Anta Earnings: Strong Profitability but Low Dividend Payout Not Satisfactory

Narrow-moat Anta 02020 delivered strong first-half 2023 earnings, featuring revenue up 14% year over year and adjusted operating profit up more than 40%. While these numbers are ahead of Refinitiv consensus estimates, they are in line with our forecasts. Management maintained its 2023 guidance while acknowledging weaker sales in July and August.

We maintain our fair value estimate at HKD 141, but we lower Anta’s Capital Allocation Rating to Standard from Exemplary, reflecting our view that there is room to improve shareholder distribution. The biggest risk to our near-term estimates remains China’s macroeconomic uncertainties. But looking beyond near-term challenges, Anta’s outlook remains very attractive over the long run. Chinese per-capita sportswear spending is still a fraction of most developed countries, and rising health awareness will continue to drive overall activewear sales. We view the shares as undervalued, trading at a 45% discount to our fair value estimate. That said, we think macroeconomic uncertainties may add volatility to the share price in the near term.

In the first half, sales growth was mainly driven by the collection of premium brands such as Fila, Descente, and Kolon. We believe revenue would have been stronger if the Chinese economy didn’t slow down since May. Profitability was the highlight of this interim period, as operating leverage brings profit growth much higher than sales growth. Looking into the second half, management expects its premium outdoor brands to continue to outperform the rest of its portfolio, a positive mix shift that will create an upside to the operating margin.