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Edited Transcript of 2020.HK earnings conference call or presentation 26-Aug-19 8:00am GMT

Half Year 2019 ANTA Sports Products Ltd Earnings Presentation (Chinese, English)

Hong Kong Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of ANTA Sports Products Ltd earnings conference call or presentation Monday, August 26, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jie Zheng

ANTA Sports Products Limited - Group President, CEO of the Outdoor Sports Brand Group & Executive Director

* Shixian Lai

ANTA Sports Products Limited - COO, CFO & Executive Director

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Presentation

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Unidentified Company Representative, [1]

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Ladies and gentlemen, good afternoon. Welcome to the 2019 Interim Results Presentation of ANTA Sports Products Limited. At the same time, welcome friends of the media for participating in our meeting on webcast. Let me introduce to you our management in attendance. We have Mr. Ding Shizhong, Chairman and CEO; Mr. Lai Shixian, Executive Director and CFO; Mr. James Zheng, Executive Director and Group President; Mr. Wu Yonghua, Executive Director and CEO of Performance Sports Brand Group.

So once again, ANTA has delivered very good results in the past half year. So first of all, we will talk about our financial performance, then Mr. Zheng will make a review of the business and also business strategy. Finally, there will be a Q&A session. Mr. Ding and his colleagues will take your questions. Now let's invite Mr. Lai to go through our 2019 interim results. Mr. Lai, please.

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Shixian Lai, ANTA Sports Products Limited - COO, CFO & Executive Director [2]

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Welcome, investors, friends, for coming. Thank you very much for your support for ANTA over the years. In first half 2019, we are quite satisfied with our results. If you refer to all the indicators, we made good achievements for revenue and profit.

For 6 consecutive years, we have maintained growth rates of over 20%, revenue growth of 40.3% and RMB 14.8 billion. Gross profits grew 45% to RMB 8.3 billion. Profits from operations was up 58.4% to almost RMB 4.3 billion.

Profits within the period. If we exclude the loss from JV after acquiring Amer, then it's up 53.5% to almost RMB 3.1 billion. If the loss from JV -- the share of loss of JV is also included, then profit was up 29% within the period. Profit attributable to equity holders was up 27.7% at RMB 2.5 billion. EPS was up 23.9% to RMB 0.6672.

The Board proposed an interim dividend of HKD 0.31 per share. Dividend payout is 30.5% of profit attributable to equity holders. Dividend payout is lower than before because we had just completed the acquisition of Amer and the management hopes to reserve more cash.

In terms of revenue, our 2 main brands continued to maintain strong growth. For ANTA, revenue was up 18.3%, FILA up almost 80%.

So for ANTA products, marketing and sales, well, they are enhanced. In fact, ANTA KIDS products are also well received in the market so there was fast growth.

For FILA, brand awareness has been enhanced. So sales revenue performed strongly. We have more stores. And if -- in fact, store efficiency has also been enhanced at the same time.

Gross profit margin. For the whole group, GP margin was up 1.8 percentage points, reaching 56.1%. This is mainly because of contribution from FILA and FILA's share of the total GP margin was also up. So FILA's GP margin is around 7%, contributing a lot. For ANTA, GP margin came down a bit, but we believe that it is still within a reasonable range. Last year, ANTA's GP margin was high at 44.5 -- 44%. This year, it came down a bit, but it is still within reasonable level. The major reason is that our product structure is now broader. Comparing with last year, we have launched more products with reasonable price points. So the product mix is such that GP margin has been pulled down a bit by footwear, but this is reasonable. In the past for ANTA, GP margin is around 40% to 42%, 43%. Last year, it was particularly high.

Operating profit margin rose 3.2 percentage points to 28.7%. On one hand, if you look at several brands, ANTA's operating profit margin rose quite fast. This is because this year, advertising expenses accounted for smaller share because while sales is normal this year, but there isn't big investment in new advertising campaign. For FILA, operating profit margin is stable, it is doing quite well and there are also some government grants, which were received earlier.

Usually, while a lot of government grants were received in June already, some will -- some was received in July and August. So this is a matter of time difference. While our business growth was still fast and we are big taxpayers in many different places, so this year, we believe that government grants will remain the same. In the future, there will be increase in this area too.

