
Robert Method/iStock Editorial through Getty Pictures
Funding Thesis
ANTA Sports activities (OTCPK:ANPDY) and Li Ning (OTCPK:LNNGY) are each main beneficiaries of the Chinese language shoppers’ nationalistic sentiments, however Li Ning’s over-reliance on this has impeded its enterprise technique. ANTA, with its comparatively diversified model portfolio and bigger market capitalization, has outperformed Li Ning in nearly all monetary measures suggesting it’s extra prone to seize a major share of the worldwide market than Li Ning.
ANTA’s success over Li Ning is attributed to its direct-to-consumer (“DTC”/”D2C”) promoting mannequin, a key differentiator in opposition to Li Ning. Studying from Nike’s (NKE) profitable DTC technique, ANTA launched its personal DTC transition in 2020, exhibiting good monetary outcomes. By studying from its friends and avoiding their pitfalls, ANTA is poised to keep up its development momentum.
ANTA has a short-term problem in stock administration. This was attributed to the pandemic and the just lately embarked DTC transformation. Indicators of restoration in stock turnover are already noticed in its newest interim report. Traders ought to observe if the “common turnover days” proceed to lower as the corporate strives to extend its retailer numbers indicating efficient inventory-to-sales conversion within the new shops.
ANTA is smaller than most main worldwide sportswear manufacturers however not far behind. Nevertheless, based mostly on Li Ning’s unsuccessful worldwide growth and lack of a profitable technique to emulate, the chances of ANTA’s reaching worldwide success aren’t in its favour.
The inventory worth is deeply undervalued presenting a superb worth play alternative just for traders who don’t thoughts the regulatory uncertainties related to investing in Chinese language firms.
Firm Overview
ANTA Sports activities is a well-established and rising firm with a robust model portfolio and a big market share in China. Because the second-largest sportswear firm by income within the Chinese language market, second solely to Nike, the corporate is well-positioned to capitalize on the rising demand for sportswear in China and around the globe.
The corporate operates a wide range of manufacturers in its portfolio, together with ANTA, FILA, DESCENTE, KOLON SPORT and AMER:
ANTA Manufacturers (Firm Web site)
Its product choices span a variety of sportswear and footwear for varied sports activities, together with basketball, operating, coaching, outside, health, and life-style.
Comparability with Li Ning
In my view, ANTA’s closest comparable firm is Li Ning.
Whereas each Li Ning and ANTA have been huge beneficiaries of the Chinese language shoppers’ nationalistic (or “Guochao“) sentiments during the last decade, this tailwind will not be a panacea to everlasting enterprise longevity.
As this text described comprehensively, Li Ning’s enterprise technique was severely impeded by its over-reliance on the rise of Guochao sentiments:
the model’s place out there is ambiguous and it depends an excessive amount of on its nationalistic designs, being susceptible to potential scandals
Can ANTA study from Li Ning’s pitfalls and rise above its present rivals in each the native and worldwide athleisure market? We take a look at just a few views to seek out out.
We take a look at the income profiles of each ANTA and Li Ning to realize extra insights:
ANTA (Guru Focus) Li Ning (Guru Focus)
Wanting on the charts:
- When it comes to geographical unfold in income, each Li Ning and ANTA’s income are extremely concentrated within the Chinese language market which is among the most risky on the planet. It is a important focus threat that each firms are attempting to mitigate by making an attempt to penetrate the worldwide market, with restricted success. In keeping with this text, the highest 10 sports activities manufacturers within the worldwide market are nonetheless dominated by non-Chinese language manufacturers.
- When it comes to model diversification, Li Ning seems to be extremely depending on its homegrown model, whereas ANTA has no less than one different main model of Fila to depend on.
