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abcGlobal Research

Competitive pressure from intl brands

is rising but near term impact is limited

Sportswear consumption is rising and

growth opportunities still exist

Overweight Anta and Xtep. Neutral on

Li Ning and Dongxiang

Changing competitive environment. The Chinese

sportswear sector is entering a new phase as industry players

are changing their business strategies to compete for market

share. International brands are looking to create new product

offerings to suit the mass market in lower tier cities.

Domestic brands, on the other hand, are placing more

emphasis on branding strategy, aiming to further strengthen

brand equity and move up the value chain.

The impact. While international brands pose a competitive

threat to the domestic brands, the impact should be minimal

in the near term as it will take time for them to fully

establish their distribution network in lower tier cities and

broaden their lower priced product offerings. In the long run,

we believe all domestic brands will be affected, but the

stronger ones can mitigate the impact by gaining market

share from weaker brands.

Growth opportunities. Despite the looming competition,

sportswear consumption is still in a growth phase, especially

in the mass mid-end market and lower tier cities. China is at

a stage in the macro cycle that wealth will likely trickle

down to the lower income group, which in turn would favour

mass market consumption, including sporting goods.

Top picks - Anta Sports (2020.HK) and Xtep (1368.HK).

Anta is the second largest Chinese sportswear brand company

in China. Stronger brand recognition and better economies of

scale should enhance Antas margins and earnings

momentum. We also like Xtep given growing recognition of

its brand in the mass mid-end market, differentiated branding

strategy, strong balance sheet and undemanding valuation.

In this report, we initiate coverage of China Dongxiang and

Xtep and Christopher Leung assumes coverage of Anta andLi Ning.

Consumer & Retail

Textiles, Apparel & Luxury Goods

China SportswearSporting challenge

Ratings summary

Market Price Target price P/E FD-EPScap (HKD) ___ (HKD)___ (x) growth

Company Ticker FYE Rating* (USDm) 3-Aug Old New FY11E FY11E

Anta 2020.HK Dec OW(V) 4,543 14.1 11.2 18.0 16.5 24%Dongxiang 3818.HK Dec N(V) 3,278 4.5 n/a 4.7 12.2 12%Li Ning 2331.HK Dec N(V) 3,513 26.0 25.5 29.0 18.6 18%Xtep 1368.HK Dec OW 1,617 5.8 n/a 6.8 12.1 24%

Priced as of 3 August 2010. OW = Overweight and N = Neutral.Source: Company reports and HSBC estimates

4 August 2010

Christopher K Leung*

Analyst

The Hongkong and Shanghai Banking Corporation Limited

+852 2996 6531 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it

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China Sportswear Selected Comparison

Company Li Ning Anta Dongxiang Xtep 361 Degrees Peak SportTicker (2331.HK) (2020.HK) (3818.HK) (1368.HK) (1361.HK) (1968.HK)FY End Dec Dec Dec Dec Jun Dec

# of Outlets Li Ning Brand Anta Brand Kappa Brand Xtep Brand 361 Brand Peak Brand- 2008 6,245 5,667 2,808 5,056 4,632 5,179- 2009 7,249 6,591 3,511 6,103 6,055 6,206- 2010e 8,000 7,241 4,161 6,903 n/a n/a- 2011e 8,700 7,891 4,811 7,703 n/a n/a- 2012e 9,300 8,541 5,461 8,503 n/a n/a

Avg Sales Per store (RMBm)- 2008 1.1 0.9 1.2 0.6 0.3 0.5- 2009 1.1 0.9 1.1 0.6 0.6 0.5- 2010e 1.2 1.0 1.1 0.6 n/a n/a- 2011e 1.2 1.0 1.1 0.7 n/a n/a- 2012e 1.4 1.1 1.1 0.7 n/a n/a

Sales Breakdown (2009)- Footwear 42% 56% 20% 46% 47% 45%- Apparel 47% 41% 76% 53% 51% 52%- Accessories 11% 3% 4% 1% 2% 3%

Revenue growth- 2008 54% 55% 94% 110% 253% 101%- 2009 25% 27% 20% 24% 162% 52%- 2010e 16% 22% 18% 22% 26% 30%- 2011e 19% 21% 14% 18% 23% 29%- 2012e 24% 22% 16% 17% 21% 21%

Net profit growth- 2008 52% 66% 67% 129% 681% 126%- 2009 31% 40% 19% 27% 253% 67%- 2010e 15% 21% 12% 14% 36% 28%- 2011e 18% 24% 12% 24% 21% 30%

- 2012e 20% 23% 10% 23% 22% 19%Gross margin- 2008 48.1% 40.0% 58.5% 37.1% 26.4% 32.7%- 2009 47.3% 42.1% 60.4% 39.1% 34.6% 37.5%- 2010e 47.0% 42.6% 61.2% 39.9% n/a n/a- 2011e 46.9% 44.5% 62.0% 41.2% n/a n/a- 2012e 47.1% 45.4% 62.2% 42.3% n/a n/a

EBIT margin- 2008 13.4% 20.1% 40.1% 20.6% 15.4% 20.4%- 2009 14.5% 23.7% 42.7% 19.8% 21.4% 23.2%- 2010e 14.3% 24.5% 41.6% 20.6% 24.1% 21.4%- 2011e 14.2% 25.9% 41.7% 21.7% 24.5% 21.4%- 2012e 13.9% 26.5% 40.2% 22.8% 25.7% 22.1%

Net margin- 2008 10.8% 19.3% 41.2% 17.7% 13.6% 18.4%- 2009 11.3% 21.3% 36.8% 18.3% 18.3% 20.3%

- 2010e 11.1% 21.2% 34.8% 17.2% 19.8% 19.9%- 2011e 11.1% 21.8% 34.1% 18.0% 19.4% 20.1%- 2012e 10.8% 21.9% 32.2% 18.9% 19.5% 19.9%

A&P Expenses (% of sales)- 2008 17.5% 13.8% 7.7% 9.1% 6.0% 7.5%- 2009 15.4% 12.7% 7.4% 11.8% 8.4% 11.3%- 2010e 15.5% 13.5% 8.5% 11.8% n/a n/a- 2011e 15.5% 13.8% 8.9% 12.0% n/a n/a- 2012e 16.0% 14.0% 9.9% 12.0% n/a n/a

Net-cash/(Debt) (RMB M)- 2008 286 3,493 6,064 2,013 -2 286- 2009 1,004 4,007 6,529 2,498 1,803 1,988- 2010e 1,479 4,081 7,248 2,286 n/a n/a- 2011e 2,412 4,963 7,907 2,715 n/a n/a- 2012e 3,034 5,846 8,536 2,640 n/a n/a

Acct Receivable Days

- 2008 48 39 28 48 86 74- 2009 47 33 34 54 103 70- 2010e 47 34 36 55 n/a n/a- 2011e 46 36 36 55 n/a n/a- 2012e 47 36 36 56 n/a n/a

Source: Datastream, HSBC estimates, I/B/ E/S estimates for non-rated (NR) companies.


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China Sportswear Selected comparison (Ranked by 1M share price movement)

Mkt-Cap Price _________P/E _____ ___ FD-EPS Growth ___ _____ P/B_____ _____ROE_____ ___Share Price Mvmt __Company Ticker FYE Rating* USDm (HKD) FY10e FY11e FY12e FY10e FY11e FY12e FY10e FY11e FY10e FY11e 1 mth 3 mth 6 mth

Peak 1968.HK Dec NR 1,562 5.8 13.1 10.0 8.4 8% 32% 19% 3.9 3.1 25% 26% 14% -6% 18%361 Degrees 1361.HK Jun NR 1,637 6.2 13.1 10.8 8.9 -2% 21% 21% n/a n/a 30% 30% 12% 4% 12%Pou Sheng 3813.HK Sept NR 569 1.0 11.4 11.4 6.4 n/a - 78% 0.7 0.7 4% 7% 10% -16% -30%Li Ning 2331.HK Dec N(V) 3,513 26.0 22.0 18.6 15.5 15% 18% 20% 7.1 4.8 36% 34% 2% -14% 2%Anta 2020.HK Dec OW(V) 4,543 14.1 20.5 16.5 13.5 21% 24% 23% 5.4 6.7 28% 30% 1% 0% 32%Xtep 1368.HK Dec OW 1,617 5.8 14.9 12.1 9.8 14% 24% 23% 3.4 7.8 24% 26% -8% -3% 13%Dongxiang 3818.HK Dec N(V) 3,278 4.5 13.7 12.2 11.1 12% 12% 10% 2.7 7.7 21% 22% -11% -17% -14%

Note: Priced as of 3 August 2010. OW = Overweight, N = Neutral, NR = Non-Rated.Source: Datastream, HSBC estimates, I/B/ E/S estimates for non-rated (NR) companies.


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Entering a new phase

We believe the Chinese sportswear sector is

entering a new phase as industry players are

changing their business strategies to compete formarket share. International brands are looking to

create new product offerings that suit the mass

market in lower tier cities. Domestic brands, on

the other hand, are placing more emphasis on

branding strategy, aiming to further strengthen

brand equity and move up the value chain.

International brands could pose a competitive

threat to the domestic brands when they shift

towards the lower tier cities with lower priced

products. In the near term, we believe the impact

on the domestic brands will be limited as it will

take time for the international brands to fully

establish their distribution network in lower tier

cities and to broaden their lower priced products

offerings. In the long run, all domestic brands will

be affected but stronger ones will prevail at the

expense of weaker brands.

