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1、,14,November 14,2012China:RetailEquity ResearchIndustry still tough:opex control the only lever,but for how long?Sports industry still facing tough condition,Following our industry checks,we believe that(1)end-demand is showing,SUMMARY OF OUR 12M TP CHANGES AND RATINGS,a limited recovery,and(2)chann
2、el inventory remains a problem.We,Target Price(HK$),TP P/E 13(x),believe the industry may not see positive sales growth in 2H13,contrary towhat is implied by consensus.We see two reasons for the slow recovery in,Li NingAnta,RatingNeutralCL Sell,New4.404.20,Old4.103.70,New119,Old128,demand:(1)Chinas
3、sports industry faces competition not only fromwithin,but also from casual wear as a substitute for sports apparel;and(2)industry participants have little experience in a downcycle and have beenslow in responding to the end-demand slowdown.Operating expense an easy lever to pull,but for how long?Wit
4、h the exception of Li Ning,which is investing in restructuring,allindustry participants are cutting back opex to help alleviate near-termmargin pressure.Wholesale brand opex is mostly fixed,but the biggestcost item,advertising and promotion(A&P),is somewhat discretionary.Inprior years,a third of A&P
5、 was subsidies for retail stores.This year,thisitem was the first to be cut back.We think the opportunity for further opexreductions in 2013 will be much smaller given the low 2012 base.Maintain Neutral on Li Ning and Sell on Anta(on CL)Li Ning has the strongest brand among domestic sports companies
6、.Wesee earnings potential should the TPG-led turnaround be successful,butthink at the current stage it is too early to be a buyer of the shares.Antahas an integrated exclusive distribution network and efficient opex,but isnot immune from sales decline.We see margin risk for Anta as theconsensus expe
7、ctation of a 9%opex cut in 2013 seems difficult to achieve.Revising our forecasts and target pricesFor Anta,we raise 2012E/13E14E EPS by 3%/1%/11%to reflect lower A&Pforecasts.For Li Ning,we revise EPS by-14%in 2012E on higherrestructuring cost,+18%/-8%in 2013E/14E on higher/lower govt subsidy.Valua
8、tion:Our coverages average P/E is now 14X(from 11X),and weupdate our growth and return discounts we apply to Anta and Li Ningstarget multiple.As a result,we raise our 12-m TP:For Anta to HK$4.20(from HK$3.70)on 9X 2013E EPS of HK$0.47(prior 8X 2013E of HK$0.46)and for Li Ning to HK$4.40(HK$3.70)on 1
9、1X 2013E EPS of HK$0.40(12X2013E of HK$0.34).,Source:Gao Hua Securities Research estimates.Risks:Upside:better-than-expected demand recovery;Downside:worse-than-expected opex control.UPCOMING EVENTS2Q13 sales fair results in mid Nov2H12 results in Mar 13RELATED RESEARCHAnta Sports Products(2020.HK).
10、Sales not bottomed,highOPM unsustainable;reiterate CL-Sell,Oct.18Trinity Ltd.(0891.HK).Tailoring Greater China growth;high-potential brands;initiate at Buy,Nov 14Daphne International Holdings(0210.HK).Sector-leadinggrowth to drive re-rating;raising TP.CL Buy,Nov 14Bosideng International Holdings(399
11、8.HK).High dividendyield and stable business priced in;down to Neutral,Nov,Caroline Li,CFA+86(10)6627-3023 Beijing Gao Hua Securities Company LimitedSource Yuan+86(10)6627-3327 Beijing Gao Hua Securities Company LimitedThe Goldman Sachs Group,Inc.,Goldman Sachs does and seeks to do business withcomp
12、anies covered in its research reports.As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in makingtheir investment decision.For Reg AC certification and other
13、important disclosures,see the Disclosure Appendix,or go Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.Global Investment Research,2,November 14,2012,China:Retail,Sports industry still toughFollowing recent discussions with leading region
