Previous TP: N/A Core Pacific - Yamaichi 26 April 2013

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1 Hosa (22 HK) Previous TP: N/A Core Pacific - Yamaichi 26 April 213 Last price: HK$3.5 China / Sportswear / Initiation Report Beneficiary of sportswear professionalization Swimwear fashion driving not only volume but also price Water Cube enhancing consumer coverage to bring long-term benefits The rise of chained fitness and yoga centers speeds up the progress of sportswear professionalization Target price: HK$3.51 Potential Return: +15% Initiate with BUY 26 April 213 Felix Kwok 郭亮 Tel: Felix.Kwok@cpy.com.hk Forecast revision (%) Year to 31 Dec 13F 14F 15F Revenue change NA NA NA Net profit change NA NA NA EPS change NA NA NA Key Share Data 52-week High / Low HK$3.6/1.6 3D avg volume 3.6m Issued share 1,62m Market cap 4,887m Major Shareholder Shi Hongliu & Asso. (61.49%) Share Price Performance 195 Stock HSI INDEX /12 5/12 6/12 7/12 8/12 9/12 1/12 11/12 12/12 1/13 2/13 3/13 Key Financials Year to 31 Dec FY12 FY13F FY14F FY15F Revenue (RMB mn) 848 1,4 1,198 1,375 Growth (%) Net profit (RMB mn) Growth (%) EPS (RMB) Growth (%) P/E (x) P/B (x) EV/ EBITDA (x) Yield (%) Source: Company data and Core Pacific-Yamaichi Catalyst Swimwear fashion driving not only volume but also price. Beach culture and water sports are sweeping across China, leading swimwear to become a fashion product rather than just for functionality. This drives the demand for branded swimwear. Besides, Spas and hot springs spawn a new demand for swimwear in winter. Water Cube enhancing consumer coverage to bring long-term benefits. A new swimwear brand Water Cube will be launched in 2H13, targeting the young generation and mass market. It is expected to drive swimwear revenue up with 21.9% CAGR (FY12-FY15F). Beneficiary of sportswear professionalization. With increasing living standard in China, there is a rising demand of consumers for products portraying professionalism. This lifts the demand for fitness wear and sports underwear. The rise of chained fitness and yoga centers speeds up the progress of sportswear professionalization. Valuation TP HK$3.51, initiate with BUY. Hosa is currently trading at FY13F PER of 11.8x with 1.1x two-year PEG (FY12 to FY14F), excluding the impact of the one-off government grants in FY12. Considering the swimwear and indoor sportswear being in the up-cycle, we set our target FY13F PER at 13.5x based on three-year sportswear sector average forward PER for the up-cycle period of 29 to 211. We, therefore, devise the target price to HK$3.51, implying 1.27x two-year PEG (FY12 to FY14F). We initiate with BUY recommendation on the counter with 15% upside potential. Our View Moderate competition in the market. We like Hosa as the indoor sportswear market is still at its early stage in China. It has the leading market position and does not need to face significant competition from international players. Along with the growth of swimwear and fitness wear markets, we expect the revenue to growth with 17.5% CAGR in revenue to RMB1,375mn in FY15F, mainly driven by the sales volume. GPM is expected to fall due to the new brand, but we anticipate it to be stay above 59.%. Due to the tightening controls on OPEX, bottom-line is expected to achieve 12.2% CAGR (FY12-FY15F), excluding the one-off government grants in FY12. Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific - Yamaichi International (H.K.) Limited ( CPYI ) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice. Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon the report. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI s written consent. The authors of this report are Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companies of Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take. 1

