Peak Sport Products Co

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05 January 2011Asia Pacific/ChinaEquity Research

Footwear (Specialty Softlines) / MARKET WEIGHT

Peak Sport Products Co. (1968.HK / 1968 HK)

ASSUMING COVERAGE

Good value for money ■ We assume coverage of Peak with an OUTPERFORM. We like Peak�s

strong growth and cheap valuation. We believe it�s a good value-for-money stock in the domestic sporting goods sector.

■ Focus on lower-tier cities and distinct market positioning. Peak has a clear focus on the mass-market sporting goods market in lower-tier cities in China and has a distinct market positioning in basketball. It is the official marketing partner of the popular NBA in China. We expect the company to deliver strong growth in the next two to three years, with a 20.6% net earnings CAGR over 2010-12E, given its good track record from store expansion, SSSG and trade fair results (24.5% for 1H11).

■ Our HK$6.4 target price implies 24% potential upside. Peak is trading at 8.3x 2012E P/E (or 9.8x 2011E P/E), implying only 0.4x PEG, despite its strong growth. We believe the recent weak stock price performance was mainly due to weak market sentiment after Li Ning�s poor results from 2Q11 trade fair and the industry concern about retail channel stuffing. Though these are still company specific, we assign a conservative target 2012E PEG of 0.50x to Peak with reference to the industry average. Our target price of HK$6.4 implies 24% potential upside and 10.3x 2012E P/E.

■ Rerating catalysts and investment risks. We believe rerating for Peak may come with consistently good operating results, removal of investment overhangs or narrowing of forward P/E discount to well-established sporting goods companies such as Anta. The major overhangs for Peak include working capital management (such as long trade receivable days), under coverage of the IT system in retail outlets and low R&D spend ratio.

Share price performance

2468

Oct-09 Feb-10 Jun-10 Oct-1080

130

180Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI China Free index which closed at 66.48 on 03/01/11 On 03/01/11 the spot exchange rate was HK$7.77/US$1

Performance Over 1M 3M 12M Absolute (%) -6.9 -9.5 20.0 Relative (%) -4.8 -10.2 17.0

Financial and valuation metrics

Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 3,094.9 3,977.5 4,879.1 5,916.0EBITDA (Rmb mn) 723.6 950.3 1,185.2 1,450.4EBIT (Rmb mn) 708.6 924.0 1,149.6 1,405.6Net income (Rmb mn) 628.3 766.8 938.6 1,117.7EPS (CS adj.) (Rmb) 0.36 0.36 0.44 0.53Change from previous EPS (%) n.a. -6.3 -8.3 -11.1Consensus EPS (Rmb) n.a. 0.38 0.48 0.58EPS growth (%) 44.1 0.8 22.0 19.2P/E (x) 12.1 12.0 9.8 8.3Dividend yield (%) 2.0 3.4 4.0 4.7EV/EBITDA (x) 10.7 7.4 5.8 4.3P/B (x) 2.5 2.7 2.3 2.0ROE 33.3 23.9 25.4 26.0Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (03 Jan 11, HK$) 5.16 Target price (HK$) (from 8.00) 6.40¹ Chg to TP (%) 24.0 Market cap. (Rmb mn) 9,182 (US$ 1,393) Enterprise value (Rmb mn) 7,042 Number of shares (mn) 2,097.90 Free float (%) 31.02 52-week price range 6.86 - 4.30 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts Eva Wang

852 2101 7365 [email protected]

Kenny Lau, CFA 852 2101 7914

[email protected]

05 January 2011

Peak Sport Products Co. (1968.HK / 1968 HK) 2

Focus charts Figure 1: Revenue breakdown (1H10) Figure 2: High exposure to 3rd-tier cities

Footw ear46%

Apparel52%

Accessories2%

1-tier cities5%

2-tier cities21%

3-tier cities74%

Source: Company data Source: Company data, as of 1H CY10A

Figure 3: Strong store expansion Figure 4: Strong trade fair results

1,320

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5,179

6,206

7,2568,056

8,856

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2005 2006 2007 2008 2009 2010E 2011E 2012E

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1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: P/E band Figure 6: Forward P/E discount to Anta

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Peak's forw ard PE discount to Anta Av erage


05 January 2011


Good value for money We assume coverage of Peak with an OUTPERFORM. Peak has a clear focus on the mass-market sporting goods market in lower-tier cities in China and has a distinct market positioning in basketball. It is the official marketing partner of the NBA in China. We expect the company to deliver strong growth in the next two to three years, with a 20.6% net earnings CAGR over 2010-12E. We like Peak�s strong growth and cheap valuation (trading at 8.3x 2012E P/E only), but, given its investment risks (especially long trade receivable days) and weak market sentiment, we assign a conservative target 2012E PEG of 0.50x with reference to the industry average. Our target price of HK$6.4 implies 24% potential upside and 10.3x 2012E P/E.

