Dynamic Management, Stable Growth, Inventory Control (Anta FY22 Performance Meeting Summary)

The following is the summary of Anta Sports' 2022 full-year performance communication, and detailed financial report comments can be found in " Anta Perfect Submission? Beware of Hidden "Reefs"."

I. Market and business review:

In 2022, the company observed several new changes in the Chinese consumer market:

1) The sports industry has grown. 2) Opportunities have emerged in new fields: camping products, skiing equipment. 3) The growth rate of comprehensive

e-commerce has slowed down, and the growth rate of comprehensive e-commerce such as Tmall and JD has dropped to a very low level, while live e-commerce such as Douyin has seized market share. 4) The growth rate of the two major international brands has slowed down, and domestic brands have risen, with the growth rate of the outdoor market higher than

the overall sporting goods market, which is an opportunity for multi-brand groups.

Guidance: Anta and FILA's full-year revenue will achieve double-digit growth in 2023 (with FILA growing faster than Anta), profit growth will be better than revenue growth, and profit margins will improve; inventory will be restored to a better level.

II. Q&A session:

1. What is the revenue situation in Q1 23? What is the full-year guidance?

For the past 3 years, the company has always emphasized dynamic management. With the epidemic under control, the overall performance of Q1 23 is good. The company will do better in retail and business model innovation.

1. What is the impact of increased investment in international brands on the company, which has recovered somewhat in the first quarter?

The reason for the progress of the industry in the past 3 years is 1) the two major international brands have started to loosen their hold on the market; 2) Chinese consumers' acceptance of Chinese brands has increased. The recovery of international brands in the industry in 23 is normal because they have performed poorly in the past few years. Adidas decreased by more than 30% compared to before the epidemic in 2019, but the company's market share is growing. Anta's success in maintaining multiple brands and channels is evident from the first quarter after the epidemic, and all brands are better than expected.

1. What is the recent inventory situation, given the large inventory pressure last year? When can it return to a satisfactory level? How do you view the market's inventory improvement?

Inventory is the most important indicator for 23, and the group added the inventory indicator to its incentive targets (stock incentives, long-term excess incentives). The industry's inventory level is generally high at present, but Anta's inventory is relatively controllable compared to the past.

The management of inventory was strengthened from 22H2 (dynamic management of controlled and purchased goods), and the inventory level began to decrease. As of the end of last year, the sales-to-inventory ratio of FILA and Anta's brand stores was 6. In January and February of 23, the sales-to-inventory ratio of Anta and FILA brand stores was 4.5-5, which is a controllable level. If managed well, there is room for further adjustment. It should return to a better level in 23H1.

1. Anta: 22 Anta Leading Plan growth was slower than expected due to the epidemic, is the goal of 3-5 points increase in market share in the next 3-5 years?

In 2011, the company proposed the Anta Leading Plan, which aimed for a compound growth of 18-25% for Anta, but sticking to this target now is not meaningful. The company will adjust the management team in 23, and more detailed strategic goals in the medium and long term will be announced in Q3 23. 5. FILA: What improvements has the company made in the past 22 years and will it achieve its goal of generating 40-50 billion in revenue by 2025-2026 as planned?

The inventory has improved to 4.5-5, and store efficiency and sales per unit area have performed well. The most important decision in 2022 was to achieve high online growth; FILA's growth rate was indeed one of the highest among the group's brands. From January to March 2023, all indicators have basically returned to normal, and various retail indicators will perform better than expected. The company maintains its medium- to long-term goal of generating 40-50 billion in revenue.

6. How are the emerging brands developing? What is the growth potential of high-end professional sports and outdoor products, and what are the prospects for stores?

Dissent: The company plans to open about 200 stores in 2023 and improve store quality to further enhance efficiency, while online business will account for 20-25% of total sales.

Kalon: We will continue to build around the outdoor lifestyle and gradually expand from the northeast and north China to become a nationwide brand, while continuing to improve store efficiency.

Amer: Since 2019, the development strategies for the five 1 billion euro brands have been gradually emerging; Amer's global growth was 22% in 2022, and the Chinese market grew by 42%, with the Chinese market share rising from less than 5% in 2019 to the current 15%. We are confident in achieving the 1 billion euro revenue target in the Chinese market in 2023-2024.

7. Why there is a slight deviation between AMER's performance in 2022 and its 22H1 guidance?

There were two reasons for the deviation from the guidance: 1) the acquisition of Peak Performance in 2018 led to goodwill impairment in 2022, and 2) a long-term incentive plan was initiated for executives that was not included in the budget plan.

The company is very confident in creating new highs in 2023, with global growth expected to be double-digit based on the performance in January and February, which exceeded expectations.

8. How does FILA's growth rate compare to international brands, and what are FILA's prospects for this year and beyond?

As of 2022, FILA has fewer than 2,000 stores, while international brands with a size exceeding 5 billion have more stores than FILA, so FILA's past growth has been focused on store efficiency. The company is still very confident in achieving double-digit growth for FILA in 2023; however, there may be some challenges in achieving double-digit growth for international brands, but FILA has the confidence to grow faster than the two major international brands.