When it comes to dimension, we are able to observe that ANTA is way bigger than Li Ning in market capitalization and enterprise worth:
Monetary Comparability (Looking for Alpha)
If we take a look at some profitability ratios and figures from Looking for Alpha, ANTA is faring significantly better than Li Ning by nearly all measures:
Profitability (Looking for Alpha)
In my view, ANTA has achieved the monetary power to overhaul Li Ning because the main Chinese language sportswear/athleisure model. It has to this point prevented the pitfall of over-leveraging on the Chinese language shoppers’ nationalistic sentiments. Wanting on the important diversification of its income away from the Chinese language market with the acquisition of the rights of the worldwide Fila model within the Chinese language market, it seems doubtless that ANTA is proactively avoiding this pitfall and making ready for an eventual penetration within the worldwide market.
In keeping with this text by Janus Henderson, as of 2022, ANTA already leads Li Ning within the Chinese language sportswear market share at 20.4%. ANTA’s market share is second solely to Nike at 22.6% whereas Li Ning’s market share is just 10.4% at 4th place. Primarily based on this information, ANTA has already overtaken Li Ning as the highest Chinese language sportswear model. If ANTA retains up with its present momentum of development, it’s en path to overtaking Nike as properly within the native Chinese language market.
Armed with its monetary prowess and present presence within the worldwide market (through the Fila model), ANTA seems to be the almost definitely Chinese language sportswear/athleisure model that may surpass its predecessors to seize a major share of the worldwide market.
ANTA’s Strengths In Direct-To-Shopper
ANTA’s success over Li Ning is not at all an accident. This text from KrASIA describes the direct-to-consumer promoting mannequin as the important thing aggressive benefit of the corporate:
Initially of its institution, the corporate was primarily a shoe OEM manufacturing facility, coming from CEO Ding’s household roots as a shoe manufacturing facility. Time beyond regulation, nevertheless, the corporate has constructed up its capabilities throughout the complete provide chain, from R&D to design, manufacturing, distributorship and even its personal devoted logistics crew. This was a key differentiator in opposition to home competitor Li-Ning.
From the corporate’s interim report, we are able to see DTC now accounts for almost all of ANTA’s income and elevated by 21.8% whereas revenues from conventional gross sales channels are the smallest in proportion and diminishing by 32.6%:
Income (Interim Report)
ANTA launched the DTC (direct-to-consumer) transition in 2020, to reflect the profitable DTC technique of Nike, which began in 2017.
Thus far, ANTA seems to have accomplished a superb job of studying from its rivals:
- It learnt the very best observe of utilizing DTC from Nike and has proven good execution outcomes financially.
- It prevented the pitfall of Li Ning the place it elevated its product costs astoundingly to blatantly reap the benefits of shoppers’ nationalistic sentiments.
If the corporate continues its due diligence of actively studying from its extra profitable friends and avoiding their pitfalls, ANTA ought to be capable to preserve its present development momentum.
ANTA’s Brief-Time period Stock Problem
ANTA has some short-term challenges with its stock administration. As an instance this, we observe the corporate’s Money Conversion Cycle (“CCC”) pattern from a multiyear perspective and located it to be visibly growing since 2020.
CCC is made up of three variables:
CCC = Days Stock Excellent (“DIO”) + Days Gross sales Excellent (“DSO”) − Days Payable Excellent (“DPO”)
Utilizing information from Morningstar below “Working and Effectivity”, we plot the modifications of those 3 variables of ANTA within the graph:
Money Conversion Cycle (Morning Star)
We are able to observe that of the three variables, DIO elevated probably the most, suggesting that ANTA is holding onto its stock for a considerably longer interval.
From the corporate’s 2022 annual report, ANTA’s administration attributed this to the pandemic and just lately embarked DTC transformation.
Stock Turnover (2022 annual report)
From the most recent interim report, we observe this heightened stock turnover is already experiencing a major restoration:
Stock Turnover (interim report)
The rise in stock turnover is anticipated to be short-lived as China’s provide chain exercise continues to get well. Whereas the DTC transformation was inflicting some short-term delay in stock turnover, this transformation is anticipated to realize higher gross sales effectivity to offer long-term development for the corporate in the long term.