14、al sports distributors and visits to retailstores,we believe that(1)end-demand is showing a limited recovery,and(2)channelinventory remains a problem.We believe the industry may not see positive sales growth in2H13,contrary to what is implied by consensus.We see two reasons for the slow recovery in
15、demand:(1)Substitute effect from casual wear.Chinas sports industry faces competition not onlyfrom within,but also from casual wear in the apparel category.As the sports participationrate is still low in China,sports apparel is mostly used as casual wear.Chinese consumersnow have a large selection o
16、f casual wear brands,so we believe the appeal of sportsapparel is unlikely to recover to the pre-2008 level.(2)Industry participants have little experience with an industry down cycle and have beenslow in responding to an end-demand slowdown.Heavy retail discounting appears to bethe common choice.Op
17、timizing inventory across provincial borders could help,but thecurrent distribution model,an exclusive province model,makes such movement betweendistributors almost impossible.Continued decline in wholesale ordersThe slowdown in wholesale started in 2H11 for most industry participants.Based on whath
18、as been disclosed by select brands,we believe the latest 2Q13 trade fair is likely to seedouble-digit sales declines.We think the likelihood of 3Q13 order growth turning positive islow given industry demand and the channel inventory situation.Exhibit 1:Wholesale order growth and future order trend,W
19、holesale growth,Trade fair order growth,1H11,2H11,1H12,3Q12,4Q12,1Q13,2Q13,msd,high-teen no longer no longer,Li Ning,-12%,-11%,-14%,decline,decline disclose disclose,hsd,low-teen 20%-30%,to be,Anta,23%,11%,-16%,decline,decline,decline released,15-20%,to be,Xtep,29%,27%,5%,flat,flat,decline,released,
20、Mid-,Mid-,High-,twenties twenties,twenties,Peak361 Degrees,25%21%,-3%7%,-30%-17%,decline6%,decline2%,Flat-23%,decline-23%,Mid-teen no longer no longer no longer,Dongxiang,-50%,-34%,-39%,decline disclose disclose disclose,Source:Company data,Gao Hua Securities ResearchGoldman Sachs Global Investment
21、Research,3,November 14,2012,China:RetailOpex a lever,but unlikely to be so for longIn 1H12,most brands kept opex flat or down yoy.Reducing opex can be a short-termmethod to protect margins when sales decline,but as wholesale brands opex is largelyfixed,room for further reduction is limited,in our vi
22、ew.Exhibit 2:Operating expensesRmb mn,1H11,2H11,1H12,1H12 yoy,Li NingAntaXtepPeak361 DegreesDongxiang,1,660849493397423482,1,967977562528630801,1,657784497324622369,0%-8%1%-18%47%-24%,Source:Company data,Gao Hua Securities ResearchEarnings revisionAnta:We raise our 2012E/13E/14E net income forecasts
23、 by 3%/1%/11%,driven by lowerA&P forecast in 2012E and 2014E.As for 2013E net income,we believe our previousforecast was already low so we only revise down slightly.We lower 2012E A&P forecast toreflect the near-term possibility for the company to further reduce subsidy to retail stores.We now forec
24、ast 13%yoy opex growth in 2014E from 18%previously,reflecting lower costin athletic sponsorship,as we are seeing less intense competition for sponsorships.Our2014E forecast still implies negative operating leverage yoy.Exhibit 3:Anta earnings revision,2012E,2013E,2014E,(Rmb mn)RevenueGross profitOpe
25、rating expenseOperating incomeNet income,Old7,7953,2571,7141,5431,364,New7,7953,2571,6631,5941,404,%chg0%0%-3%3%3%,Old6,9572,8371,8011,036930,New6,9572,8371,7971,040936,%chg0%0%0%0%1%,Old7,3122,9822,134848782,New7,3122,9822,025957865,%chg0%0%-5%13%11%,Grow th,Revenue growthOpex growthOP growthNet in
26、come growth,-12%-6%-20%-21%,-12%-9%-18%-19%,0pts-3pts3pts2pts,-11%5%-33%-32%,-11%8%-35%-33%,0pts3pts-2pts-2pts,5%18%-18%-16%,5%13%-8%-8%,0pts-6pts10pts8pts,M argin,Gross marginOpex/salesEBIT marginNet margin,41.8%22.0%19.8%17.5%,41.8%21.3%20.5%18.0%,3bps-66bps66bps51bps,40.8%25.9%14.9%13.4%,40.8%25.
