Anta: DTC transformation continues to show results, high-end brand development momentum is good.

Minutes of Anta's mid-year 2022 financial report conference call:

Management Speech

Despite the domestic epidemic rebound, the significant decrease in passenger flow and the weakened consumer willingness, the Anta Group's "single focus, multiple brands, globalization" strategy still achieved significant results.

Key Performance Indicators

1. Revenue in the first half of the year was RMB25.97 billion, a year-on-year increase of 13.8%, exceeding market expectations;

2. The group's strength in multiple brand was once again validated. DESCENTE and KOLON, as outdoor sports brands, achieved strong growth under the epidemic, with brand revenue increasing by 29.9% to RMB183 million;

3. With successful marketing in the Winter Olympics, Anta became the brand with the highest Olympic relevance. High-end products and spokesperson effects drove Anta's brand income to grow by 26.3% to 13.36 billion, consolidating its leading position in China. FILA's income only slightly decreased by 0.5% to 11 billion yuan, still outperforming international top brands;

4. Although the direct-operated business and first- and second-tier city business of the entire group accounted for a large proportion and were severely affected by the epidemic, the gross profit margin of the group in the first half of the year only slightly decreased by 1.2 percentage points, and the net profit margin slightly decreased by 3.6 percentage points, fully demonstrating the cost control ability of this group. Although the epidemic was more severe in the first half of this year than in the second half of last year, the gross profit margin and net profit margin both improved month-on-month, with Anta brand increasing by 1.9 percentage points, FILA increasing by 2.5 percentage points, and other brands increasing by 4.9 percentage points;

5. The results of the globalization strategy have appeared. Amer joint venture company performed well, especially the overseas business which exceeded expectations. The Chinese business maintained a high-speed growth despite the epidemic, with the total revenue of the joint venture company increasing by 21.2% year-on-year and EBITDA increasing by 28.2%. The joint venture company loss has been significantly reduced to RMB180 million, compared to RMB350 million in the same period last year;

6. The net profit attributable to shareholders only decreased slightly by 6.6%, which was better than market expectations;

7. The total amount of cash and cash equivalents, time deposits and mortgaged deposits of the entire group reached 24.91 billion yuan, an increase of 350 million yuan year-on-year, and the total borrowing decreased by 400 million yuan, so the net cash increased by 800 million yuan to RMB12.16 billion;

8. The dividend payout ratio for the mid-year dividend this time has reached 40.6%, an increase of 5.3 percentage points compared to the same period last year.

Review of Financials in the First Half of the Year

The group's overall revenue increased by 13.8%, with Anta's brand revenue up 26.3% to RMB13.36 billion, FILA decreased slightly by 0.5% to RMB10.77 billion, and all other brands increased by 29.9% to RMB1.82 billion. The domestic epidemic fluctuated in the first half of the year, and many offline physical stores closed, leading to a decline in passenger flow. Moreover, the weakened consumer willingness brought unfavorable effects, but we strengthened online sales to offset part of the impact. The current online business income accounts for 28.9% of the group's overall revenue, and in terms of absolute amount, it increased by 20.6% compared to 2021. Revenue: ANTA brand's revenue growth of 26.3% is due to the fast growth of e-commerce and the revenue contribution from DTC transformation. FILA's majority of stores are located in first and second tier cities' shopping centers with a higher rate of store closures, resulting in a slight decline of 0.5 percentage points. Other brands achieved revenue growth of 29.9% due to their good brand positioning and increased telesales. By business mode, DTC accounted for 49.7%, e-commerce accounted for 34.2%, and traditional wholesale decreased to 16.1%.

Gross profit margin: The overall gross profit margin of the group in the first half year slightly decreased by 1.2 percentage points to 62%, ANTA's gross profit margin increased by less than 3 percentage points, mainly due to the high gross profit margin of the DTC mode. FILA's gross profit margin slightly decreased by 1.2 percentage points, mainly due to the impact of the epidemic and the increase in raw material prices. The overall net profit margin was 22.3%, decreasing by 3.6 percentage points, mainly due to the rise in operating expenses. We implemented strict cost control on the D2C model and retail-related expenses, resulting in a small decrease in percentage. ANTA brand's operating net profit margin was 22%, FILA was 22.5%, and other brands 21.6%. Among the operating expenses, the proportion of advertising and publicity expenses was 10.3%, slightly up by 0.9 percentage points in the first half of the year due to the significant cost of Beijing Winter Olympics and online marketing activities. The proportion of employee costs increased by 0.9 percentage points to 15.3% as there was an increase in the number of employees due to ANTA's retail transformation while employee salaries increased slightly. The proportion of R&D costs increased by 0.1 percentage point to 2.3%, due to the strategy of improving R&D capabilities of the group.