2 Swimwear becomes a fashion Swimwear becoming a fashion With the development of Hainan tourism, the beach culture and water sports are sweeping across China. With growing popularity of beaches and water sports activities in China, people put more emphasis on swimwear s outlook and design, leading swimwear to become a fashion product rather than just for functionality. According to government data, most of the domestic consumers generally replace their swimsuits every one to two years. Besides, by our observation, the ladies tend to have more sets of swimsuit currently. Both factors lead to a higher demand for swimwear. Based on the industry figures reported by Xinhuanet in Aug212, approximately 2mn sets of swimwear were sold in the PRC in 211, about 2% of overall global sales. Based on the report of Frost and Sullivan, the domestic ex-factory revenue of swimwear is expected to grow with 19.4% CAGR for 21 to 215F. driving the demand for branded As swimwear is becoming a fashion and there is a sustainable growth in per capita income, the demand for branded swimwear is strong. Frost and Sullivan also expects the growth of domestic ex-factory revenue for mid-to-high end swimwear to outperform the market with 25.6% CAGR for 21 to 215F. Although some international brands, such as Speedo and Arena, play actively in the PRC market, the domestic brands, including Hosa and Zoke, continue to play a leading role. Another point is that, due to the Chinese culture, domestic female consumers favor non-bikini two pieces swimwear more than bikini, which also restricts the expansion of foreign swimwear fashion brands in the PRC market. not only being used in summer. Spas and hot springs become more popular in the PRC. Unlike those in Japan, people are required to wear swimwear in hot springs, which spawns a new demand for swimwear in winter. Although some people anticipate this to give birth to a new swimwear segment, which is called hot water bathing suits, we believe the mainstream tends to go to general swimwear rather than that functional swimwear. The hot water culture definitively benefits Hosa and lowers the seasonality risks of its swimwear segment. In addition, the increasing numbers of indoor heated swimming pool also drive the swimwear demand in winter. Therefore, we stay positive to the sustainable growth in China s swimwear market. Figure 1: Outdoor Hot spring Resort in China Figure 2: Indoor Hot spring Resort in China Source: Fengshan Hotspring Resort Source: Valley View Hotspring Resort 2

3 Capturing mass swimwear market Launching a new swimwear brand, Water Cube, in 2H13. Hosa is positioning itself as a mid-to-high end brand. This leaves a loophole on its clienteles for those in the mass market segment. To cater this group of customers, Hosa joins hands with National Aquatics Center to launch Water Cube Brand swimwear and accessories. According to the corporation agreement, Hosa will owned the Water Cube swimwear brand for the next 2 years and it plans to launch new products in 2H13 targeting the teenagers and mid-to-low-end market. Expecting 21.9% CAGR in swimwear revenue for FY12-FY15F. Due to the expectation of lower ASP for the new brand, the pressure on swimwear GPM cannot be avoided. However, we believe it is positive for Hosa to enhance its consumer coverage without direct impact to its original mid-to-high end Hosa brand. Meanwhile, Hosa is looking for acquisitions in high-end international professional swimwear brand to strengthen its high-end market position, especially enhancing the bargaining power with department stores due to more comprehensive product mix. Excluding potential acquisitions, we expect the revenue of swimwear business to growth with 21.9% CAGR to RMB551mn in FY15F with GPM keeping above 59%. Figure 3: Swimwear under Water Cube brand Source: Company data 3

4 Beneficiary of sportswear professionalization Rapid growth in the indoor sportswear sector. With continuous improvement in living standards, people in China have stronger awareness of both healthcare and fitness. With the construction of more indoor stadiums, urbanites are moving towards the indoors, such as fitness and yoga. Comparing with those outdoors, the amount of exercise for indoor sports is generally more controllable and they are more personalized, especially matching the white-collar professionals favors. Meanwhile, fitness and yoga players have a relatively stronger sense of superiority in China, which is also an incentive for white-collar professionals to join those activities. Furthermore, the serious air pollution in China is another motivator to shift people from outdoor sports towards indoor sports. All these bring up the demand for both fitness and yoga centers. The rise of professional chained fitness and yoga centers speeding up the progress of sportswear professionalization. Chained fitness and yoga centers have been growing rapidly in the past decade in the first-tier cities, especially in Beijing and Shanghai, and the big names, such as Kingsport, Will s, Tera and Hosa Fitness (Hosa Fitness is held by the Hosa s major shareholders but is not under the listed company.), have hundreds of thousands members in the PRC. Meanwhile, yoga sports have attracted a large group of office ladies to be their fans. The centers are generally targeting on the mid-to-high-end consumers, who are more affordable and willing to buy relevant branded sportswear portraying professionalism, such as fitness wear and sports underwear. This provides golden business opportunities to Hosa. The company has a good start in capturing this target customer group through its distribution channel in related professional fitness centers. Further sales cooperation with other professional yoga fitness gyms is one of its major direction. Along with the market growth, we anticipate the revenue in fitness wear segment to increase with 19.% CAGR to RMB35mn in FY15F. Figure 4: Hosa Fitness Center (Longde) Figure 5: Yoga room (Longde) Source: Company data and Hosa Fitness Center Source: Company data and Hosa Fitness Center 4