Focus on lower-tier cities; strong growth potential Peak has a very clear focus on China�s mass-market sporting goods market, especially in the lower-tier cities. Over 70% of its retail outlets are located in the 3-tier cities and counties. We believe the company would benefit from the fast income growth and the on-going urbanization process in China accordingly. We like the company�s good track record in new store opening, store size increases, strong SSSG and good results from trade fairs, which we believe would continue to support the company's long-term development.

Clear market positioning to improve brand image Peak is the official marketing partner of the NBA in China, which has the rights and license to use the NBA logo on advertisements of the Peak brand. The company has 12 endorsed NBA players, far ahead of its domestic peers. We believe Peak�s clear focus on the popular basketball sport has derived unique brand value for Peak, especially with tailor-made footwear and stylish sportswear products. The company�s effective marketing and distribution strategies will not only improve its brand equity, but also help enhance its retail network penetration and control.

Investment risks We believe the key investment risks for Peak include working capital management, under-coverage of the IT system in retail outlets and low research & development (R&D) spend ratio. The company�s cash conversion cycle was 69 days as of 1H10, and its trade receivable days were 74 days (at the high end in the peer group range), which is our biggest concern. Although the company has been improving its working capital management, we believe it would take time for Peak to reduce the credit period for its distributors, thereby posing potential risks to its account receivables.

Attractive valuation We expect Peak to achieve a 13.5% SSSG and a 20.6% net earnings CAGR over 2010-12E. Peak is trading at 8.3x 2012E P/E (or 9.8x 2011E P/E), implying only 0.4x PEG. We believe the recent weak stock price performance was mainly due to weak market sentiment after Li Ning�s poor results from 2Q11 trade fair and the industry concern about retail channel stuffing. However, these issues are still company specific. We still like Peak�s growth story and clear marketing and customer focus.

We assume coverage of Peak with an OUTPERFORM, given its growth potential and cheap valuation. We assign a target 2012E PEG of 0.50x with reference to the industry average of the HK-listed China sporting goods companies (Figure 28). Our target price of HK$6.4 implies 24% potential upside and 10.3x 2012E P/E. We�re reluctant to give it an aggressive valuation unless the major overhangs (such as account receivable concern) are removed and market sentiment improves. We believe rerating catalyst may come from consistently good operating results, removal of investment overhangs or narrowing of forward P/E discount to well-established sporting goods companies such as Anta.

We like Peak�s strong growth and cheap valuation; assume coverage with an OUTPERFORM

Conservative target price set at 0.5x target PEG only

Focus on lower-tier cities in China; beneficiary of urbanisation; good growth record and potential

Focus on basketball: the official marketing partner of the NBA in China

Investment overhang: 74 trade receivable days: in 1H10 � potential risk, should anything in distribution channel go wrong

Cheap valuation at 8.3x 2012E P/E only

Potential rerating catalysts: consistent good operating results; removal of risk overhang; narrow P/E discount to established peers such as Anta

05 January 2011


Financial summary Figure 7: Peak � income statement Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E - Footwear 571 1,029 1,397 1,849 2,311 2,888 - Apparel 386 961 1,606 2,019 2,436 2,869 - Accessories 58 52 92 110 132 158 Turnover 1,015 2,042 3,095 3,977 4,879 5,916 YoY change (%) 62.6 101.3 51.6 28.5 22.7 21.3 Cost of sales -709 -1,374 -1,935 -2,475 -3,032 -3,670 Gross profit 306 668 1,160 1,502 1,847 2,246 Gross margin (%) 30.2 32.7 37.5 37.8 37.9 38.0 Other revenue 1 0 7 11 20 24 Selling & distribution expenses -116 -181 -380 -477 -585 -710 Admin expenses -15 -85 -78 -111 -132 -154 Operating profit 176 403 709 924 1,150 1,406 Operating margin (%) 17.3 19.7 22.9 23.2 23.6 23.8 D&A 3 9 15 26 36 45 EBITDA 179 412 724 950 1,185 1,450 EBITDA margin (%) 17.6 20.2 23.4 23.9 24.3 24.5 Other net (loss)/income 2 4 3 0 0 0 Finance income 1 3 5 8 24 27 Finance costs -2 -7 -15 0 0 0 FX losses & fair value gains -1 8 1 3 0 0 Profit before taxation 176 411 703 935 1,173 1,433 Taxation -10 -35 -75 -168 -235 -315 Profit for the period 166 376 628 767 939 1,118 Minority interests 0 0 0 0 0 0 Profit to equity shareholders 166 376 628 767 939 1,118 YoY change (%) 93.2 126.5 67.1 22.0 22.4 19.1 Net margin (%) 16.4 18.4 20.3 19.3 19.2 18.9 Diluted EPS (Rmb) 0.11 0.25 0.36 0.36 0.44 0.53 YoY change (%) 93.2 126.5 44.1 0.8 22.0 19.2 Ordinary DPS (HK$) 0.00 0.00 0.12 0.20 0.24 0.28 Payout ratio (%) 0.0 0.0 35.1 47.2 46.1 45.2

