China Sportswear:Going the Distance,Solid Golden Week,especially Li Ning (revised)

Revision in this report: we changed a confusing statement to “The storesoperated under Li Ning’s new franchisees also delivered strong performance, inour view.”

    The information is based on physical store visits. We have no understanding ofthe performance of direct-to-consumer (DTC) e-commerce.

    Anta: 4Q16 incentive program delivering positive resultsWe see accelerating YoY revenue momentum at selected stores. At the sametime, retail discount remains largely controlled. We attribute the acceleration toa low base and initial results of the incentive program. We noticed moretemporary staff promoting Anta’s products, also more decorations andposters. This likely reflects wholesalers’ efforts to drive sales withoutleveraging significant discount.

    Li Ning: Very robust performance in the North, improving in the South

    We forecast Li Ning delivered very strong sellthrough growth during theGolden Week. We sense very controlled discount at stores operated by LiNing’s wholesalers. Although the level of discount is slightly heavier at LiNing’s direct-operated stores, it remains under control. In addition, wewitnessed strong performance at stores operated by Li Ning’s newwholesalers. The stores operated under Li Ning’s new franchisees alsodelivered strong performance, in our view. In general Li Ning demonstratedvery strong performance in Northern China while its market position improvedin Southern China, in our view.

    We continue to expect Li Ning’s momentum to beat market expectations andrecommend accumulating Li Ning’s shares to gain exposure to upcomingpositive catalysts.

    Valuation and risks

    We value the sporting goods space using discounted cash flow (DCF) as weexpect investors to focus on the companies’ long-term growth potential. Wesupport our valuations using PER derived from historical cycle or peercomparison. Downside risks: weaker cyclical recovery, weaker innovation,sports segmentation and e-commerce failing to drive growth for the sector.