Operating expenses. Advertising and promotion expenses came down in terms of share of revenue by 1.7 percentage points to 10%. The expenses increased, but because our sales revenue increased faster, so that's why its share of revenue came down. It is still within reasonable range. Usually, our advertising and promotion expenses is low double digit like 11%, 12%, 13%. In the second half, there will be slight increase from first half because there are many marketing events related to the Olympics. So they will take place in the second half.

Staff costs as a share of revenue went up slightly because staff costs for FILA marketing is usually higher, its share of the total is also higher. So the overall expense amounts rose. For R&D, its share of revenue came down, but the absolute expense amounts went up. Its share of revenue came down 0.4 percentage points, but because sales revenue increased fast, and in 2018, we had put in place some R&D infrastructure, design office. R&D office represented investment of last year. So this year, its share of revenue decreased. But still, we invested a lot in R&D.

Loss in JV and also profit attributable to equity shareholders. We acquired Amer, we set up a JV, so during the period, end of March to 30th June. So the revenue was CNY 4 billion, but there is net loss of RMB 890 million. The main reason is that there are some acquisition expenses and in Amer, there is also JV, a one-off loss and expenses for Amer. Their products are mainly winter products. And usually, in Q2, there will be loss. So we believe that these results are rather normal. For winter products, usually towards the end of the year in Q3, Q4, sales and profit will improve a lot. So we hope to be able to make up for the loss.

We have 58% shareholding, so share of loss in JV is RMB 490 million. As a result of such loss, profit attributable to equity holders came down 1.6 percentage points, reaching 16.8%. If this part is excluded, then we will achieve record high in equity -- in profit attributable to equity holders, around 20%.

Working capital management. We maintain healthy working capital management. Inventory turnover days rose a bit. It increased 4 days to 87 days. Now FILA's share is quite high at 45%. In the past, 30% or 40%. FILA is self-operated. So its inventory will lead to a higher turnover days. FILA's growth in the first half approached 80%.

Now for receivables and turnover days, they are in normal level. So receivable days, 34 days. Our turnover days, 51 days.

Liquidity and financial resources. Operating cash inflow was CNY 3.44 billion, up 133% year-on-year. So our cash flow is very healthy. Operating cash inflow grew big -- at a bigger percentage than sales. At the end of June, we have net cash of over CNY 8 billion. So that's why if you refer to all our operating indicators, financial indicators and growth indicators, they all look well.

So now, James will report to you on business.

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Jie Zheng, ANTA Sports Products Limited - Group President, CEO of the Outdoor Sports Brand Group & Executive Director [3]

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Friends from the investment sector, good afternoon. Once again, thank you, and welcome to ANTA Group's 2019 Interim Results Presentation. Just now, Mr. Lai presented our first half results highlights. All the data are encouraging. The group once again achieved record high. If you refer to all our indicators, we surpassed all the plans and targets set in 2018 for 2019.

If you look at our overall business, in the first half, you all know that the overall Chinese economy is full of challenges. Recently, the U.S.-China trade war is getting worse. So in the future, if you look at macroeconomy, there is a lot of uncertainty. What is quite fortunate is that ANTA Group is in the sportswear area. The sportswear sector in the first half -- well actually, we are the last listed company in the sportswear industry announcing results. In the first half, if you look at the sports segment, well, it is rather good in the Chinese economy. Among various industries, our industry is still on the rapid growth track.

In 2020 (sic) [2022], there will be the Beijing Winter Olympic Games. With this event, the winter sports and the overall sports atmosphere will be much boosted. So in the overall economy, there is challenge. But in the sportswear segment, we still see a lot of, opportunities, especially in the coming 3 years. Next year, there will be Winter Olympics. And then in 2020 (sic) 2022 , there will be Beijing Olympics. So for the sportswear industry, there will be a lot of opportunities. Given this background, in the first half of the year comparing with the past, we made a lot of change. In 2016, we said that we want to have omnichannels and multiple brands. And then besides, in this period, we have upgraded this strategy. On 1st of April, we completed acquisition of Amer Group. As a result, you can see all these sectors: performance sports, fashion sports. From high-end brands to mass brands, we now have a full coverage. So in the first half of this year, we adhere to our 10-year strategy, and we have made a very firm step. So our Group has become a world-leading sportswear group. So this is the first big thing that we did in the first half.

