China Sporting Goods:3Q16channel conditions

Anta: 3Q16 physical retail stabilizing; gear up for 4Q16We believe the retail conditions of Anta’s adult physical distributors have beenstabilizing in 3Q16. The stabilization is represented by an easing decline insellout YoY and stabilizing retail discount. Furthermore, channel inventory levelstayed largely stable QoQ; thanks to the more conservative ordering for 3Q16products (Anta 3Q16 orderbook was up high-single-digit ppt YoY vs. lowdoubledigit ppt YoY in 2Q16).

    For 4Q16, we forecast Anta to launch an incentive scheme to help fueldistributors’ sell-through. This, coupled with an easier comp (4Q15 was likely alow base), should help Anta’s 4Q16 sell-through momentum.

    Li Ning: sustainable recovery momentumIn Northern China, we believe retail conditions at Li Ning’s distributorscontinue to improve. This is represented by narrowed retail discounts, climbingsellout and better channel inventory age mix.

    We witnessed some of Li Ning’s distributors taking more orders during the2Q17 sales fair, driven by the outperformance of their sub-distributors.

    Valuation and risksWe value the sporting goods space using discounted cash flow (DCF) as weexpect investors to focus on the companies’ long-term growth potential.

    We support our valuations using PER derived using historical cycle or peercomparison. Downside risks: weaker cyclical recovery, weaker innovation,sports segmentation and e-commerce failing to drive growth for the sector.