5 Stepping into casual sports underwear market Casual sports underwear business helping to diversify the seasonality risks. Although the professional sports underwear market is growing very fast, it is still very niche comparing with the thermal and casual sports underwear market. Therefore, Hosa has stepped into this market already. This market segment should account for approximately 5% of sports underwear revenue in FY12, based on our estimation. As Hosa s thermal and casual sports underwear is targeting mid-to-high end market, the ASP only dropped by 3.1% yoy for the overall sports underwear segment. However, because of the relatively higher raw materials cost, it dragged down the segment s GPM by 6.8pts to 5.2% in FY12, which was still reasonably high. Based on our observation, Hosa s thermal underwear is very popular in winter while the casual sports underwear is suitable throughout the whole year. We believe this is an enormous opportunity and can help to diversify the seasonality risks of the Company. As a whole, we estimate the revenue in sports underwear to grow with 12.4% CAGR to RMB428mn in FY15F. Table 1: Hosa s thermal and casual sports underwear Products Thermal underwear Female casual sports underwear Male casual sports underwear Marked Price RMB399 per set RMB159 (Top only) RMB159 (Top only) Discounted Price RMB279.3 per set RMB111.3 (Top only) RMB111.3 (Top only) Materials 6% cotton 35% viscose fiber 5% Spandex Source: Company data, Tmall and Core Pacific-Yamaichi 48% regenerated cellulose fiber 47% Cotton 5% Spandex 48% regenerated cellulose fiber 47% Cotton 5% Spandex 5

6 Retail networks expansion Store network expanding to 1,33 POS in 212. As the Group now adopts a distributorship model (as of FY12, Hosa sold its products through 31 distributors), Hosa product line is able to expand at a faster pace throughout China. The Group currently has 1,33 stores across China, operated by distributors with approximately 7% of the stores located in tier 1 cities and 3% of the stores located in tier 2 and 3 cities. Department stores are the key retail channels and Hosa is likely to keep that strategy for the sales of swimwear. Further expansion of 1 POS in 213. In 213, the Company plans to further develop its professional retail outlet network (in fitness centers or aquatic facilities including club houses), but this takes a relatively longer time to negotiate with different parties. Therefore, the new separated feature retail outlets for fitness wear in the shopping malls will be the Company s focus this year for the purpose of strengthening its brand image. Management tends to enhance the quality of its retail outlets rather than taking an aggressive expansion plan. It targets to have a net increase of 1 POS by the end of 213. We believe Hosa will maintain this expansion progress in coming few years with increasing exposures in tier 2 and 3 cities. Table 2: Retail stores distribution A net increase of 118 POS in FY12 mainly in department stores Year end 31 Dec FY8 FY9 FY1 FY11 FY12 Department stores ,12 Professional retail outlets Hosa Specialty stores Total ,212 1,33 Source: Company data and Core Pacific-Yamaichi Figure 6: Hosa Shop of Glory mall Figure 7: Hosa Shop of Glory mall Source: Company data and Hosa Fitness Center Source: Company data and Hosa Fitness Center 6

7 Figure 8: Distributor Network Management Source: Company data Figure 9: Retail stores distribution in 212 by region Source: Company data and Core Pacific-Yamaichi 7

8 Moderate competition in the market Unaffected by current sportswear woes. Unlike the current general China sportswear market, the swimwear and indoor sportswear markets are still at their early stages in China. Hosa does not have to face the problems of high inventory level and product homogeneity, which lead to significant pressure on ASP in general sportswear market. Besides, currently, major international swimsuit brands such as Speedo and Arena or Fitness/sports underwear brands such as Lulu Lemon and Under Armor have yet to fully penetrate and establish a solid foothold in China market. Hence, it gives Hosa a chance and valuable time to capture strong growth as well as prepare for the future competition from overseas by solidifying its current brand and establishing an extensive retail network. Table 3: Peer comparison of major competitors Brand Hosa Nike Adidas LuluLemon Under Armour Speedo Arena Zoke Stock Code 22 HK NKE US ADS GR LULU US UA US N/A N/A N/A Brand Origin China USA Germany Canada USA USA France China Core Products Swimwear, Fitness wear & Sports underwear Footwear & Apparel Footwear & Apparel Swimwear, Fitness wear & Sports underwear Fitness wear & Sports underwear Swimwear Swimwear Swimwear & Fitness wear POS in China* 1, Major Market Segment Mid-to-high Mid-to-high Mid-to-high High Mid-to-high High High Mid-to-low Approximate Price Range (RMB) Swimwear (per set) 398 N/A N/A Fitness wear (top only) N/A N/A 238 Sports underwear (top only) N/A N/A 168 Market Share (21) # Swimwear 6.1% N/A N/A N/A N/A 2.3% 2.6% 2.4% Fitness wear 4.6% N/A N/A N/A N/A N/A N/A 2.1% Sports underwear 31.1% 3.2% 4.9% N/A N/A N/A N/A N/A * The POS figures are based on company data and official websites information and the figures exclude Taiwan, Hong Kong and Macau. For Nike, it only includes Nike Womens and Women's Training. For Adidas, it only includes outlet stores, originals stores and brand centers. For LuluLemon, it currently only has footprint in Hong Kong for the Greater China Region # The market share figure was based on the domestic ex-factory revenue in 21. (Source: Frost and Sullivan) Source: Company data, Frost and Sullivan, Tmall and Core Pacific-Yamaichi Figure 1: Products of Hosa Source: Company data and Frost and Sullivan 8

