China Sportswear Companies: Approaching end of de-stocking

Store visits in Xiamen. We visited retail outlets of Li Ning, Anta, Xtep, Kappa, China Hongxing and 361 at Zhongshan Road, the busiest shopping area in Xiamen, between 7pm and 9pm on 2 Sep09. We were surprised to see substantial product discounts across all brands at all outlets.

Industry-wide de-stocking is likely to end before Nov09. The big discounts are meant to clear summer inventories before the full-scale launch of winter products, in our view. Thus, price discounting should not extend into November.

Industry prospects are improving. Retail sales growth in China is on an uptrend on a y-o-y basis, and the Business Climate Index for clothing and footwear showed a strong rebound in 2Q09 after 6 quarters of decline from its peak in 3Q07.

Upgrade China Hongxing to BUY, TP raised to S$0.31, based on 12x FY10 P/E or 30% discount to Anta’s FY10 P/E, with no change in earnings estimates, for we expect the valuation discount to continue to narrow to its normalized level as we have correctly foreseen in May09.

Maintain BUY on China Sports, TP raised to S$0.33, based on 6x FY10 P/E or 40% discount to Xtep’s FY10 P/E, in anticipation of normalizing valuation discount along with economic recovery.

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