Source: Company data, Credit Suisse estimates

Figure 8: Peak � operating performance Year-end 31 Dec 2007 2008 2009 2010E 2011E 2012E Sales volume (mn) Footwear 7.2 11.7 16.5 22.3 27.8 34.8 Apparel 7.1 18.3 30.1 36.0 41.4 48.8 YoY change (%) Footwear 53.2 62.5 41.0 35.0 25.0 25.0 Apparel 73.2 157.7 64.5 19.7 14.9 17.8 ASP Footwear (Rmb/pair) 79.2 87.9 84.7 83.0 83.0 83.0 Apparel (Rmb/piece) 54.4 52.5 53.4 56.0 58.8 58.8 YoY change (%) Footwear 1.6 11.0 -3.7 -2.0 0.0 0.0 Apparel -12.6 -3.5 1.6 5.0 5.0 0.0 No. of retail outlets 3,661 5,179 6,206 7,256 8,056 8,856 Same-store sales growth n.a. 19.2% 13.5% 13.5% 13.5% 13.5%


05 January 2011


Focus on lower-tier cities and strong growth potential Peak has a very clear focus on China�s mass-market sporting goods market, especially in lower-tier cities. Over 70% of its retail outlets are located in 3rd-tier cities and counties. We believe the company should benefit from the fast income growth and the ongoing urbanisation in China accordingly. We like the company�s good track record in new store opening, store size increases, strong SSSG and good results from trade fairs, which we believe should continue to support the company's long-term development.

Clear market focus in lower-tier cities We believe Peak will continue to benefit from the fast income growth and the on-going urbanisation process in China, with its clear focus on development in lower-tier cities. We expect its retail outlet exposure structure to remain relatively stable, with over 90% stores located in 2nd-tier and 3rd-tier cities.

Beneficiary of income growth and urbanisation

We believe Peak is well positioned to benefit from China�s strong economic growth, especially the fast growing household income and the ongoing urbanisation. Its good value-for-money products will help it gain penetration in China�s mass-market sporting goods market, especially in lower-tier cities and rural areas. We believe the total size of its targeted market is still expanding, as Credit Suisse expects China�s urbanisation to increase at 0.9% per year in the next five years.

Figure 9: Share of wage income and consumption on the rise

Figure 10: China�s urbanisation ratio

30

40

50

60

70

80

1992 1995 1998 2001 2004 2007 2010E 2013E

% o

f GDP

Wage Other Income Priv ate Consumption

31.435.8

40.545.1

49.553.6

57.260.5

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10

20

30

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1995 2000 2005 2010E 2015E 2020E 2025E 2030E

urban polulation as % of total polulation

Source: CEIC, Credit Suisse Research Source: CEIC, Credit Suisse Research

Market differentiation and focus on lower tier cities

Currently, about 74% of Peak�s retail outlets are located in 3rd-tier cities, while its exposure to 1st-tier cities is only 5%. We believe the company should benefit from its unique expansion strategy in lower-tier cities, with its mid-level priced products (e.g., footwear retail price at Rmb200-300/pair, 10-20% below Anta�s and 20-40% below Li Ning�s). This clear market differentiation and product offering would help Peak to effectively improve penetration in its targeted market.

Focus on lower-tier cities in China; beneficiary of urbanisation; good growth record and potential

Over 90% stores located in 2nd-tier and 3rd-tier cities

Target market size expanding, with urbanisation to average 0.9% over the next five years in China

Targets lower-end of the mid-market, with ASP 10-20% below Anta�s and 20-40% below Li Ning�s

05 January 2011


Figure 11: Revenue breakdown (1H10) Figure 12: High exposure to 3rd-tier cities

China89%

Ov erseas11%

1-tier cities

5%

2-tier cities21%

3-tier cities74%

Source: Company data Source: Company data, as of 1H CY10A

Strong growth momentum Peak has shown a good track record of new store opening, store size increases, strong SSSG and good growth from trade fairs, which are the key drivers of its growth story. We expect the company to continue this trend, with 2,600 new stores to open in 2010-12E, while at the same time increase its production capacity to support its fast retail outlet expansion and enhance supply chain control.