Joint venture losses and net profit margin attributable to shareholders: Amer's joint venture losses were RMB 170 million, significantly decreasing from RMB 350 million in the same period last year. Net profit margin attributable to shareholders decreased by 3 percentage points to 13.8%, due to the decrease in operating profit margin and the impact of tax offset.

Business capital management: Inventory turnover days increased by 28 days to 145 days, with some impact from the epidemic, but mainly due to ANTA's DTC transformation reclaiming some retail inventory, resulting in a slight increase in overall inventory levels. Accounts receivable days decreased by 6 days to 22 days, reflecting the group's effective management of accounts receivable. Accounts payable days increased by 9 days to 53 days, within the normal range.

Liquidity and financial resources: In the first half of the year, free cash flow was RMB 4.1 billion, and the net cash at the end of the period was close to RMB 12.2 billion, slightly higher than the end of last year. Overall, the cash flow situation was very good.

Business development in the first half of the year: In the first half of 2022, the retail market experienced significant challenges due to the epidemic and various external factors, with many uncertainties. Our company achieved dynamic management and high-quality growth. According to data from the National Bureau of Statistics, the epidemic caused consumer confidence in the second quarter to drop to the lowest level in 15 years. Starting from May, the government increased its support for the real economy, issued policies to promote market recovery and boost consumer confidence, which had some effect at the beginning of June. However, there is uncertainty in epidemic prevention and control, which has a significant impact on social consumption, especially among young people.

In the first half of 2022, the Chinese sports goods market showed four characteristics: firstly, the epidemic has encouraged more people to participate in sports, especially in emerging sports such as skateboarding, camping, and frisbee, which have brought new consumption scenarios and demands. Secondly, Chinese sports brands continue to outperform the market, and some niche brands have emerged, reducing the market share of previously larger international brands. Thirdly, the overall competition pattern of e-commerce platforms is changing, with Tmall maintaining its leading position overall, but its share gradually decreasing, while platforms such as JD.com are constantly upgrading. Fourthly, Douyin's live e-commerce is developing rapidly, with growth of over 100% in the first half of this year, while audience demands for live content are becoming increasingly high.

These changes in the environment represent a good opportunity for all of our group's brands. This year marks the start of Anta Group's new decade-long strategy, and we will continue to adhere to our development strategy of "single focus, multiple brands, and globalization", with outstanding operational capabilities for multiple global brands as our core competitiveness. By focusing on emotional category creation and excellent retail operations as key driving forces and through three major platforms—multiple brand management coordination, multiple brand talent cultivation, and multiple brand innovation value chain—we have formed a matrix growth model with three growth curves, continuously strengthening the leading position of multiple brands in the segmented track.

From the perspective of focusing on emotional category creation for each brand, Anta focuses on the running field, FILA focuses on the representative category of high-end sport fashion, DESCENTE focuses on skiing and golf, and KOLON focuses on hiking and camping. Each category needs to create a brand personality to further consolidate Anta Group's position as an industry leader. In order to sustain the healthy development of multiple brands, we will continue to implement the “winning and leading plan” proposed in the middle of last year for the Anta main brand, continuing to break through the mainstream audience and mainstream channels under the strategic guidance of “professionalism first and brand advancement”. At the same time, we are firmly promoting FILA's "Three Tops" strategy, maintaining FILA's leading position in high-end sport fashion through the continuous optimization of brand power and merchandise competitiveness as well as the quality of terminal operations. DESCENTE and KOLON are also actively promoting their own category development in their defined high-end professional sports and high-end new outdoor lifestyle areas, becoming the third growth curve of the entire group's development. At the same time, the group has established four major platforms for multiple brand management: supply chain, research and development innovation, digitalization, and functional empowerment. As the most important initiative in Anta's globalization, Amer has achieved good results in the first half of this year. We will focus on the three main brands of Arc'teryx, Salomon, and Wilson, further strengthening the development of the entire group in the three major markets of China, North America, and Europe. At present, the global business performance of the joint venture company is good, although its Chinese business has been affected by the epidemic, it achieved growth of over 30% in the first half of this year.

