Greater China Sporting Goods:1H17preview,More positive on USexporting ODMs (FT and Eclat)

Buy FT & Eclat into sustainable upcycle, Anta for strong retail sales; avoid Giant

    The upcoming results could be generally positive for share prices. We believeUS-exporting ODMs have exited painful adjustments & should enter asustainable upcycle, with multiple structural drivers. We continue torecommend buying FT (Feng Tay) and Eclat into the results. We view Anta as abetter proxy to enjoy accelerating consumption in China vs. Li Ning and PouSheng. M&A analysis suggests Asics could be an ideal candidate for Anta. Weexpect SZ (Shenzhou) to receive compensation from Nike before Flyknitcapacity utilization recovers in 2H18, and disagree with the bears’ arguments.For Giant, its challenge may extend beyond revenue to utilization and margins.

    Upcoming results: in general positive, ODMs will likely outperform

    For ODMs: we expect generally good results from Eclat, YY (Yue Yuen) and SZ(mainly strong margins). Although FT has reported preliminary 2Q17profit, webelieve its monthly profit releases in 2H17will drive up consensus earningsforecasts. We expect more positive comments on US demand in 2H17and2018from management. For domestic sportswear companies: Anta’s 2Q17retail sales may surprise consensus to the upside, boosting market confidencein its 2020targets. Li Ning’s channel inventory and 2018order book targets arelikely positive for the share price. Pou Sheng: we see positive signs in 2Q17operating margin, but still lack conviction in our forecasts. Giant: demandweakness may translate into capacity underutilization and hurt its margins. Wehave concerns about the financial standing of its wholesalers in China.

    Incremental on ODMs: more positive on US-exporting ODMs

    FT: contrary to bearish investors, we expect FT’s India expansion and Chinaautomation to boost operating profit significantly.

    Eclat’s growth sustainability may surprise the market to the upside. Itsgarment growth may beat the market’s expansion in the next 18months dueto Eclat’s heavy efforts in building a true vertically-integrated platform.SZ: Nike’s compensation to SZ on Flyknit capacity underutilization is likely anupside surprise. Textile operation remains very solid.

    YY’s improvement in ODM profitability will likely sustain into 2018E due to astrengthened supply chain in Vietnam.

    Incremental on domestic sportswear: Anta M&A analysis

    Anta: among the potential M&A targets that could be seen as well suited toAnta’s often mentioned M&A strategy, we find Asics the most suitable:

    (1)financial risk-reward on the investment is likely favorable to Anta,

    (2) the 2020Tokyo Olympics, Asics’ huge potential in China and its relationship with YYmakes Asics an ideal fit for Anta’s strategy.

    LN’s unique competitive edge in e-commerce should support its 2017E profit.Management’s initiatives to create omni-channel and enhance the supplychain should further boost its e-commerce capability.

    Valuation and risks to our positive industry view

    We value the sporting goods sector using DCF, as we expect investors to focuson the sector’s long-term value creation. For WACC, we follow DB’s view onRFR and ERP while assigning a beta between 0.9to 1.3and terminal growth of1-2%. Downside risks: weaker cyclical recovery, weaker innovation, sportssegmentation and e-commerce failing to drive sector growth. Upside risks(Giant): China banning bike sharing and/or allowing sports e-bikes.