Traders ought to observe whether or not ANTA’s stock turnover continues to enhance to finally carry down the rising CCC pattern.
Rising Retailer Numbers
From the interim report, the administration supplied the most recent and focused variety of shops for every model:
Present Retailer Numbers (interim report) Goal Retailer numbers (interim report)
In my view, the corporate will not be removed from assembly its goal. With a retailer variety of 1942, the Fila model has already met its goal of 1900 – 2000 retailer quantity. The shop numbers from different manufacturers are additionally very near their respective targets.
Not solely has the Fila model met its retailer targets, however these new shops have additionally elevated its income considerably.
Income Breakdown (Interim Report)
For its homegrown “ANTA” and “all different” manufacturers, traders ought to observe if the corporate can meet each its retailer quantity targets and proceed its momentum of income development on the identical time.
This may point out the brand new shops can successfully convert their stock into gross sales, which can assist to scale back their stock turnover and can carry down the rising CCC pattern finally.
Capturing Worldwide Market Share
Thus far, we mentioned how ANTA has risen above its predecessor Li Ning to turn out to be the highest Chinese language sportswear firm. Now we discover the possibilities of it capturing a major share within the worldwide market.
Utilizing a top-of-mind recall, I record down some well-known sportswear manufacturers that come up instantly in my thoughts. Utilizing Looking for Alpha’s abstract web page for every firm, I estimated their market capitalizations and in contrast them with ANTA:
- Nike: $157B
- Lululemon (LULU): $61B
- Adidas (OTCQX:ADDYY): $35B
- ANTA: $26B
- Underneath Armour (UA): 4B
In my view, proper now, though ANTA is visibly smaller than many of the main worldwide manufacturers, it isn’t lagging too far behind. ANTA’s dimension remains to be within the “ten of billions” vary, much like Lululemon and Adidas. I don’t assume ANTA will materially problem Nike’s dominance, but it surely may need a honest likelihood in opposition to different manufacturers on the record.
Now, let’s take a look at the general technique of ANTA to penetrate the worldwide market. As noticed earlier, ANTA’s most profitable manufacturers based mostly on income share are homegrown ANTA and the acquired worldwide model of Fila.
Earlier than ANTA, Li Ning additionally tried to develop internationally utilizing its homegrown model when it opened its U.S. headquarters and flagship retailer within the US in January 2010. Greater than 10 years have handed and its income share from the worldwide market remains to be lower than 2%, as noticed from the Guru Focus web site earlier. Therefore, based mostly on Li Ning’s expertise, the chances of ANTA’s homegrown model reaching success internationally aren’t in its favour.
How about ANTA’s Fila model? Was there a priority of success by a Chinese language firm in utilizing an acquired worldwide model to dominate the market? I can’t consider an instance from the sportswear market. Nevertheless, in my view, trying on the e-commerce business, we are able to infer from Alibaba’s acquisition of the Lazada model to seize the market share of e-commerce within the SEA area again in 2016.
In keeping with this LinkedIn article, after the acquisition, what adopted for Lazada was a sequence of disorganized modifications in administration that the creator described as “a sport of musical chairs”. When it comes to efficiency, Lazada is now lagging behind Shopee by way of GMV ($21B in opposition to $73.5B). Additionally, this technique failed regardless of Alibaba’s repeated injection of money into Lazada:
Alibaba has repeatedly injected money into the corporate since 2022, with this most up-to-date funding — its third in 2023 — bringing this yr’s whole to over $1.8 billion.
Earlier in my article, I remarked that:
ANTA seems to be the almost definitely Chinese language sportswear/athleisure model that may surpass its predecessors to seize a major share of the worldwide market.
In comparison with its predecessor Li Ning, I nonetheless assume so, based mostly on its monetary prowess in opposition to Li Ning and its observe report in emulating well-proven strategic execution.