9 Earnings forecasts 17.5% CAGR in revenue for FY12 to FY15F. Although the new products of Water Cube will be launched in 2H13, we expect they will not make material contributions in FY13F but they will fuel the growth in FY14F. With the market expansion and retail network forecast of 1,43/1,56/1,66 for FY13F/14F/15F respectively, we expect the revenue to growth with 17.5% CAGR in revenue to RMB1,375mn in FY15F. The growth will be mainly driven by the sales volume growth. Figure 11: Retail stores distribution in 212 by region RMB Mn Swimwear [LHS] Fitness wear [LHS] Sports underwear [LHS] 1,5 99.9% Total Revenue [LHS] % Change YoY [RHS] 1,375 1,198 1,4 1, % 1% 8% 6% 5 22.% 18.4% 19.3% 14.8% 4% 2% FY11 FY12 FY13F FY14F FY15F % Table 4: Key assumptions on revenue Unit FY11 FY12 FY13F FY14F FY15F Swimwear (ASP) RMB YoY growth % 79.6% 43.2% -1.2% -3.4%.5% Swimwear (Volume) Mn YoY growth % -7.9% -1.5% 21.7% 31.7% 17.7% Swimwear (Revenue) RMB Mn YoY growth % 65.4% 28.1% 2.3% 27.3% 18.3% Fitness wear (ASP) RMB YoY growth % 42.8% 1.3% 1.3% 1.3% 1.3% Fitness wear (Volume) Mn YoY growth % 47.3% 32.% 2.% 17.5% 15.% Fitness wear (Revenue) RMB Mn YoY growth % 11.4% 33.7% 21.6% 19.% 16.5% Sports underwear (ASP) RMB YoY growth % 46.1% -3.1% 2.4% 2.5% 2.5% Sports underwear (Volume) Mn YoY growth % 65.8% 15.2% 12.7% 9.5% 7.% Sports underwear (Revenue) RMB Mn YoY growth % 142.2% 11.6% 15.4% 12.2% 9.7% Accessories (ASP) RMB YoY growth % 27.1% 9.% 8.% 8.% 8.% Accessories (Volume) Mn YoY growth % 34.6% -1.4% 1.5% 1.5% 1.5% Accessories (Revenue) RMB Mn YoY growth % 71.1% 7.5% 9.6% 9.6% 9.6% Total Revenue RMB Mn ,4.1 1, ,374.9 YoY growth % 99.9% 22.% 18.4% 19.3% 14.8% 9

10 Figure 12: Swimwear revenue forecast RMB Mn Water Cube Brand [LHS] Hosa Brand [LHS] 8 GPM [RHS] 64.7% 65.5% 63.8% 62.% % % % 6% 5% Figure 13: Fitness wear revenue forecast RMB Mn Fitness wear [LHS] GPM [RHS] % 67.6% 67.2% 67.4% 67.3% % % 6% 5% 4% FY1 FY11 FY12 FY13F FY14F FY15F FY1 FY11 FY12 FY13F FY14F FY15F 4% Figure 14: Sports underwear revenue forecast RMB Mn % % 27 Pro Sports underwear [LHS] Thermal & casual underwear [LHS] GPM [RHS] % 49.8% 49.4% 49.1% FY1 FY11 FY12 FY13F FY14F FY15F 6% 55% 5% 45% 4% Figure 15: Accessories revenue forecast RMB Mn Accessories [LHS] GPM [RHS] % 66.7% 66.% 66.4% 66.2% % FY1 FY11 FY12 FY13F FY14F FY15F 7% 65% 6% 55% 5% 45% 4% Table 5: Profit & loss forecast Year to Dec (RMB mn) FY13F FY14F FY15F Revenue 1,4 1,198 1,375 Swimwear Fitness wear Sports underwear Accessories COGS (43) (486) (563) Gross profit Other Income (net) SG&A (172) (23) (231) EBITDA EBIT Net Financial Income (Cost) (1) (1) (1) Contribution from subsidiary Profit before tax Income tax (11) (13) (148) Minority interests Net Income EPS (RMB) Margin Gross profit 59.9% 59.4% 59.% EBITDA 44.5% 44.4% 44.4% EBIT 43.9% 43.5% 43.3% Net profit 32.8% 32.6% 32.4% 1

