In the world of global sportswear leaders like Nike and Adidas, high returns on invested capital (ROICs) exceeding 20% are not uncommon during peak years. Taking a closer look at the Chinese footwear market, I uncovered ANTA Sports Products Limited (OTCPK:ANPDY)—a company with a strong track record of execution and a multi-brand strategy—that is well-positioned to be a long-term compounder. In addition to its strong execution, the Chinese sportswear industry has massive growth potential, backed by government policies and a growing sense of nationalism among consumers.
Why Anta?
Anta is a Chinese designer and manufacturer of sports fashion, generating 99% of its revenue domestically. The company’s product line includes a range of footwear and apparel for various sports and activities, all strategically marketed through its multi-branded strategy. The revenue is divided into three main segments: the core Anta brand, Fila brands, and other acquired brands targeting the premium market for outdoor sports.
The core Anta brand, established in 1991, primarily focuses on the Chinese mass market with affordable sports shoes and apparel. Fila brands, acquired by Anta in 2009, offer athleisure products targeting young, trendy individuals. The other acquired brands, such as Descente, Kolon Sports, and Amer Sports (including Arc’teryx and Salomon), cater to the premium market for outdoor sports.
In terms of gross margins, Anta brand stands at 54% in FY22, Fila at 66%, and other brands at 72%. This demonstrates Anta’s successful multi-brand strategy with the main brand serving the mass market, while the other brands command higher average selling prices (ASPs) and target premium segments.
Industry Overview
According to Euromonitor, China’s domestic sportswear industry is projected to grow at a compounded annual growth rate (CAGR) of 9% from CNY 363 billion in 2022 to CNY 551 billion in 2027. This growth is attributed to several factors, including economic growth, increasing public awareness of fitness and health, and supportive government policies. In fact, the Chinese government has set ambitious sports-related goals in their 14th Five Year Plan, aiming for a significant increase in population engagement in regular physical activity and considerable infrastructure development.
The Chinese sportswear market is experiencing a shift towards two rapidly growing segments: athleisure and winter sports. Athleisure has gained popularity over the past three years, driven by the growing acceptance of athleisure as everyday wear and an emphasis on daily fitness. On the other hand, the growth of winter sports has been accelerated by the 2022 Winter Olympics and the attention it brought, leading to increased interest and investment in winter sports facilities and apparel.
Competitive Positioning
The Chinese sportswear market is highly consolidated, with Anta, Nike, Adidas, Li Ning, Xtep, and 361 Degrees being the key players. Anta and Li Ning have managed to gain market share from foreign leaders like Nike and Adidas, thanks to their improving product quality and a sense of nationalism among Chinese consumers. Anta’s market share growth can be attributed to the success of its core Anta brand, as well as the strong performance of Fila in the athleisure market. Currently, Anta owns 18.6% of the sportswear market in China, with its core Anta brand ranking fourth and Fila ranking fifth.
Investment Thesis
#1: Market Is Overlooking Anta’s Successful Improvements In Brand Equity
Anta has made significant investments in marketing and research and development (R&D) to improve the quality and perception of its brand. The company has successfully established strong brand collaborations and engaged with consumers through social media platforms. Anta’s efforts have paid off, as the brand has seen a surge in popularity and positive consumer sentiment, with users associating Anta with “value for money” and “quality”.
#2: Anta’s Multi-Brand Strategy Makes It Best Positioned For China’s K-Shaped Recovery
In the current consumer environment, where higher-end consumption remains strong while broader consumption is slowing down, Anta’s multi-brand strategy allows it to cater to both mass market and premium market consumers. Anta’s value proposition and quality offerings make it an appealing choice for price-conscious consumers, while its premium brands, such as Fila and other acquired brands, target the growing demand for high-quality and fashionable sportswear.
#3: Anta’s Successful Acquisition and Transformation of Amer Sports
Anta’s acquisition of Amer Sports, a company known for its popular brands in winter and outdoor sports, presents a significant growth opportunity. Anta has a proven track record of successfully turning around brands, as seen with the transformation of Fila. Applying the same strategies, Anta is well-positioned to drive growth and margin expansion for Amer Sports’ brands like Arc’teryx and Salomon.
Financials and Valuation
Anta’s financials demonstrate the company’s strong performance and robust financial health. The company is expected to continue growing its store count and average revenue per store, primarily driven by increasing store productivity and the potential for higher ASPs in the long term. Anta’s gross margin is projected to improve, thanks to a shift towards direct-to-consumer (DTC) sales and higher-priced products. As a result of better product mix and operational efficiencies, Anta’s return on capital employed (ROCE) is expected to increase from 19% in FY22 to 24% in FY27.
In terms of valuation, a 10-year discounted cash flow (DCF) analysis indicates a target price of HKD 122.62, representing a 34% upside from the current closing price.
Catalysts and Risks
A successful launch of premium Anta products, coupled with the company’s efforts to improve brand equity, could act as a catalyst for Anta’s growth. However, prolonged negative consumer sentiment could pose a risk, potentially leading to steep discounts and affecting top-line revenue and margins. Nevertheless, Anta’s diversified brand portfolio and strong positioning in the market make it more resilient to such risks compared to its competitors.
Overall, Anta Sports is a compelling long-term investment opportunity in the Chinese sportswear market. With its strong execution, multi-brand strategy, and successful brand-building efforts, the company is well-positioned for sustainable growth.
