China Sports Footwear

Newly listed Anta marks a new scale on the gauge
Anta’s debut on HKSE. Anta sports, one of the top sneaker makers in China
has launched its IPO on this Tuesday. The successful IPO and strong share
price performance has re-enforced our positive view on the whole sector. We do
a close comparable with the top three sports brand owners in

Anta is more close to China Hongxing. Anta’s brand image, business model,
ASP at retail level and sales revenue are more close to China Hongxing who is
also focusing on the 2nd and 3rd tier cities. Li Ning, China’s top sports brand has
been using a business model more close to Nike who outsourced all its
production and focus on brand operation. We can see Li Ning’s marketing
expenses, gross margin and ASPs are much higher than the other two.

Possible explanation to Anta’s low profitability. Anta is regarded as the 2nd
famouse China sports brand to Li Ning although its ASP is 30%-40% discount
to Li Ning’s on the retail level. However, we found that even its stores have
outnumbered China Hongxing’s, its revenue and gross margins are lower than
China Hongxing’s. We think this may due to: 1) Anta gives out more profit to its
distributors (35 at end 06). Hongxing’s distributors (24 at end 06) usually take
10% margin by selling to franchisers while anta’s distributors may enjoy higher
profitability than Hongxing’s. This has resulted in same ASP at retail level while
big gap at whole sale level. 2) Anta may use more stringent accounting policy
to record earnings and this may leave room for the coming earnings surprise.
We found Anta’s account receivable days are significantly shorter than those
two.

Vaualtion. Our assumption on Hongxing is based on a convex growth curve;
while Anta’s number was based on an aggressive forecast even Anta has more
shops. We also found Anta’s high growth from FY04-FY06 was mainly due to its
appeal sales which accounts for 33% in terms of total revenue for FY06 from
only 13% for FY04. As such, Hongxing may have higher than expected growth
if its apparel sales catch up. We will revise upwards our forecast on Hongxing.