The second big thing is that given this situation concerning our group's business organization, we actually rationalized our organization. So based on the attributes of various brands we had built or we have established 3 brand groups: the first brand group is Performance Sports Brand Group and it mainly includes ANTA. It is the core brand of Performance Sports Brand Group. So ANTA, ANTA KIDS, SPRANDI positioned as performance sports brands and they are grouped together.

For the second sports brand group, it is Fashion Sports Brand Group. You can see FILA has become an important foundation of our business. In the past years, FILA developed fast. So under FILA brand, there is development of some subsidiaries. So we have built the fashion sports brand group, which includes FILA, FILA FUSION, FILA KIDS, KINGKOW, mainly these four, which builds or which comprise our fashion sports brand group. And then we have outdoor sports brand group, which includes Amer that we have just acquired and its related brands and also DESCENTE and KOLON.

Now in the first half of the year, this is an important move that we made. So we would like to go for incubation of these brands. So those brands with similar attributes will be grouped together. And then from design to marketing, we have dedicated teams to lead the development of various brands. At the same time, we have built 3 main platforms: the first one is retail, so that is the overall retail and operation platform; the second big platform is sourcing platform, supply chain; the third one is service support platform, which includes IT, finance, human resources, that is the services support platform.

So these platforms cross brands and business groups. So when business groups operate, they will be given the biggest support. So the brands and the business groups can enjoy adequate development. In the first half, these 2 rather important moves led the group to the new stage. And then we think that this new stage or interface will give our group more competitiveness in future developments.

Now I would like to briefly explain the developments of various brands. For ANTA main brand, in the first half of the year, it grew 18.1%. For 6 consecutive years, ANTA brand enjoys a high double-digit growth rate. So in Mainland China, among sportswear brands, ANTA is #1 in terms of market share, there's no doubt about it. We provide for consumers very professional sportswear and gears. And then we introduced brand-new Hydrogen Running Shoes with a weight of only 110 grams, and we also work together with Coca Cola. And as the official sportswear partner of the COC, we work with Palace Museum in launching ANTA X Winter Olympic Games products. So we want to showcase traditional Chinese culture.

And then in the first half, KT4, among all basketball category products performed the best, KT4 basketball shoes. So apart from China, in the U.S., consumers also like the products a lot. Selling price is CNY 999 per pair. So sales is very good. So in terms of ANTA's positioning in the area of mass sports, we are still able to deliver very high-quality products, and we are well received in the market.

And then ANTA KIDS this year, we continue to develop this line with full force. In the first half, in the sportswear industry, it has become the biggest kids' sportswear brand. If you talk about our store image and also our slogan for ANTA KIDS all our activities and events are well received in the market. This year, we'll be in 27 cities in terms of our events and activities. In the past, we're only in like 4 cities. So in the kids sportswear industry, we are the #1 brand.

For FILA, this is the first time that we present FILA's results completely, and FILA's business has grown 40-odd percent in the first half of the year based on last year's foundation, last year for the first time, we exceeded CNY 10 billion in sell-through. And in the first half this year, we did an important thing for FILA. In core important cities, we opened FILA big stores and integrated stores. So if you look at store efficiency and store image, these stores are leading in the industry.

So on all the platforms and also among the retail land lots, we have -- we are much commended. So our flagship stores are well liked. So through these big stores, we are able to deliver the best experience to users. So the fashion sports concept is now more deeply rooted in people's mind. 80% of FILA's growth is related to the promotion by all these big stores. We continue to work more with important fashion designers. So there is crossover collaboration. So in the first half of the year, we launched FILA X 3.1 Phillip Lim series. In the market, in the sportswear industry, among fashion sports segments, we performed very well.