The key situation for each brand: Anta brand continues to uphold its development strategy of professionalism first and brand advancement, with Olympic technology as the lead to continuously enhance brand value, and has won the publicity war for the Beijing Winter Olympics and taken the position of the first brand in Olympic relevance. In terms of breakthrough in professional categories, the sales of high-end products such as running shoes priced above RMB 599 and basketball shoes priced above RMB 649 have exceeded expectations. In terms of upgrading our customer base, we have successfully attracted a large number of new and emerging white-collar workers, seasoned middle-class consumers, and sophisticated mothers, among other middle to high-end consumer groups. Sales of middle to high-end consumer groups account for more than 5%. In terms of channels, we continue to upgrade, with coverage of first and second-tier shopping centers continuing to increase, ANTA's flagship store monthly sales rising to 270,000, and core field telesales reaching 500,000 per month. Another important growth engine for ANTA comes from the rapid development of ANTA Kids, which has now become China's number one children's sports brand, with overall mindshare among children's professional sports brands ranking first. Sales of ANTA Kids' sports shoes have seen a significant increase, with online high-quality consumer groups accounting for more than 70%. ANTA Kids mainly focuses on functional products such as running, basketball, and football shoes, with sales of basketball shoes, running shoes, and football shoes ranking first on the Tmall platform, and their development momentum is currently good. Overall, ANTA's 6,600 flagship stores are 52% directly operated by us and 48% operated by franchisees in accordance with ANTA's operating standards.

FILA has adopted different growth strategies at different stages, and after more than a decade of rapid growth, its revenue has exceeded 20 billion. Therefore, we need to take a more rational attitude towards future development. We position and manage FILA with high quality and efficiency, transitioning from rapid growth to high-quality growth. In the first half of 2022, FILA continued to advance its strategy of "top products, top brands, top channels," outpacing leading international brands and narrowing the gap in scale with them, with particularly significant breakthroughs in footwear, which grew by more than 15% year-on-year. In terms of online business, during the June 18th shopping festival, FILA ranked third in sales on Tmall, and FILAKIDS ranked among the top five in sales growth. In the first half of the year, FILA expanded into professional sports markets, particularly golf and tennis series. We have built different communities in the high-end sports and fashion industries, strengthened interaction with consumers, and improved channel efficiency through digitization, with turnover on the official website and mini-programme doubling year-on-year. FILAKIDS also maintains a leading position in the high-end children's shoe and clothing market, with sales surpassing those of leading international sports brands, and offline store sales far exceeding those of other children's clothing brands, successfully creating a sports mindshare product. The share of sports shoes has increased from 30% to over 40%, while the share of sports line products in clothing has increased from 25% to 30%. FILAFUSION performed well in the first half of the year, with the share of shoes increasing from 35% to 45%, and the share of women's products increasing to around 50%.

Small and medium-sized brand DESCENTE and KOLON achieved strong growth in the first half of the year. DESCENTE focuses on high-end professional and high-quality products, developing flagship retail stores. Despite being in a state of large-scale lockdown in first-tier cities in the first half of the year, overall channel sales continued to steadily increase, with online revenue growing by 5% and offline store sales reaching around 1.2 million, a growth of more than 30% for the entire first half. It has successfully established matrices for professional skiing and high-end golf products. KOLON continues to lead in new outdoor and women's markets, strengthening its high-end positioning. The brand achieved strong growth during the pandemic, with revenue exceeding 30%, and offline store sales reaching 500,000. In particular, revenue from women's products has seen significant growth, surpassing 50%. As DESCENTE and KOLON continue to grow, they have greatly boosted our overall business prospects.

Despite the complex and changing global situation, our Amer business exceeded expectations in the first half of the year. The core revenue of our consistent brand business increased by over 30% YoY, while joint venture revenue increased by 21%, reaching 9.67 billion RMB. Retail, e-commerce, and major regional road revenues have shown significant growth. Our ancestral bird brand has grown by more than 25% YoY, Wilson by 30%, and our winter sports equipment has grown by over 70% YoY.

