Earnings Call: H1 2024

Aug 28, 2024

Summary

H1 revenue rose 13.8% YoY to CNY 33.735bn, with 25.7% operating margin and strong cash generation. ANTA and outdoor brands grew, while weak consumption and an uncertain H2 environment temper the outlook.

Ladies and gentlemen, welcome to ANTA Sports Products Limited interim results presentation. We have just announced our interim results. We have achieved the best results historically and also our profitability. We maintained high operating level, and our operating profit is at healthy level. Let me first introduce our management in attendance. They are Chairman and Executive Director, Mr. Ding Shizhong; Executive Director and Co-CEO, Mr. Lai Shixian; Executive Director and Co-CEO, Mr. Wu Yonghua; Executive Director, Mr. Zheng Jie; and Executive Director and CFO, Mr. Xu. In today's presentation, first of all, Mr. Ding will go through the financial results for the half year, and then Mr. Lai will go through a business review and outlook. Finally, in the Q&A, Mr. Ding will lead other executives to answer questions from investors. Now, let's first invite Mr. Lai to go through our 2024 first half financial performance, please. Investors, good afternoon. Welcome to our 2024 interim results presentation of ANTA Sports Products Limited. Now, let me report to you our financial performance. In the first half of this year, despite the challenging external operating environment, while the overall consumption market is still recovering, ANTA insists on our medium to long-term strategy of multi-brand strategy. We had revenue of CNY 33.735 billion, up 13.8% year-on-year. Operating profit margin, 25.7%, more or less the same as last year. Net profit margin, excluding Amer Sports, CNY 6.16 billion, up 17% year-on-year. For free cash flow, CNY 7.62 billion. So it is a very good cash revenue level. In the first half, we pay dividend of 118 Hong Kong cents, up 40% year-on-year. Dividend payouts ratio, comparing with the whole year last year, is more or less the same. Our revenue, CNY 33.7 billion. For ANTA brand, we got double-digit growth, CNY 16.08 billion, up 13.5% year-on-year. We got this result starting from 2023. We focused on mass market positioning, performance of professional sports. In 2023, we did some brand and merchandise and channel work, and we achieved some good results. For FILA brand, CNY 13.06 billion, up 6.8% year-on-year. For other brand, CNY 4.6 billion, up 41.8% year-on-year. These exceeded our expectations. Let me talk about ANTA brand. CNY 16.08 billion, up 13.5% in revenue. In the first half of the year, all basketball shoes, they are sold globally. We achieved very good results, an increase in volume in tier 1, 2 cities in high-end shopping malls. We also achieved some breakthrough in main shopping centers. Overall, retail sales through achieved double-digit growth. Besides this year for ANTA Champion and also some other footwear stores, we achieved good store efficiency. In first half, online channels achieved a 20% growth. So for all these initiatives, they drove ANTA brand double-digit growth. Gross profit margin. Overall gross profit margin, 64.1%, up 0.8 percentage point. For ANTA brand, up 0.8 percentage point. This is mainly because an increase in gross margin for footwear, and there are also the online channels accounting for bigger share. FILA brand gross profit margin, up one percentage point. This is mainly because this year, inventory is very healthy. If you talk about inventory provisioning, there is a bad provision as compared to last year. New products share a big increase. As a result, there is 1% increase in gross margin for FILA. For other brands, 72.7% gross margin. It is at a high level for DESCENTE and KOLON SPORT. Market discount has risen. So overall speaking, this is because of our brand structure reason. There is a slight decline in gross margin for other brands. When it comes to our three operating expenses, staff costs accounted for 15.5% of total, more or less the same as last year. This shows that in terms of human resources and talent development, we kept on investments. Advertising expenses, 7.5%, up 0.4 percentage points. This year is a major sports year, so A&P expenses increased. All our A&P expenses are within our budget. We have a strong budget management system to manage various expenses. R&D cost ratio, 2.7%, up 0.4 percentage point from last year. R&D expenses increased 36%, so we continue to invest in the future. Globally, we built six major design R&D centers with Tsinghua University, Beihang, Donghua University, and many professors. We collaborated in many innovation work. For the research or R&D findings, many of them had been shifted into market investment stage. Operating profit margin, 25.7%, more or less the same as last year, flat year-on-year. High-quality growth is a goal set at the beginning of the year. For high-quality growth, first of all, there must be growth. Secondly, there must be sustainable, stable profitability. For ANTA brand, operating profit margin 21.8%, up 0.8 percentage point. This is mainly because gross profit margin of ANTA brand increased. For high-end shopping centers, our operating efficiency also improved. For FILA brand, operating profit margin down 1.1 percentage points. This is mainly because we increased