2020.HK ANTA - Rare Buffett-type Stock
Elevator Pitch
Description
ANTA is a sportswear company, and its brands include Anta, Fila, Descente, Kolon. The firm acquired Amer Sports in 2019 and now owns 43% AMER (AS US Equity). AMER’s brands include Arc’teryx, Salomon, Wilson, Peak Performance, Atomic, etc
It is a very high-quality business with excellent returns on invested capital. Capex is only 1-2% of the revenue. Current operating assets are higher than non-interest bearing liabilities. Invested capital is about $4 bn, and 5-year average FCF/IC is well above 50%.
The stock trades at 6~10x free cash flow (defined as operating cash flow minus capital expenditure). ANTA’s current EV is 28bn - 5bn (net cash) - 43%*16bn (AMER’s mkt cap is 16bn usd, 2025/01) = 16bn USD. EV/FCF is roughly 6~10x (2021-2023FCF: 1.6bn, 1.5bn, 2.6bn), while its 2023FY revenue growth is 15% and net profit growth is over 30%. Dividend payout ratio is increased to 50% from 30% in 2019 – so future dividend yield is at least above 2.5%.
I believe that the market undervalued both ANTA (it owns 43% of Amer Sports, AS US Equity) and the DTC strategy will contribute to a consistent high ROIC for relative high-end brands like Arc’teryx, Salomon and Descente.
WHY ANTA is undervalued?
AMER is undervalued both on the accounting basis and future growth potential
AMER is accounted for using the equity method on ANTA's balance sheet, with a valuation of only 12.8 billion CNY for its 43.33% stake in AMER. However, AMER’s current market value is estimated at $16 billion USD, making ANTA’s stake worth over 43% × $16 billion = $6.8 billion USD (approximately 48 billion CNY). This valuation is nearly four times higher than the amount recorded on the balance sheet.
AMER’s future growth drivers include the expansion of its store network and the acceleration of its direct-to-consumer (DTC) strategy. During the 2024 Investor Day, ANTA’s COO projected revenue growth of 10–15% annually for 2024–2026. Currently, AMER operates only 187 stores, compared to Lululemon’s more than 650 stores.
The gross margin of Fila and Descente stands at approximately 70%. Meanwhile, Anta is also undergoing a significant DTC transformation, increasing its DTC contribution from 42% to over 85% within three years. As a result, Anta’s gross margin has risen from 41% in 2019 to 54% in 2023.
Chip Wilson, the founder of Lululemon, owns a 15% stake in AMER. He is actively involved in overseeing AMER’s DTC implementation and has brought in Lululemon experts to lead the effort. For instance, Stuart Haselden, the CEO of Arc’teryx, previously served as COO and CFO at Lululemon
The floor can be referenced by the conversion price of the convertible bonds and Chip Wilson's private placement price.
WHY both ANTA and AMER's strategy will be successful? The management is the key.
ANTA’s management has a great capital allocation track record.
ANTA’s sales have already surpassed NIKE China.
Bought Fila in 2009 and implemented DTC from 0 to 1. DTC stores are jumped from only 350 in 2012 to over 1972 stores. Net profit broke even in 2012. 10-year sales CAGR is 41% and revenue is over $3 bn now. Gross margin is over 70%, operating margin is 27%, comparatively lululemon’s gross margin and operating margin is 58% and 22%.
Discovered the potential of AMER even earlier than Chip Wilson and took actions first. “Unbeknownst to me, the same week I was working on my offer, an offer to acquire Amer came in from a consortium that consisted of Anta Sports, the Chinese leader in sportswear and athletic shoes; FountainVest Partners, a private equity firm from Hong Kong; and Tencent Holdings, a Chinese multinational investment holding conglomerate”. - The story of lululemon
The management acts in shareholders’ interest
Steady and reliable dividend policy. Before acquiring AMER in 2019, ANTA maintained 70% dividend payout ratio from 2013-2017. From 2018-2022, its payout ratio is around 30-40%. According to the latest earnings call, future payout ratio will be at least 50%.
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Chip Wilson’s viewpoints on ANTA
"I was encouraged that Anta understood vertical retailing and I was sure they knew just how lucrative the direct-to-consumer business model could be"
"Anta will surpass both Adidas and lululemon"
?"it seemed possible to me that Anta was making their move to become a global company and that the Amer deal would be the first step in that direction"
"Now at the age of 65, my sole job is to support and expand upon the vision of Chairman Ding as the leader of our consortium. In this role, I get the opportunity to think critically about organizational structure and to help find great people to build out our team. My excitement comes from believing that Amer creates the greatest possibility to elevate the lives of 20 and 30-year-olds via transformational development inside the athletic business. This is what I was meant to do."
WHY DTC and Multi-brand Strategy is important?
In short, DTC will contribute to a consistent higher ROIC, and Multi-brand Strategy will lead to a bigger TAM.
What's different between Anta's DTC strategy and Nike's is that Anta has maintained its extensive offline store network, while Nike has significantly reduced its exposure in offline channels by terminating partnerships with retailers like Foot Locker. However, clothing and sports footwear are products that often require customers to try them on in-store before making a purchase, which may limit Nike's ability to fully replace offline touchpoints with digital channels.
DTC is a positive feedback loop, and the wholesale model is a negative feedback loop.
Cons of wholesaling/having a middleman:
Pros of DTC:
Multi-brand Strategy can unlock greater TAM potential
Each brand faces limitations in terms of positioning and market share. Anta's management implemented several strategies to expand FILA's Total Addressable Market (TAM) and boost sales. To grow FILA's target market, the brand now operates across multiple sub-brands, including FILA, FILA Kids, and FILA Fusion. Additionally, FILA has diversified its sports target markets to include golf, tennis, baseball, and more.
SUMMARY
Catalyst