COVID-19 induced shift in consumer habits: sportswear spending benefited UBS

Evidence Lab surveyed (> Access Dataset) the shift in consumption habits due to COVID-19, which indicated sports-related consumption benefited the most. We flag positive catalysts for sportswear consumption in 2020-22 including a colder winter so far than 2019, the Double 12 shopping festival, the later Chinese New Year and major sports events in 2021-22. Due to the robust demand outlook, we assume coverage of Li Ning with a Buy (from Neutral) and maintain our Buy rating on Anta. We view both companies' valuations as attractive on 35%/27% earnings CAGRs in 2019-22E and 32x/24x 2022E PE vs global peers' 15%/31x. We like Li Ning as we believe its brand image is shifting to a more prestigious brand driven by improving design, marketing, technology, increased shopping mall presence and leveraging the guochao trend (domestic brands/products integrating traditional Chinese style/culture). For Anta, we think market concerns about the perceived drag from DTC and Amer is overdone and that DTC's business model should benefit Anta's long-term operations.

Expect leading companies' inventory close to last year end's level by end-2020

We expect most leading companies will control inventory close to last year end's level by end-2020 though old product mix may still be slightly higher. While brands will leverage discounting in the remainder of the year and 2021 to clear inventory, UBS Evidence Lab's Sportswear Merchandise Planning data (> Access Dataset) indicates online discount levels in October remained under control for major companies.

Guochao theme and kidswear market favour domestic brands

UBS Evidence Lab's Regional Exposure Model shows that leading international brands such as Adidas have broadly expanded into lower-tier cities with similar numbers of stores as domestic brands. We expect slower further penetration for Adidas/Nike of lower-tier cities. Leading domestic companies have slowed down cannibalisation from international companies and are taking share from smaller domestic brands. Li Ning benefits from the guochao theme on improving designs, marketing and technology, and Anta has maintained its strength in the kidswear market.

Buy ratings on Li Ning and Anta; Neutral on Yue Yuen

We raise our price targets for Li Ning from HK$34.21 to HK$53.20, implying 47x/35x 2021E/22E PE on a 35% earnings CAGR from 2019-22E, and Anta from HK$84.92 to HK$128.10, which implies 35x/27x 2021E/22E PE on a 27% earnings CAGR from 2019-22E. We assume coverage of Yue Yuen with a Neutral rating (from Buy).