investment into merchandise of FILA last year. There were some major projects investing into FILA products. For fabrics, the silhouette of the cutting and so on, we made investment into R&D. For FILA footwear, growth exceeded 20%. For FILA, we will continue to keep our own strategy. We will invest into our brand and products. For other brands, operating profit margin, more or less the same year-on-year, so it is at a relatively high level. Profit attributable to equity shareholders, 18.3%. In first half 2021 is 18.3%. This year, 18.3% again. Without exceptional circumstances, 18.3% is the best historical level as margin of profit attributable to equity shareholders. Working capital management. Our group average inventory turnover days, 114 days, down 10 days. For our brands this year, all inventory is within five months level. This is a healthy level. For ANTA Group, we adopt DTC business model, so our inventory is being digested online, offline in all channels and in various regions in all retail outlets. We are able to achieve highly effective inventory management. Besides, for our all channels data, inventory data are very clear. If inventory experience any issues, we will make quick adjustment to the structural data in sales phases. For inventory management, it is something that we have been attaching a lot of importance. Inventory management is also a core element of high-quality development. Inventory must be healthy. Average trade payables turnover, average trade receivables turnover days, both are at a good level. Operating cash flow, CNY 8.5 billion. This is basically proportional to operating profit. This year, the first half sell-out rate is over 90%. Free cash flow, CNY 7.62 billion. This is strong cash generation capability. Cash and cash equivalents at the end of the period, more than CNY 47 billion. There is CNY 15 billion of debt. Net cash, CNY 32.4 billion. Overall financial position is very healthy. This time the board said that within the coming 18 months, no less than 10 billion Hong Kong dollars will be spent in share buyback. The purpose is to enhance overall return to shareholders. All along, I have been saying that our group manages multiple brands, and we have been enhancing our multi-brand differentiated management model. We have put in place some targets. We strive for high-quality growth. For high-quality growth to be achieved, we need growth first. We need market share to increase. At the same time, we need stable profitability. At the same time, we need healthy operating metrics. Finally, we need to keep investing for the future. These factors constitute our high-quality growth strategy. In the first half of this year, if you look at profitability, operating margin and margin of profit attributable to equity shareholders reached best historical level. For operational indicators, our GP margin increased. Inventory turnover days came down by 10 days. We have stable cash flow. Looking at these operational indicators, these are important data for us. Investment for the future. R&D investment continues to increase, accounting for 2.7% of the total. For channels, we keep on trying out new formats. For smart logistics, we built our multi-brand DTC model logistic network. We will continue to invest for the future in areas that we ought to invest. Overall objective is to use this dynamic management model to adhere to our established strategy and strive for high-quality growth. That's all on my part. Now I will pass the floor to Mr. Lai. Thank you. Thank you, Mr. Bi. The group's single-focus multi-brand globalization strategy enables us to keep on making use of our strengths. Mr. Lai will talk about how we will enhance our deployment to strive for high-quality growth. Mr. Lai, please. Investors, good afternoon. Just now, Mr. Bi talked about our first half results. In various areas, we achieved the best historical levels. In the first half of this year, if you look at the macro market, according to statistics from January to June, total retail sales value of consumer goods only increased 3.7%. As of June, you can see that consumer confidence index was only 86.2%. You can see that consumption recovery is still weak, so it takes time for confidence to be restored. If you talk about apparel and footwear and hats, retail growth is only 1.3%. It is even lower than total retail sales value of consumer goods growth. For sportswear, growth is slightly better than 1.3%, but it is still weak. If we take a look at the overall market and industry, there are a few main characteristics. We refer to K-shaped divergence. This refers to high-end luxury products and also products that emphasize good value for money. This trend still continues. However, this trend is not as strong already. This shows that the overall market is rather weak. For products with rigid demand and the experiential consumption categories, they surpass the market and there is divergence in different customer groups. Overall confidence is not enough. But then for high-income groups and lower-tier markets and Gen Z, they remained relatively more optimistic. At the same time, if you look at sportswear industry, there are a few characteristics. First, vertical categories and outdoor segment outpaced the market. For running, yoga, outdoor vertical brands and selected outdoor