27、8%15.0%13.5%,0bps-7bps7bps8bps,40.8%29.2%11.6%10.7%,40.8%27.7%13.1%11.8%,0bps-150bps150bps114bps,Source:Gao Hua Securities Research estimatesGoldman Sachs Global Investment Research,4,November 14,2012,China:RetailWe are below consensus for Anta due to our higher opex assumptions.Consensusassumes 13%
28、opex cut in 2012,followed by another 9%opex cut in 2013,before recoveringto 4%opex growth in 2014.We,however,believe opex yoy decline will only occur in 2012E,followed by 8%/13%yoy growth in 2013E/14E.We think it is unlikely to not have expensegrowth in wages,rental,and A&P on a three-year basis.Exh
29、ibit 4:Our earnings estimates for Anta vs.consensus,opex the biggest difference,2012E,2013E,2014E,(Rmb mn)RevenueGross profitOpexOperating incomeNet income,GS7,7953,2571,6631,5941,404,Cons7,8713,2281,5921,6361,393,%diff-1%1%4%-3%1%,GS6,9572,8371,7971,040936,Cons6,9942,8251,4451,3801,120,%diff-1%0%24
30、%-25%-16%,GS7,3122,9822,025957865,Cons7,3542,9551,5091,4461,145,%diff-1%1%34%-34%-24%,Grow th,Revenue growthOpex growthOP growthNet income growth,-12%-9%-18%-19%,-12%-13%-16%-19%,-1pts4pts-2pts1pts,-11%8%-35%-33%,-11%-9%-16%-20%,0pts17pts-19pts-14pts,5%13%-8%-8%,5%4%5%2%,0pts8pts-13pts-10pts,Source:
31、Bloomberg,Gao Hua Securities Research estimatesLi Ning:We raise our 2013 net income forecast by 18%to adjust for our previously overlyconservative view on government subsidy income.On the other hand,we tweak salesgrowth and margin assumptions slightly lower,to reflect our view that any positivefinan
32、cial impact of restructuring and business turnaround may not be reflected till 2014.Given the low earning visibility during restructuring,we think it is not meaningful tocompare our estimates with consensus.Exhibit 5:Li Ning earnings forecast:cut on sales and margin,slightly offset by higher2013E go
33、vernment subsidy assumption,2012E,2013E,2014E,(Rmb mn)RevenueGross profitOperating incomeNet income,Old8,1493,612(11)(62),New7,9493,522(22)(71),%chg-2%-3%-105%-14%,Old8,8334,077650319,New8,5783,918631377,%chg-3%-4%-3%18%,Old9,9714,604801497,New9,6814,469808459,%chg-3%-3%1%-8%,Grow th,Revenue growthO
34、perating incomeNet income,-9%-102%-116%,-11%-105%-118%,-2%-2%-2%,8%NMNM,8%NMNM,0%NMNM,13%23%56%,13%28%22%,0%5%-34%,M argin,Gross marginEBIT marginNet margin,44.3%-0.1%-0.8%,44.3%-0.3%-0.9%,-2bps-15bps-13bps,46.2%7.4%3.6%,45.7%7.4%4.4%,-47bps0bps78bps,46.2%8.0%5.0%,46.2%8.3%4.7%,-2bps32bps-24bps,Sour
35、ce:Gao Hua Securities Research estimatesGoldman Sachs Global Investment Research,5,November 14,2012,China:Retail,Valuations:sector-relative growth and return-adjusted P/EWe set our valuations on sector relative growth and return adjusted P/E basis.We use 14X2013E P/E for our H-share branded retail s
36、ector average(prior:11X,as we have sincedropped coverage for four sports names),and apply 20%growth discount and 20%returndiscounts,for the stocks with bottom quartile growth and return relative to the sector.For Li Ning,we assign a 20%discount to reflect the companys sector-lagging returns(2013E an
37、d 2014E average CROCI 24%below sector average).We previously assigned 10%growth premium as we were expecting earlier-than-sector growth recovery.However,wedo not apply premium or discount on growth as the company is loss-making in 2012,andgrowth profile becomes less relevant for a company going thro
38、ugh restructuring.As aresult,our 12-month target price for Li Ning is increased to HK$4.40(from HK$4.10)on 11X2013E EPS of HK$0.40(previously 12X 2013E EPS of HK$0.34).For Anta,we assign a 20%discount on returns to reflect the companys sector-laggingreturns(2013E and 2014E average CROCI 41%below sec