We have signed contract with Huang Jingyu and Ma Sichun. They are very good healthy stars in China. So they will be our new spokespersons. So in the area of high-end sportswear, they will help us lead the market. The FILA mains -- main brand is very successful. Then if you refer to other FILA series, where they are also very important for our development, 2 years ago, we launched FILA FUSION and FILA KIDS. In the first half this year, these 2 businesses have their own stores.

So in the first half this year, for these 2 businesses, they developed very fast in the market, no matter whether you look at store image and store efficiency, they performed the best. FILA FUSION signed contracts with the most popular Japanese celebrity, Koki. She is a young spokesperson, perhaps you all know her. So among young people in the age of 20 to 30, well, Koki is very influential. After 2 years of hard work, well, this is the third year of DESCENTE. So this year, no matter whether you talk about store image and our product line, in core cities, in Tier 1 cities, well, they are already well recognized by consumers.

DESCENTE's business this year will be able to be doubled. We believe that this year, we can offer a very good report card for DESCENTE. So we have made investment in the past 2 years. This year, we will start to see profitability. And in the area of high-end sports segment, I think DESCENTE is going to have a very unique image.

KOLON now. We sorted out the positioning of KOLON once again. And also, we established the team in the coming 5 years. There is the chance that KOLON will become very important in outdoor fashion sports. KOLON will become the best brand in this segment. In the coming 5 years, we are very confident to create a unique image for KOLON in this area.

For SPRANDI and KINGKOW, well, these 2 brands are still in the creation stage or shaping stage. We are still trying to find a suitable brand positioning and product mix to meet needs of consumers.

Next, distribution network management. In the first half of the year to 30th of June, not including Amer, we have altogether 10,223 ANTA stores; for ANTA main brand, 10,223 stores; FILA, 1,788 stores. So among these 1,788 stores, the number of stores of FILA KIDS doubled. For SPRANDI, 110 stores; KOLON SPORT, 173; KINGKOW, 70. So for the whole group, we have altogether 12,479 stores, excluding Amer. So if you look at our coverage and our store numbers, store counts among all sportswear groups in China, we are leading.

Besides, we keep on optimizing our retail channels. We have launched Ninth-Generation Stores of ANTA in Shanghai and Chongqing and then there is the 4.0 Store for ANTA KIDS and FILA flagship store. So as a result, our overall store image in the first half this year greatly improved.

E-commerce. E-commerce has been given a lot of attention. We talk about omnichannels. Of course, e-commerce is also important. In the first half of the year, e-commerce business growth was strong, more than 40%. E-commerce has an increasing share of our total sales. So e-commerce is the most important platform for interaction with consumers. It is also an important sales channel.

All our e-commerce business is self-operated. We have more than 400 people in our e-commerce operations team and they operate our e-commerce business.

Supply chain and product management. In the first half of the year, we made very comprehensive, highly effective and efficient and reasonable layout. Now technological innovation and original design are important in our supply chain management. In the first half, concerning our self-produced apparel and footwear, well, self-produced footwear accounted for 34.4% of total sales, apparel, 11.9%. For our supply chain, if you look at overall layout and our R&D costs or investment, we have made a very good plan.

So just now in relation to our 2019 first half operations, I made a report to you already. So there are 4 months to go before this year comes to an end. In the coming 4 months, we'll continue to focus on synergy and value retail, so that all departments, all brands can work together and complement each other. We'll continue to optimize our organization to enhance management of the 3 brand groups. So our retail, sourcing, and service support platforms will work well together with the brand groups, so that our organizational structure will be more synergistic and highly efficient. And then in April, we completed the acquisition of Amer Sports, and we have put in place a 5-year plan for Amer together with the group.

Concerning targets for future developments. Well, there will be a high degree of synergy with the management of Amer, and in the second half of the year, we will cooperate well with the management so that the management can build a highly effective team to implement all the strategies. So we want to make sure that in the coming 5 years, all the strategies can be efficiently implemented. And then by means of digitalization, we can also leverage on big data to deliver customer-centric products and experience with value retailing. We hope to also dig deeper into smart retail. There are still 4 more months before this year comes to an end. So we have already started all our work in an orderly and systematic way in accordance with our established strategies.

The whole team is working very hard with full force. After 4 months, we hope that we are able to present a very satisfactory report card to all investors. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]