Half Year 2020 ANTA Sports Products Ltd Earnings Call (Chinese, English)
Hong Kong Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of ANTA Sports Products Ltd earnings conference call or presentation Tuesday, August 25, 2020 at 9:00:00am GMT
TEXT version of Transcript
* Lai Shixian
ANTA Sports Products Limited - CFO
* Zheng James
ANTA Sports Products Limited - Group President & CEO, Outdoor Sports Brand Group
Unidentified Company Representative 
Good afternoon, ladies and gentlemen. Welcome to ANTA Sports Products' 2020 interim results announcement investors presentation. I believe you are able to see the live streaming of our four members of management, but I would like to introduce them to you one by one. First, Chairman and CEO, Mr. Ding Shizhong; Group President and Outdoor Sports Brand CEO, Mr. Zheng James; CFO, Mr. Lai Shixian; Commercial Sports Brand CEO, Mr. Wu Yonghua.
In today's presentation, Mr. Lai will go through our 2020 first-half financial performance and then Mr. Zheng will review business performance and actually online, we have already broadcast an announcement on direct operation and outlook. Finally, Mr. Ding will lead the management to answer your questions. We will first handle questions over the phone and then take questions online. First, let's have Mr. Lai to go through 2020 first-half results. Mr. Lai, please.
Lai Shixian, ANTA Sports Products Limited - CFO 
Investors, good afternoon. Now let me report to you our group's 2020 first-half financial review. Even though in first half 2020 the operating environment was full of challenge and difficulties, the group is still able to deliver good interim results and the management is quite satisfied. The highlights are as follows. Revenue, slightly down 1% at RMB14.7 billion, operating profit down 15.3% at RMB3.6 billion, profit attributable to shareholders, not including Amer Sports loss, down 20.1% at RMB2.38 billion. Profit attributable to shareholders, including JV's loss impact, down 28.6% at RMB1.61 billion. EPS down 28.8% at RMB61.63. The Board proposed to distribute dividend of HKD0.21, payout ratio 31.1% so which is over 30% dividend payout ratio.
In 2020, revenue was down 1% year-on-year at RMB13.7 billion and the major brands are as follows. ANTA revenue came down 10.7% mainly because, in the first half, there was the pandemic and so we took the initiative to cancel some orders. And by means of e-commerce growth, some of the impact was offset for FILA brand, revenue was up 9.4%, mainly because, under the pandemic, we stepped up our work in e-commerce and because of the pandemic, some stores were closed so there was some impacts here.
For other brands, up 8.3% so the contribution was mainly from Descente. GP margin, overall GP margin up 0.7 percentage point year-on-year at 56.8%, which is a historical high level. Overall, GP margin increased because FILA was a bigger gross profit margin had now a bigger share, so it's contribution increased. For various brands, ANTA brands, GP margin slightly came down by 0.9 percentage points. It's 41.6%. FILA also came down 1 percentage point, so GP margin was 70.5% for other brands. The GP margin was 64.5%, slightly up. So the two main brands, ANTA and FILA, decreased in GP margin, but they performed quite well in the first half, especially FILA. So there was no heavy discounting as worried by people, so for the two brands, there is a slight GP margin increase.
Operating profit margin, down 4.1 percentage points at 24.6%. Operating profit margin came down mainly because of provisioning on receivables and also an increase in staff costs. So as a result, operating expenses accounted for a bigger share. For receivables, the group's provisioning policy has been very prudent. So under the pandemic, some distributors had lengthened the credit period and so provisioning has increased. The management is of the view that in the future, most of the amounts, most of the provisioning could be recovered and so overall staff costs -- overall staff costs increased comparing with the same period of last year. No matter whether we talk about number of employees and fringe benefits for employees, they all increased and last year, at the end of last year, we introduced the stock option incentive scheme and so quite a large percentage of that was included in cost.
And operating profit margin for various brands performed quite well. For ANTA, it's 26.6%, FILA, 24.7%. These are the two major brands. For the other brands, for the first time, they achieved profit and it is mainly contribution from Descente. For the other brands, in the first half, operating profit margin was 2.6%. Operating expenses ratio, advertising and promotion more or less the same as last year at 9.9% of the total. This year, because of the pandemic, the Company was even more stringent over this expense. So some advertising was delayed or deferred. Staff costs as a share of revenue was up 2.5 percentage points reaching 15%. Comparing with the first half last year, there is a higher bigger number of employees and also (technical difficulty) more was included in this year's cost.