Chinese consumers have low brand loyalty,

especially in lower tier cities, and we think thebiggest challenge for the international brands in

moving into the lower tier cities is to ensure their

expansion will not negatively affect their

perceived high-end brand image. On the other

hand, for domestic brands, we think the key

success factors in this new phase are to improve

the perceived product performance along with

building and/or maintaining the brand.

Nikes China strategy

Nike recently said that it is moving more

aggressively into the lower tier cities in China and

is looking at pricing options and product

introductions that may be at the lower end of the

Nike product range, as well at different

opportunities with some of the other brands in the

portfolio. Below are some of our thoughts on

Nikes strategy in China.

We believe the expansion into lower tier

cities takes time and we do not think we will

see any large scale roll-out of lower priced

products in the lower tier cities until 2012.

To retain its high-end image, we think Nike

will maintain its high-end price positioning

and the new lower priced products will still be

priced at a premium to the domestic brands.

In addition, we also think Nike may introduce

Industry dynamics

Competition has intensified and companies are changing their

business strategies to compete for market share

International brands, ie Nike and Adidas, are moving into lower

tier cities and putting pressure on domestic brands

Despite looming competition, sportswear consumption in China is

still at an expansionary stage with growth opportunities


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a sub-brand or a new brand to penetrate the

lower tier cities.

Based on our store visits in five first and

second tier cities last month (Tianjin, Xian,

Taiyuan, Chongqing, and Changsha), the

retail ASP for Nike running shoes is around

RMB528/pair and it is about 56% higher than

that of Li Ning. If Nikes lower priced

products are at the RMB400 level, the price

difference would be reduced to around 18%.

Selected Comparison Running shoe avg. retail price in China

Brand Running shoe retail ASP (After Discount)

Nike RMB528/pairAdidas RMB510/pairLi Ning RMB339/pairAnta RMB265/pairXtep RMB219/pairPeak RMB213/pair361 Degrees RMB196/pairXdlong RMB185/pair

Source: HSBC estimates

Given Nikes distributors are mainly focused

on the first and second tier cities, Nike may

need to provide higher financial incentives to

their distributors for their expansion into the

lower tier cities. Belle (1880.HK) and Pou

Sheng (3813.HK) are the two largest listed

distributors for Nike in China and we think

they may benefit from Nikes move towards

the mass market.

Nike may also need to find new suppliers asthe existing suppliers incur higher overhead

costs and may not want to allocate the

existing resources and capacity to lower

margin orders.

All domestic brands will be affected as Nike

may erode their customer base. However, we

think the strong domestic brands, ie Li Ning

and Anta, etc) could mitigate the impact by

gaining market shares from other smaller

brands that underinvested in product

development and brand equity.

Growth opportunitiesWe believe the Chinese sportswear market is still

in a growth phase, especially in the mass market

and lower tier cities where the growth is generally

faster than the mature first and second tier cities.

China is at a stage in the macro cycle that wealth

will likely trickle down to a lower income group

and in turn would favour mass market

consumption, including sporting goods.

We forecast the size of Chinas sportswear market

will grow from RMB74bn in 2009 to RMB150bn

in 2014e, representing an annual CAGR of 19%.

Growth in the sportswear market slowed from

36% in 2008 to 11% in 2009 due to inventory

overhang after the Beijing Olympic Games and

the weak consumption environment after the

financial crisis. However, we believe rising

income and urbanization will continue to propel

sportswear consumption in the next few years.

China sportswear market size, 2009-13e

-

50

100

150

200

2009

2010E

2011E

2012E

2013E

Rmb

in

billions

0%

5%

10%

15%

20%

YoYGrowth

China Sportsw ear Market Size

Annual Growth Rate

Source: ZOU Marketing, HSBC estimates

Chinas urbanization rate could top 65% by the

end of 2030e and eventually reach 70-80% by the

middle of the century, which means there is still

another 25-35ppts room to go from the current

level, according to our China strategist, Steven

Sun. In addition, the renewed policy focus on

income distribution reform in China could also

spur consumption further.

The minimum wage is going up 10-30% across

China this year and we believe this is just the


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beginning. The State Council stated its intention

to double labour compensation during the 12th

Five-Year Plan period, representing a 15% CAGR

in labour compensation.

This, then, would fuel rising discretionary income

and support growing demand for many products,

including sports wear.

Government intends to double labour comp, 2011-2015e

-

20

40

60

80

2 010 e 20 11e 2 012 e 2 01 3e 20 14 e 2 01 5e

39%

40%

41%

42%

43%

44%

45%

46%

47%Labour comp. (Rm b trn)

N orminal GDP

Ratio

Source: HSBC, State Council (assuming nominal GDP CAGR=12% vs 15% CAGR for

labour compensation as implied by 12th Five Year Plan.

Market segmentationThe China sportswear market can be divided into

three segments:

The high-end segment is largely dominated

by foreign brands and their retail price for a

pair of running shoe ranges from RMB600-

1,000.

The mass mid-end and low-end segments are

dominated by the domestic brands. In themass mid-end segment, the general retail

price for a pair of running shoe ranges from

RMB200-400.

For the low-end segment, the pricing is below

RMB200 per pair.

Based on our analysis of 15 sportswear

companies, we found the high-end segment

accounted for 35% of total market size in 2009

and the mid-end made up 41%, followed by the

low-end segment at 24%.

With rising income and urbanization in China, we

believe the high-end and mass mid-end segments

will continue to see faster growth over the next

few years and the low-end segment will continue

to shrink.

Our estimates show that Nike has the biggest

market share in China (16% in 2009), followed by

Adidas (13%), Li Ning (11%), and Anta (8%).

Other smaller brands (such as Deerway, Umbro,

Mizuno, and Guirenniao) made up 17% of the

total market size in 2009.

In the past few years, dominant brands have been

gaining market shares from the smaller brands and

we think this consolidation trend will continueover the next few years as smaller players that are

under invested in A&P and R&D may lose market

share to the dominant brands.

China sportswear market shares, 2009

Others

17%Qiaodan

5%

Xdlong

3%

Yeli

3%

Adidas

13%

Nike

16%

Li Ning

11%

Flyke

1%Erke

3%Meike

1%Xtep

5%

Peak

4%

Anta

8%Kappa

5%

361o

5%

Source: ZOU Marketing, Company Reports, and HSBC estimates


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Critical factorsFor domestic brands to continue gaining market

share, we believe effective branding strategies and

strong financial position are two critical factors.

For the six Hong Kong listed Chinese sportswear

companies, they are generally financially healthy,

with high net-cash position and positive cash

flow. The strong financial performance reflected

their good operating performance in the past years

and the new capital from the equity market. We

summarize below the net cash and FCF of the six

HK listed sportswear companies in 2009.

Net-cash and FCF comparison, 2009 (RMBm)

Company Net cash FCF

Li Ning 1,004 1,039Anta 4,007 1,157Dongxiang 6,529 1,319Xtep 2,498 794Peak 1,988 165361 Degrees 1,803 403

Source: Company reports

In order to improve brand equity and product

offering, we think most sportswear companies

will increase their spending on Advertising and

Promotion (A&P) and Research and Development

(R&D) spending over the next few years. For

example, Dongxiang (3818.HK) is increasing its

A&P expenses from 7.4% of sales in 2009 to

around 10% of sales over the next two years. Anta

has also recently signed Kevin Garnett as its

second endorsed NBA player and we think its

A&P spending will also be higher over the next

few years. In the chart below, we summarize the

A&P spending of the six Hong Kong listed

sportswear companies in 2009.

The increase in A&P spending is likely to have a

negative impact on profitability, while a

companys ability to raise product prices and/orachieve economies of scale would be critical. In

the past few years, the Chinese sportswear brands

(with the exception of Dongxiang) have expanded

their operating margins through gross margin

expansion and/or operating leverage.

EBIT margin comparison, 2006-09

Company Ticker 2006 2007 2008 2009

Li Ning 2331.HK 12% 13% 13% 14%Anta 2020.HK 12% 16% 20% 24%Dongxiang 3818.HK 45% 42% 40% 43%Xtep 1368.HK 12% 20% 21% 20%Peak 1968.HK 18% 17% 20% 23%361 Degrees 1361.HK 5% 8% 15% 21%


A&P expense comparison, 2009

-

200

400

600

800

1,000

1,200

1,400

Li Ning Anta Xtep Peak Dongx iang 361 Degrees

A&PExpenses(RmbM)



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Sales outlookDongxiang recently announced its retail same-

store-sales (SSS) dropped from +4% in 1Q 2010

to only +0.4% in 2Q-2010 and its retail inventory

also deteriorated to 5.2x. Management attributed

the weak performance to the poor weather (ie:

heavy rains in Central and Southwest China in

May and June).

While it is alarming to see such a big decline in

the second quarter, we think this is not an industry

wide issue as Kappa products are more cyclical

than others and this seems like a company-

specific issue.

For 2H 2010, we expect most sportswear

companies will report improvement in their retail

SSS growth, mainly due to a lower comparison

base from last year. However, for Li Ning, there is

risk that its SSS in 3Q 2010 could be below our

expectation as the company has recently changedits logo and its distributors are now offering

bigger discounts to clear the old logo inventories.

Based on our store visits in Shenzhen, we noted

Li Ning stores are offering 30-40% discounts on

old logo products.