11 Slight pressure on GPM. Raw material costs accounted for 76.7% of COGS in FY12. We estimate that fabrics (made of yarn or fibers) should take a key portion of the raw material cost, which was highly related to the cotton and crude oil prices. With the increasing proportion of casual sports underwear, especially the thermal underwear, more raw materials will be consumed relatively. Together with the factor of lower ASP for the new swimwear brand, we see some pressure on the overall GPM, but we expect this will be partly offset by the change on product mix, i.e. increasing proportion of fitness wear. Tightening controls on OPEX. In FY12, Hosa offered more incentives and subsidies to its distributors and the one-off establishment cost of a R&D center in Beijing lifted FY12 R&D expenses to RMB34.5mn. These two drove the ratio of OPEX/revenue up to 19.1%. Starting from 213, management tends to have a better control on the OPEX by tightening the distributors incentives and subsidies. We anticipate the OPEX ratio to fall to 17.1% in FY13F. Potential tax rate increase FY13F onwards. Income tax rate for the Group is expected to increase from 12.5% to 25% from FY13F onwards due to the expiration of tax benefit policy in China. According to the 2+3 tax holiday, Hosa was exempted from income tax from FY8-FY9 and will be subjected to 12.5% income tax rate from FY1-FY12, after which income tax will return to 25% from FY13 onwards which may add pressure to profit margins. Excluding the impact of the one-off government grants in FY12, we expect the EPS to growth with 12.2% CAGR (FY12-FY15F). Figure 16: FY12 COGS breakdown Procurement Manufacturing costs of finished overhead products 3.3% 9.% Labor 11.% Figure 17: Margins forecast % GPM EBITDAM NPM Raw materials 76.7% FY1 FY11 FY12 FY13F FY14F FY15F Source: Company data and Core Pacific-Yamaichi Table 6: Key assumptions on GPM, OPEX and tax rate Unit FY11 FY12 FY13F FY14F FY15F Swimwear (Segment GPM) % 64.7% 65.5% 63.8% 62.% 6.8% Fitness wear (Segment GPM) % 66.9% 67.6% 67.2% 67.4% 67.3% Sports underwear (Segment GPM) % 57.% 5.2% 49.8% 49.4% 49.1% Accessories (Segment GPM) % 65.4% 66.7% 66.% 66.4% 66.2% Overall GPM % 62.2% 6.6% 59.9% 59.4% 59.% Selling & distribution expenses as % of revenue % 9.4% 1.8% 1.% 1.% 1.% Administration expenses as % of revenue % 7.9% 8.3% 7.1% 6.9% 6.8% Total OPEX as % of revenue % 17.3% 19.1% 17.1% 16.9% 16.8% Effective tax rate % 13.3% 12.6% 25.% 25.% 25.% 11

12 Expansion in production base. Besides, the Group plans to increase the ratio of in-house production, which was about 6% in FY12, for the purpose of enhancing production flexibility and quality control. A new plant is expected to be built in Jinjiang, next to the current production base, doubling current production capacity if it is fully utilized. We expect that Hosa will not acquire the land and the total estimated CAPEX is approximately RMB9mn. Given the current net cash position and strong operating cash flows, even though the trade and bills payable days may fall, Hosa s financial position is still healthy. Figure 18: In-house production process Research, design & development of products Sales fair - Presentation of sample products - Placing of orders by distributors Procurement of raw materials Materials inspection, preparatio n and fabric layout Delivery to customers Final product inspection and packaging Ironing (if needed) Fabric cutting, sewing and stitching Source: Company data Figure 19: Working capital cycle Days Average inventory turnover days 1 FY1 FY11 FY12 FY13F FY14F FY15F Average trade and bills receivables turnover days Average trade and bills payable turnover days 62 12

