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Edited Transcript of 2020.HK earnings conference call or presentation 26-Feb-19 8:15am GMT

Full Year 2018 ANTA Sports Products Ltd Earnings Presentation (Chinese, English)

Hong Kong Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of ANTA Sports Products Ltd earnings conference call or presentation Tuesday, February 26, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jie Zheng

ANTA Sports Products Limited - Brand President & 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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Honorable investors and investors from all over the world watching webcast, good afternoon. Welcome to ANTA 2018 full year results announcement.

Now let me introduce to you members of the management today. They are Chairman and CEO Mr. Ding Shizhong; Executive Director and Group Director, Mr. Zheng Jie; and the Group Executive Director and CFO, Mr. Lai Shixian; Executive Director and Sales Director, Mr. Wu Yonghua.

In today's presentation, Mr. Lai will go through 2018 full year financial performance. Then Mr. Zheng will go through business performance and outlook. Finally, there will be a Q&A session. Mr. Ding and other members of the management will take your questions. First, we will play a video on a review of 2018.

(presentation)

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Unidentified Company Representative, [2]

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The company was listed in 2017 (sic) [2007]. This is already the 12th year -- the 12th anniversary from listing. So again, we have achieved new heights in terms of our results.

Now I'll ask Mr. Lai to go through our business results.

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Shixian Lai, ANTA Sports Products Limited - COO, CFO & Executive Director [3]

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Welcome, investors, friends, to our presentation today.

I remember that in the first half when we reported our half yearly results, at that time, our business growth was fast, and at that time, the management said that we are confident that in the second half of the year, we'll be able to maintain a more or less similar growth rate as in the first half. At that time, many investors did not believe us because at that time, there were many challenges in the macro environment, and consumption was rather gloomy. And later on during roadshow, many people asked, what do you mean by saying that the second half will be more or less the same as the first half of the year? Why are you confident that the 2 half-year periods would be more or less the same? So now we have the final report, and we have really worked hard to achieve these results. For the whole year 2018, the management is quite happy with the results for all key indicators. We have also achieved best results in history. In terms of revenue and profit, this is the fifth consecutive year that we achieved double-digit growth.

So here are the financial highlights. Revenue up 44.4% at RMB 24.1 billion. Gross profit growth 54%, reaching CNY 12.7 billion. Operating profit, up 42.9% at RMB 5.7 billion. Profit attributable to shareholders, up 32.9% to CNY 4.1 billion. EPS, up 30.6% at RMB 1.5282. The board proposed to pay out final dividend of HKD 0.28 per share. So for the whole year, dividend is HKD 0.78 per share. Then dividend payout was 44.9% of profit attributable to shareholders.

If you look at the second half, dividend payout was 30%. This payout ratio was lower than before because we have to retain some cash for a large-scale acquisition. If you look at absolute amount, if you do not include the special dividend, the total amount of dividend payment is more or less the same as in 2017.

Now let me go through these items one by one. Revenue, up 44.4%. This growth rate was fast because our main brand, ANTA, maintained stable growth. And for Fila, last year, in each quarter, it achieved fast growth. So we announced the sales growth quarterly from Q1 to Q4, the growth rate did not decline. So for the whole group, revenue was higher than expected. So revenue growth and all the way to product breakdown, while apparel accounts for quite a higher percentage, for example, Fila and DESCENTE, so the growth rate is rather high -- higher for apparel.

Gross profit margin, up 3.2 percentage points, reaching 52.6%. Main reason for growth in GP margin was the ANTA brand maintained stable GP margin. And then for new brands, they enjoy high GP margin in retail sales, and their share was quite high of the whole group's business, so they make contributions to the group's GP margin. If you look at apparel and footwear, we achieved quite good growth in GP margin.

Operating expenses and operating profit margin. For advertising and publicity expenses, the share increased 1.5 percentage points, reaching 12.1%. In 2018, there was sponsorship from COC, so that was a whole year expense. For 2017, the expense was only CNY 300 million. So this piece of expenditure is quite big.

And then for Fila and DESCENTE, there is marketing and promotion, publicity events, and so expenditure went up. In Milan of Italy, we did a fashion show, which helped the brand's performance.

For staff cost, the share was down 1.1 percentage points, reaching 10.9%. So looking at absolute value of staff costs, in fact, it went up. We wanted to invest more resources for staff to have better development, and then we can bring in more professional staff members to work for us.

R&D expenses, its share came down by 0.5 percentage points at 5.2%. In the past year, we enhanced our R&D capability. If you look at the absolute amount, there is a big increase in R&D expense. We continue to maintain our innovation capability. Operating profit margin, down 0.2 percentage points at 23.7%.

Last year, there were ANTA brand and Fila brand having stable OP margin. This year, we had acquired some new brands, which incurred loss. So as a result, OP margin came down slightly. However, if you only look at ANTA and Fila, the OP margins are stable.