SSS growth for Anta, Dongxiang, Li Ning, and Xtep

Yr to 31 Dec Anta Dongxiang Li Ning Xtep

1Q09a +7-9% +6% Up Single Digit +2%2Q09a +7-9% +2% Down Single Digit +5%3Q09a +5-7% -11% -8% +6%

4Q09a +7-9% +1% +3.8% +8-9%

1Q10a +10-12% +4% +5% +5%2Q10a/e +7-9% +0.4% +4% +8-9%3Q10e +9% +5% +8% +8%4Q10e +7% +4% +9% +5%

Source: Company reports and HSBC estimates

Sales volume growth from store expansion by

distributors will continue to be one of the key

drivers of revenue growth for most of the

sportswear companies over the next two years.

The table below is a summary of our forecast forthe outlet additions on Anta, Dongxiang, Li Ning

and Xtep.

Outlet additions Anta, Dongxiang, Li Ning, and Xtep

Year to 31 Dec Anta Dongxiang Li Ning Xtep

# of outlets (% YoY)2009A 16% 25% 16% 21%2010E 10% 19% 10% 13%2011E 9% 16% 9% 12%2012E 8% 14% 7% 10%


Based on our analysis of six sportswear

companies in China, we noted most of their stores

are located in the eastern and northern China

regions and their exposure in the western and

southern China regions are lower. With the

government planning to speed up economic

development in cities or city circles in the inland

and western parts of China, we believe the

domestic brands will focus more on their network

expansion in western China.

Sportswear outlets breakdown by region

Region Adidas Anta DX* Peak Xtep 361*

East 35% 38% 33% 30% 41% 28%South 14% 21% 14% 21% 12% 15%West 16% 14% 17% 18% 18% 19%North 35% 28% 36% 31% 30% 39%

* DX = Dongxiang and 361 stands for 361 Degrees. Note: For Anta and Xtep, the data wasfrom 2008 annual report. For Kappa, Peak, and 361, the data was based on 2009 annualreport. For Adidas, the data was based on its Chi na website.Source: Company reports, websites, and HSBC estimates

All domestic sportswear brand companies have

completed their sales fairs for 2010 and total order

values for Anta, Dongxiang, Li Ning and Xtep

increased 17-23%. For 2011, we are looking for

order book growth between 16-18%.

Order book growth for Anta, Dongxiang, Li Ning and Xtep


1Q-FY10 18% 17% 12% 22%2Q-FY10 16% 22% 15% 20%3Q-FY10 18% 22% 20% 23%4Q-FY10 25% 23% 20% 25%

Average 19% 21% 17% 23%

1Q-FY11 17% 14% 18% 18%2Q-FY11 19% 15% 18% 20%3Q-FY11 17% 18% 16% 18%4Q-FY11 18% 18% 16% 17%

Average 18% 16% 17% 18%Source: Company reports and HSBC estimates


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Company highlights


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Investment summary

We upgrade Anta Sports (2020.HK) to an

Overweight (V) rating from Neutral (V) as we

think the stock could be re-rated on higherearnings expectations. We also raise our target

price to HKD18.00 from HKD11.20 and revise up

our 2011-12 earnings forecast by 23-25% as we

believe there is potential upside for the groups

margins due to lower wholesale discounts offered

to its distributors and better economies of scale.

We also introduce our 2012 earnings forecast and

project Anta will achieve 23% earnings CAGR

over 2010-12. Our 2010-12 earnings estimates are

5-12% above consensus.

Focusing on mass mid-tier market

Anta is focused at the mass mid-tier market (pricing

between RMB200-400) and we believe it will

continue to be the groups core focus in the next few

years. Anta acquired the FILA brand business from

Belle in September 2009 to tap the potential of the

high-end market and this suggested that the

company has no plans to elevate its core Anta brand

to the high-end market.

Stronger brand recognition

Anta is the second largest Chinese sportswear

brand company in China. One of its competitive

advantages is that its brand is increasingly

recognised by the mass mid-tier market, in our

view. Since Anta aligned with the Chinese

Olympic Committee (COC) in 2009, it has further

raised brand awareness and perceived value

through various sponsorships and new product

offerings. For example, Anta sponsored outfits for

the Chinese sport delegates in major international

competitions and launched new COC apparel

collections in its retail stores to remind consumers

that it is the official partner of the Chinese

Olympic Committee. In addition, it has also

launched new sport shoe technology called A-

Jelly that has anti-compression and resilience

functions to differentiate its product offerings.

Anta also recently announced that it has signed

Kevin Garnett as its second endorsed NBA player

to enhance the groups brand image in basketball.

Anta Sports (2020)

Despite rising tax rate, net margin should remain steady due to

higher gross margin and larger economies of scale

23% earnings CAGR over 2010-12e. Our estimates for 2010-12

are 5-12% above consensus forecast

Upgrade to OW(V) on higher earnings expectations and raise

target price to HKD18, representing 29% potential return


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FILA could be profitable in 2011

We expect the FILA operation will incur a small

loss this year. However, we think it will be

profitable in 2011 on bigger scale and Anta may

accelerate its stores expansion for FILA after

revamping the product offerings. Management

currently targets to have 300 FILA stores in China

by end-2010 and we expect it will increase to 800

in 2011 and 1,600 in 2012. We forecast the FILA

operation will post a small profit of RMB36m in

2011 and an operating margin of 12%.

Anta Key Assumptions for FILA Brand Business

FYE Dec (RMBm) 2009e/e 2010e 2011e 2012e

Revenue 92 71 300 743Cost of sales -46 -35 -150 -371Gross profit 46 35 150 371Gross margin 50% 50% 50% 50%Operat ing cost -88 -55 -114 -245EBIT -42 -20 36 126EBIT margin n/a n/a 12% 17%

# of stores in China 50 300 800 1,600

Source: Company R=reports and HSBC estimates

We visited Antas new FILA store in Xiamens

pedestrian zone and noted its product mix is

mainly dominated by apparel products, while the

price of both footwear and apparel is much higher

than other local brands, eg the retail price of a

polo shirt is RMB288-330 and RMB500-700 for a

pair of sports shoes.

Anta - FILA Store in Xiamen, China

Source: HSBC


Source: HSBC


Source: HSBC


Source: HSBC


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Earnings outlookWe forecast Anta will achieve 23% earnings

CAGR over 2010-12e on 22% revenue growth.

Gross margin should increase from 42.1% in 2009

to 45.4% in 2012, largely driven by lower

wholesale discounts given to distributors and

better economies of scale. We also expect the

groups EBIT margin to expand from 23.7% in

2009 to 26.5% in 2012 on the back of the gross

margin expansion and lower operating costs due

to efficiency gains. That said, we expect net

margin to be flattish at the 21-22% level over next

few years due to a higher effective tax rate. We

forecast the groups effective tax rate will rise

from 14% in 2009 to19% in 2010.

Anta - HSBC vs Consensus

Yr to 31 Dec FY10e FY11e FY12e

Revenue -1% -3% -1%EBIT 7% 8% 5%Net profit 5% 9% 12%

Source: Bloomberg and HSBC esti mates

1H10 earnings preview

The company is scheduled to report its 1H 2010

results in mid August 2010 and we are looking for

earnings to rise 20% y-o-y on 21% revenue growth.

Anta 1H10 earnings preview

Year to 31 Dec (RMBm) 1H09 1H10e % YoY

Revenue 2,817 3,406 21%COGS -1,648 -1,948 18%

Gross Profit 1,169 1,458 25%Other income 14 18 25%Selling & Distribution -396 -511 29%Admin expenses -105 -119 14%Other gain/losses 0 -1 n/mOpg Profit 683 845 24%Finance income 26 28 7%PBT 709 873 23%Tax -101 -141 40%Net Profit 608 733 20%


Business analysisAnta has three major product lines: sports

footwear, sports apparel and sports accessories. In

2009, sports footwear and apparel accounted for

56% and 41% respectively of its business. In

addition to the ANTA brand, the company also

owns the Fila trademark in China, which it intends

to use to tap the potential of the high-end

sportswear market.

The companys core ANTA brand targets the mass

market for the 14-29 years old age group. The

ANTA brand has established high brand awareness

among young consumers and is positioned as a

trendy professional sportswear brand.

In the past few years, Anta has achieved strong

growth, with sales CAGR of 40% and earnings

CAGR of 53% between 2007 and 2009, thanks to

rapid retail network expansion and margins

improvement.

ANTA brand

The ANTA logo is designed in the shape of

English letter A slanting to the left as if it is

accelerating into motion. The red colour

represents youth and energy and the Chinese

slogan means keep moving. In

addition to the performance-based series, the

company launched the Sports Lifestyle series and

Kids sportswear series in 2008.

In terms of price positioning, Antas price point is

currently about 20-30% lower than Li Ning and

50-65% below the high-end international brands

such as Nike and Adidas. Yet its ASP is gradually

moving up, driven by increase in consumers

income and strengthening of brand image. We

expect Anta will continue to enhance its brand

equity through effective promotions and

sponsorships. In June 2009, the company entered

into a strategic alliance agreement with theChinese Olympic Committee (COC) to sponsor

Chinese athletes to wear ANTA sports apparel to


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11 international competitions from 2009 to 2012,

including the London 2012 Olympic Games. In

addition, Anta has sponsored various athletes to

endorse its products, including Kevin Garnett and

Luis Scola (NBA players), Zheng Jie (Chinese

female tennis player), and various CBA (China

Basketball Association) players.

ANTA A-Jelly Shoes ad

Source: HSBC

An integrated business model

Anta adopts a vertically integrated business model

for the ANTA branded sportswear business where

the company engages in design to marketing of its

products. The footwear and apparel production

bases are located in Fujian province where

approximately 42% of footwear and 17% of

apparel sold were manufactured in-house in 2009.

