Greater China Sporting Goods：FY16 preview: Time to buy US exporting ODMs; upgrading YY to Buy

Deutsche Bank Markets Research Asia China Consumer Industry Greater China Sporting Goods Date 21 February 2017 Recommendation Change FY16 preview: Time to buy US-exporting ODMs; upgrading YY to Buy Buy Eclat, YY, FT & PS; stay cautious into Anta’s 2H16 results ________________________________________________________________________________________________________________ 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. John Chou Research Analyst (+852 ) 2203 6196 john.chou@db.com Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Key Changes Company Target Price Rating 0551.HK 35.00 to 38.00(HKD) Hold to Buy 1476.TW 435.00 to 430.00(TWD) - 2313.HK 62.00 to 56.00(HKD) - 9910.TW 170.00 to 156.00(TWD) - 2020.HK 24.00 to 26.50(HKD) Buy to Hold 2331.HK 6.20 to 5.90(HKD) - Source: Deutsche Bank Top picks Yue Yuen (0551.HK),HKD26.95 Buy Eclat Textile (1476.TW),TWD309.00 Buy Feng Tay (9910.TW),TWD130.00 Buy Pou Sheng (3813.HK),HKD1.94 Buy Source: Deutsche Bank The upcoming earnings could be mixed for the sporting goods space, with YY (Yue Yuen) likely delivering a more meaningful beat. Having said that, we believe the results and management comments will improve the sentiment for US-exporting ODMs. We thus recommend buying Eclat, FT (Feng Tay) and we upgrade YY to Buy. PS’s 2017 growth may surprise to the upside, but its 4Q16 results may miss. Any weakness post results should be a buying opportunity. We expect the market to digest emerging uncertainties on SZ (Shenzhou) and LN (Li Ning). We view Anta’s multi-brand strength as priced-in, with growing uncertainties on the Anta Adult orderbook. We thus downgrade it to Hold. Upcoming results: be selective; US recovery is our best theme For ODMs: YY’s 4Q16 earnings may beat market expectations, while Eclat and FT could be mixed. Nevertheless, we expect the US-driven exporters to deliver positive comments regarding a US market recovery. SZ’s 2H16 results should be in line, but we anticipate more investor questions on its 2017 growth outlook. For domestic sportswear companies: Anta’s 2H16 earnings are likely to beat consensus, thanks to heavier inventory build by wholesalers during 2H16. We lack conviction on LN’s 2H16 earnings but expect positives including off-line and e-commerce sell-through growth. PS’s 4Q16 earnings may miss due to unsuccessful discount in November (highlighted previously). Incremental to our view: higher conviction on US-exporting ODMs Eclat will likely add a new e-commerce private label client in 3Q17. Our recent conversations with Eclat’s private competitors show the strong demand for jacquard fabric and Eclat’s dominant position. YY will likely benefit from Adidas’s order shift from Apache. Our profit analysis uncovers YY’s significant non-recurring loss in 2016 and potential to recover. FT’s anchor basketball shoes have finally entered mass production. This, along with better demand for the Kobe Bryant series, will likely boost FT’s shares. PS should demonstrate stronger-than-expected momentum in 2017. We also detected the first breakeven of PS’s e-commerce business in 2016. Some issues the markets need to digest SZ: 2017 gross margin pressure and a slowdown in Flyknit upper orders may lead to uncertainties. But we argue the negatives are temporary by nature. LN’s 2017 expenses outlook may be higher than some investors’ expectation. But we view the expenses as necessary investments to optimize its channels. Also, LN’s profitable e-commerce business shouldn’t be ignored by investors. Anta: we estimate a slight rise in inventory levels. Although the current level (5-6 months) is far from the crisis level (over 10 months), we anticipate Anta’s wholesalers to reduce orders from the 4Q17 sales fair, to take a breather. Valuation and risks to our positive industry view We value the sporting goods sector using DCF, as we expect investors to focus on the sector’s long-term value creation. For WACC, we follow DB’s view on RFR and ERP while assigning a beta of 0.9 to 1.3 and terminal growth of 1-2%. Downside risks: weaker cyclical recovery, weaker innovation, sports segmentation ad e-commerce failing to drive sector growth. Upside risks (Anta): faster destocking by wholesalers, stronger performance by new brands. Distributed on: 20/02/2017 22:57:48 GMT 21 February 2017 Consumer Greater China Sporting Goods Page 2 Deutsche Bank AG/Hong Kong 2H16 /4Q16 preview Our best ideas