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Could the “Nike of China” Wreak Havoc on Nike, Adidas, and Under Armour?

China is a major growth market for Nike (NYSE: NKE), Adidas (OTC: ADDYY), and Under Armour (NYSE: UA) (NYSE: UAA). Nike's revenues from China grew 23% annually (on a constant currency basis) to $1.85 billion and accounted for 18% of its top line last quarter -- making it the company's fastest growing region.

Adidas' revenues in China rose 11% annually (in constant currency) to 2.09 billion euros ($2.33 billion) last quarter, making it the core growth engine of the Asia-Pacific business which generated a third of its sales. Under Armour also considers China to be a top market in its Asia-Pacific region, which grew its revenues 4% to $155 million last quarter -- or 11% of its top line.

Image source: Anta Sports.

Nike, Adidas, and UA all attract Chinese shoppers with brand recognition and high-profile celebrity endorsements. However, Anta Sports (OTC: ANPDF), a Chinese maker of footwear, athletic apparel, and accessories, has grown quickly in recent years and is now frequently referred to as the "Nike of China."

Could Anta's growth eventually throttle the growth of Nike, Adidas, and Under Armour in China? Let's take a closer look at its origins and expansion plans.

Understanding Anta's business

Anta was founded 26 years ago, but it didn't gain significant momentum until the Beijing Olympics in 2008, which boosted domestic interest in sportswear brands. Anta capitalized on that growing interest and went public in Hong Kong in 2007.

Anta acquired the trademark rights for Fila in China, Hong Kong, and Macao from Belle International in 2009. Fila subsequently became a major growth engine for Anta, and it continued growing faster than its namesake brand over the following decade.

It also expanded its brick-and-mortar footprint with Descente and Sprandi stores in China, as well as Kolon Sport and Kingkow stores across China, Hong Kong, and Macao. And it pulled NBA stars Kevin Garnett and Klay Thompson away from Adidas and Nike, respectively, with massive endorsement deals. Other Anta-endorsed players include Gordon Hayward and Rajon Rondo.

Anta also recently led a consortium which acquired Amer Sports in a deal which values the Finnish sporting goods company at 4.6 billion euros ($5.2 billion).

Image source: Anta Sports.

How fast is Anta growing?

Anta's growth decelerated slightly in the first half of 2019, but its revenue and earnings growth easily outpaces the growth of its Western rivals:

YOY growth

FY 2018

1H 2019

Revenue

44.4%

40.3%

Gross profit

54%

45%

Operating profit

42.9%

58.4%

Diluted EPS

30.7%

27.7%

Data source: Anta. YOY = year over year.

Most of its growth comes from Fila, which generated 80% revenue growth in the first half of 2019 and accounted for 44% of its top line. Its Anta revenues, which accounted for the rest, grew 18% -- which still outpaced the growth of Nike, Adidas, and UA.

FILA's products, which generally cost more than Anta products, had a gross margin of 71.5% last quarter, which was significantly higher than Anta's gross margin of 42.5%. Its total gross and operating margins expanded annually during the first half of 2019, which suggests that it has strong pricing power and firm control over its expenses.

Metric

1H 2018

1H 2019

Gross margin

54.3%

56.1%

Operating margin

25.5%

28.7%

Data source: Anta.

By comparison, Nike, Adidas, and UA posted gross margins of 44%, 52.1%, and 48.3%, respectively, in their latest quarters.

Looking ahead, Anta expects soft goods (like athletic apparel), direct-to-consumer channels (including e-commerce and brick-and-mortar stores), and rising income levels in China to fuel its long-term growth. It also expects Fila and Amer Sports -- which owns Wilson, Louisville Slugger, Arc'teryx, and other western brands -- to bolster its overseas growth.

The market leaders should keep an eye on Anta

Anta's stock already delivered a near-15 bagger return since its IPO, and the stock could head even higher over the next decade.

It's growing at a faster pace than its Western rivals, it operates at higher margins, and it's quickly gaining recognition as China's "national" sportswear brand. Even President Xi Jinping was photographed wearing Anta apparel -- which is noteworthy since most Chinese leaders don't wear clothing with visible corporate logos.

Anta's growth won't necessarily hurt Nike, Adidas, and Under Armour in China, since there could be plenty of room for these brands to flourish without trampling each other. However, investors in these Western footwear makers should realize that this resilient domestic competitor could cap their long-term gains.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.


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