Fast expansion driven by new stores and store size increases

Peak has experienced fast store expansion in the past few years and it targets to maintain a reasonable new store opening pace in the future. It targets to open 1,000 new stores in 2010 and achieved 59% of the target in 1H10, with total store numbers rising to 6,796 by the end of June 2010. We believe the company could exceed its full-year target in 2H10. We expect the company to open 800 new stores per year in the next two years.

Figure 13: Strong store expansion Figure 14: Small store size = room for growth

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Li Ning Anta Dongx iang 361Degrees

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The company targets to increase its average store size from 74 sq m to 80 sq m over the long term. Though its store size is smaller than that of peers, we believe this is probably due to its exposure to lower-tier cities, which also implies large room for growth in the future. We expect the company to take a prudent strategy in store size expansion.

Good track record and stable growth potential

1,000 new store opening target for 2010 will likely be exceeded

Average store size on the rise; targets 80 sq m

05 January 2011


Strong sales order growth and SSSG

Peak has achieved rapid SSSG YTD and its trade fairs have achieved good results with 24-35% order growth for 2010-1H 2011. The company has guided 15% SSSG for 4Q10, according to local news reports, implying it is well on track to achieve 12-15% SSSG target for 2010.

Figure 15: Decent SSSG Figure 16: Strong trade fair results

17.0%18.0%

15.3%

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3Q09 4Q09 1Q10 2Q10 3Q10

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1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Source: Company data Source: Company data

Production capacity increases to support growth potential

Peak targets to increase its production capacity to support its fast retail outlets expansion and to enhance supply chain control (including cost control and operation control). Peak�s self production ratio was 35.4% for footwear and 22.6% for apparel in 1H10. It targets to increase footwear production capacity by 80% to 15.7 mn pairs in 2010-13E and apparel production capacity by 95% to 18.7 mn pieces in 2010-12E. We believe this should help maintain the company�s profitability in an environment of rising raw material costs and an overall industry trend of higher wholesale discounts.

Good SSSG YTD; 24.5% YoY trade order growth for 1H11.

Footwear production capacity to +80% in 2010-13E and apparel +95% in 2010-12E

05 January 2011


Clear market positioning to improve brand image Peak is the official marketing partner of the NBA in China, which has the rights and license to use the NBA logo on advertisements of the Peak brand. The company has 12 endorsed NBA players, far ahead of its domestic peers. We believe Peak�s clear focus on the popular basketball sport has derived unique brand value for Peak, especially with tailor-made footwear and stylish sports wear products. The company�s effective marketing and distribution strategies should not only improve its brand equity, but also help enhance its retail network penetration and control.

Focused sports resources Peak has been promoting its brand value mainly through its endorsement as the official marketing partner of the NBA in China and 12 NBA players. It also has partnership with other international basketball associations, such as FIBA and WNBA. Besides basketball, Peak is the official footwear and apparel partner of the WTA (Women�s Tennis Association) tour and has endorsed Olga Govortsova. We believe the company�s clear focus on the popular basketball sport in China has established its position in this specific area, while at the same time, the diversification into a few other sports area should help the company to benefit from well-leveraged sports resources.

Cooperation with NBA, the world�s most recognised basketball league

Figure 17: 12 endorsed NBA players as of 30 June 2010

Source: Company website

Clear sports activity focus; effective marketing and distribution strategies

Focus on basketball: the official marketing partner of the NBA in China

05 January 2011


Peak is the official marketing partner of the NBA in China, which has the rights and license to use the NBA logo on advertisements of the Peak brand. The company has the rights to display signage in home stadiums of the Houston Rockets (the most broadcast NBA team on CCTV) and the New Jersey Nets. We believe the company�s focus on the NBA, the world�s most recognised basketball league, has derived unique brand value for Peak, especially with tailor-made footwear and stylish sports wear products.

From basketball to other endorsements

Besides NBA, Peak has partnerships with other international basketball associations, such as FIBA and WNBA. It has successfully become one of the top three domestic brands for basketball shoes in China.

Besides basketball, Peak is the official footwear and apparel partner of the WTA (Women�s Tennis Association) tour and has endorsed Olga Govortsova.