9. What is the relationship between ANTA's brand revenue and growth in sales?

Anta's brand revenue growth was low-single-digit, with a report growth of 15% in 2022, and a large proportion of sales revenue came from DTC. Compared with other domestic brands, Anta's growth was not as high, but its end inventory was healthier. Companies with a greater proportion of distribution sales may experience delayed sales performance by 1-2 quarters compared with Anta, whereas companies with a larger proportion of direct sales have healthier retail models. FILA generates revenue every quarter, and half-year performance reports can reflect this. The company is confident in the guidance for its core brands this year, and AMER is divesting non-core businesses. The company will maintain high-quality growth this year, with a reasonable return to inventory and an appropriate increase in profit margin. 10. Reasons for the decrease in company inventory?

1. The company has attached great importance to the management of procurement dynamics over the past 2 years, with planned measures to reduce inventory;

2. After the lifting of the epidemic, the revenue growth in January and February exceeded expectations, while the company's previous plans were relatively conservative;

3. Multiple measures were taken through various channels, including outlets like OLE, to reduce inventory.

4. The company has made inventory reserves of more than 4 billion yuan, which, from the accounting treatment, only reduces the value of inventory, without affecting the quantity of inventory. Therefore, the inventory turnover ratio is not affected by the reserve.

The industry's inventory level is relatively high, and the slight decline in FILA's gross profit margin in the year 2022 is also due to the effect of increasing inventory turnover. The current inventory level is around 4.5, and it will continue to decrease in the future.

1. Reasons for the company's confidence in improving its profit margin in 2023?

The company's confidence comes from the improvement in retail, as the proportion of direct sales is relatively high, and terminal sales are growing rapidly.

1. Under the current competitive environment, trends in the company's YoY discounts and improvements in gross profit margins?

The discounts for Anta and FILA in 2H2 2022 were deepened, leading to a slight decrease in gross profit margins. This is mainly due to the high discounts for handling inventory; full-price stores have remained stable. In the year 2023, industry inventory levels are generally high, and the company has the opportunity to improve, but gross profits will not recover quickly. The recovery will be slow in the 2-3 quarters. At the same time, expense management was good in 2022.

1. How does the company view the industry penetration rate and growth rate for the entire year 2023?

The performance of various brands is differentiated, and for international brands with a lower base of 2022, the recovery and guidance in the year 2023 will be stronger. There is still some uncertainty about some international brands. Adidas has reduced by about 40% compared to 2019, and Nike can basically return to 2019 levels. These two have a large share and a significant impact on the industry. For domestic brands, there were many one-time events in recent years, and the recognition of domestic brands by consumers has increased. We have been growing faster than the industry as a whole.

1. Outlook for selling expenses as a percentage of revenue in 2023? Will there be any important marketing activities?

The selling expenses rate is basically between 10-12%, and it is expected to remain relatively stable in 2023. The main event in 2023 will be the Asian Games, with a moderate impact. Investment may be made in NBA stars' visits to China, and digital marketing and community building will be strengthened. At present, marketing will be more accurate, with the main focus put on product research and development.

2024 is the year of the Paris Olympics, and as a partner of the Chinese Olympic Committee, we will prepare, warm up, and promote athletes' marketing in 2023, which is an important year for marketing.

1. Operation status of ANTA's Champion Store and future development?

ANTA is currently stable, expanding old businesses while developing the brand upwards. Certain products will be more diverse at champion stores. In 2023, the champion stores will focus on products rather than opening new locations.

1. ANTA's main brand's DTCOPM level?

In the year 2022, there were many changes, and factors such as closing stores and traffic control due to the epidemic affected the profit margins. Directly-operated stores' profitability was slightly lower than that of 2021, but it was still positive. The profit margins from DTC and franchises have increased by more than a dozen points, but it is still slightly lower than that of 2021. 17.23 years, it is expected that more than 500 stores will be added for general merchandise and children's products. What will be the main focus of the new stores?

General merchandise stores are expected to add 100-200 stores, while children's stores are only expected to add a little over 100. Anta has emphasized improving store efficiency and maintaining steady expansion of store numbers. In 2023, the focus will mainly be on high-end shopping malls and shopping centers, adhering to a brand-upward strategy, and the number of stores is expected to remain relatively stable.

What was the growth rate for January and February? Can we focus more on the revenue growth rate of 10%-20% for the whole year?

Sales were good during the Chinese New Year, and the performance for January and February was better than expected. Q1 overall is optimistic, but there are also fluctuations. For example, the performance in February was not ideal for a certain period of time and online. Whether the consumption recovery can continue still needs to be observed.

Taking into account the current opportunities and challenges, the guidance given at this point is relatively cautious. Double-digit growth should not be a problem, but whether the growth rate for the whole year will be high or low still needs time to judge and communicate. FILA is expected to have higher certainty and perform better than Anta.

What is the markup for DTC in 2022?