The majority of the raw materials are sourced

from suppliers located in Fujian, which are

logistically convenient to Antas production

facilities. This also helps to lower theprocurement costs. Part of the production is

outsourced to external contract manufacturers

through two types of arrangements: purchasing

from OEMs and subcontracting. Anta does not

enter into long-term agreements with contract

manufacturers but enters into separate purchase

contracts for different products.

The ANTA brand products are sold on a

wholesale basis to more than 50 exclusive

distributors who will distribute to authorized

ANTA retail outlets.

Each year the company organizes four trade fairs

for distributors to place orders for the next

seasons products. After receiving the orders from

sales fairs, the company will determine the raw

materials requirements and place orders with

suppliers. Raw materials are purchased in bulk toenjoy more favourable purchase prices. The

company will also order commonly used raw

materials in advance in anticipation of future sales

orders, which allows better cost control on sales.

ANTA sport store

Source: HSBC

ANTA store

Source: HSBC


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Financial analysisRevenue outlook

We forecast Anta will achieve 22% revenue

CAGR over 2010-12, largely driven by the ANTA

branded business. Anta recently completed all

four sales fairs for 2010 and we estimate total

order book values were up 19% y-o-y. For 2011,

we are looking for total order book values to rise

18% y-o-y, driven by 9% volume growth from

new store additions by its distributors and 7%retail same-store-sales growth.



1Q-FY10 18% 17% 12% 22%2Q-FY10 16% 22% 15% 20%3Q-FY10 18% 22% 20% 23%4Q-FY10 25% 23% 20% 25%

Average 19% 21% 17% 23%

1Q-FY11 17% 14% 18% 18%2Q-FY11 19% 15% 18% 20%3Q-FY11 17% 18% 16% 18%

4Q-FY11 18% 18% 16% 17%Average 18% 16% 17% 18%




1Q09a +7-9% +6% Up Single Digit +2%2Q09a +7-9% +2% Down Single Digit +5%3Q09a +5-7% -11% -8% +6%4Q09a +7-9% +1% +3.8% +8-9%

1Q10a +10-12% +4% +5% +5%2Q10a/e +7-9% +0.4% +4% +8-9%

3Q10e +9% +5% +8% +8%4Q10e +7% +4% +9% +5%


Retail network expansion is one of the key growth

drivers of revenue growth. As at end-2009, the

company had a total of 6,591 Anta sport outlets in

China. For 2010, management aims to add around

600-700 new outlets. Our model currently

assumes it will add 650 new outlets in each of

2010, 2011, and 2012.

In 1Q 2010, Anta added 136 new Anta sport

outlets, bringing the total number to 6,727. Total

sales floor area also surged 23% y-o-y to 727,703

square meters. In terms of sales volume, footwear

was up 8.1% y-o-y to 10.3m pairs and apparel

surged 24% y-o-y to 15.2m.

In addition to the Anta sport products, the

company also launched two new collections in

2008 - Anta kids and Anta lifestyle. Anta kids

product is mainly targeted at children aged 9-14

years old and the retail price point is about

RMB150-200 for footwear and RMB80-150 forapparel. As at end-2009, Anta had 228 Anta kids

stores in China. Management said they plan to add

70 new Anta kids stores in 2010.

ANTA kids store

Source: HSBC

Anta lifestyle product is targeted at customers

aged 15-28 years old and the retail price point is

about RMB150-250 for footwear and RMB100

for apparel. The average store size for Anta

lifestyle is around 60-70 sq m and that is 35-44%

smaller than Anta sport store. For 2010, Antaplans to add 200-300 Anta lifestyle stores.

Anta Retail network in China

Year to 31 Dec 2008a 2009a 2010e 2011e 2012e

Anta sport stores 5,667 6,591 7,241 7,891 8,541% Chg. 20% 16% 10% 9% 8% # of New Stores 951 924 650 650 650 Average # of stores 5,192 6,129 6,916 7,566 8,216% Chg. 18% 18% 13% 9% 9%

Anta kids stores 81 228 298 368 438- Chg n/a 147 70 70 70

Anta lifestyle stores 33 343 593 843 1093

- Chg n/a 310 250 250 250Source: Company reports and HSBC estimates


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Margins outlookHigher gross margin

Despite key raw material costs, such as cotton and

rubber, having surged 28-39% since September

2009, we think Anta should able to continue to

expand its gross margin in the next few years on

change in ASP. In addition, the company has its

in-house shoe sole production factory in Anhai,

Fujian and we think it could lower part of the

product costs through more in-house production.

For reference, the shoe sole output increased from

9.3m pairs in 2008 to 12.7m pairs in 2009.

Furthermore, pricing power of brand owners (e.g.

Nike, Anta, Li Ning) is generally stronger than for

manufacturers (e.g. Yue Yuen) and we think Anta

may not need to fully absorb the increase in raw

material costs.

For 2010, we expect the groups gross margin to

increase 0.5ppt to 42.6%, mainly driven by the

improvement in the footwear gross margin. For2011, we expect the groups gross margin to

increase by 1.8ppt to 44.5% in 2012e on higher

ASP and lower cost increase. As Anta has further

strengthened its brand recognition through the

COC sponsorship, we think the company is likely

to reduce its wholesale discount to its distributors

by 0.5ppt in 2011. By product segment, we expect

footwear gross margin will rise from 45.5% in

2010 to 47.1% in 2011, largely driven by a 5%

increase in wholesale price. We also expect

apparel margin will increase to 40.3% in 2011

from 38.4% in 2010.

Anta Gross margin breakdown, 2008-12e

Year to 31 Dec 2008a 2009a 2010e 2011e 2012e

Footwear 41.3% 44.4% 45.5% 47.1% 47.7%Apparel 38.0% 39.0% 38.4% 40.3% 41.4%Accessories 41.2% 41.4% 41.4% 41.4% 41.4%


Efficiency gains

In addition to our expectation of gross margin

improvement, we think there is room for lower

operating expenses in the next two years due to

efficiency gains. The company is constructing a

new operational centre in Xiamen and it is

planned for completion in early 2011.

Management indicated the new operational centre

not only provides a better working environment, it

can also enhance the groups operating efficiency.

But higher tax rate

While we expect the groups gross and EBIT

margin will continue to expand, the positive

impact on the bottom line is likely be mitigated by

effective tax rate. We expect the groups effective

tax rate will rise from 14% in 2009 to 16% in

2010 and 18% in 2011, and 19% in 2012 due to

expiration of tax incentives, Overall, we expect

the groups net margin to remain steady at the 21-

22% level.

Anta Key margin assumptions

Year to 31 Dec 2008a 2009a 2010e 2011e 2012e

Gross margin 40.0% 42.1% 42.6% 44.5% 45.4%EBITDA margin 21.0% 24.7% 25.5% 26.9% 27.4%EBIT margin 20.1% 23.7% 24.5% 25.9% 26.5%Net margin 19.3% 21.3% 21.2% 21.8% 21.9%Effective tax rate 7.0% 13.6% 16.2% 18.1% 19.3%

Key cost itemsA&P (% of sales) 13.8% 12.7% 13.5% 13.8% 14.0%R&D (% of sales) 3.0% 3.0% 2.5% 2.5% 2.5%Staff (% of sales) 3.7% 4.7% 4.5% 4.3% 4.1%Effective tax rate 7.0% 13.6% 16.2% 18.1% 19.3%



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ValuationWe use P/E to value Anta as we believe it can

better reflect the companys earnings momentum.

We believe using the groups historical P/E to

determine our target multiple for Anta is

appropriate given the Chinese sportswear sector is

becoming more competitive and the industry

growth rate in the next few years is unlikely to be

as strong as the levels seen in 2004-08.

Our target price of HKD18 is based on a 22x one-

year forward PER and it is derived from a 35%

premium to the groups historical forward PER

average since July 2007. We believe such

premium is warranted by steady earnings growth,

rising ROE (from 26% in 2009 to 28% in 2010

and 30% in 2011) and its strong brand positioning

in the mass mid-end market.

On a PEG basis, our target price of HKD18.0

would translate into a PEG of 1x based on our23% earnings CAGR forecast for 2010-12e.

Under HSBCs research model, our target price

suggests a potential return of 29% (including 3%

dividend yield), which is above the Neutral band

of 0-20% for volatile Chinese stocks.

Key risks

Intensified competition from international and

domestic brands.

Lower than expected gross margin due to

sharp increase in raw material costs or delay

in lowering wholesale discount to its

distributors.

Higher than expected A&P spending or

operating expense.

