4 sports initiations: Buy Belle (Conviction), Dongxiang; Sell Li Ning
Positive on sector into 2009; post-Olympics fears overdone
We initiate coverage of the Chinese sports goods sector with one distributor
and three brands. A large population, rising income levels, rapid urbanization,
and increasing interest and participation in sports together provide a favorable
macro backdrop for China’s sports goods sector. We believe the sector will
continue to register healthy sales growth—ZOU Marketing forecasts a 20%
sales CAGR though 2012. We believe market fears of a post-Olympic demand
slump are unsubstantiated, based on our analysis of sector growth drivers and
evidence of 1Q09 orders booked to date.
Some regions "over-stored"; limited near-term risk to leading
brands' expansion plans
Though our store analysis by geography shows that ten regions already
appear “over-stored”, we believe leading brands’ store expansion plans should
still get executed in the near term, as we expect small brands to be competed
out of the market. For the four companies we cover in this report, we forecast
store growth to moderate from 42% in 2007 to 12% in 2010E.
Prefer distributors to brands; Buy Belle (on Conviction List)
We believe performance visibility for individual brands after 2-3 years is low.
Distributors offer the same exposure to sector growth, but with better visibility
and lower risk, as they represent multiple brands. Our top pick is Belle
(1880.HK), which we add to our Conviction List. Our DCF-based 12-month TP is
HK$10.00, implying 22X 2009E P/E, with 40% upside potential. We cross check
using a P/E-based SOTP methodology, which gives a similar valuation.
Brands' valuation should converge: Buy Dongxiang, Sell Li Ning
We believe the three brands have similar business models. While each brand
has strengths and risks associated with it, in general, we believe their valuation
should converge over the next 1-2 years. We recommend taking advantage of
the current valuation discrepancy—Buy Dongxiang (3818.HK), Sell Li Ning
(2331.HK). We are Neutral on Anta (2020.HK).
Risks to our view
(1) A macro slowdown could negatively impact all consumer discretionary
names. (2) Raw material/labor/rent inflation could create margin pressure. (3)
Intensifying competition. (4) Brands (including Belle’s footwear) are subject to
brand risks and fashion misses.

Table of contents
Prefer distributors to brands: Belle (Buy, Conviction list), Buy Dongxiang, Sell Li Ning, Neutral on Anta 2
Olympics-related demand boom/bust fears appear unsubstantiated 5
Ten regions “over-stored”: Is Li Ning’s 10k store plan at risk? 8
Better growth, lower risk: Why we prefer distributors 12
Comparing three brands: Why is Dongxiang’s ROIC so high? 15
Belle (1880.HK, Buy, Conviction List): Our top pick 18
Dongxiang (3818.HK, Buy): Should benefit from convergence in brand valuation 24
Li Ning (2331.HK, Sell): Deserves a smaller valuation premium 29
Anta (2020.HK, Neutral): Better margins than Li Ning, lower valuation 34
Disclosures

Prefer distributors to brands: Belle (Buy, Conviction list), Buy
Dongxiang, Sell Li Ning, Neutral on Anta
We initiate coverage of China’s sporting goods sector with one distributor and three
brands. We have a positive view on the sector, based on the favorable macro backdrop of
a large population, rising income levels, rapid urbanization, and increasing interest and
participation in sports.
ZOU Marketing, a sports marketing research firm based in Shanghai, estimates that
China’s sportswear sales will continue to grow at a 20% CAGR through 2012. According to
their estimates, the market will double from current levels to Rmb80bn in 2011.
We expect the leading brands to continue gaining market share at the expense of smaller
brands. Though our store analysis by geography shows that ten regions already appear
“over-stored”, we believe leading brands’ could still execute their store expansion plans in
the near term, as we expect small brands to be competed out of the market first. For the
four companies we discuss in this report, we forecast average store growth to moderate
from 42% in 2007 to 12% in 2010E.

Top pick Belle (1880.HK, Buy, Conviction List). Our DCF-based 12-month target price is
HK$10.00 (40% potential upside), implying 22X 2009E P/E. Belle is currently trading at 16X
2009E P/E. We cross-check using a P/E-based SOTP, which gives a similar valuation. We
like Belle as:
• We prefer distributors to brands, as there is low visibility for individual brands’
performance two-three years out. We believe distributors offer the same exposure to
sector growth, but have better growth visibility and lower brand risk.
• Belle enjoys a market leadership position in China’s highly fragmented softline
retailing segment. It is the market leader in mid-to high-end women’s footwear
(owning five of the ten best-selling brands in China), and the largest sportswear
distributor (by 2007 revenues) in China.
• We believe Belle’s large brand portfolio provides it with significant economies of scale
and strong bargaining power. Its multi-brand strategy also provides multiple growth
opportunities while reducing overall brand risk, in our view.
• We forecast a 25% net income CAGR over 2007-2010E, driven by store expansion,
same-store-sales growth, and contribution from the newly acquired footwear
business. We expect any FILA-related newsflow to be a positive catalyst. Belle has
recently acquired FILA’s brand rights in China but has not announced any specific
plans so far.
Buy Dongxiang (3818.HK, Buy), best brand idea. Our DCF-based 12-month target price is
HK$3.60, implying 14X 2009E P/E. The stock is currently trading at 11X 2009E P/E, at a 40%
discount to Li Ning and an 11% discount to Anta. We recommend buying Dongxiang,
based on:
• Our expectation of convergence in brands’ valuations. We believe brands have a
similar business model, and while each has its own strengths and risks, in general, they
should trade at similar P/E levels.
• Dongxiang’s Kappa brand is the most popular (as per Euromonitor, Kappa has the
highest market share in China’s fashion sports market) fashion sports brands in China.
We believe Dongxiang will continue to generate higher ROIC than Li Ning and Anta,
due to its high-margin and asset-light business model.
• We believe Dongxiang has better store expansion potential than Li Ning and Anta,
with a store base of less than half of the other two.
• We forecast a 23% net income CAGR over 2007-2010E, driven by store expansion and
same-store-sales growth. The launch of the “Robe di Kappa” casual-wear line
(management expects to launch in the next 12 months) could also be a positive
catalyst.