series, they maintained high growth. For niche sportswear brands, they showed potential even though the total volume is not big. For example, golf, tennis. These categories saw steady growth and increasing scale. Social e-commerce platforms captured new consumer segments. For example, Li-Ning, Red Book, Dewu. They cover more and more consumer segments, and they maintained fast growth. Let me go through the business of our various brands. For ANTA brand in 2023, we started some transformation. In the first half of this year, we began to see outcomes or effects of transformation. First, from head office to the final end, ANTA brand clarified our positioning for the mass market. Product structure adjustment and channel adjustment in the past year, we did some refinement and we put in place clearer initiatives. For professional sports brand, first of all, we are mainly on basketball and running. In terms of Owen and Baker, we achieved some breakthrough. For our product matrix, we also did some rationalization so that there is more reasonable and complete product matrix. For ANTA Champion, after some time of adjustment, we began to see rapid growth. For traditional channels, we have achieved upgrading and breakthrough in the past. All ANTA stores were the same. They looked the same. Now, based on different segmentation models of channels where there are Palaces and also footwear stores and other new format stores. Now on consumer end, we received good feedback. Besides, when we carried out such transformation, we maintained good inventory level and our operating indicators remained healthy. For ANTA KIDS, again, we focused on basketball and running, and we increased the share of functional products. For functional products last year, the share was not more than 50%. Now we are at 55%. We continued to enhance the ANTA TH series. In the past, for ANTA KIDS, the kids are really small kids. But now, the kids, of course, grow fast. This segment is big. We introduced a number of TH series products like 01 series, and also with Chinese National Geography, we created some outdoor series. Online growth is very fast on live streaming and social media. We organized many events focusing on kids and TH. As a result, there was high growth. For 9,900-odd ANTA stores, we have 8,000 B2C model stores. 49% are direct operated, 51% are franchisees operated under our strict management. For FILA brands, we continue to adhere to this strategy of top-notch products, top-notch brands and top-notch channels. We achieve record high store efficiency, more than CNY 1 million in many core areas like Beijing, Sanlitun, and also Wuhan, and so on. We opened some new store formats for tennis and golf series. FILA continues to lead for golf. We are number one in the industry for tennis and golf sales. We are within top two in the industry. Besides, for FILA sub-brands like FILA KIDS and FILA FUSION, there are some new store formats being opened. For FILA KIDS, we will increase the proportion of functional products. For FILA FUSION, we continue to cater to fashionable lifestyle of young people. In the first half, for high-end outdoor brand, it maintained high growth. DESCENTE's revenue growth exceeded 30%, KOLON SPORT more than 55%. For DESCENTE, according to Kantar Brand Health Survey, for the first time, we are number one in skiing category in terms of brand power. Offline store efficiency of DESCENTE continued to rise in the first half. It exceeded 2.2 million in retail sales. DESCENTE also developed KIDS category. As of the end of June, we opened seven KIDS stores. Store efficiency exceeded 550,000. It will continue to strengthen the KIDS business. Active VIP members exceeded 1 million. For KOLON SPORT, in the first half, it is the most successful brand, and it reinforced high-end outdoor brand leading strength. In terms of brand recognition, KOLON SPORT in the past half a year was enhanced by five times. Originally, brand awareness is not that high for KOLON SPORT, but in the past two to three years, every year, there was big improvements. In Little Red Book, the ranking in terms of interaction in the past was only in the seventh, eighth position. Now we are within top three. To a certain extent, it drove consumers' attention. Now for our salient brands, for KOLON SPORT, one is footwear. It grew more than 100%. For, more than 90%. KOLON SPORT, in the past, in Northern and Eastern China, shop efficiency exceeded 1.1 million, up more than 45% in terms of same store. For discount ratio, it is enhanced by six to seven percentage points, bringing very good operating efficiency. For retail channel management, we continue to enhance our sales network to strengthen efficiency of stores. ANTA core brand, 7,073 stores, quite stable. ANTA KIDS, 2,831 stores. There is a slight increase. FILA, 1,981 stores. DESCENTE, 197 stores. KOLON SPORT, 160 stores. These are at stable level. There is slight increase. We focus more efforts on improving store efficiency. For online business, right now for e-commerce revenue, it accounts for 33.8% of total. In terms of absolute amounts, comparing with same period last year, it is up 25.1%. It is the best performing sportswear group online. Looking at Tmall, JD, Douyin platforms transaction in the first half, FILA and ANTA brands are within top three. For