Figure 18: Other sports promotion partners

Source: Company data

Effective marketing and distribution strategy We think Peak has executed some effective marketing and distribution strategies to improve its brand equity as well as retail penetration, including:

■ Leverage on professional sports image to improve brand value, but target on casual wear and lifestyle products as well (for example, footwear products include ~30% basketball shoes, 20%+ running shoes, 20%+ skateboard shoes and 20%+ casual shoes)

■ Diversification of marketing efforts (for example, A&P expenses are allocated as ~30% of total for sponsorships, ~40% for TV advertising and ~30% for internet, magazines and others)

■ More geographical segmentation and increase in the number of distributors to improve penetration in certain important markets (for example, the company has 36 regional distributors as of 1H10)

■ Increase ERP coverage from less than 20% in 1H10 to ~50% in two to three years, with most hardware expenses to be paid by retailers while Peak would be responsible for software and training

Multi-level cooperation with the NBA

�with diversification into tennis and other sports

Professional sports image + mass-market products

A&P accounted for 11.3% of revenue in 1H10

More than one distributor for more detailed market differentiation

05 January 2011


Investment risks We believe the key investment risks for Peak include working capital management, under-coverage of the IT system in retail outlets and low research & development (R&D) spend ratio.

Working capital control, especially trade receivables

We think one of the key risks facing Peak is working capital management during rapid expansion. The company�s cash conversion cycle was 69 days as of 1H10, and its trade receivable days were at the high end in the peer group range (Figure 20). Although the company has been improving its working capital management, we believe it would take time for Peak to reduce the credit period for its distributors, thereby posing potential risks to its account receivables.

Figure 19: Peak � working capital projection 2007 2008 2009 2010E 2011E 2012E Inventory turnover days 66.4 43.4 35.8 40.0 40.0 40.0 Trade receivable days 95.1 74.2 69.7 75.0 75.0 75.0 Trade payable days 129.8 79.2 42.4 45.0 45.0 45.0 Cash conversion days 31.7 38.4 63.0 70.0 70.0 70.0 Trade & other receivable days 143.5 126.8 129.3 134.2 134.1 134.3 Trade & other payable days 139.9 101.1 66.9 62.5 60.0 60.0 Blended cash conversion days 70.0 69.2 98.2 111.7 114.1 114.3


Figure 20: Trade receivable days � Peak at the high end Figure 21: R&D as % of sales � Peak at the low end

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Anta Dongx iang Li Ning Xtep Peak 361°

Trade & bills receiv able turnov er day s

2.9% 2.8%

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Anta Dongx iang Li Ning Xtep Peak 361°

R&D ex penses / sales

Source: Company data, Credit Suisse estimates, as of 1H2010, excluding prepayments and deposits

Source: Company data, Credit Suisse estimates, as of 1H2010

IT system instalment in retail outlets

As of August 2010, about 1,200 peak retail outlets were equipped with the ERP system, which is only 18% of its total number of outlets by 1H10. We appreciate the company�s efforts to improve its retail outlet ERP coverage to 50% in two to three years, however, the current low coverage ratio remains an overhang for the control of the distribution channel and the reaction to retailing environment changes.

Research & development spending

As of 1H10, Peak�s R&D spending accounted for only 0.5% of its sales revenue, at the low end of the peer group range (Figure 21). Although it may be due to the increased internal design capacity, we believe such a ratio is too low to be supportive of the company�s long-term development. We expect the company to put more efforts in new product designs to remain attractive to customers.

1H10 trade receivable days: 74 days � biggest risk, should anything in distribution channel go wrong

Less than 20% retail ERP coverage as of August 2010

R&D spend too low to support a sustainable development

05 January 2011


Attractive valuation We expect Peak to achieve a 13.5% SSSG and a 20.6% net earnings CAGR over 2010-12E. Peak is trading at 8.3x 2012E P/E (or 9.8x 2011E P/E), implying only 0.4x PEG. We believe the recent weak share price performance was mainly due to weak market sentiment after Li Ning�s poor results from 2Q11 trade fair and the industry concern about retail channel stuffing. We assume coverage of Peak with an OUTPERFORM on its growth potential and cheap valuation. We assign a target 2012E PEG of 0.50x with reference to industry average (Figure 28). Our target price of HK$6.4 implies 24% potential upside and 10.3x target 2012E P/E. We believe rerating catalysts may come from consistently good operating results, removal of investment overhangs or narrowing of the forward P/E discount to well-established sporting goods companies, such as Anta.

Key assumptions We expect Peak to achieve a 13.5% SSSG over 2010-12E (Figure 22).