Anta 1yr forward PER, 2008-present

25x

20x

15x

10x

5x

-

2

4

6

8

10

12

14

16

18

20

Jul-07

Aug-07

Oct-07

Nov-07

Jan-08

Feb-08

Apr-08

May-08

Jul-08

Aug-08

Sep-08

Nov-08

Dec-08

Feb-09

Mar-09

May-09

Jun-09

Aug-09

Sep-09

Nov-09

Dec-09

Feb-10

Mar-10

May-10

Jun-10

Aug-10

SharePrice(HK$)

Source: Datastream and HSBC estimates


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Financials & valuation: Anta Sports Products Ltd Overweight (V)Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Profit & loss summary (CNYm)

Revenue 5,875 7,151 8,661 10,558EBITDA 1,458 1,827 2,334 2,897Depreciation & amortisation -64 -72 -86 -101Operating profit/EBIT 1,395 1,755 2,248 2,797Net interest 51 57 63 75PBT 1,446 1,811 2,310 2,871HSBC PBT 0 0 0 0Taxation -197 -293 -418 -553Net profit 1,251 1,519 1,890 2,316HSBC net profit 1,251 1,519 1,890 2,316

Cash flow summary (CNYm)

Cash flow from operations 1,689 1,075 2,030 2,234Capex -111 -200 -200 -200Cash flow from investment -1,870 -200 -200 -200Dividends -658 -801 -949 -1,151Change in net debt 835 -75 -881 -883FCF equity 1,515 875 1,830 2,034

Balance sheet summary (CNYm)

Intangible fixed assets 487 487 487 487Tangible fixed assets 695 823 937 1,037Current assets 4,910 5,466 6,523 7,793Cash & others 2,437 2,512 3,393 4,277

Total assets 6,103 6,788 7,959 9,329Operating liabilities 966 933 1,161 1,363Gross debt 0 0 0 0Net debt -2,437 -2,512 -3,393 -4,277Shareholders funds 5,080 5,798 6,740 7,905Invested capital 2,688 3,331 3,393 3,677

Ratio, growth and per share analysis

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 27.0 21.7 21.1 21.9EBITDA 49.7 25.2 27.8 24.1Operating profit 49.9 25.8 28.1 24.4

PBT 49.0 25.3 27.5 24.3HSBC EPS 39.7 21.0 24.4 22.5

Ratios (%)

Revenue/IC (x) 3.0 2.4 2.6 3.0ROIC 62.1 48.9 54.7 63.9ROE 26.2 27.9 30.1 31.6ROA 22.6 23.6 25.7 26.8EBITDA margin 24.8 25.5 26.9 27.4Operating profit margin 23.7 24.5 25.9 26.5EBITDA/net interest (x)Net debt/equity -47.4 -42.9 -49.9 -53.7Net debt/EBITDA (x) -1.7 -1.4 -1.5 -1.5CF from operations/net debt

Per share data (CNY)

EPS Rep (fully diluted) 0.50 0.61 0.75 0.92HSBC EPS (fully diluted) 0.50 0.61 0.75 0.92DPS 0.35 0.40 0.49 0.57Book value 0.00 0.00 0.00 0.00

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 4.8 4.0 3.2 2.5EV/EBITDA 19.4 15.5 11.7 9.1EV/IC 10.5 8.5 8.1 7.2PE* 24.6 20.4 16.4 13.4FCF yield (%) 4.9 2.8 5.9 6.6Dividend yield (%) 2.8 3.3 4.0 4.6

Note: * = B ased on HSBC EPS (fully diluted)

Issuer information

Share price (HKD) 14.14 Target price (HKD) 18.00 Potent'l return (%) 29

Reuters (Equity) 2020.HK Bloomberg (Equity) 2020 HKMarket cap (USDm) 4,542 Market cap (HKDm) 35,256Free float (%) 31 Enterprise value (CNYm) 28,258Country China Sector Textiles, Apparel & Luxury GoodsAnalyst Christopher K Leung Contact +852 29966531

Price relative

0

5

10

15

20

25

2008 2009 2010 2011

0

5

10

15

20

25

Anta Sports Products Ltd Rel to HANG SENG INDEX

Source: HSBC

Note: price at close of 03 Aug 2010


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Investment summary

We are initiating coverage on China Dongxiang

(3818.HK) with a Neutral (V) rating and a target

price of HKD4.70 based on 13x 12-monthforward PER. The share price of Dongxiang has

fallen 25% y-t-d and the current valuation at 12x

FY2011 PER is below the groups historical

average PER of 14x. However, despite low

valuations, we do not see any positive catalysts in

the next 12 months that could re-rate the stock.

Kappa is mainly seen as a fashion sportswear

brand, with over 70% of sales from bright

coloured apparel. We think Kappa products are

more cyclical than other sportswear brands and

management is stepping up its effort to fortify its

brand positioning through new marketing

campaigns and better product offerings.

On the marketing side, management launched a new

advertising campaign called We Are One in

November 2009, with large scale outdoor

advertisements across China. The company also

launched its first TV advertisement in May 2010 to

promote the Kappa brand. On the product offeringside, Dongxiang is placing higher focus on the

design of its footwear and apparel products and on

the new sub-brands, ie: Kappa Golf, Kappa Ski,

Robe di Kapp) to diversify its product offering. For

example, the company recently launched a new

collection called Pack Away Concept to target the

urban youth market. The new collection was co-

developed with Michael Michalsky, the former

Global Creative Director of Adidas.

Weak 2Q 2010

Management recently held a conference call to

provide an update on its operation in 2Q 2010.

The retail SSS on the distribution side of its

business dropped sharply from +4% in 1Q 2010 to

+0.4% in 2Q 2010. Retail inventory also

deteriorated to a historically high level of 5.2x at

end 2Q 2010 from 4.6x in the past few quarters.

Management attributed the weak performance to

the poor weather, ie heavy rains in Central and

Southwest China in May and June) and is

planning to arrange a few special promotional

activities in August 2010 to help its distributors to

alleviate the excess inventory issue.

China Dongxiang (3818)

Top-line growth will be mainly driven by stores addition. However,

margins could be eroded by higher advertising and tax expenses.

11% earnings CAGR over 2010-12e, barring any acquisitions. Our

estimates for 2010-12 are 2-9% below consensus forecast

Initiate Neutral (V) and TP of HKD4.70, based on 13x 12-mth

forward PER


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Higher A&P and tax expensesTo strengthen the Kappa brand, management plans

to increase its A&P spending from 7.4% of sales in

2009 to 8.5-9% in 2010 and around 10% of sales in

2011 and 2012. Operating margin in 2010-12e is

likely to be negatively affected by the increase in

advertising spending. Net margin will also be further

affected by higher effective tax, which will rise from

19% in 2009 to 24% in 2012E.

Multi-brand strategy in the long runThe company currently has more than RMB7bn

net cash, representing 33% of market cap. Given

its strong financial position, Dongxiang is

interested in establishing a multi-brand portfolio

in the long run through the acquisition of the long-

term operating right of a foreign brand or

formation of a joint-venture. However, in the near

term, management said they dont have plans to

acquire any brands as they would like to focus on

developing their self-owned Robe di Kappa brand.

Earnings outlook

We forecast Dongxiang will achieve 11%

earnings CAGR over 2010-12 on 16% revenue

growth, barring any acquisitions. We expect the

groups gross margin to rise from 60% in 2009 to

62% in 2012e, mainly driven by the improvement

in the gross margin of the Phenix Japan business.

Despite the improvement in the groups gross

margin, we expect EBIT margin to decline from43% in 2009 to 40% in 2012. Net margin will also

drop further due to higher effective tax rate. We

project net margin will drop from 37% in 2009 to

35% in 2010, 34% in 2011, and 32% in 2012.

Dongxiang - HSBC vs Consensus

Yr to 31 Dec FY10e FY11e FY12e

Revenue -2% -6% -7%EBIT 0% -4% -8%Net profit -2% -6% -9%

Source: Bloomberg and HSBC estimates

1H 2010 earnings previewThe company is scheduled to report its interim

results in late August and we are looking for

earnings to rise 14% y-o-y on 18% revenue

growth.

Dongxiang - 1H 2010 earnings preview


Revenue 1,868 2,202 18%COGS -706 -827 17%Gross Profit 1,163 1,374 18%

Other income 24 24 -3%Selling & Dist ribut ion -259 -321 24%Admin expenses -79 -97 24%Opg Profit 850 980 15%Net Fin income/(cost) 59 64 8%Profit or losses from JCE -5 -1 -69%PBT 904 1,042 15%Tax -182 -219 20%Net Profit 722 823 14%

Source: Company Reports and HSBC estimates


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Business analysisChina and Japan

Dongxiang derives its revenue from two business

segments Kappa China and Phenix Japan. In

2009, the Kappa China operation made up 86% of

total revenue and 99% of operating profit. The

Phenix Japan business was started in May 2008

and the contribution to the groups earnings is still

small. The company does not plan to expand the

Japan Phenix business in next few years as Japanis a more mature market and management intends

to focus on integrating the Japan Phenix operation

with the China production network for better

margins. In the next few years, we believe the

Kappa China business will continue to be the

growth driver of the company.

Dongxiang - Revenue breakdown, 2009

China

86%

Japan

14%


An asset-light model

Similar to Li Ning, Dongxiang adopts an asset-

light wholesale business model, where production

and retailing are outsourced. At the end of 2009,

the company has 41 non-exclusive distributors

and 3,511 retail outlets in China. Once every

quarter, Dongxiang organizes sales for

distributors to place orders.

The Kappa brand

Kappa is a popular international sport fashion

focused brand in China but we think its products

are more cyclical than other sportswear brands.The retail price point is similar to other high-end

brands such as Nike and Adidas. The Kappa logo

resembles two people sitting back to back and was

designed to express an active, young and

passionate lifestyle.

Weaker footwear design

Sports footwear, sports apparel and sports

accessories are the three major products lines of the

Kappa China business. Unlike other sportswear

companies, Dongxiang derives over 75% of sales

from apparel products and we think this suggests

their footwear product designs are less attractive thanits apparel products. To cope with this issue,

Dongxiang has found a new footwear designer to

improve its shoe designs.