R&D expenses, its share went up 0.3 percentage points to 2.7% because we enhanced our R&D capability and in the first half, revenue growth was not as expected before so R&D expenses as share of revenue increased.
So for JV companies, because of the pandemic, loss of JV companies amounted to RMB719 million. This is within the group's expectation. So profits, profit margin attributable to shareholders, 11.3% so dropped 4.4 percentage points. This is because of a big loss from JV companies and then there is increase in costs and expenses as well.
So operating capital management, average inventory turnover days increased from 48 days to 135 days because, in the first half, there were some sales products returns and also inventory buyback by ANTA and for FILA, its retail business inventory was quite big so that is why the turnover days was big. Receivables turnover days increased from 12 days to 46 days. Average payable turnover days also increased from 21 days to 72 days. Even though these turnover days, comparing with the past increased, we believe that all these levels are within expectation and we think that they are acceptable given the pandemic. The management is confident that, in the second half of the year, we will step up management so that these turnover days will resume a healthy level.
Liquidity and financial resources. Free cash flow inflow RMB1.9 billion, operating cash inflow RMB2.7 billion, down 29.6% year-on-year. This is more or less the same as the trend of the operating revenue. As of 30th of June, we have cash and cash equivalents of RMB14.6 billion and we have more than three months fixed deposit of RMB6.-something billion, so we have more than RMB20 billion of financial resources, net cash RMB3.73 billion, more or less the same as in 2019. And last week, we repaid EUR316 million of syndicated loan. That syndicated loan was EUR860 million. That is for the acquisition of Amer and last week, we made repayments of RMB360 million. At the same time, yesterday, we successfully issued a RMB1 billion Panda bond.
So overall speaking, our liabilities have come down. So we have increased RMB liabilities and reduced foreign currency liabilities so that our debt structure is more reasonable. So that is all in my part; now I will pass the floor to Zheng.
Zheng James, ANTA Sports Products Limited - Group President & CEO, Outdoor Sports Brand Group 
Investors, good morning, good afternoon. Welcome for joining ANTA Group's -- okay, this is the first-half results announcement. So Mr. Lai just presented the financial data and now I will spend some time to go through some business operations.
In 2020, I think you all know that there was COVID-19 impact in the first half of the year. The pandemic had dealt a big blow to China and the world and there is also the tense US China relationship. So as a result, there is a lot of uncertainty in the markets. And for the first time in history, China's GDP in Q1 contracted and it came down to 6.8%, but then in Q2, we went back to a growth of 3.2%. So under the pandemic, in the first half in Q1, things were really bad. In Q2, in China, we can see an overall effective recovery.
The risk of the pandemic today still exists; however, the pandemic has enabled people all over the world to become more conscious in virus or infection control and in our industry, well, the sportswear industry has become healthier, so this is interrelated. For the medium to long term for the sportswear industry, we still believe that things will be positive.
In the first half, well, all retail industries have been threatened. Especially in Q1, most retail stores were closed.
Offline footfall continued to decline and in Q1, sales revenue declined overall speaking. Enterprises' operating profit was greatly affected. Besides in the first half, in our industry, we faced inventory pressure and there was discounting and products being sold as low. So in all channels, you can see that this has become the normal. The pandemic has changed people's psychological behavior and shopping behavior.
In the first half, we saw some positive factors. So first, in the industry, when it comes to online business, it developed fast. Off-line stores are closed and there is restriction on footfalls so most companies made use of this and most consumers use online as the main shopping channel. In the first half comparing with the same period last year, our results were more or less the same, so we adopt a multibrand strategy. So in the first half, this strategy gave us good support so we are able to be resilient against the pandemic as compared to other single brand companies. So we are much stronger.
In terms of business development at the beginning of the year, our management introduced a transformation mindset and high quality growth concept and under this concept, in the first half, in order to tie in with the group's multibrand strategy and an upgrading in organizational structure, we have professional brand, outdoor brands and also casual fashion brand segmentation and they achieved good synergy. And this lays a good foundation for future growth.
So under ANTA Group, there are 13 most important brands. So when it comes to the mass market and also high-end market and professional market, we have effective layout so as a result, in the sportswear industry we have broader and better capability to compete in various market segments so that we can have a better status and position in the market. Now let me go through the performance of our core brands. ANTA, the strategy is professional sports led by technology and very high value. We continue to support Chinese athletes and the national team and we are making preparations for the 2022 Beijing Winter Olympics and the Paralympics and in July, we announced the 2022 Beijing Winter Olympic and Paralympic sportswear styles for the national team.