Nevertheless, in my view, regarding penetrating the worldwide market, traders ought to think about that ANTA doesn’t have a profitable technique to emulate, which means a major quantity of uncertainty in its worldwide growth plans.
ANTA introduced a 5-year plan in 2019 to advertise their manufacturers to higher heights, each regionally and internationally. Except for ongoing incremental investments in R&D, the corporate additionally used the 2 Olympics occasions Tokyo 2020 and Beijing 2022 to spice up its model’s consciousness on the worldwide scene.
ANTA additionally targets youthful Technology Z by working intently with influential younger idols and athletes resembling Wang Yibo and Gu Ailing. This collaboration with worldwide athletes in high-profile occasions seems to have been executed by its predecessor Li Ning as properly with restricted success. Nevertheless, previous failures won’t indicate future failures.
Traders ought to observe whether or not ANTA’s executions in these plans will probably be profitable in the long term.
Valuation
ANTA has a really beneficial high and backside line that largely trickles right down to its free money move (“FCF”):
FCF (Calculated by Creator)
From the FCF graph tabulated from Looking for Alpha’s information, on common, the expansion in FCF is greater than 30% per yr.
Listed here are the inputs and assumptions for my calculations of ANTA’s intrinsic worth utilizing the DCF mannequin:
Intrinsic Worth Enter (Calculated by Creator)
- The beginning worth of FCF is derived utilizing money move figures from Looking for Alpha. The remainder of the inputs are taken from completely different hyperlinks from Focus Guru.
- For development charge, Focus Guru’s projection of 16.5% is cheap and conservative since ANTA has traditionally grown its FCF by greater than 30% on common, as mentioned in an earlier part.
The Chinese language authorities is well-known for taking sweeping measures to manage focused industries, as demonstrated within the crackdown on its main tech firms greater than two years in the past. That is additionally noticed within the training enterprise. We have now not witnessed such drastic measures within the sports activities business but, which ANTA is in. Nonetheless, in my view, this presents a cloth uncertainty distinctive to investing in Chinese language firms.
With such uncertainty in thoughts, I’ll mannequin my DCF calculation with a extra conservative development timeline by assuming that ANTA will proceed to develop by 16.5% for less than the subsequent 3 years (versus my standard desire of 5 years), with development tapering to a terminal worth of three%:
Intrinsic Worth (Calculated by Creator)
Taking into consideration the corporate’s short-term liquid belongings and debt, the intrinsic worth is $408.41, implying the inventory is deeply undervalued, presenting an upside of greater than 75%.
Dangers
ANTA inherits the identical regulatory dangers as different Chinese language shares as a result of authorities’s willingness to impose sweeping measures on focused firms, forcing them to conform even when it means drastically hurting their backside line for the good thing about the general public’s welfare. This began greater than 2 years in the past and remains to be occurring just lately.
Traders ought to solely put money into ANTA if they’re comfy with this threat.
Conclusion
ANTA has outperformed its friends solely within the Chinese language market primarily by emulating profitable methods and avoiding pitfalls dedicated by its friends.
Regardless of short-term stock challenges as a result of pandemic and DTC transformation, restoration indicators are evident from its newest interim report.
Within the worldwide market, ANTA is the almost definitely Chinese language sportswear firm to seize a major market share. Nevertheless, there has not been a priority of so successful among the many Chinese language sportswear firms. I mentioned earlier that ANTA’s strengths lie in emulating profitable methods from its friends. Therefore, with out such priority of success, its prospect of increasing internationally is unsure.
The inventory is undervalued, however investing in a Chinese language firm like ANTA presents regulatory uncertainties which traders ought to pay attention to.
Total, this inventory is a ‘purchase‘ just for traders who perceive and settle for the regulatory dangers related to investing within the Chinese language inventory market.
Editor’s Word: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.