Effective tax rate and margin of profit attributable to equity shareholders. Effective tax rate is stable at 26.6%, more or less the same as before. Operating profit margin, down 0.2 percentage point. Margin of profit attributable to equity shareholders, down 1.5 percentage points. This is mainly because of foreign exchange in 2018 that was RMB depreciation against USD. We have some RMB assets in Hong Kong, and so they depreciated. But looking at the whole group together on a consolidated basis, while there is a foreign currency reserve so there isn't big impact on the group. In 2017, there was a gain from this foreign exchange movements. In 2017, the FX gain was slightly more than CNY 100 million. In 2018, FX loss was around CNY 100 million. So these 2 numbers offset each other. So the impact on profit attributable to equity shareholders was bigger, but for the whole group's operation, this is just very normal.

Working capital management. In the second half for the whole year, our performance was very healthy. Inventory turnover days, up 6 days because our business model has changed quite significantly. The self-operation ratio has increased to a high level. Inventory usually is bigger for self-operation, and so there is an increase to inventory turnover days for 6 days. If you look at retail sales of ANTA brand in the past, it increased more than 80%. Inventory increase is -- was only very healthy. So if you compare different brands, the inventory turnover days, all came down no matter whether it is Fila, Kolon and DESCENTE. So inventory turnover days all came down for each brand, but when the share of retail went up for some brands, then there will be increase. Then trade receivables and trade payables were 35 days and 52 days, respectively, at a very healthy level in the industry.

Liquidity and financial resources. Cash flow in the first half faced some challenge. And then at the end of the day, we still achieved quite good performance. The year before last year saw more than CNY 4.4 billion of operating cash net inflow, up 39.5% year-on-year, quite comparable to growth in profit attributable to shareholders. So now towards the end of 2018, there'll be net cash of around RMB 10 billion.

So for cash, we had done preparation for potential acquisition. And recently for the acquisition, I would like to talk about the progress of the syndicated loan, is smooth. And in the market, we received quite good response. So concerning loans, that's our preparations for the acquisition. So far, progress has been smooth. Thank you.

Now I will defer to James to do a business review.

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Jie Zheng, ANTA Sports Products Limited - Brand President & Executive Director [4]

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Investors, good afternoon. First of all, on behalf of ANTA Group, I would like to welcome you all this afternoon to our 2018 annual results presentation. Just now, Mr. Lai already reported to you on our 2018 results.

During half yearly reports, one of the participants asked us a question about the second half of the year, and I said that the growth will be more or less the same as the first half then we will be able to complete our yearly target. Today, you can see the result.

After making the remark that day, I was a bit worried. I'm worried that what I said would not be fulfilled. Today, I'm happy that I have not failed your expectation.

2018 is the 11th or 12th anniversary of our listing, and this is the best year since listing. No matter whether you refer to our sales revenue and net profit, we achieved new highs since listing. And we have not failed investors' trust and recognition.

If you look at the market, 2018 is a year full of challenges. If you look at the macroeconomic environment of China, GDP growth was 6.6%. It's okay. So in line with expectation.

Then if you look at total retail sales of consumer goods, 9%. Even though the market is full of challenges, consumers still have confidence their purchasing power is still good. So overall, atmosphere is good.

Last year, NDRC and General Administration of Sport of China issued the 13th 5-year plan for development of sports and industry, and this then led to more development plans. So actually, these documents constituted important driving force for the sports industry.

In 2022, there would be the Winter Olympic Games in Beijing, so there are only 3 more years to come. In terms of development of winter sports, last year, if you look at promotion on national level, it was quite significant. So in the coming 3 to 5 years, concerning winter sports, we see big opportunities. However, the overall industry environment is good, but different brands performed differently. So in the industry, you can see a process of consolidation.

Why did ANTA achieve such good results? You may still remember that in 2016, we announced the development target for the coming 10 years, and 2018 is the third year, which we implemented our model of single focus, multi-brand and omnichannel strategy. So under this strategy, the whole group in different business operation had achieved high quality of operation. So as a result, we enjoy good opportunity to compete with our competitors. So for those good competitors, our distance from them was narrowed. And then for the inferior competitors, we widened our distance from them. So in 2016, we announced this strategy, which has proven to be very correct.