13 FY12 results summary FY12 net profit increased 21.2% yoy, in line with market expectation. Hosa announced FY12 results on 28Feb213 with 22.% and 21.2% increase in top-line and bottom-line respectively. Excluding the RMB17.8mn government grants, the results were in line with Bloomberg consensus. The top-line growth was mainly driven by the increase in sales volume of fitness wear and ASP of swimwear at 32.% and 43.2% yoy respectively. However, the increase in the proportion of thermal and casual underwear lifted the raw material costs up 4% yoy. It dragged down the GPM by 1.6pts to 6.6%. Although there will be some margin pressure on the underwear segment, we believe this can smooth out the seasonality impacts from swimwear and benefit Hosa in the long run. Besides, operating expenses also grew significantly in FY12. With the completion of the R&D center in Beijing and the tightening cost control on the incentives and subsidies to the distributors, we expect the ratio of operating expenses to revenue to drop in FY13. Table 7: FY12 results review Year to 31st Dec (RMB mn) FY12 FY11 YoY Chg Turnover % Comments - Swimwear % ASP increased 43.2% but sales volume dropped 1.5% yoy - Fitness Wear % ASP increased 1.4% while sales volume gained 32.% yoy - Sports Underwear % Including thermal and casual underwear; ASP declined 3.2% but sales volume increased 15.2% yoy - Accessories % ASP increased 9.1% but sales volume dropped 1.4% yoy Increase in COGS mainly due to the increasing Cost of sales % proportion of thermal and casual underwear, which requires more materials in the production process Gross profit % GPM fell 1.6pts to 6.6% Other revenue % Other net (loss)/income N/A Selling and distribution expenses Administrative and other operating expenses Including RMB17.8mn government grants (FY11: RMB3.4mn) % Increase in the incentives and subsidies to the distributors in FY12 The increase was mainly due to the R&D % expenses on setup a R&D center in Beijing which lifted FY12 R&D expenses to RMB34.5mn Profit from operations % EBITM reduced.9pts to 44.8% Finance costs % Profit before taxation % Income tax % Profit for the year % Earnings per share (RMB) FY12 was the last year to enjoy 2+3 tax holiday with income tax at 12.5% Basic % Because of the dilution effect in IPO in 211 Diluted % Source: Company data and Core Pacific-Yamaichi 13

14 Justified for a premium valuation TP HK$3.51, initiate with BUY recommendation. Hosa is currently trading at a FY13F PER of 11.8x with 1.1x two-year PEG (FY12 to FY14F), excluding the impact of one-off government grants in FY12. Considering the swimwear and indoor sportswear being in the up-cycle, we set our target FY13F PER at 13.5x based on three-year sportswear sector average forward PER for the up-cycle period of 29 to 211, where those six major domestic sportswear players, listed in Table 1, recorded approximately 23% CAGR for the total revenue during that period. It is also equivalent to the sector average forward PER for the past three year plus one standard deviation or the three-year average forward PER for Anta (22 HK). We, therefore, revise the target price to HK$3.51 implying 1.27x two-year PEG (FY12 to FY14F). We initiate with BUY recommendation on the counter with 15% upside potential. Major risks. 1) Hosa is unable to solidify its leading market position and maintain its brand loyalty given increasing competition from international brands in the near future. 2) Significant slowdown in economy which affects consumer demand. Table 8: 3-year average forward PER (29-11) (29-211) Median Average Std ANTA XTEP DEGREES LI NING PEAK Average Source: Bloomberg and Core Pacific-Yamaichi Table 9: 3-year average forward PER Median Average Std ANTA XTEP DEGREES PEAK Average Source: Bloomberg and Core Pacific-Yamaichi Table 1: Peer valuation Company Name Bloomberg code Fiscal Yearend CUR Price (Local) Market Cap (HKDm) 2 years EPS PEG EV/ Yield PER(x) CAGR (%) (x) EBITDA (%) Net margin (%) ROE (%) 12 13F 14F 12-14F 12-14F 13F 13F 12 13F 13F HOSA* 22 HK 12 HKD 3.5 4, Chinese Sportswear ANTA 22 HK 12 HKD , NA NA DONGXIANG 3818 HK 12 HKD , XTEP* 1368 HK 12 HKD , NA NA DEGREES 1361 HK 12 HKD 2.9 4, NA NA LI NING 2331 HK 12 HKD ,129 NA NA 43.9 NA NA (29.4) (4.4) (12.3) PEAK 1968 HK 12 HKD , NA NA Average 7, International Sportswear NIKE NKE US 5 USD , ADIDAS ADS GR 12 EUR , LULULEMON LULU US 1 USD , UNDER ARMOUR UA US 12 USD , PUMA PUM GR 12 EUR , QUIKSILVER ZQK US 1 USD ,43 NA NA NA 1.3 NA (.5) BILLABONG BBG AU 6 AUD.48 1,839 NA NA NA (19.2) Average 111, Source: Bloomberg and Core Pacific-Yamaichi estimates (*Hosa and Xtep only) 14

