li>Even though we are trimming our FY22E net profit forecasts, we believe the sector has already bottomed out in 1Q23E, supported by: 1) decent YTD retail sales growth, 2) turn around in inventory level and retail discounts.</li><li>While we expect a more conservative FY23E guidance by the brands, we do see decent upside surprises from GP margin improvements, helped by better retail discounts and cheaper input costs, etc.</li><li>Therefore, for brands with a higher DTC mix, we believe brands like Anta (2020 HK) and Topsports (6110 HK) are going to outperform.</li></ul><p><em>Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.</em></p>

Even though we are trimming our FY22E net profit forecasts, we believe the sector has already bottomed out in 1Q23E, supported by: 1) decent YTD retail sales growth, 2) turn around in inventory level and retail discounts.While we expect a more conservative FY23E guidance by the brands, we do see decent upside surprises from GP margin improvements, helped by better retail discounts and cheaper input costs, etc.Therefore, for brands with a higher DTC mix, we believe brands like Anta (2020 HK) and Topsports (6110 HK) are going to outperform.Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

China Sportswear Sector – We expect prudent guidance but decent margins

<ul>
<li>With the recent rally in the equity markets in Hong Kong and China, we think the asset play investment thesis for <a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang Group Co (3818 HK)</a> has revived.  </li>
<li>We estimate its investment portfolio value may have increased by HK$2bn since end-Sep, yet market capitalisation only rose HK$500m, suggesting still significant 77% discount. </li>
<li>Encouraging recent developments at <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and Ant Financial, which both are its holdings, are positive. The reduction is losses for sportswear business is an added driver. </li>
</ul>


With the recent rally in the equity markets in Hong Kong and China, we think the asset play investment thesis for China Dongxiang Group Co (3818 HK) has revived.  
We estimate its investment portfolio value may have increased by HK$2bn since end-Sep, yet market capitalisation only rose HK$500m, suggesting still significant 77% discount. 
Encouraging recent developments at Alibaba Group (9988 HK) and Ant Financial, which both are its holdings, are positive. The reduction is losses for sportswear business is an added driver. 


China Dongxiang (3818 HK): Extremely Deep Discount to Cash and Investments

<ul>
<li>
<a href="https://www.smartkarma.com/entities/xinjiang-goldwind-science-technology-h" target="_blank" data-smartkarma-citation="entities:10112:1" rel="noopener">Xinjiang Goldwind Science &amp; Technology (2208 HK)</a> performed badly in 2022 and with sustained pressure on WTG price, earnings will stay under pressure. We will only pick up post-FY22 result.</li>
<li>Removal of "zero COVID" policy and consumption recovery should revive sportswear business of <a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang Group (3818 HK)</a>. Improvement in equity market will boost its investment portfolio value.   </li>
<li>Valuation retreat for <a href="https://www.smartkarma.com/entities/china-longyuan-power-group-corp-ltd" target="_blank" data-smartkarma-citation="entities:14215:1" rel="noopener">China Longyuan Power (916 HK)</a> has made it more attractive. Rebound in electricity demand, continued green energy push and potential asset injection are drivers. </li>
</ul>



Xinjiang Goldwind Science &amp; Technology (2208 HK) performed badly in 2022 and with sustained pressure on WTG price, earnings will stay under pressure. We will only pick up post-FY22 result.
Removal of "zero COVID" policy and consumption recovery should revive sportswear business of China Dongxiang Group (3818 HK). Improvement in equity market will boost its investment portfolio value.   
Valuation retreat for China Longyuan Power (916 HK) has made it more attractive. Rebound in electricity demand, continued green energy push and potential asset injection are drivers. 


Our Three Worst Calls in 2022: Signs of Reversal in 2023

<ul>
<li>The potential IPO of <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports Products (2020 HK)</a>'s 52.7% owned Amer Sports is positive in unlocking the latter's underlying value, though the impact is quite limited.</li>
<li>Assuming a P/S of 1.8x (30% discount to peers) and 25% enlargement in share capital, we estimate the exercise may bring ~HK$6n of potential pre-tax deemed disposal gain.</li>
<li>Although Anta Sports may not receive any cash, it can still pay out special dividends given its Rmb12bn net cash, and this will raise FY23 dividend yield to 3.1%.  </li>
</ul>


The potential IPO of Anta Sports Products (2020 HK)'s 52.7% owned Amer Sports is positive in unlocking the latter's underlying value, though the impact is quite limited.
Assuming a P/S of 1.8x (30% discount to peers) and 25% enlargement in share capital, we estimate the exercise may bring ~HK$6n of potential pre-tax deemed disposal gain.
Although Anta Sports may not receive any cash, it can still pay out special dividends given its Rmb12bn net cash, and this will raise FY23 dividend yield to 3.1%.  


Anta Sports (2020 HK): Assessing the Impact of a Potential Amer Sports IPO

China

China Dongxiang Group Co Ltd retails sportswear apparel products.

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China Dongxiang (3818 HK)

Anta Sports (2020 HK): Our View After Placement

With proceeds to be used for debt repayment, expansion in China and pursuing SE Asia markets, we should not overlook long-term benefits. News flow...

Osbert Tang, CFA

China Sportswear Sector – We expect prudent guidance but decent margins

While we expect a more conservative FY23E guidance by the brands, we do see decent upside surprises from GP margin improvements, helped by better...

CMB International