Dongxiang Kappa revenue breakdown by product, 2009

Accessories

4%

Apparel

76%

Footwear

20%


Dongxiang Kappa 3Q 2010 footwear

Source: China Dongxiang


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Dongxiang Kappa 3Q 2010 and 4Q 2010 apparel






Aggressive expansion planComparing to the international brands like Nike

and Adidas, management believes its Kappa retail

network in China is still small and they think their

distributors can continue to open new stores in

lower tier cities. The company expects its

distributors to add around 700 new outlets in each

of 2010E and 2011E. Through its distributors,

Dongxiang currently has around 3,800 Kappa

retail outlets in China. During 1H09, the number

of Kappa outlets in China increased from 3,403 to

3,820, representing a net increase of 417 outlets.

Kappa outlets in China

As at 31 Dec 2007 2008 2009 2010e 2011e 2012e

Kappa outlets 1,945 2,808 3,511 4,161 4,811 5,461Chg. 807 863 703 650 650 650 # of distributors 41 43 41 41 41 41


Lower sales per store

Over the past two years, management has been

expanding its retail network for Kappa brand into

lower tier cities. While the company has expanded

its retail network size, its sales per store actually

lowered sales contribution from the new stores in

lower tier cities were also lower than the ones in

first and second tier cities.

As at end-2009, the company had a total of 3,511

retail outlets in China, including 24% in 1st tier

cities, 24% in 2nd tier cities, and 36% in 3rd tiercities, 15% in fourth tier cities.

Kappa China revenue growth and store growth comparison

Year to 31 Dec (RMBm 2007 2008 2009

Kappa China Revenue Growth 199% 170% 117%Kappa China Avg Stores Growth 196% 154% 133%Average Sales Per Store Growth 2% 10% -12%



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Dongxiang Kappa store in Tianjin

Source: HSBC

Dongxiang Kappa store in Tianjin

Source: HSBC

Dongxiang Kappa store in Pingyiu County

Source: HSBC

Dongxiang We Are One outdoor billboard in Taiyuan

Source: HSBC

Phenix JapanIn May 2008, Dongxiang acquired a 91% stake in

Japan-based Phenix Co for a consideration of

JPY1 but Dongxiang also injected capital of

USD5m into the company.

Japan Phenix was established in 1953. The

company owns a few brands, including Phenix, in

the ski and outdoor sportswear segment and

Kappa in the football and athletic-wear segment in

Japan. In 2009, the Phenix brand and Kappa brandaccounted for 66% and 34% of Phenix Japans

revenue respectively.

Management has no plans to further expand the

Phenix Japan business in the near term as Japan is

a more mature market. However, management

plans to integrate the Japan Phenix operation with

the China production network in order to lower

production costs and enhance the gross margin of

the Phenix Japan business. The gross margin of

Phenix Japan business improved from 40.7% in

2008 to 45.2% in 2009. We expect it will further

improve to 48% in 2010.

Dongxiang Phenix Japan revenue and gross margin

Year to 31 Dec 2009 2010e 2011e 2012e

Revenue (RMBm) 567 574 592 609%Chg 37% 1% 3% 3% Gross margin 45.2% 48.0% 53.0% 55.0%


Robe di Kappa brand is still smallRobe di Kappa (RDK) is a new brand business

that Dongxiang started in 2010. RDK is a sister

brand of Kappa and we estimate it will account

for 1% of total revenue in 2010. At present, there

are four Robe di Kappa stores in China and

management is expecting its distributor to have

20-30 stores by end-2010. Management indicated

retail sales for a Robe di Kappa store is around

RMB200,000 per month and the wholesale

discount to the distributors is around 55%.


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Due to the expiration of certain tax incentives in

China, the groups effective tax rate is expected to

rise from 19% to 21% in 2010, 23% in 2011, and

24% in 2012. In 2009, Dongxiang received a

government subsidy income of RMB109m. The

subsidy income is related to the tax rebate from

local governments and management expects this

to be a recurring item in 2010 and 2011.

Dongxiang Key margin assumptions

Year to 31 Dec 2008 2009 2010e 2011e 2012eGross Margin 58.5% 60.4% 61.2% 62.0% 62.2%EBITDA margin 40.8% 43.3% 42.5% 42.6% 41.1%EBIT margin 40.1% 42.7% 41.6% 41.7% 40.2%Net Margin 41.2% 36.8% 34.8% 34.1% 32.2%Core Net Margin 36.8% 36.8% 34.8% 34.1% 32.2%Tax Rate 15.4% 18.7% 20.8% 22.8% 24.3%


Strong balance sheet & high payoutGiven Dongxiang operates an asset-light model,

the company generates strong free cash flow and

has a strong balance sheet. In 2009, the company

generated operating cash flow of RMB1.5bn and

free cash flow of RMB1.3bn. We estimate the

company will have net-cash of RMB7.2bn by

end-2010 and we expect the group will increase

its dividend payout from 57% in 2009 to 70% in

2010, in view of its strong financial position.

Dongxiang Key cash flow items

Year to 31 Dec (RMBm) 2008 2009 2010e 2011e 2012e

Net Cash/(Debt) 6,064 6,529 7,248 7,907 8,536Operat ing Cash Flow 949 1,484 1,595 1,860 1,964FCF 915 1,319 1,645 1,910 2,014Dividends paid (265) (818) (827) (1,151) (1,285)Total Payout 54% 57% 70% 70% 72%



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ValuationWe use P/E to value Dongxiang as we believe it

could better reflect the companys earnings

growth momentum. We believe using the groups

historical P/E to determine our target multiple for

Dongxiang is appropriate given the Chinese

sportswear sector is becoming more competitive

and the industry growth rate in the next few years

is unlikely to be as strong as the levels seen in

2004-2008.

Our target price of HKD4.70 is based on 13x 12-

mth forward PER, which is derived from a 10%

discount to the groups historical one-year

forward PER average since October 2007. We

believe such a discount is warranted given the

deterioration in its margins and slower earnings

growth outlook.


would translate into a PEG of about 1.2x based onour 11% earnings CAGR forecast over 2010-12e.



dividend yield), which is within the Neutral band


Key risks Margin erosion due to more discounts to

distributors, and sharp increase in raw

material input costs.

Upside risks include stronger consumption

environment and lower than expected A&P

and tax expenses.

Dongxiang 1-yr forward PER band chart, Oct-07 to present

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Financials & valuation: China Dongxiang Group Co Neutral (V)Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 3,970 4,695 5,363 6,236EBITDA 1,720 1,997 2,287 2,564Depreciation & amortisation -23 -45 -50 -54Operating profit/EBIT 1,697 1,952 2,237 2,510Net interest 110 117 129 140PBT 1,796 2,066 2,367 2,655HSBC PBT 0 0 0 0Taxation -336 -430 -538 -646Net profit 1,460 1,636 1,828 2,009HSBC net profit 1,460 1,636 1,828 2,009


Cash flow from operations 1,196 1,481 1,731 1,819Capex -16 -50 -50 -50Cash flow from investment -5,132 -50 -50 -50Dividends -818 -827 -1,151 -1,285Change in net debt -389 -719 -659 -629FCF equity 1,434 1,548 1,809 1,908


Intangible fixed assets 304 281 258 234Tangible fixed assets 154 182 205 224Current assets 7,073 8,054 8,699 9,644Cash & others 6,331 7,049 7,708 8,337

Total assets 7,912 8,897 9,542 10,483Operating liabilities 553 729 698 914Gross debt 0 0 0 0Net debt -6,331 -7,049 -7,708 -8,337Shareholders funds 7,354 8,164 8,840 9,565Invested capital 647 738 756 851


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change


PBT 11.2 15.0 14.6 12.2HSBC EPS 19.6 12.1 11.7 9.9

Ratios (%)

Revenue/IC (x) 5.9 6.8 7.2 7.8ROIC 205.0 225.8 233.8 238.5ROE 20.7 21.1 21.5 21.8ROA 18.0 18.4 18.8 19.0EBITDA margin 43.3 42.5 42.6 41.1Operating profit margin 42.7 41.6 41.7 40.2EBITDA/net interest (x)Net debt/equity -86.1 -86.4 -87.2 -87.2Net debt/EBITDA (x) -3.7 -3.5 -3.4 -3.3CF from operations/net debt

Per share data (CNY)

EPS Rep (fully diluted) 0.26 0.29 0.32 0.35HSBC EPS (fully diluted) 0.26 0.29 0.32 0.35DPS 0.17 0.23 0.26 0.29Book value 0.00 0.00 0.00 0.00

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 3.9 3.1 2.6 2.2EV/EBITDA 9.0 7.4 6.2 5.3EV/IC 23.9 20.0 18.7 15.8PE* 15.2 13.6 12.1 11.1FCF yield (%) 6.6 7.1 8.3 8.7Dividend yield (%) 4.2 5.9 6.6 7.4

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (HKD) 4.49 Target price (HKD) 4.70 Potent'l return (%) 11

Reuters (Equity) 3818.HK Bloomberg (Equity) 3818 HKMarket cap (USDm) 3,278 Market cap (HKDm) 25,442Free float (%) 47 Enterprise value (CNYm) 14,775Country China Sector Textiles, Apparel & Luxury GoodsAnalyst Christopher K Leung Contact +852 29966531

Price relative

01234

56789

10

2008 2009 2010 2011

01234

5678910

China Dongxiang Group Co Rel to HANG SENG INDEX

Source: HSBC

Note: price at close of 03 Aug 2010


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Key points

Li Ning recently unveiled its revitalization

campaign for the companys core LI-NING brand.