Although our China-based business faced strict challenges related to pandemic control, we still managed to maintain 35% growth in the first half of the year, increasing revenue's share from 5% in 2019 to 14% presently. Our joint venture's EBITDA increased by 28.2%, reaching 710 million RMB. Even in the off-season first half of the year, joint ventures successfully reduced their losses substantially. We hope to significantly contribute to ANTA Group profits throughout the year.

Good progress has been made among all brands in distribution network management. Our brands are upgrading their image while breaking through channels at the same time, continuously expanding brand influence. With a focus on retail strategies aimed at optimizing store experiences, as of the end of June, ANTA adult has 6660 stores and ANTA kids has 2563 stores. In the first half of the year, we increased the percentage of high-end central shopping centers, resulting in sales growth of core stores of 30%. At the end of June, FILA had 2021 stores which are being further improved upon. While other brands have not seen substantial store increases, there has been overall sales growth, with the goal of leading in individual market areas.

Looking to the second half of 2022, we foresee the continued existence of pandemic related issues, and the complexity of international situations will likely cause uncertainty for the global economy. However, perceived as an athletic goods industry as a whole, the pandemic has stimulated very high demand for healthy lifestyles, resulting in continued high enthusiasm for sports. Particularly in China, there have been recent measures aimed at promoting the rapid development of the sports industry as well as promoting integration between sports and education, bringing benefits to the entire industry, resulting in many new development opportunities for ANTA multi-brand category. So, we will continue to adhere to the single-focus multi-brand globalization strategy, using dynamic management to address potential market challenges and uncertainties while adjusting our operational management model in a timely fashion, in order to achieve high-quality growth and improve the resilience of our business.

In the longer term, the professional sports group will consolidate ANTA's leadership position in China's sports brand sector through strengthened development, maintaining a focus on professionalism, while elevating our brand. We will achieve breakthroughs in expertise recognition, mainstream channels, and audiences. FILA will maintain high-quality growth and run faster than the industry in terms of flowing speed in the fashion mindset, top channels, and golf. Our outdoor sports group will retain the high-end and professional characteristics of outdoor brands, leverage diverse, niche sport activities & new consumer demands towards innovative products and continue to strengthen the position of DESCENTE and KOLON Sport. This year marks our 15th year as a listed company in Hong Kong. We have grown into a listed company with international competitiveness and modern governance standards, and have become the largest company by market value in the Chinese athletic footwear and apparel industry. Regardless of external changes in the future, we will adhere to the correct strategic orientation, adhere to the "single focus, multiple brands, globalization" strategy without wavering, and strive firmly to realize our vision of becoming the world's leading multi-brand sports goods group.

Analyst Q&A

Q: Assuming that the epidemic is stable in the second half of the year, what will be the impact of the market operating environment on the performance of the company's main brands in the second half of the year? Is there a trend towards consumption downgrading, and what impact does it have on its sub-brands?

A: First of all, there are still many uncertain factors affecting the retail market in the second half of the year due to the COVID-19 epidemic. However, since the outbreak of the epidemic, athletic goods have had relatively good growth in the consumer goods field from 2000 to now. Although the retail sales of consumer goods did not increase from January to July, the growth of athletic outdoor products exceeded 9% from the 618 data. Secondly, with the improvement of people's living standards, the emphasis on sports and health continues to increase, and the willingness to consume in the sports goods industry will also be higher. Compared with developed countries, we still have considerable room for growth, and the proportion of disposable athletic goods consumption will also continue to increase. The growth of sports goods in the future will be better than other consumer goods. In addition, although the market this year is full of uncertainties, we still adhere to our own strategy and implement dynamic management. ANTA Group has laid out early to meet the needs of the diverse consumer market and formulated the "single focus, multiple brands, globalization" strategy. From the results, our strategy meets the needs of today and future sports goods.

There is also an upgrade of consumption, as well as a downgrade of consumption, and the market pattern has not changed much. Among ANTA Group's brands this year, high-end positioned brands have performed better than mass-market brands. Through the combination of multiple brands, our group achieves full coverage of consumers and sports scenes. With differentiated brand positioning of various brands, we have a more diverse product portfolio and efficient brand operational capabilities, which also reflects our risk-resistant ability in uncertain factors. This is the value of ANTA's multi-brand strategy.