15 Sector overview early stage growth China indoor sportswear sector still at its early growth stage. The indoor sportswear market in China is still at a relatively early stage in growth relative to other sportswear categories. Hosa is a leader in indoor sportswear which includes swimwear (swimwear and beachwear for woman, men and children), fitness wear (yoga, gym and dance, track suits, general training suits, performance shirts and jackets, leggings and dance apparel). Sports underwear are professional sports underwear for men and women. According to Hosa s IPO prospectus, research done by Frost and Sullivan, China s indoor sportswear sector has grown by a CAGR of 3.5% from and it is expected that the sector in terms of ex-factory price will continue to grow at a CAGR of 24% from As China s leading indoor sportswear brand, we believe that if the Management can formulate a sound strategic plan in capturing market share, brand recognition and promotion, Hosa will be able to benefit with the growing demand of indoor sports apparel. In 21, the Group has the largest market share in indoor sportswear, which includes swimwear (6.1%), fitness wear (4.6%) and sports underwear (31.1%). However, if we only consider the mid-high end indoor sportswear universe in which the Hosa operates, the leadership of Hosa can be much more evident at 23.5%, 19.4% and 42.7% for swimwear, fitness wear and sports underwear respectively. Figure 2: China indoor sports market ex-factory revenue (21-215) RMB Bn CAGR (27-21): 3.5% CAGR (21-215F): 24.% F 212F 213F 214F 215F Source: Company data and Frost and Sullivan 15

16 Figure 21: China s swimwear segmentation Ex-factory revenue (RMBmn) 3, 2,5 2, 1,5 1, Mid-to-high end CAGR (21-215F): Mid-to-high end: 25.6% Low-to-mid end: 17.% 1, , , ,756 Source: Company data and Frost and Sullivan Low-to-mid end 832 2,56 1,42 2,353 2,627 1, F 212F 213F 214F 215F Figure 22: Swimwear market share (21) China s Swimwear Marker: Segmentation Share by Domestic Ex-factory Revenue, 21 Low-to-mid end 74.2% Mid-to-high end 25.8% Source: Company data and Frost and Sullivan China s Swimwear Marker: Top Mid-to-high End Brands Market Shares by Domestic Ex-factory Revenue, 21 Others 41.5% Hosa 23.5% Speedo 8.8% Heatwave 6.4% Arena 1.3% Zoke 9.5% Figure 23: China s fitness wear segmentation Ex-factory revenue (RMBmn) 4, 3,5 3, 2,5 2, 1,5 1, 5 CAGR (21-215F): Mid-to-high end: 25.9% Low-to-mid end: 28.2% Mid-to-high end 1, , ,952 Source: Company data and Frost and Sullivan Low-to-mid end 725 2, ,157 1,118 3, F 212F 213F 214F 215F Figure 24: Fitness wear market share (21) China s Fitness Wear Marker: Segmentation Share by Domestic Ex-factory Revenue, 21 Low-to-mid end 76.2% Mid-to-high end 23.8% Source: Company data and Frost and Sullivan China s Fitness Wear Marker: Top Mid-to-high End Brands Market Shares by Domestic Ex-factory Revenue, 21 Others 54.7% Hosa 19.4% Zoke 9.% Sunyoga 8.8% Pieryoga 8.1% Figure 25: China s sports underwear segmentation Ex-factory revenue (RMBmn) 1, CAGR (21-215F): Mid-to-high end: 28.1% Low-to-mid end: 24.% Mid-to-high end Source: Company data and Frost and Sullivan F 212F 213F 214F 215F 155 Low-to-mid end Figure 26: Sports underwear market share (21) Low-to-mid end 27.2% China s Sports Underwear Marker: Segmentation Share by Domestic Ex-factory Revenue, 21 Mid-to-high end 72.8% Others 41.% Source: Company data and Frost and Sullivan China s Sports Underwear Marker: Top Mid-to-high End Brands Market Shares by Domestic Ex-factory Revenue, 21 Aimer 2.1% LYY 2.9% Hosa 42.7% Adidas 6.8% Nike 4.5% 16