digitalization, we continued our work in digitalization. We improved our efficiency by digitalization. In terms of product design and live streaming, we started to use AI technology. In this way, we can enhance operating efficiency and produce product sample with AI, reduce making physical samples. On live streaming, we utilize AI digital humans to engage with audience, and we can enhance consumer experience and boost conversion rates. Now let me talk about ESG results. For ESG, first of all, mutualism with the environment. For our greenhouse gas emission reduction target, it is already approved by SBTi. We are the first in China getting the approval as an apparel brand. This shows that our targets set by ourselves reach industry-leading and world-leading level. We undertake that by 2030, we have to reduce Scope 1 and Scope 2 greenhouse gas by 40%, and for Scope 3 emission, it should decrease by 51.6%. As of the end of June, we encouraged over 140 suppliers to use clean and renewable energy. We work with supply chain partners to discharge our promise. We also push the industry to go for green transformation. We lead the development of technical specification for evaluation of sustainable products footwear. It has been approved by China National Light Industry Council. We released supplier lists and several sustainability management policies. We get access to Social & Labor Convergence Program, SLCP, so as to enhance overall transparency and management. Then for mutualism with employees, as of the end of June, we had about 62,000 employees. Last year, we had 60,000. We had more employees. We established Chief Diversity Officer. The Chief Human Resources Officer worked in this position as well. In the first half of this year, we launched 36 employee welfare initiatives, and we are named the World's Best Employers and one of the top 100 happy enterprises in China. For mutualism with consumers this year in Shanghai Wukang Road, we started the first ANTA Zero Carbon Mission Store. It is the first carbon neutral retail store in the Chinese footwear and apparel industry, certified by authoritative institution. In the Paris Olympics, our champion official uniform and footwear, they used eco-friendly materials, and they are also recognized by the Chinese sports delegation for award ceremonies at the Olympic Games. FILA and our outdoor brands also introduced some sustainable products. For mutualism with society, we have actually implemented a project for many years, Steady Growth charity project. As of the end of June, we trained over 6,800 physical education teachers. We donated 185 ANTA Dream Center and 50 ANTA Fields. We organized 17 ANTA Camps benefiting over 7.2 million youths. For the second half of the year, the external environment is still very uncertain. The most important thing is to firmly adhere to our established single focus multi-brand globalization strategy and improve our brand value in the following four areas. We should be a leading benchmark that is in terms of our innovation, social responsibility, brand value and employees. For single focus, we will continue to focus on sports shoes and apparel industry, and each brand will strengthen the salience, the mind share and establish leading position. In terms of multi-brand, each brand pursues sustainable and healthy development. The group strengthens our multi-brand management synergy capabilities and develops digitalization of supply chain, R&D, innovation, and also enhance our brand strength to support our business. For globalization, apart from ANTA brand being in Southeast Asia last year, this year, we will enhance our deployment in other overseas markets. Besides, we also arrange overseas design resources and supply chain so that we can have value chain being globalized. In terms of environmental protection and also social responsibility and governance, we strive to be world-leading. For various brands, ANTA brand, there will be differentiated store types and vertical products with innovative concepts. We will adjust the structure and improve quality of each retail performance. For different tiers of cities, there will be different strategies. We will strengthen the efficiency of stores and products. For FILA, we will enhance products at products level. We will improve quality and strengthen competitiveness in vertical fields such as golf and urban tennis. We will actively optimize store layouts, and in high-end core business districts, we will deploy new store formats. Outdoor sports brands, we need to strengthen penetration into new markets. For DESCENTE Kids, we will increase their presence in first tier and new first tier cities in China. For KOLON SPORT, we will increase contribution of spring and summer products, thus strengthening market coverage in Southern China. Despite challenges that we will face, we remain cautiously optimistic and confident about the fundamentals and long-term development prospects of China's sportswear industry. While some brands is such that we will need to adjust our work in order to enhance their performance. For ANTA brand's transformation, we have seen very positive results. We do have confidence that in face of very complicated competitive landscape, we will adhere to long-termism and achieve long-term returns for shareholders. Thank you.