Now I would like to take this opportunity to go through with you the performance of our main brands. ANTA is the mother brand. In 2018, its performance is satisfactory. At the end of 2017, we signed contract with Beijing COC as their strategic working partner of the Winter Olympic Games. And then at the beginning of the year, there is the PyeongChang Winter Olympic Games. This is a very good chance for ANTA to showcase our very good image of representing professional athletes and professional sports. And then we offered the best and most fashionable professional sports products. Perhaps you can still remember, apart from the products for the athletes, in fact, there are also some outdoor gear and equipment. These are commended by the sports teams and officials. Besides, we received reaction from the market. Last year in Q4 -- well, there are products that had become product for sales in relation to the Olympic Games. So starting from 2018, our sponsorship had been turned into productivity. And last year, in August, in the Asian Games in Jakarta, we designed for the Chinese team the latest gear and equipment for training as well as for competition so they can meet the needs of young, modern athletes in terms of product functions and product design. So the gear and equipment is very light, fully functional. They can help the Chinese sports team to achieve good results in the Jakarta Asian Games. In the future, we can see that this sponsorship will extend to 2022 and 2024.

So there are 2 important games coming: the Winter (sic) [Summer] Olympic Games in 2020 and Beijing Winter Olympic Games in 2022. So in these 2 important games, ANTA will have the opportunity to showcase even better and brilliant products. So this is one important highlight for the ANTA main brand.

For 2018, ANTA is a professional sports brand for the mass markets. And in promoting our core products, we have achieved some big breakthrough. For basketball, KT series was very successful. So as a result, ANTA basketball in the Chinese basketball market became market leader. And then if you look at the quantity of basketball shoes, well, we are #1 sports brand in China. For KT series, well, its success has led our products to the more professional and fashionable path, and we have achieved a very unique path. We had signed contract with Gordon Hayward, a new star. So he's an NBA star. And in 2019, we believe that ANTA basketball will achieve even brighter results.

In 2018, we worked with NASA to launch a crossover limited edition of Dad sneakers. They help runners in relation to shockproof. So we offer the best functions to them during running. So in the market, our products were received. With all these moves in 2018 in all main market segments, we performed very well. No matter whether you look at sell-through or store efficiency, among various Chinese brands, ANTA brand is among the top.

For ANTA Kids, I would like to say more about ANTA Kids. After 10 years of hard work, last year -- well, I'm not sharing official data, but if you look at our business intelligence summit, we can see that in the children's products area, ANTA Kids is among the top. We already have a very unique competitiveness. In 2018, we had more than 2,700 stores under ANTA Kids. So in the industry, we are among the top. We face infants, children all the way to teenagers, so full age range of children products. We offer full range around choices to consumers. Positioning is professional sports, and then it is also extended to sports, lifestyle, fashion and so on so that our products can meet children's different needs.

Last year, we worked with Marvel, Hello Kitty in terms of IP. So the design elements of our products are significantly enhanced so more consumers like our products. So that's about ANTA Kids last year.

Another brand is also our main brand, Fila. In 2018, we achieved 44% growth in sales. One major reason is because of Fila. 2018 is an explosive year for Fila. Our retail sales for the whole year exceeded CNY 10 billion.

In China, in the high end of sports fashion brand, we are a leader for Fila. So concerning crossover collaboration last year, we did a lot. Apart from working with Jason Wu in 2018, we signed contract with Phillip Lim. We launched Fila 3.1 Phillip Lim series. It's already in the market, and we have received good response from the market. In September last year, Fila as the first sports brand with -- Fila is the first sports brand featured in Milan fashion week. So it had driven Fila's development in China as well as development in Europe and the U.S.

So Fila in the Greater China region, given our hard work, achieved good results. If you look at Europe and the U.S., there are big changes in Fila. And we have achieved very good business return. Fila's success is that apart from being -- apart from the main brand, there's also Fila Kids and Fila FUSION. These are series of Fila, and we have made good attempts for Fila Kids. It is in the high-end kids' products area, and it has achieved a leading position. In 2018, there are more than 200 stores of Fila Kids, and it is still in the process of high-speed development. So in the shopping malls or department stores, very often fila Kids are #1. Fila FUSION targets at consumers 20 to 25 years' old, young consumers, so that Fila can become younger and more fashionable. For Fila FUSION, we have opened around 100 stores in 2018, so efficiency exceeded our expectation.

So Fila is not only a single brand. It has already extended to a portfolio of brand with main brand as well as sub-brands. So in terms of customer coverage, we have extended ourselves a lot. Without changing the original positioning, we can cover more customer segments, and we offer a richer content to consumers so that on different occasions, they can wear Fila.

DESCENTE, in 2018 -- well, 2018 was the second year. In 2017, we introduced the DESCENTE brand. So the brand at that time just started. The best thing is that DESCENTE had already entered the best department stores and shopping malls in China. The top 100 department stores and shopping malls in China, DESCENTE had already entered. So this is not an easy task. Store efficiency has achieved our expectation already because positioning is very accurate. It's positioning is high-end professional sportswear, and the design and also salespersons' service quality are in line with this positioning. As a result, if you look at main sportswear brands, we had achieved good differentiation. And then we also signed contract, which had enhanced the overall brand awareness. So for DESCENTE, it has strong DNA of winter sports. Its iconic product is the skiing suit -- ski suit. So I think DESCENTE is going to see even better opportunities in the future.