It changed its logo and also introduced a new

slogan Make the change to focus more on the

post-90s generation. We are generally positive on

this new brand revitalization campaign as we

believe it could enhance the companys

competitiveness and elevate its brand image and

price positioning in the long run. It could capture

the high growth potential in the higher end of the

market when consumers attain greater affluence.

However, in the near term, we see limited positive

impact on the groups earnings as it will take time

for consumers to change their perception on the

new brand and products.

Lower replenishment orders

Li Ning completed all four sales fairs for 2010

and we estimate total order book values were up

17% y-o-y. However, we forecast revenue growth

for LI-NING brand business will only be around

15% this year because of lower replenishmentorders due to the digestion of the old logo

inventories by distributors. Replenishment orders

accounted for 8% of total sales in 2009 and we

expect they will drop to 6% this year. In addition,

the contract execution rate could also be lower ifthe sell-through of the old logo products in

coming months is weaker than expected.

Earnings and TP change

We revise down our 2010-11 earnings estimates

by 3% and 11%, respectively to reflect lower sales

growth. We also introduce our 2012 forecast and

expect Li Ning will achieve 18% earnings CAGR

over 2010-12e.

We raise our target price from HKD25.5 toHKD29.0 as we roll over our earnings. Our target

multiple for Li Ning is unchanged at 22x and is

in-line with the groups historical forward P/E

average since 2004.

Li Ning (2331)

New brand revitalization campaign a positive move in competitive

environment but positive earnings impact in near term to be limited

2010e order book up 17% y-o-y, but revenue growth could be

lower due to smaller replenishment orders

18% earnings CAGR over 2010-12e. Our estimates for 2010-12e

are 5-8% below consensus

Maintain Neutral (V) rating and raise TP to HKD29 from HKD25.5


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Li Ning New window display

Source: HSBC

Li Ning 6th generation store

Source: HSBC

Li Ning New logo running shoe

Source: HSBC

Li Ning New window display and logo

Source: HSBC

Li Ning 6th generation store

Source: HSBC

Li Ning New logo running shoe

Source: HSBC


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Business analysisAn asset-light business

Li Ning operates an asset-light wholesale model,

where production and most of the retailing are

outsourced. The company organizes four sales

fairs per annum for its distributors to place orders

six months in advance. The company currently

has 129 distributors, of which 100 of them are on

an exclusive basis.

LI-NING brand

The LI-NING brand business accounted for 92%

of the groups revenue and 101% of operating

profit in 2009 and we believe it will continue to

be the groups core growth driver in the next few

years. Through its distributors, the company had a

total of 7,249 LI-NING branded outlets in China.

Management is planning to add 750 new outlets in

2010 and 700 outlets in 2011. Most of the new

outlets will be focused on southern China, ie

Fujian, Guangdong, and Guanxi, and other

provinces where Li Ning has lower exposure, ie

Anhui and Jiangxi.

LI-NING branded retail outlets in China, 2008-12e

Year to 31 Dec 2008 2009 2010e 2011e 2012e

Franchised 5,935 6,854 7,565 8,225 8,785Directly-managed 310 395 435 475 515

Total 6,245 7,249 8,000 8,700 9,300% Chg. 19% 16% 10% 9% 7%


By product category, footwear and apparel

products represented 94% of total LI-NING brand

revenue in 2009. We expect footwear and apparel

products will continue to account for the majority

of sales for the LI-NING brand business in the

next few years. We also expect the contributions

from accessories will increase slightly from 5.6%

in 2009 to 6% in 2010 as we expect higher

badminton racket sales.

LI-NING brand - Revenue breakdown by product, 2008-12e

Year to 31 Dec 2008 2009 2010e 2011e 2012e

Footwear 2,918 3,474 3,970 4,675 5,753Apparel 3,098 3,788 4,322 5,090 6,264Accessories 339 432 529 623 767Total 6,354 7,693 8,821 10,388 12,784

% of totalFootwear 45.9% 45.2% 45.0% 45.0% 45.0%Apparel 48.8% 49.2% 49.0% 49.0% 49.0%Accessories 5.3% 5.6% 6.0% 6.0% 6.0%Total 100% 100% 100% 100% 100%


Overseas markets

The contribution from overseas markets is still

insignificant and we do not expect it will have any

major contribution to the company in the next few

years. The company currently has three directly

managed stores outside China, including one in

Singapore, one in Hong Kong and one in

Portland, United States. The company also sells

some of its LI-NING badminton racquets to South

East Asia.

In 2009, sales from overseas markets accounted

for 1.5% of total revenue. In the long run,

management targets to increase the sales from

overseas markets to 20% between 2014 and 2018.

Other brands

Besides the LI-NING brand, the company also

operates a few other smaller brands, including Lotto,

Double Happiness, Aigle, Z-Do, and Kason. These

other brands made up 8% of total revenue in 2009

and their profitability is still low compared to the

companys core LI-NING brand. We do not expect

the other brands business to have a significant

earnings contribution to the group in the near and

medium term as some of the brands are still new to

the Chinese market and management also does not

have an aggressive expansion plan for these brands

in the next few years.


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Revenue breakdown by brand, 2008-12e

Year to 31 Dec 2008 2009 2010e 2011e 2012e

LI NING Brand 6,355 7,693 8,821 10,388 12,784%Chg 50% 21% 15% 18% 23%Double Happiness 206 427 467 511 543%Chg n/a 108% 9% 9% 6%Lotto 6 76 228 416 670%Chg n/a 1169% 200% 82% 61%Others 124 190 219 257 298%Chg 19% 54% 15% 17% 16%Total Revenue 6,690 8,387 9,736 11,572 14,295% Chg 54% 25% 16% 19% 24%

Note: Others include Kason, Z-Do, and AIGLESource: Company Reports and HSBC estimates

Double Happiness

Double Happiness is a well-known table tennis

equipment brand and is also the largest table tennis

equipment supplier in China. Li Ning acquired a

57.5% stake in Double Happiness in 2007 for a

total consideration of RMB305m. In 2009, the

Double Happiness business achieved sales of

RMB427m and an operating profit of RMB73m.

Double Happiness primarily sells high-end table

tennis equipment and is mainly distributed via

wholesale and integrated sporting goods stores.

Management indicated the table tennis market in

China is not a high growth industry and they

expect sales growth for the Double Happiness

business to be around 10% per annum.

Z-Do

Z-Do brand is a sub-brand of Li Ning, which

adopts hypermarkets as its sales channel and shares

resources with the group to achieve economies of

scale. As at end-2009, Z-Do brand products were

available in 702 stores in 169 cities across China

via 62 distributors. Its price point is at the low-end

of the market, eg apparel retail price is around

RMB120/piece and RMB200/pair for footwear.

AIGLE

AIGLE brand specialises in high-end outdoor

sports and casual apparel and footwear products.

In 2009, there were 34 AIGLE shops in China, ofwhich 24 were directly managed. The price point

for AIGLE products is around RMB600-700.

Kason

Kason sells professional badminton equipment

under the Kason brand and is one of the top 3

badminton equipment brands in china. It has no

retail network but sells through wholesalers across

China, which includes hypermarkets and

department stores. Kasons price point is at the

low-end of the market while Li Nings established

products are at the mid-high end.

LottoLotto is an Italian sports fashion brand. Li Ning

obtained the exclusive license from Lotto Sport in

July 2008 to use the Lotto trademarks in China for

20 years. Lotto brand products are more fashion-

oriented and their retail prices are generally in a

range between RMB350 for apparel and RMB400

for footwear.

As at end-2009, there were 171 Lotto brand stores,

of which 58 were directly managed by Li Ning and

113 were managed by distributors. Management

does not have an aggressive store expansion plan for

Lotto in 2010 as management aims to improve the

store efficiency in the near term.

Li Ning Lotto outdoor advertisement in Taiyuan

Source: HSBC


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Financial analysisRevenue outlook

We forecast 16% revenue growth in 2010e, 19%

in 2011e and 24% in 2012e, mainly driven by the

volume growth from distributors retail network

expansion and ASP growth on both apparel and

footwear products. By brand segment, the

companys core LI-NING brand is expected to

remain the core revenue driver as the other brand

businesses (i.e. Z-Do, AIGLE, Lotto, and DoubleHappiness) will represent less than 11% of total

revenue in next two years.

In terms of retail network expansion, management

currently targets to add 750 outlets in 2010, 700 in

2011, and 600 in 2012. For other brands,

management indicated they do not have major

expansion plan for Z-Do and AIGLE brands but

they plan to add 100 new Lotto stores this year.

Li Ning Revenue breakdown by brand, 2008-12e

Year to 31 Dec 2008 2009 2010e 2011e 2012e

Li-Ning Brand 6,355 7,693 8,821 10,388 12,784Z-Do Brand 108 170 191 211 232Aigle Brand 16 20 28 46 66Lotto Brand 6 76 228 416 670Double Happiness 206 427 467 511 543Total Revenue 6,690 8,387 9,736 11,572 14,295


Li Ning Retail network breakdown by brand, 2008-12e

# of POS 2008 2009 2010e 2011e 2012e

Li-Ning Brand 6,245 7,249 8,000 8,700 9,300Z-Do Brand 624 702 782 862 942Aigle Brand 34 34 54 74 94Lotto Brand 14 171 291 411 531Total 7,217 8,456 9,447 10,367 11,187


Order bookLi Ning completed all four sales fairs for 2010

and we estimate total order book values were up

17% y-o-y. However, we expect the actual sales

growth for the LI-NING brand business in 2010

will be lower than the order book growth due to

lower replenishment orders and contract execution

rate. Replenishment orders accounted for 8% of

total sales in 2009 and we expect it will drop to

6% this year as its distributors may need to digest

the old logo inventories after the change of logo.