So you can see that these products can get into people's daily life and we are showcasing to the whole world our national image. So we are enhancing national pride. Besides we put in place an all channel transformation and we [distributed] the layout in shopping malls and online. We also actively co-promoted the digital transformation. In the first half, we focused during the pandemic the upgrading of ANTA's official website. At the same time, we continue to work with Thompson and other entities and so on to launch a number of basketball styles. And in many cities, we organized basketball contests. So in core cities, we hope that these public events can be organized and in each event, a few thousand basketball fans, young basketball fans will be attracted to join.
So after the pandemic, you can see our rapid development of sports activities in various places. We also launched the upgraded version of the new hydrogen running shoe 2.0. So all these mean work for ANTA main brand.
ANTA Kids, it has become a leading brand for kids sportswear and we provide professional sports products for kids. We have personal advantage and through consolidated comprehensive experience, the playful spirit is incorporated into children's growth journey. So we optimized the channels; we are doing omnichannel strategy. We closed low efficiency stores and we optimized channel quality. We expedited online development and in fact growth exceeded 50% in the coming five years. So ANTA Kids online, well, it will have a share more than 40%.
In the first half, there were crossover products with various cartoon characters. We worked with some supermodels and they led many children to create the future and release their energy. So under the pandemic, in the first half, we actually found ways to promote the development of the brand, FILA. Mr. Lai also said that FILA omnichannel in the first half achieved an industry-leading growth. There is positive growth for omnichannel and it is among very rare brands, which can achieve positive growth during the pandemic. So we face consumers and we continue to upgrade. We create the best experience for consumers.
In the first half, we inherited our 100 years of DNA of high-end sports fashion. And we led the fashion trend for high-end sports. At the same time, there was channel transformation and upgrading and there is reshaping of off-line channels and new upgraded store layout and design. For onshore, we adopted an attack strategy. So for online business, we achieved more than 100% growth.
Finally, well, originally, for FILA, apparel accounted for quite a high share, but in the first half this year, FILA footwear business grew fast and its share of sales continues to rise. So it boosted the sports fashion and become necessities for the trendy people. And then we have FILA Kids and FILA Fusion in the first half. They boosted growth for FILA overall. So in other words, we are covering from one person to the whole family with FILA Kids and FILA Fusion. FILA Kids inherited the elegance and unique style of FILA and it is providing for three to 15-year-old kids in terms of footwear and accessories in mid to high-end shopping malls. (inaudible) is definitely leading. FILA Fusion led a youthful development of the brand and it has actually entered the elite generation crowd and it has built a successful image and also enhanced the market's recognition of the brand.
So in the high-end sports fashion area, FILA has become a leading brand and in the first half, we achieved very good results. For Descente, it's concentrated on high-end professional sports and in the first half this year, we achieved very good results. [For] online off-line full channel integration in the first half, we saw very fast business growth. For both online and off-line there was growth. And also accounted for more than 30% of total and to sales team members, Descente's brand loyalty keeps on rising and in the industry, we are leading in terms of membership sales. And we have very technological or high-tech fabric, which is leading the market. So this enhances our high-end professional quality image and together with internationally renowned popstar Daniel Wu and also Xin Zhilei, a Chinese actress, we are working together to get good results.
As of 30th June 2020, our ANTA main brands store coverage was that we have 10,197 stores for FILA, both FILA Kids and FILA Fusion 1,788 stores, Descente 145 stores, Kolon 155. We continue to optimize our network to achieve sustainable development. As at end of June, total number of stores was stable. In terms of store count, it's decreased because of our effective integration of stores. We expanded online business and we closed some low efficiency stores.
For e-commerce, as I said just now, in the first half of the year when off-line business was seriously affected, all brands started work online. We achieved market opportunities and we introduced all staff at retail and also live streaming plus e-commerce. And then e-commerce grew more than 55% overall speaking. For FILA and Kolon online business revenue increased more than 100%.
So you can see that in the first half online business developed rapidly. Supply chain management, we continued to optimize and enhance our management model. We encourage suppliers to create more innovative products. So we combine internal as well as outsourced production so that we can understand the changes in consumers' taste faster. And for ANTA group apparel to footwear, 28.5% to 12.9% and we enhanced efficiency of managing the suppliers and supply chain management since mid-February for self-operated factories and other agency factories while they gradually resumed production. So now the supply chain is functioning normally to support our business.