Figure 22: Peak � SSSG assumptions Year-end 31 Dec 2008 2009 2010E 2011E 2012E Total store numbers 5,179 6,206 7,256 8,056 8,856 No. of same stores opened > 2 yrs 2,340 3,661 5,179 6,206 7,256 No. of new stores opened in 2yrs 2,839 2,545 2,077 1,850 1,600 Total store areas (sq m) 362,531 453,038 547,538 610,538 682,538 Area of same stores 140,000 240,000 362,531 453,038 547,538 Area of new stores 222,531 213,038 185,007 157,500 135,000 Sales per sq m (Rmb) For same stores 7,500 7,538 8,030 8,402 8,784 YoY 0.0% 0.5% 6.5% 4.6% 4.5% For new stores 3,311 4,748 3,614 3,781 3,953 % of same stores sales per sq m 44.1% 63.0% 45.0% 45.0% 45.0% Domestic sales revenue (Rmb mn) 1,787 2,821 3,580 4,402 5,343 Same stores at current year 1,050 1,809 2,911 3,806 4,810 New stores opened in 2 years 737 1,012 669 595 534 SSSG 19.2% 13.5% 13.5% 13.5% 13.5%


Figure 23: Peak � sales volumes and ASPs Year-end 31 Dec 2007 2008 2009 2010E 2011E 2012ESales volumes (mn) Footwear 7.2 11.7 16.5 22.3 27.8 34.8Apparel 7.1 18.3 30.1 36.0 41.4 48.8YoY change (%) Footwear 53.2 62.5 41.0 35.0 25.0 25.0Apparel 73.2 157.7 64.5 19.7 14.9 17.8 ASP Footwear (Rmb/pair) 79.2 87.9 84.7 83.0 83.0 83.0Apparel (Rmb/piece) 54.4 52.5 53.4 56.0 58.8 58.8YoY change (%) Footwear 1.6 11.0 -3.7 -2.0 0.0 0.0Apparel -12.6 -3.5 1.6 5.0 5.0 0.0


Target price HK$6.4, based on 0.5x target PEG, implying 10.3x target 2012E P/E

13.5% SSSG estimates

05 January 2011


We expect the company to achieve a slightly better gross margin in future, given the increase in its production capacity. At the same time, we�re reluctant to forecast any aggressive improvement in its profitability due to the overall competitive retail environment and the company�s target to maintain a stable wholesale discount (wholesale prices 38% of retail prices).

Figure 24: Peak � revenue and gross margin by product Year-end 31 Dec 2007 2008 2009 2010E 2011E 2012ETurnover (Rmb mn) Footwear 570.6 1,028.9 1,397.2 1,848.5 2,310.7 2,888.3Apparel 386.4 961.5 1,606.0 2,018.9 2,436.4 2,869.2Accessories 57.7 51.7 91.7 110.0 132.0 158.4Total 1,014.6 2,042.0 3,094.9 3,977.5 4,879.1 5,916.0% of Total Footwear 56% 50% 45% 46% 47% 49%Apparel 38% 47% 52% 51% 50% 48%Accessories 6% 3% 3% 3% 3% 3%Total 100% 100% 100% 100% 100% 100%YoY change Footwear 56% 80% 36% 32% 25% 25%Apparel 51% 149% 67% 26% 21% 18%Accessories n.a. -10% 77% 20% 20% 20%Total 63% 101% 52% 29% 23% 21%Gross margin Footwear 30.3% 32.1% 37.8% 37.8% 37.9% 38.0%Apparel 30.0% 33.0% 37.2% 37.8% 37.9% 38.0%Accessories 30.0% 38.1% 36.7% 36.5% 36.5% 36.5%Total 30.2% 32.7% 37.5% 37.8% 37.9% 38.0%


We expect Peak to achieve a net earnings CAGR of 20.6% over 2010-12E. Our effective tax rate assumption is on the rise for the next few years on the expiry of tax holidays.

Figure 25: Peak � ratio analysis (%) 2007 2008 2009 2010E 2011E 2012E Gross margin 30.2 32.7 37.5 37.8 37.9 38.0 EBITDA margin 17.6 20.2 23.4 23.9 24.3 24.5 Operating margin 17.3 19.7 22.9 23.2 23.6 23.8 Net margin 16.4 18.4 20.3 19.3 19.2 18.9 S&D / sales 11.5 8.9 12.3 12.0 12.0 12.0 Admin / sales 1.4 4.1 2.5 2.8 2.7 2.6 Revenue growth 62.6 101.3 51.6 28.5 22.7 21.3 Gross profit growth 72.7 118.3 73.7 29.5 23.0 21.6 EBITDA growth 57.6 130.5 75.8 31.3 24.7 22.4 Operating profit growth 58.1 129.3 76.0 30.4 24.4 22.3 Net earnings growth 93.2 126.5 67.1 22.0 22.4 19.1 Effective tax rate 5.6 8.5 10.6 18.0 20.0 22.0 Net cash to shareholder equity 23.0 27.9 47.1 62.5 58.3 62.2 ROE 62.0 64.2 33.3 23.9 25.4 26.0 ROA 18.9 26.2 18.5 19.0 20.4 20.3

Note: *Net cash / shareholders' equity; ** Net cash and fixed deposit / shareholders' equity Source: Company data, Credit Suisse estimates

More revenue contribution from higher-margin apparel products

Forecast a 20.6% three-year net earnings CAGR

05 January 2011


Valuation Peak is trading at 8.3x 2012E P/E (or 9.8x 2011E P/E), implying only 0.4x PEG. We believe the recent weak share price performance was mainly due to the market concern about the overall industry inventory build-up at retailers, especially after Li Ning announced poor results of the 2Q11 trade fair last month.

