China sportswear:Robust down jacket demand

Robust down jacket demand could boost sportswear retail sales in 4Q17

    We were previously more cautious on Anta and Li Ning’s December retail salesgrowth, due to a high base (driven by early Chinese New Year). However,recent channel checks suggest December momentum could be stronger thanour previous anticipation, due to the robust demand for down jackets.What is driving the growth?

    (1) weather,

    (2) fashion, and

    (3) government policyNice cool-off in October and a colder November & December (especially inNorthern China) drove demand for heavy coats. Temperature trends during2017winter look more normal vs. that in 2015and 2016(which are impactedby El Nino and La Nina).

    We also noticed a changing fashion trend in favor of down jackets, startingfrom Korea.

    Last but not least, we noticed that government has been suppressing coalfurnaceheating in selected regions in Northern China. According todistributors, demand for heavy coats increased meaningfully in these regions.How significant is down jacket?

    We believe down jacket (and other heavy coats) can represent c. 20% ofdistributors’ apparel retail sales in 4Q, that is, 7-9% of distributors’ overall retailsales.

    Industry valuation and downside risks

    We value the sporting goods sector using DCF, as we expect investors tofocus on the sector’s long-term value creation. For WACC, we follow DB’sview on RFR and ERP while assigning a beta between 0.9to 1.3and terminalgrowth of 1-2%.

    Downside risks: weaker cyclical recovery, weaker innovation that fails to drivenew demand, sports segmentation and e-commerce’s inability to drive sectorgrowth.