The contract execution rate could also be lower if

the sell-through of the old logo products in

coming months is weaker than expected. For

reference, the contract execution rate in 2009 was

97.8%.

LI-NING order book growth, 1Q 2010 to 4Q 2010

Year to 31 Dec 1Q10a 2Q10a 3Q10a 4Q10a

VolumeFootwear 1.9% 1.2% 0.5% 1.0%Apparel 7.7% 16.1% 20.7% 10.9%ASPFootwear 3.3% 3.1% 11.1% 7.8%Apparel 8.7% 6.4% 7.6% 17.9%ValueFootwear 5.3% 4.3% 11.7% 8.9%Apparel 17.1% 23.5% 29.9% 30.8%Overall 11.6% 15.4% 20.0% 20.3%

Source: Company Reports

In 2010, we estimate apparel sales will grow 26%

y-o-y, driven by 10% ASP increase and 15%

volume growth. For footwear, we estimate sales

will grow only 8%, on 7% ASP increase and 1%

volume growth.

We believe the sluggish footwear sales were due to

the increase in ASP as Li Ning is launching more

high priced footwear products. In 3Q10 and 4Q10,

we note footwear ASP increased 11.1% and 7.8%

respectively, while volume growth was less than 1%.

Management believes the weak volume growth is

only temporary and expects footwear volume growth

to be higher in coming quarters.


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Li Ning will host its 1Q 2011 sales fair in August

and we are looking for total order values to rise

18% y-o-y. For the full year of 2011, we expect

total order values to increase 17% y-o-y,

including 9% volume growth from retail network

expansion by its distributors and 7% from same-

store-sales growth.

The company has previously guided for 10% SSS

growth for the full year of 2010, but we think this

target looks a bit high as it was only 5% in 1Q2010. Having said that, we think the SSS growth

should be higher in 2H on the back of a lower

comparison base. The key swing factor to the SSS

growth in 2H 2010 is how fast the old-logo

inventories will be cleared. Based on our visit to a

Shenzhen shopping area, we noted a LI NING

store is offering 30-40% discounts on old logo

product. Our model currently assumes 7% SSS

growth in 2010 for Li Ning, including 5% in

1H10 and 9% in 2H10.

Li Ning - 30-40% discount for old logo products

Note: Picture was taken on 31 July 2010. Source: HSBC



1Q-FY10 18% 17% 12% 22%2Q-FY10 16% 22% 15% 20%3Q-FY10 18% 22% 20% 23%4Q-FY10 25% 23% 20% 25%

Average 19% 21% 17% 23%

1Q-FY11 17% 14% 18% 18%2Q-FY11 19% 15% 18% 20%3Q-FY11 17% 18% 16% 18%4Q-FY11 18% 18% 16% 17%Average 18% 16% 17% 18%




1Q09a +7-9% +6% Up Single Digit +2%2Q09a +7-9% +2% Down Single Digit +5%3Q09a +5-7% -11% -8% +6%4Q09a +7-9% +1% +3.8% +8-9%

1Q10a +10-12% +4% +5% +5%2Q10a/e +7-9% +0.4% +4% +8-9%3Q10e +9% +5% +8% +8%4Q10e +7% +4% +9% +5%


Margins outlookLi Ning is offering more discounts to its

distributors and we expect the gross margin for

the LI-NING brand business will decline from

48.5% in 2009 to 48.1% in 2012. However, we

think the groups gross margin should remain

flattish at the 47% level on the back of better

gross margin of other brand businesses. In

particular, we expect the gross margin of Lotto

brand to improve sharply from 27% in 2009 to

40% in 2010 and 46% in 2011 and 49% in 2012due to lower R&D expenses and better pricing.

Li Ning Gross margin breakdown, 2008-2012e

Year to 31 Dec 2008 2009 2010e 2011e 2 012e

LI -NING Brand 48.9% 48.5% 48.4% 48.2% 48.1%Double Happiness 34.9% 38.2% 38.2% 38.2% 38.2%Lotto n/a 27.1% 39.9% 45.8% 48.5%Others n/a 16.8% 16.8% 16.8% 16.8%

Group gross margin 48.1% 47.3% 47.0% 46.9% 47.1%


Management expects the A&P expense to salesratio to range between 15.5% and 16.5% in 2010.

As the third biggest sportswear companies in

China, it seems Li Ning is benefiting from

economies of scale and we think it should be able

to maintain the A&P expense to sales ratio at the

low-end of management guidance in 2010 and

2011. However, for 2012, we think it will increase

slightly given higher spending for the London

Olympic Games. Our model currently assumes the

groups A&P to sales ratio to be 15.5% in 2010,15.5% in 2011 and 16.0% in 2012.


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Li Ning Key margins assumptions, 2008-12e

FYE Dec (RMBm) 2008 2009 2010e 2011e 2012e

MarginsGross Margin 48.1% 47.3% 47.0% 46.9% 47.1%EBITDA Margin 15.0% 16.7% 16.1% 15.8% 15.2%EBIT Margin 13.4% 14.5% 14.3% 14.2% 13.9%Net Margin 10.8% 11.3% 11.1% 11.1% 10.8%

R&D (% Sales) 2.7% 2.7% 2.7% 2.7% 2.7%A&P (% Sales) 17.5% 15.4% 15.5% 15.5% 16.0%Other S&D (% Sales) 10.6% 10.3% 10.0% 10.0% 10.0%Tax Rate % 21.7% 24.5% 24.5% 24.5% 24.5%


1H 2010 earnings previewLi Ning is scheduled to report its 1H 2010 earnings

in late August 2010 and we are looking for net profit

to rise 17% y-o-y on 15% revenue growth.

Li Ning 1H 2010 earnings preview


Revenue 4,052 4,657 15%COGS (2,115) (2,470) 17%Gross Profit 1,937 2,187 13%Other income 69 63 -10%Selling & Distribution (1,039) (1,146) 10%

Admin expenses (281) (335) 19%Opg Profit 686 768 12%Other finance costs 3 (17) n/mInterest expenses (39) (6) -84%PBT 650 745 15%Tax (165) (183) 10%Net Profit before MI 485 563 16%MI (12) (12) -5%Net Profit 473 551 17%

Source Company report and HSBC estimates


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ValuationWe use P/E to value Li Ning as we believe it could

better reflect the companys earnings momentum.

We believe using the groups historical P/E to

determine our target multiple for Li Ning is

appropriate given the Chinese sportswear sector is

becoming more competitive and the industry growth

rate in the next few years is unlikely to be as strong

as the levels seen in 2004-08.

Our target price of HKD29.0 is based on a 22x

one-year forward P/E, which is derived from the

groups historical average forward P/E since

2004. Compared to its peers, Li Nings earnings

growth profile is slower. However, we think the

22x P/E multiple is warranted given its high

returns (ROE of 36% in 2010) and leading

position in the Chinese sportswear market.


would translate into a PEG of 1.2x based on our18% earnings CAGR forecast over 2010-12e.



dividend yield), which is within the Neutral band


Key risks Downside risks include 1) intensified

competition from international and domestic

brands, and 2) margin erosion due to more

A&P spending or discounts to distributors,

and sharp increase in raw material input costs.

Upside risks include 1) a stronger

consumption environment and 2) lower than

expected effective tax rate.

Li Ning 1yr forward PER, Jun-2004 to present

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Financials & valuation: Li Ning Neutral (V)Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 8,387 9,736 11,572 14,295EBITDA 1,525 1,696 1,957 2,291Depreciation & amortisation -183 -183 -184 -184Operating profit/EBIT 1,342 1,513 1,773 2,107Net interest -59 -46 -41 -35PBT 1,283 1,466 1,732 2,072HSBC PBT 0 0 0 0Taxation -314 -359 -424 -508Net profit 945 1,083 1,281 1,537HSBC net profit 945 1,083 1,281 1,537


Cash flow from operations 1,274 1,111 1,602 1,382Capex -243 -200 -200 -200Cash flow from investment -225 -200 -200 -200Dividends -256 -437 -470 -560Change in net debt -824 -475 -932 -622FCF equity 968 870 1,361 1,141


Intangible fixed assets 870 781 701 630Tangible fixed assets 1,346 1,410 1,465 1,512Current assets 3,160 4,239 5,188 7,048Cash & others 1,264 1,639 2,572 3,194

Total assets 5,376 6,431 7,355 9,189Operating liabilities 1,700 2,184 2,271 3,101Gross debt 260 160 160 160Net debt -1,004 -1,479 -2,412 -3,034Shareholders funds 2,675 3,321 4,133 5,110Invested capital 2,412 2,607 2,513 2,895


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change


PBT 38.1 14.3 18.1 19.6HSBC EPS 30.6 14.7 18.3 20.0

Ratios (%)

Revenue/IC (x) 3.9 3.9 4.5 5.3ROIC 50.0 48.2 54.6 60.8ROE 41.3 36.1 34.4 33.3ROA 21.1 19.3 19.4 19.2EBITDA margin 18.2 17.4 16.9 16.0Operating profit margin 16.0 15.5 15.3 14.7EBITDA/net interest (x) 25.9 36.7 47.7 64.7Net debt/equity -35.1 -41.9 -55.2 -56.4Net debt/EBITDA (x) -0.7 -0.9 -1.2 -1.3CF from operations/net debt

Per shar

hsbc research

Documents