And then there are 3 smaller brands: Sprandi, Kolon Sports and Kingkow. Last year is the first year we made preliminary attempts. Now the progress is more or less in line with our expectation. We believe that in 2019, they will discover their own unique business model. And in our group, they will have their own place. We hope that in 2020, 2021, these brands will enter their explosive stages to deliver higher-quality output for the group.

Just now, I reported to you the development of various brands in 2018. As you all know, in our industry, our channel strategy is very important. So we emphasized omnichannel. So for both online and offline, we hope that all our brands can achieve organic integration of offline and online. So we hope to deliver the best consumer experience and service.

In 2018, for our main brands, ANTA and Fila and DESCENTE, for offline and online, we have made adequate plan. For offline, in 2018 -- at the end of 2018, the ANTA brand has more than 10,000 stores. ANTA Kids had 2,700. ANTA Kids, 2,700 stores. Fila, at the end of 2018, there were 1,652 Fila stores. DESCENTE, 117 stores.

So for these stores, in early 2017, Mr. Ding already said that in the future, we did not -- we would not focus on the number of stores to be opened. The most important is store quality and store efficiency. So store quality means the location, the area of store. Is it in line with the brand? For store image, is it in line with our expectation? And can the store service match the message that the brand wants to convey? So our stores do not only sell products. The stores are for customers to interact with us and to experience our brand, so consumers can have a better understanding of our brand trial products. And eventually, we hope they will like our products in order to buy them. So this is very important. So that means a platform. In 2018, we did quite a lot of good work in this area. For online in 2018, e-commerce business achieved quite big enhancements. During Double 11, on one single day, we achieved sales of CNY 1.13 billion. For ANTA brand, in the sportswear category, we're #3; Fila, #5.

So for these 2 brands in the sportswear industry, we are already in leading positions. e-commerce business development has completed our overall business. Our products and also individual consumers have opportunity to interact. So there is better chance for them to experience our latest products. e-commerce has become the most important constituents of our business.

If you look at platform management where now we have 6 brands. In 2018, we had created a retail procurement and sharing platforms so that on these platforms, we can enjoy full service, and we hope that the operation quality and efficiency can be enhanced. In 2018, we continued to step up -- or increase our investment in product R&D because we believe that product innovation is the most important foundation for us to achieve better results. It is also the most important core competitiveness.

In 2018 concerning R&D, well, it accounted for 5.2% of cost of sales, and investment in R&D went up 25% from 2017. So this means that in relation to product innovation and R&D, it is our very important promise. In 2018, we achieved 44% business growth. We achieved very good operating profit. And just now, I already explained to you the reasons behind prospects. It is already the end of February 2019, two months have gone. So what will happen to ANTA in 2019? If we look forward, we are full of confidence in 2019.

As I said just now, in 2018, internally, we had built 3 platforms, and we have established and described clearer positioning for each brand. For each brand, well, we look at product retail, and there is clear task and mission in these 2 important areas, that is product and retail. So we said that we have to do synergistic incubation and retail with value. So in other words, we have to build a more complete and more efficient platform so that all brands can receive sufficient service, then they can better complete the target for value retail. Well, this is introduced by Mr. Ding. It is a very important concept in the future for retail, no matter whether it's online and offline, it is the most important platform for us to create value for consumers. So value retail is a very broad concept. There's a lot of work that we need to do. How can we build an effective CRM system so as to have better interaction with consumers? How can we enable our salespeople and sales managers to have better skills to communicate with consumers so that consumers understand more about our product functions? What kind of attractive retail environment should we build so that consumers can have better experience? More importantly, in the interaction with consumers, what kind of data platform should we build so that the data can empower our sales teams and product teams so that they can design products that are more innovative and that can better meet market needs? So for 2019, these are our important goals, promoting incubation synergy and value retail.

After these are achieved, then our group will continue to achieve mid- to high double digit in retail sales growth for ANTA and then also for Fila. So overall, 20% to 25% growth in retail sales for the whole group. That's our target.

So regarding 2019, these are our goals. For ANTA Group, 2019 is a year full of opportunities. And as you may know, we are -- we have already made an offer to Emirates Sports in Europe. M&A is now underway. Things are progressing according to our plan. Concerning acquisition of Emirates Sports, this is going to be our milestone. If the acquisition is successful, then in the future, very quickly, we'll be able to achieve our vision, that is we will become a respectable, world-class sportswear brand. So this vision will be then achieved. Of course, many challenges will be brought to us. After acquisition, how can we achieve 1 plus 1 bigger than 2? However, we are still full of confidence in the future. We believe -- well, 2018 has gone, and we have delivered good results to shareholders. In 2019, we'll continue to work hard to create more value for shareholders so that our company can achieve our vision, and we can move up to a higher step, a higher platform. So we won't stop. Thank you very much.