Q: What is the revenue growth of ANTA's various brands since July and August, and what is the revenue outlook for the second half of the year? What guidance is there for the entire year?

A: Because of the fluctuations in the epidemic across the country in July and August, we continue to adhere to cautious dynamic management. Revenue growth in July and August is better than in the first half of the year, and the group's revenue growth is in double digits. Furthermore, August is better than July, and ANTA is confident that revenue in the second half of the year will be better than in the first half of the year. Due to the epidemic fluctuations, it is not easy to give a more accurate guidance for the entire year. ANTA's income growth in the first half of the year exceeded 26%, and this year's income growth will remain above 20%. The FILA brand is currently in a strategic consolidation period, from high-speed growth to high-quality growth. FILA's target for the second half of the year is also double-digit growth or more. The momentum of other brands, mainly DESCENTE and KOLON, is also very good, and we still maintain guidance of a 30% or more increase in revenue for the whole year. Q: Did the epidemic in the first half of the year affect Anta's brand leadership plan? Can Anta continue to benefit from the promotion of the Winter Olympics in the second half of the year and beyond? What is the future development strategy of Anta's children's brand and categories?

A: Although the first half of the year was affected by the epidemic, the leadership plan still steadily progressed according to the established work list, and good results were also achieved in the first half of the year: firstly, the sales volume in the first half of the year, especially the sales of high-end running shoes and basketball shoes, increased by more than double year on year, and the unit price also increased by double digits. Through insights from some data of 618, the proportion of high-end consumers such as white-collar workers online has also increased by 5 percentage points. Secondly, in high-end professional products, we have built an Anta product family mainly based on the Olympic technology product matrix, and we have increased our research and development efforts on nitrogen technology shoe products as well as exclusive technology clothing products such as ice-hot packs. In early August, we launched Olympic champion running shoes at the innovation and technology conference, mainly based on the running training scenario of athletes from 5 to 10 kilometers, to help reduce exercise injuries and improve sports performance with strong cushioning and stability performance. Thirdly, our Olympics marketing has achieved good results. According to market research results, Anta's brand Olympic relevance remains industry leader. We have realized the flow-to-sales conversion of Olympic technology and public empowerment, and ultimately realized the brand value precipitation under Olympics marketing. Fourthly, we are still optimizing the channel structure. Although the quantity decreased by 6% year on year in the first half of the year, the revenue gained a mid-single digit growth, and the average telesales also grew well. We vigorously expanded mainstream channels in first- and second-tier cities in the first half of the year, and the number of new stores also met expectations.

Anta Kids will continue to consolidate its leading position in children's sports brand and sports equipment. Currently, Anta Kids' share in the children's sports market is the first, and the mind share of children's professional sports products is also ranked the first. This year's corporate ratio is expected to increase significantly, and the proportion of high-quality online users has also exceeded 70%. The main sports products will still focus on functional products such as running, basketball, and football. The development trend is good with the research and development of children's exclusive sports technology.

Q: What is the trend of FILA's gross profit margin and operating profit margin under the current situation? What is FILA's medium- and long-term growth goal? If there is no impact of the epidemic, what is FILA's revenue growth and profit margin level?

A: FILA's scale has reached the level of 20 to 30 billion yuan, and there are few brands that continue to maintain high-speed growth at such a scale. Therefore, in the past two years, FILA has been in a strategic consolidation period from last year to this year, and its positioning needs to shift from high-speed growth in the past to sustainable high-quality growth in the future. The epidemic occurred mainly in first- and second-tier cities in the first half of the year, and FILA's closure rate during the peak has reached 30%. Despite these conditions, FILA's growth level in the first half of the year still outperformed some international head brands, and the profit level has also increased by 2.5 percentage points from the second half of last year. In addition, a brand will have different growth models at different stages. Therefore, in order to adhere to FILA's positioning as a high-end sports fashion brand, we will strengthen product awareness of FILA genes such as golf and tennis. We will also focus on product development in sports fashion, high-end professional sports products, golf, tennis, fitness, and cross-border joint ventures with top brands, as well as collaboration with some top overseas resources. Over the past two years, the profitability of FILA has continued to improve. In terms of terminal retail performance, the entire brand and all retail stores have not experienced a downturn, ensuring a very high-end retail image and retail experience in first and second-tier mainstream channels. Average store efficiency and area efficiency are also industry-leading. The overall medium and long-term target remains unchanged at ¥40-50 billion, with double-digit growth in the medium and long term and an operating profit margin of over 25%.

