Sporting Goods:Asia marketing feedback ?higher conviction on key ideas

Still room for expectation upgrades.

    We finished an eight-day marketing event with nearly 60 meetings. We havegrowing conviction that Pou Sheng (PS) and Li Ning’s (LN) 2016 performancemay beat market expectations. Our contrarian buys on Feng Tay (FT) and Eclatgained good interest. We believe FT’s shares are getting attractive and forecastexpectation upgrades from 1Q17 onward. For Eclat, we forecast a goodrecovery in 2017 if Thanksgiving 2016 was normal. Some investors are likelylooking for entry points to accumulate Anta's and Shenzhou’s shares.

    Li Ning & Pou Sheng: growing convictions; we suggest accumulating now.

    We sense LN’s robust earnings outlook is not fully priced in. We now believethe potential wholesale business turnaround may post an upside surprise tothe market. We expect additional buyers once LN’s growth potential isrevealed through upcoming SSSg, orderbook and earnings data. On PS, someinvestors have been hesitant due to share price volatility and weak Augustsales. Most investors we spoke to are interested in our positive arguments ongross margin and rental income. We sense that expectations on 2H16profitability are modest and continue to expect a beat. For a longer investmenthorizon, investors are worried about competition from Nike’s direct-toconsumer(DTC) efforts. We will monitor Nike’s DTC expansion closely butremain comfortable with developments in the competitive landscape.

    FT & Eclat: contrarian buys with interest; suggest waiting after Thanksgiving.

    Most investors agree with our arguments that the recent weak data points area reflection of the past, while leading indicators (sell-through) are alreadyimproving. Some investors are positively surprised by FT’s contracted R&Dbusiness. Given the low expectations and our conviction on recovering growthmomentum from 1Q17, we believe FT’s shares are getting more attractive. OnEclat, investors have reduced expectations for 2016 but in general forecast arecovery in sales momentum from 1Q17. Nevertheless, we continue to believethe jump in jacquard fabric contribution from 2Q17 may surprise the market tothe upside. For longer-term investors, we suggest waiting after Thanksgivingsellthrough data. If Thanksgiving 2016 was normal (vs. abnormally weak in2015), FT and Eclat should deliver a strong recovery in 2017.

    Anta & Shenzhou: high-quality buys; we suggest accumulating on pull-backs.

    Anta’s multi-brand strategy is well-known by investors, in our view. We alsosense that investors have reduced expectations on Anta adult products whileshifting more attention to e-commerce, kids and Fila. Interestingly, Fila’sperformance was widely discussed in the marketing trip, with some investorsciting Fila’s fashion risks. We continue to see a strong performance with Fila,as the athleisure style in China remains intact. Shenzhou also gainedtremendous investors interest. Most investors are aware of a potential revenueYoY slowdown in 2H16 (due to a higher base) but anticipate a strong 2017.

    Valuation and downside 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 using a historical cycle or peercomparison. Downside risks: weaker cyclical recovery, weaker innovation,sports segmentation and e-commerce failing to drive growth for the sector.