This can be understood as the gap between Anta's brand income and revenue. By the end of 2021, there were about 6,000 DTC stores, and by the end of 2022, there will be approximately 7,100. There were 2,500 more stores in 2021 and 1,100 more in 2022. Therefore, the speed of DTC store recovery is different, and it is almost complete now. Therefore, the impact of DTC on revenue in 2023 will be relatively small. Anta's revenue in 2022 will increase by a relatively low unit number of the same amount, with a reporting caliber of +15.5%, and the difference will be due to DTC factors.

Will Anta's growth rate possibly be better than FILA's this year as Anta has the new store opening trend while FILA maintains its store numbers and targets double-digit growth for the whole year?

FILA is expected to perform better than Anta in 2023, because FILA was more affected in 2022. FILA's target for the number of stores is not changing much and is mainly being adjusted. There will not be too many new ones.

Regarding the main brand OPM, the rate remained constant last year, mainly due to the decrease in the proportion of advertising expenses. What were the other reasons? Is the rent reduction a one-time event or a sustainable one?

Both brands' OPMs will be over 20% in 2022. The reason for the rent reduction is due to the lockdown, which only alleviated the profit margin. In the future, there are plans to reduce channel fees. The rate of various expenses will improve this year because last year was affected by the epidemic. This year, there will be more negotiations with major shopping malls to lower their deductions, and turnover will also increase.

For FILA and Anta, they both have double-digit revenue growth, primarily relying on store efficiency rather than the number of stores, right?

Yes, last year there was a lot of pressure due to the epidemic. This year, it will still mainly focus on store efficiency and store transformations.

What are the factors behind the rapid increase in government subsidies on the IS table in recent years?

According to the company's tax-related regulations, as long as the company's scale expands and taxes increase, the government will refund a certain proportion. There has not been any significant adjustment in the policy, and there is no sign of change for at least the next three years. Currently, Anta is discounted at about 60% and Fila at about 70%, which is similar to last year. Therefore, the inventory-to-sales ratio is better than that in the second half of last year, not solely relying on discounts and without deeper discounts. The discount for current season products is quite good, but the entire inventory still needs to be reduced. The online sales in the first 1-2 months were not very good compared to the expectation of several major platforms, compounded by the outlet possibility, which may deepen the discount a little. Therefore, the comprehensive discount still needs more time and is relatively conservative.

The overall inventory age structure is still good. If it exceeds a certain period of time, the reserve will be increased. Therefore, the inventory age is similar to the inventory-to-sales ratio, and will gradually improve.

1. What are the original prices of Anta and Fila? If the raw materials fall, is it possible to increase the gross profit margin?

Anta emphasizes stability while expanding. The gross profit margin of the old part will still maintain the cost performance and will not increase the price too much. The newly added products will drive a little, but will not contribute too much. The trend of raw materials will not be as affected as the market due to our mature brand control, and will be relatively stable.

1. Which company's OPM has a greater improvement this year, Fila or Anta? The challenge of the first 1-2 months of online sales, what about for the whole year?

Fila online is less affected, with a higher proportion of the same high-end brand online and offline, and less sensitivity to discounts. Fila's certainty will be better, and once improved, the leverage contribution will be greater. Anta has e-commerce exclusively supplied items, with many differentiated products.

1. Amer's performance is impressive, and double-digit revenue growth is expected in 2023. What about the profit contribution?

The operating profit margin has not yet reached our target and will continue to improve in the next few years. Of course, after the epidemic, re-entering the growth track and achieving a new high in income, the previous investment will start to take effect, so there is an opportunity, and the profit margin will improve. It is difficult to accurately predetermine the complex business and has great confidence in the profit margin in the long term.

1. How much has the growth of Solomon Wilson been in China for 22 years?

The entire Amer has grown by 42% in China for 22 years, mainly due to the rapid growth of Solomon and the First Bird, which has increased several times compared to 2019. The growth of over 30% this year is not a problem.

1. If Fila was not affected by the epidemic last year, how much more profit would it make now?

We used to think that a desirable OPM for Fila is about 25%, which is relatively satisfactory for us. Anta is a little over 20%. Fila is now setting goals to achieve about 25%. If it were not for the epidemic, retail profit margin would be higher, and an increase of 2 points would not be a problem. Other children's trendy brands, golf and other sectors are relatively small, with lower OPMs and still need to work towards the goal of about 25%.

1. What is the revenue breakdown for each brand in 2022?

Of the more than 50 billion yuan in revenue, Anta's large goods account for about 40%, and children's goods account for over 10%. Fila's large goods are more than 20%, and trendy and children's brands are in the middle. Diadora is in the middle, and Kelon is 1-2%.

The growth rate: other brands have grown rapidly by more than 20%; Anta's large goods have grown by over 10%, children's goods by over 20%; Fila's trendy brands have grown the fastest, children's brands have also grown, and the sales of large goods have been negatively affected by the epidemic.

Risk Disclosure and Statement for this article: Dolphin Research Risk Disclosure and General Disclaimer