Q: What is the reason why DESCENTE and KOLON were not affected as severely as FILA? What are DESCENTE and KOLON's future development directions, medium and long-term store opening plans, and store efficiency?

A: DESCENTE and KOLON maintained strong growth in the first half of the year despite the pandemic. The most important reason for this is that these two brands adhere to a high-end niche positioning.

DESCENTE specializes in high-end professional sports brands and has no clear competitors in this field. Such brands are highly attractive to middle and high-end consumer groups. DESCENTE's growth exceeded 30% in the first half of the year, with store efficiency reaching ¥1.2 million. The three sports categories it focuses on, golf, skiing, and triathlon, are relatively niche but also rapidly developing, providing significant impetus for the creation of high-end, high-quality professional products. DESCENTE's medium and long-term development is mainly based on improving store efficiency and area efficiency. The future strategy is to upgrade the retail operating model, with store efficiency as the management center, and also to increase the overall operation of the community to enhance the brand's influence, visibility, and credibility among the consumer groups it targets.

KOLON is the earliest brand in Asia to create a camping lifestyle. Its growth exceeded 35% during the pandemic, with store efficiency reaching over ¥500,000. KOLON will continue to adhere to a high-end brand positioning, focusing on the development of camping, hiking, and women's products. In the future, stores will not be opened too much, but the focus will be on strengthening the consumer experience and creating high-quality flagship stores.

We expect DESCENTE's sales scale to reach ¥5 billion next year. We believe that the overall scale level is not too important; the core issue is how to have better appeal to the target audience to increase their loyalty to the brand while maintaining the brand's high-end, high-quality professional sports positioning to achieve more stable and healthy development.

Q: What is the reason for the increase in inventory turnover days in the interim report? Are the inventory turnover days of each brand healthy? If there is still room for improvement, what is the ideal situation?

A: The overall inventory turnover days of the company in the first half of the year increased partially because the proportion of directly operated stores, including DESCENTE and KOLON, is increasing. The main reason comes from the impact of ANTA Sports' D2C repurchase of distributor inventory, as ANTA's directly operated stores have reached over 70%. The inventory-to-sales ratio of ANTA Sports is around 5, slightly higher than before. Because of the high proportion of directly operated stores now, whenever there is some market softness, inventory will respond immediately, which is completely different from other companies that mainly adopt a wholesale model, which may take a few months to display. Due to different business models, it is difficult to compare inventory turnover days among different companies. Affected by the epidemic in the first half of this year, the inventory of the entire group is slightly higher than the healthiest level, but still at a controllable level. It is expected that the inventory will return to a healthier level by the end of this year.

Q: What are the specific reasons for AmerSports' better-than-expected overseas performance in the first half of the year, and which markets performed well? How much has the epidemic affected the business in China? Will overseas business be affected by inflation and economic recession in European and American markets in the second half of the year?

A: After acquiring Amer in 2019, we set targets of over 1 billion euros for five different areas, successfully divesting non-core businesses and focusing on three major brands: Arc'teryx, Salomon, and Wilson. Over the past two years, we have reorganized the three major brands, especially by replacing core executives including the CEO and President, laying a solid foundation for long-term development. We have also formulated clear 5-year strategies for the three major brands, which are currently being implemented in an orderly manner with good results. In the first half of this year, our global revenue grew by 21% year-on-year, driven by the core brands, and our EBITDA also increased by 28%. In addition, a major driving force behind the development of these three core brands is the growth of our D2C business. Our D2C business grew by over 40% in the first half of the year, driving the overall health and sustainability of our business. In particular, the sales of Arc'teryx's self-operated stores in North America doubled in the first half of the year, and Amer's revenue in China also increased by over 30%. After ANTA Sports' acquisition of Amer, we also identified several important focus areas for organizational efficiency and operational efficiency. These focus areas have steadily progressed over the past two years. This year marks the first time the joint venture company has contributed a full-year profit, contributing over 100 million yuan to ANTA Sports Group. It is expected to perform better next year.

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