ANTA SPORTS: The East’s next Adidas and Nike
- ANTA Sports Products Limited (HKSE: 2020.HK) is China’s largest athletic-apparel producer and leading sportswear brand.
- Key drivers include a strong emphasis on a multi-brand, globalisation strategy, and growing consumer preferences towards local brands.
- With the acquisition of international brands and athlete endorsement deals, ANTA Sports has garnered the ability to widen its presence and consumer outreach.
- China’s slow recovery from the pandemic and macroeconomic volatilities have dampened ANTA Sports’ share price in the near term, leading to an attractive valuation for shareholders.
Company Description
Founded in 1994, ANTA Sports Products Limited (HKSE: 2020.HK) is a relatively young brand compared to its Western counterparts – Adidas and Nike, which started nearly 4 decades prior. Yet in the short time since its inception, coupled with China’s meteoric rise and transition to a market economy, ANTA Sports has grown into a leading homegrown sportswear giant.
ANTA Sports produces athletic goods ranging from sportswear, footwear, apparel, and accessories, and owns a brand portfolio from ANTA, FILA, DESCENTE, and KOLON SPORT. It was the official sports apparel partner of the 2022 Winter Olympic Games and Paralympic Winter Games and became the first Chinese supplier of sportswear uniforms to the International Olympic Committee (IOC). In recent years, ANTA Sports also forged multiple partnership deals with sports superstars (think Kyrie Irving, Eileen Gu, and Manny Pacquiao).
With a revenue CAGR of 26.3% since 2017 and over 1000% return in stock price since inception, the Group has witnessed tremendous growth and value brought to its shareholders.
Brand Positioning: Multi-Brand Strategy Provides Full Market Coverage
As highlighted by the Group’s management discussion in 2022, the nichification of sports and heightened health awareness in China have led to a growing demand for greater brand differentiation. ANTA tackles these structural shifts through its multi-brand strategy, underpinned by 3 growth curves – Performance Sports Group, Fashion Sports Group, and Outdoor Sports Brands. The Group’s portfolio ensures that there is a product for consumers from all walks of life, spanning across athleisure and professional sports, as well as premium and mass-market customers to penetrate distinct consumer segments and establish its brand salience.
Diving deeper into the Group’s operations, it adopts a vertically integrated model to manage and monitor all stages of the value chain, from design to research & development, manufacturing, marketing, and sales of its sports products. Such integration enables ANTA to meet its economies of scale, minimise costs, as evident in its increasing margins, and cater quickly to the differentiated needs of its consumer base.
ANTA employs an omni-channel approach for the distribution of its products, as it utilises the direct-to-consumer (DTC), e-commerce, and traditional wholesale model. Building upon its retail business, ANTA embarked on its DTC model transformation in 2020 to increase exposure on online channels and engage consumers more directly. As of FY2022, the DTC model accounts for 49.4% of revenue, a 60% increase from 2021.
Competitive Edge: Western Brands Loss To Be China’s Gain
The Xinjiang cotton controversy and Uighur forced labour allegations in 2021 triggered a pivotal shift that saw Chinese shoppers gravitate towards domestic brands after years of Western domination. Massive consumer backlash and boycotting of Western brands sparked exits from Chinese e-commerce platforms, termination of celebrity partnerships and subsequently leading to a declining presence in a key demographic market.
Following the outcry, Chinese brands such as ANTA and Li-Ning were able to capitalise on the rise of nationalistic consumption, capturing 28% of sneaker sales by the end of January 2022, 12% higher than before the controversy. Domestic brand reputation was further boosted by the emergence of the Guochao (国潮) or ‘national trend’. Today, local brands that incorporate elements of the country’s culture and national identity appeal more to Chinese consumers, and for Generation Z and millennials who grew up in the age of China’s economic boom, the “Made in China” label is now proudly embraced, with more trust and confidence in its high-quality products than ever before.
While ANTA’s market share in China (20.4% in 2022) slightly trails behind Nike (22.6%), internal tailwinds are likely to favour ANTA over foreign brands, at least in the near term.