Today, apart from our regular announcement, we issued another announcement that is the new business model of ANTA brand. For this new business model, well, we had introduced some major changes. In the past 20 years, in the China market, our model is a wholesale plus distribution, but now with rapid change in consumption pattern, our brands need to change actively in order to face up to uncertainty in external environment.
So the business model needs to be transformed and we need to face consumers directly so that we can be in a more favorable position. So with a lighter and lean structure, our efficiency can be enhanced and then in major cities and markets in China, we will be able to open bigger stores so that efficiency can improve. And then by doing B2C, we will be able to enhance operation management efficiency and we can build a digitalized operation system and with the least amount of inventory we will be able to achieve the maximum retail value.
Besides there will be seamless integration between online and off-line business and there will be synergy with retail big platform, so we will take reference from the successful experience of FILA so that in terms of retail channel, product, finance, human resources and logistics, there will be relative or related system among all these six areas. So we hope to see better synergy in terms of inventory and there will be big data analytics by capitalizing on our existing digital office.
So in 11 places, including Changchun, Changsha, Chengdu, Chongqing, Guangdong, Kunming, Nanjing, Shanghai, Wuhan, Xian, Zhejiang, we are going to start a hybrid operation model. So ANTA stores will be directly operated by our group and they may be designated by our franchisees to operate the stores. So ANTA brand stores now total 3,500 and we will need six to nine months' time to complete the above work. After completion around 60% of the 3,500 stores will be operated by our group directly. 40% will be operated by designated franchisees according to our brand operation standards.
So in other words, we will have to acquire some distributors and that will need a funding of RMB2 billion. 80% to 90% will be related to products refund or return of ANTA brand products. And we will be paying with our own internal resources.
Starting April last year, we acquired Amer Sports globally and you may be concerned about first-half 2020 results of Amer Sports. And if you read our financial statement, you can see that in terms of the sharing of financial profit, well, in the first half, Amer Sports has incurred a loss. Overall speaking, in the first half at the end of March, when the spread of the pandemic globally, we tried to come up with an estimate of the first half results and after three months, our actual operation was better than our original expectation.
At the same time, at the end of March, we put in place some cost-cutting measures. So in the first half we achieved savings of more than 20%. Overall speaking, for Amer Sports, up to end of July, most self-operated stores of brands under Amer Sports had already reopened. So comparing with our expectations in the first half of the year, actual business results were better than our expectations.
One important point is our management of liquid capital in the first half. For all our inventory and operating costs, we exercised effective management. As of end June for Amer Sports Group, liquid capital was at a healthy level. We don't need further injection of funds to support its operation. So that's about Amer Sports in the first half of the year.
Looking toward the future, the pandemic has brought challenges that are not only over the short run. So given the pandemic, our group will continue the digital transformation oriented around consumers. That is our main strategy. So consumers will come first and we will enhance or expand direct business of various brands so that brands will face consumers directly.
Based on consumers' needs and demands, we will use various data to enhance online business and from the traffic of data and also consumers' data, we go for breadth and depth and we want high-quality development. We will continue to work hard in the first half. ANTA is the first global strategic collaborator of WWF and we are actually discharging our corporate social responsibility and this is actually the most important corporate social responsibility for store counts. If you look at the second half, we will continue to strive for quality of stores instead of store counts. In the second half, ANTA would focus on optimizing the stores to achieve growth. At the end of the year, for ANTA and ANTA Kids stores, originally, there were 10,117 stores, but it will come down to 9,800 or 9,900. For FILA at the end of the year, there will be 2,000 to 2,100 stores and for Descente, at the end of 2020, the transaction, the deal will be completed. After that Descente brand will be injected into our JV.
So concerning Descente's future development, this means that we are more confident. At the end of the year, store count of Descente will be 180 to 190 for Amer Sports. In the second half, we are prudently optimistic about this operation. Amer Sports' core business is in Q3 and Q4. That is during winter. Winter is the most important season for Amer Sports brands. So fall winter business accounts for more than 60% of the total. So now under the pandemic, we can see that the market is gradually resuming a normal situation and in the second half, various brands of Amer Sports in the focal markets should be able to return to a relatively normal condition.
For liquid capital in the second half, well, we believe that it will be able to support our operations. There won't be much challenge. For Amer Sports, its development in China in the first half achieved positive growth. Amer Sports China in the first half achieved good growth and we have confidence that Amer Sports China in the second half will continue to see business growth on the foundation of the first-half position. That's our estimate or forecast about Amer Sports.
So concerning the work in the first half on various brands, I have just made a report to you. Thank you.
Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.