At the centre stage of growth;initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Consumer Retail / Wholesale Trade Company Pou Sheng Date 26 September 2016 Initiation of Coverage At the centre stage of growth; initiating with Buy Reuters Bloomberg Exchange Ticker 3813.HK 3813 HK HSI 3813 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E DB EPS growth (%) – 1,230.2 81.6 39.9 24.0 PER (x) 67.4 9.2 14.5 10.3 8.3 Source: Deutsche Bank estimates, company data Dual driving forces from international brands and channel brand efforts ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 23 Sep 2016 (HKD) 2.64 Price target - 12mth (HKD) 3.40 52-week range (HKD) 2.78 - 1.19 HANG SENG INDEX 23,686 John Chou Research Analyst (+852 ) 2203 6196 john.chou@db.com Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Price/price relative 0.40.81.21.62.02.42.83.29/143/159/153/16Pou ShengHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 6.9 20.0 111.2 HANG SENG INDEX 3.0 13.5 11.2 Source: Deutsche Bank China’s importance as a market for international sports brands continues to rise, inspiring structural growth for leading distributors like Pou Sheng (PS). We forecast PS will become a more efficient player in distributing products for international brands. At the same time, PS has been aggressively enhancing its own channel brands through multi-brand stores and e-commerce. We forecast PS’s revenue to post a 13% CAGR in 2015-20E (driven by network expansion and SSSg equally), an earnings CAGR of 37%, driven by revenue growth and margin expansion. Our DCF-based target price implies 14x 2017E PER, Buy. Growing with international brands’ long-term targets... We forecast PS will enjoy structural growth driven by intentional brands’ well-planned expansion in China. Accounting for c.20% of Nike and Adidas sell-through in China (Figure 14), we believe that PS is well embedded in the brands’ growth schemes. PS also has the flexibility to accommodate each brand’s agenda (Figure 15). In addition to a robust store expansion target (Figure 16) we view SSSg and efficiency as the two major growth opportunities for PS. On SSSg, a near-term driver is the easing inventory shortage (Figure 21). Moreover, a long-term SSSg driver results from more flagship stores that PS will install for the brands. On efficiency, PS’s operating efficiency is far behind that of Belle and Foot Locker (Figure 22). However, we anticipate strong efficiency improvements driven by consolidating JV stores, adjusting inventory systems, and reducing discounts. We forecast PS to expand its store network to 6,800 by 2020 (from 4,943 in 2015, representing a 7% CAGR). ...while developing the channel brands and e-commerce In addition to distributing on behalf of international brands, PS is also exploring the potential of its channel brand and e-commerce. We forecast that PS will add significantly more multi-brand stores under its brand “YY Sport”. This also represents its answer to the sports segmentation trend (Figure 27). Also, PS’s unique multi-brand store format allows for more rental income (Figure 28). We forecast that sporting goods e-commerce will become more disciplined, and major distributors, such as PS, should benefit (Figure 32). We do not expect brands’ DTC (direct-to-consumer) to impact PS significantly, as China remains a diverse and under-penetrated market for sporting goods. DCF-based target price of HKD3.4 supported by PER, downside risks We use discounted cash flow (DCF) as our primary approach to value PS’s shares. We adopt the DCF methodology as we expect investors to focus more on PS’s long-term value creation (detailed assumptions in Figure 4). Downside risks: a market slowdown, heavier competition from DTC, inventory shortages, as well as weaker demand for channel brand concepts. This report is published in conjunction with our sector report – Greater China Sporting Goods: Giant Steps Distributed on: 26/09/2016 16:00:00 GMTDistributed on: 26/09/2016 14:55:00 GMT 26 September 2016 Retail / Wholesale Trade Pou Sheng Page 2 Deutsche Bank AG/Hong Kong Model updated:23 September 2016 Running the numbers Asia Hong Kong Textiles & Apparel Pou Sheng Reuters: 3813.HK Bloomberg: 3813 HK Buy Price (23 Sep 16) HKD 2.64 Target Price HKD 3.40 52 Week range H