Competitive Edge: Global Acquisition Efforts To Achieve Brand Internationalisation
In 2009, ANTA acquired the rights to the Italian-South Korean brand FILA on the Chinese mainland, Hong Kong and Macao. Since the acquisition, ANTA was able to leverage FILA’s position as a high-end sports fashion clothing brand and diversify into FILA, FILA Kids, and FILA Fusion, further gaining consumers by playing on the athleisure trend. In addition, FILA expanded its store numbers in China by tenfold, from 200 in 2010 to upwards of 2000 in Mainland China, Hong Kong SAR, Macao SAR, and Singapore. During FY2022, FILA contributed to 40.1% of ANTA’s revenue and provided the second-largest income stream for the Group.
More recently in 2019, ANTA set up an investor consortium to acquire Finnish sports company Amer Sports (home to brands including Arc’teryx, Salomon & Wilson) for US$5.2 billion to unlock exposure and brand equity to the international markets. During FY2022, revenue for the joint venture holding Amer Sports recorded a 21.8% revenue growth to $24.03 billion and 8.8% EBITDA growth, benefiting the Group with a positive share of profit for the first time since the acquisition. As highlighted by ANTA management, Amer Sports is making steady progress to realise the “Five billion euro targets” outlined in its strategic growth plan – establishment of 3 “billion euro brands” – Arc’teryx, Salomon & Wilson, as well as driving its Direct-To-Consumer and China business to the billion Euros level.
With the frequent acquisition of international brands, ANTA has shown its track record for successfully re-packaging brands to serve different market segments and reflects management’s long-term commitment to advance its global presence, bringing international products to its customers as well as gaining access to foreign markets.
Valuation: Mispricing Creates Opportunity To Enter At A Discount
A sluggish post-Covid economic recovery, volatile geopolitical climate, and lower consumer sentiments have affected Chinese equities across all market sectors. As of the time of writing, ANTA is 54.7% down from its all-time high in 2021, and 38.9% down from its 52-week high in February 2023. This short-term price shock has provided an opportunity for value investors to enter at a discount relative to the stock’s intrinsic value.
This Discounted Cash Flow (DCF) model assumes revenue growth from analyst estimates from $62,718 to $107,476 from FY2023 to FY2027, translating to a CAGR of 14.41%. I opine that this is a realistic estimate, as China’s sportswear market is poised to grow at a 9-10% CAGR by 2027, coupled with the fact that ANTA is a key market player and has the ability to outpace the market growth as outlined above.
Following this, an EV/EBIT Exit Multiple of 10.0x and a conservative Perpetuity Growth Rate of 2.5% were applied to arrive at a DCF implied share price of $103.26 and $101.18 respectively, assuming a Weighted Cost of Capital of 8.0%. This price gives a ~20% upside from the current share price of $84.50. Sensitivity analyses further show that there is a limited downside for both methods.
Risk Assessment
The main risk factor facing ANTA will be uncertainty around China’s economic environment. After optimistic quarter-on-quarter growth of 2.2% in Q1 2023, China’s economy has lost momentum in Q2 2023, with GDP expanding only 0.8%. A multitude of factors including weakened retail sales, falling trade exports and rising youth unemployment signal a bleak outlook for domestic spending levels and consumer confidence. As the sportswear industry is markedly susceptible to economic cycles and the retail market environment, we could see an adverse impact on the ANTA’s top line if the economy continues to show a weakened recovery in the next few months.
The next risk factor lies in the changes in consumer tastes and preferences, should Chinese consumers turn back to foreign brands such as Adidas and Nike. This would present a sizeable threat to ANTA, given that both brands currently hold significant market power. However, the likelihood of such turnover is small, as ANTA continues to project its foothold in different consumer segments, while the guochao trend shows no sign of weakening.
Conclusion
In the brief duration since its founding, ANTA Sports has proven to be a formidable force in the sportswear market, dominating with its multi-brand approach and international outreach, coupled with strong domestic demand. ANTA’s share price implies that it is currently undervalued by the market, and value investors might see this as a worthwhile opportunity to seize.