39、tor average)and 20%discount ongrowth to reflect its bottom-quartile growth(2012-14E EPS decline by 21%CAGR,vs.sectoraverage growth of 10%).Previously,we assigned 25%growth and return discounts forAnta.The 20%discounts are now in line with stocks with bottom quartile growth or returnrelative to the s
40、ector within our coverage.As a result,our 12-month target price for Anta isincreased to HK$4.20(from HK$3.70)on 9X 2013E EPS of HK$0.47(previously 8X 2013EEPS of HK$0.46).Key risks for Li Ning:Faster-than-expected positive earnings impact from business turn-around;worse-than-expected brand erosion o
41、n the downside.Key risks for Anta:Better-than-expected opex control.Exhibit 6:We assign 20%return discount to Li Ning,and 20%return and growth discounts to Anta,relative to our H-share branded retail coverage,12-14,13-14,growth,return,Rating,New,Target,price,Current,TP P/E,2013,EPS,Prem/,CROCI,Prem/
42、,prem/dis,prem/dis,Company,Old,New TP upside,Old,New,Price,Old,New,CAGR,Disc,Avg,Disc,on P/E,on P/E,1880.HK Belle0891.HK Trinity,Buyna,BuyBuy,11%26%,16.00na,16.006.70,14.405.31,20 Xna,20 X17 X,18%20%,81%101%,23%19%,35%12%,20%20%,20%0%,0210.HK Daphne,CL Buy CL Buy,37%,11.00,11.90,8.69,16 X,17 X,23%,1
43、35%,20%,13%,20%,0%,3998.HK Bosideng,Buy,Neutral,13%,2.70,2.70,2.39,11 X,11 X,10%,-2%,18%,4%,-20%,0%,2331.HK Li Ning2020.HK Anta,Neutral NeutralCL Sell CL Sell,5%-31%,4.103.70,4.404.20,4.206.12,12 X8X,11 X9X,NM-21%,NM-315%,13%10%,-24%-41%,0%-20%,-20%-20%,Brand average,11X,14 X,10%,17%,Note:Prices are
44、 in HK$.Current Prices are based on Nov 12 close;Target prices are based on a 12-month horizon.Source:Company data,Gao Hua Securities Research estimates.Goldman Sachs Global Investment Research,6,November 14,2012Li Ning Company:Summary Financials,China:Retail,Profit model(Rmb mn)Total revenueCost of
45、 goods soldSG&AR&DOther operating profit/(expense)EBITDADepreciation&amortizationEBITInterest incomeInterest expense,12/118,928.5(4,814.0)(3,627.0)-0.0748.8(261.3)487.517.2(99.2),12/12E7,949.1(4,427.3)(3,544.1)-0.0215.4(237.7)(22.4)12.9(174.5),12/13E8,577.5(4,659.1)(3,287.1)-0.0870.8(239.4)631.415.3
46、(174.5),12/14E9,680.9(5,212.3)(3,660.6)-0.01,058.9(250.8)808.019.3(174.5),Balance sheet(Rmb mn)Cash&equivalentsAccounts receivableInventoryOther current assetsTotal current assetsNet PP&ENet intangiblesTotal investmentsOther long-term assetsTotal assets,12/111,209.72,439.01,133.00.04,781.6831.71,123
47、.558.2533.87,328.8,12/12E1,374.42,384.7974.00.04,733.1928.71,028.958.2533.87,282.7,12/13E1,686.52,573.3931.80.05,191.61,005.9926.758.2533.87,716.2,12/14E2,182.22,710.7886.10.05,779.01,084.3811.558.2533.88,266.7,Income/(loss)from uncons.subs.,(1.5),0.0,0.0,0.0,OthersPretax profitsIncome taxMinorities
48、,143.4547.4(136.4)(25.2),125.0(58.9)14.7(26.8),68.2540.5(135.1)(28.5),0.0652.9(163.2)(30.3),Accounts payableShort-term debtOther current liabilitiesTotal current liabilities,2,124.9838.1100.13,063.1,2,036.6838.1186.53,061.2,2,050.0838.1201.33,089.3,2,084.9838.1227.23,150.2,Long-term debt,0.0,0.0,0.0
49、,0.0,Net income pre-preferred dividendsPreferred dividendsNet income(pre-exceptionals),385.80.0385.8,(71.0)0.0(71.0),376.90.0376.9,459.40.0459.4,Other long-term liabilitiesTotal long-term liabilitiesTotal liabilities,601.1601.13,664.2,601.1601.13,662.3,601.1601.13,690.4,601.1601.13,751.2,Post-tax ex
50、ceptionals,0.0,0.0,0.0,0.0,Net income,385.8,(71.0),376.9,459.4,Preferred shares,0.0,0.0,0.0,0.0,Total common equity,3,471.8,3,400.9,3,777.8,4,237.2,EPS(basic,pre-except)(Rmb),0.37,(0.07),0.36,0.44,Minority interest,192.8,219.6,248.0,278.3,EPS(basic,post-except)(Rmb),0.37,(0.07),0.36,0.44,EPS(diluted