17 FY12 net profit increased 21.2% yoy Company Background. China s leading indoor sportswear brand. Hosa Int l Ltd. (Hosa) is China s leading indoor sportswear brand in China. The Group designs and manufactures a wide range of indoor sportswear products at the mid-high end under the brand name Hosa. In 21, the Group had the largest market share in indoor sportswear, which includes swimwear (6.1%), fitness wear (4.6%) and sports underwear (31.1%). However, if only the mid-high end indoor sportswear universe is considered, the leadership of Hosa can be much more evident with market share of 23.5%, 19.4% and 42.7% for swimwear, fitness wear and sports underwear respectively. Figure 27: Shareholding Structure (As of 25Apr213) Ho Born Investment* (BVI) Well Born Industrial* (BVI) Zehui Investment (BVI) Yixin Investment (BVI) & Mr. Zeng Shaoxiong Public Shareholders 53.9% 7.5% 7.5% 6.1% 25.% Hosa International (22 HK) * Mr. Shi Hongliu, Chairman of Hosa, and Mr. Shi Hongyan, Vice Chairman & CEO of Hosa, are the beneficial owners of Ho Born Investment and Well Born Industrial with majority shareholding. Source: Company data, HKEX and Core Pacific-Yamaichi Table 11: Directors and senior management Name & Title Mr. Shi Hongliu Chairman and Executive Director Mr. Shi Hongyan Vice chairman, CEO and Executive Director Mr. Zeng Shaoxiong Executive Director Mr. Zhao Yan Executive Director Mr. Lai Ho Man, Dickson CFO and Company Secretary Source: Company data and Core Pacific-Yamaichi Profile Aged 47, is the founder of the Hosa brand. He was appointed as the chairman and executive Director of the Company on 2 September 21. Mr. Shi has over 27 years of experience in the apparel industry and is primarily responsible for the corporate strategic planning and overall business development of the Group. Aged 44, was appointed as the Vice Chairman, CEO and Executive Director of the Company on 2 September 21. Mr. Shi Hongyan has over 2 years of experience in the apparel industry and is primarily responsible for developing and implementing operation plans, and monitoring the overall manufacturing activities of the Group. Aged 46, was appointed as an executive Director on 2 September 21. Mr. Zeng has over 14 years of experience in investment and finance and is primarily responsible for corporate investment and financing activities of the Group. Aged 44, was appointed as an Executive Director on 2 September 21. He has over 2 years of experience in corporate management and is primarily responsible for implementing and overseeing development plans, administration, human resources, management and information systems of the Group. Aged 39, was appointed as the CFO and Company Secretary of the Company on 14 February 211. Mr. Lai has over 15 years of experience in finance and accounting business and is primarily responsible for the overall financial affairs of the Group. 17

18 Income Statement Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Revenue ,4.1 1, ,374.9 Swimwear Fitness wear Sports underwear Accessories COGS (262.6) (333.9) (43.1) (486.) (563.2) Gross profit Other Income (net) SG&A (12.4) (161.9) (171.5) (22.9) (23.8) EBITDA EBIT Net Financial Income (Cost) (1.5) (.6) (.8) (1.4) (.8) Contribution from subsidiary..... Profit before tax Income tax (41.9) (47.9) (19.9) (13.) (148.5) Minority interests..... Net Income EPS (RMB) DPS (RMB) Cash Flow Statement Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Operating Cash Flow Pre-tax profit Depre & amort Change in wc 9.2 (56.) (67.1) (17.5) 12.9 Others (21.8) (73.4) (139.9) (165.4) (189.8) Investing Cash Flow 36.3 (85.9) (35.1) (45.) (9.1) Free Cash Flow Financing Cash Flow 26.2 (75.2) (161.1) (123.2) (189.8) Equity financing Chg in bank loans (98.8) 86.3 (46.5) 14.7 (28.2) Dividend (151.7) (161.5) (114.6) (137.9) (161.6) Others (31.9).... Net cash flow Ending cash ,96.1 Time deposits & pledged cash..... Balance Sheet Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Total Assets 1,43.8 1, , ,648. 1,861.9 Current Assets ,23.2 1, ,56.3 1,718.9 Cash & equivalents ,96.1 Inventory Accounts receivable Others Noncurrent Assets PP&E Intangible assets associates & JCEs..... Others Total Liabilities Current Liabilities Accounts payable Bank borrowings (ST) Others Non Current Liabilities Bank borrowings (LT) Others..... Total Equity ,52.1 1, , ,642.7 Shareholders' equity ,52.1 1, , ,642.7 Minority interests..... Net cash / (debt) ,69.1 Working capital ,88.7 1,29.6 1,499.8 Total invested capital Key Ratios Year to Dec (%) FY11 FY12 FY13F FY14F FY15F Momentum Revenue EBITDA EBIT Net profit (.4) EPS (8.) (.4) Margin Gross profit EBITDA EBIT Net profit Return ROIC ROE ROA Financial risk Net gearing Net Cash Net Cash Net Cash Net Cash Net Cash Interest coverage (x) Liquidity Current ratio (X) Quick ratio (X) Others Effective tax rate Payout ratio I, Felix Kwok, the author of this research report and the license holder of Type 4 Regulated Activity registered with Hong Kong Securities and Futures Commission ( SFC ), hereby declare that all the views expressed in this research report accurately reflect my personal views and that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Besides, I confirm that (a) neither I nor my associates serve as an officer of any of the Hong Kong listed companies covered in this research report; and (b) neither I nor my associates have any financial interests in the stock(s) covered in this research report. 18