We don�t think Peak is immune, should there be a serious industry-wide inventory build-up at the distributor and retailer levels. However, the issues are still company specific. We like Peak�s growth story and clear market focus, but we�re reluctant to give it an aggressive valuation unless the major overhangs (such as account receivable concern) are removed and market sentiment improves.

We assume coverage of Peak with an OUTPERFORM on its growth potential and cheap valuation. We assign a target 2012E PEG of 0.50x with reference to the industry average for the HK-listed China sporting goods companies (Figure 28). Our target price of HK$6.4 implies 24% potential upside and 10.3x target 2012E P/E.

We believe rerating catalysts may come from continued positive operating results (such as SSSG and trade fair results), removal of investment overhangs or narrowing of the forward P/E discount to well-established sporting goods companies, such as Anta.

Figure 26: Peak�s P/E band Figure 27: Peak�s forward P/E discount to Anta

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Cheap valuation at 8.3x 2012E P/E only

Strong growth but overhang remains

Target price HK$6.4, based on 0.5x target PEG, implying 10.3x target 2012E P/E

Potential rerating catalysts

05 January 2011


Figure 28: Sporting goods brands valuation comparison Mkt PEG Growth cap Price CS P/E (x) EPS growth (%)# CY10-12 growth (%)# FY Company Ticker US$ mn Local rating CY10E CY11E CY12E CY10E CY11E CY12E CY11E P/E CY12E P/E CY10-12E endChina sports � HK listed Peak * 1968.HK 1,393 5.16 O 12.3 9.8 8.3 1.2 22.3 18.9 0.48 0.40 20.6 12/2009Anta * 2020.HK 3,954 12.32 O 17.5 14.3 12.3 21.9 19.7 16.7 0.79 0.67 18.2 12/2009Li Ning 2331.HK 2,260 16.68 Restricted 13.7 12.6 11.0 17.7 6.7 14.7 1.18 1.03 10.7 12/2009Dongxiang 3818.HK 2,487 3.41 Not rated 10.6 9.7 8.6 8.1 7.5 12.3 0.98 0.87 9.9 12/2009Xtep 1368.HK 1,551 5.54 Not rated 13.6 11.0 9.1 19.2 21.1 20.5 0.53 0.44 20.8 12/2009361 Degrees 1361.HK 1,499 5.63 Not rated 10.4 8.8 7.3 8.8 15.4 20.4 0.49 0.41 17.9 06/2010Meike 953.HK 274 1.78 Not rated 11.1 6.6 4.5 14.8 64.3 47.8 0.12 0.08 55.8 12/2009Flyke 1998.HK 175 1.70 Not rated 7.4 5.6 3.9 19.0 30.0 42.3 0.15 0.11 36.0 12/2009Average 12.1 9.8 8.1 13.8 23.4 24.2 0.59 0.50 23.7 China sports � other listed Exceed EDS.OQ 205 8.34 Not rated 5.0 4.4 3.9 4.4 13.6 13.6 0.33 0.29 13.6 12/2009China Hongxing CHXS.SI 370 0.17 Not rated 18.8 17.3 15.7 -3.0 8.7 10.0 1.85 1.68 9.3 12/2009K-Star KSTR.KL 39 0.45 Not rated 1.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 12/2009Average 11.9 10.8 9.8 0.7 11.1 11.8 1.09 0.98 11.5 Int�l Sportswear Nike * NKE 41,140 86.09 O 20.6 18.1 15.8 8.7 13.6 14.6 1.29 1.12 14.1 05/2010Adidas * ADSGn.F 13,653 48.94 O 18.1 15.9 13.8 41.6 13.8 15.6 1.08 0.93 14.7 12/2009Puma PUMG.DE 4,959 246.55 Not rated 16.0 14.2 12.8 80.9 12.9 11.3 1.17 1.05 12.1 12/2009Average 18.2 16.1 14.1 43.8 13.5 13.8 1.18 1.04 13.6 Average of total 12.6 11.4 9.8 18.7 19.2 19.9 0.80 0.70 19.5Maximum 20.6 18.1 15.8 80.9 64.3 47.8 1.85 1.68 55.8Minimum 1.1 4.4 3.9 -3.0 6.7 10.0 0.12 0.08 9.3

Note: # Bloomberg consensus except for * Anta, Peak, Nike and Adidas; O = OUTPERFORM; N = NEUTRAL. Source: Company data, Credit Suisse estimates, Bloomberg, prices are as of market close on 3 Jan 2011.

