Investment Summary

1H21 revenue recorded CNY 22.81 billion, a Yoy increase of 55.5%. Net profit attributable to the parent was CNY 3.84 billion, a Yoy increase of 131.6%. Excluding the share of the joint venture's net loss, net profit was CNY 4.19 billion, a Yoy increase of 76.1%. The overall performance is better than the profit alert data. The company's GPM increased, with a Yoy increase of 6.4 ppts to 63.2%, which was higher than our expectation (expected: 61%), mainly due to the transformation of the main brand DTC and the recovery of retail discounts of various brands to a better level.

The company's revenue in 1H recorded CNY 22.81 billion, an increase of 55.5% Yoy. In terms of brand breakdown, Anta's main brand revenue was CNY 10.58 billion, a Yoy increase of 56.1%, while FILA's revenue was CNY 10.83 billion, a Yoy increase of 51.4%. Revenue from other brands was CNY 1.41 billion, a Yoy increase of 90.1%. From the perspective of revenue structure, the revenue from Anta/FILA/other brands accounted for 46.4%/47.5%/6.1%, respectively, with a Yoy change of +0.2/-1.3/+1.1 ppts.

1H gross profit was CNY 14.41 billion, an increase of 72.8% Yoy, and the overall GPM was 63.2%, an increase of 6.4ppts Yoy, and an increase of 7.2 ppts compared to 2019. Mainly due to the DTC transformation of Anta's main brand, which led to an increase in GPM. In addition, the retail discount rate of Anta's main brand and FILA brand was at a better level in 1H, driving the increase in main brand GPM. From the perspective of brand classification, the GPM of Anta/FILA/other brands has improved, increasing by 11.2/1.8/5.9 ppts to 52.8%/72.3%/70.4%.

The company completed its DTC transformation plan, and its operating performance exceeded management expectations

The company completed the DTC transformation plan announced last year in March, earlier than originally expected. The company disclosed Anta's revenue by business model for the first time. Revenue from DTC/e-commerce/wholesale was CNY 3.70/3.61/3.27 billion, accounting for 35.0%/34.1%/30.9%, respectively. The revenue from DTC business accounts for about 40% of the offline flow. If 3.70 billion from DTC is converted into wholesale revenue, it is about CNY 2 billion. Excluding the impact of DTC transformation on revenue recognition changes, Anta's main brand revenue increased by approximately 30% Yoy. The monthly sales of some DTC stores exceeds CNY 300,000, which is higher than the average monthly sales of wholesale stores of 260,000. Anta's main brand OPM was 23.1%, a decrease of 4.3 ppts from the same period last year. Mainly due to the increase in the proportion of direct sales, which has a negative impact on the overall OPM. The OPM of DTC business is MSD. Because the DTC model company bears additional operating costs, including rent and store staff costs. It is expected to be further improved in the future when the sales per store improve, and the management expects to reach a HSD level in the future.

Changes in the retail environment, expected slowdown in performance growth in the 2H

Due to the repeated domestic epidemic and the impact of floods, the operating environment has changed in the 2H, and retail sales have slowed down, but the management maintains the previous guidance for full-year sales growth. Based on the excellent performance in 1H, we believe that if the growth rate slows down slightly in the 2H, it will still be able to meet the management guidance. Net profit margin is expected to face greater pressure in the 2H. The main influencing factors are 1) The discount rate in the 2H failed to maintain the level of 1H; 2) Anta's Olympic advertising investment is mainly reflected in the sales expenses of the 2H; 3) The labor cost and rental cost of Anta's main brand have risen.

Valuation and investment advice

The company's performance in 1H was outstanding, but with the change in the retail environment in the 2H, it is expected to have an impact on the company's profitability in the 2H. In addition, after the company announced its DTC business data, its profitability was lower than our previous expectations. Adjust the company's future GPM and expense ratio to reflect the impact of the company's DTC transformation. Reduce the company's EPS for 2021/2022/2023 to CNY 2.97/3.80/4.82 (previously: 3.03/4.15/5.16). Rollover the company's target P/E to 40x FY22, adjust the company's target price to HKD 178.89 (previously: HKD 178.24) corresponding to 51.24/40.00/ 31.55 times the expected P/E for 2021/2022/2023, and maintain the Accumulate rating.

(Current price as of September 20)

Risk

1) Covid-19 rebound

2) The profitability of DTC has not improved as desired

Financials

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