05 January 2011


Appendix I � financial statements Figure 29: Peak � income statement Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E - Footwear 571 1,029 1,397 1,849 2,311 2,888 - Apparel 386 961 1,606 2,019 2,436 2,869 - Accessories 58 52 92 110 132 158 Turnover 1,015 2,042 3,095 3,977 4,879 5,916 YoY change (%) 62.6 101.3 51.6 28.5 22.7 21.3 Cost of sales -709 -1,374 -1,935 -2,475 -3,032 -3,670 Gross profit 306 668 1,160 1,502 1,847 2,246 Gross margin (%) 30.2 32.7 37.5 37.8 37.9 38.0 Other revenue 1 0 7 11 20 24 Selling & distribution expenses -116 -181 -380 -477 -585 -710 Admin expenses -15 -85 -78 -111 -132 -154 Operating profit 176 403 709 924 1,150 1,406 Operating margin (%) 17.3 19.7 22.9 23.2 23.6 23.8 D&A 3 9 15 26 36 45 EBITDA 179 412 724 950 1,185 1,450 EBITDA margin (%) 17.6 20.2 23.4 23.9 24.3 24.5 Other net (loss)/income 2 4 3 0 0 0 Finance income 1 3 5 8 24 27 Finance costs -2 -7 -15 0 0 0 FX losses & fair value gains -1 8 1 3 0 0 Profit before taxation 176 411 703 935 1,173 1,433 Taxation -10 -35 -75 -168 -235 -315 Profit for the period 166 376 628 767 939 1,118 Minority interests 0 0 0 0 0 0 Profit to equity shareholders 166 376 628 767 939 1,118 YoY change (%) 93.2 126.5 67.1 22.0 22.4 19.1 Net margin (%) 16.4 18.4 20.3 19.3 19.2 18.9 Diluted EPS (Rmb) 0.11 0.25 0.36 0.36 0.44 0.53 YoY change (%) 93.2 126.5 44.1 0.8 22.0 19.2 Ordinary DPS (HK$) 0.00 0.00 0.12 0.20 0.24 0.28 Payout ratio (%) 0.0 0.0 35.1 47.2 46.1 45.2


05 January 2011


Figure 30: Peak � balance sheet Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E Current assets Cash & cash equivalents 102 418 1,413 2,140 2,315 2,878 Fixed deposits >=3mths 0 0 519 131 131 131 Trade & other receivables 448 507 864 956 1,272 1,429 Inventories 158 169 210 332 332 472 Pledged deposits &others 67 70 55 55 55 55 Total current assets 775 1,165 3,062 3,614 4,106 4,966 Non-current assets PP&E 25 137 244 311 418 466 Construction in progress 47 95 61 66 21 26 Lease prepayments 20 20 16 29 28 28 Intangible assets 9 10 10 10 10 9 Deferred tax assets 0 8 6 9 11 13 Total non-current assets 101 269 338 424 488 542 Total assets 876 1,435 3,400 4,039 4,594 5,508 Current liabilities Trade & other payables 391 370 339 508 489 718 Amounts due to a related party 68 53 0 0 0 0 Bank loans 11 132 0 0 0 0 Current taxation 8 13 27 67 94 126 Total current liabilities 478 568 367 575 583 844 Non-current liabilities Bank loans 0 70 0 0 0 0 Deferred tax liabilities 0 23 31 40 40 40 Total non-current liabilities 0 93 31 40 40 40 Equity Share capital 0 13 18 18 19 19 Reserves 398 761 2,984 3,405 3,952 4,606 Total shareholder equity 398 774 3,002 3,424 3,971 4,625 Total liabilities and equity 876 1,435 3,400 4,039 4,594 5,508


05 January 2011


Figure 31: Peak – cash flow statement Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E Pre-tax profit 176 411 703 935 1,173 1,433 Taxes paid -24 -14 -51 -122 -210 -285 Interest income -1 -3 -5 -8 -24 -27 Depreciation & amortisation 3 9 15 26 36 45 Others -3 -6 -2 1 5 5 Operating cash flow before wc chg 151 396 660 831 980 1,170 Net change in working capital -157 -93 -428 -46 -335 -68 Others 17 -26 21 0 0 0 Operating cash flow 12 277 254 786 645 1,102 PP&E & CIP capex -92 -170 -89 -113 -100 -100 Disposal gains / losses 2 0 7 3 3 3 Decrease in investments 0 9 0 0 0 0 Interest received 1 3 5 8 24 27 Change in fixed deposits 0 0 -519 388 0 0 Others -48 26 -2 3 0 0 Investing cash flow -137 -135 -604 289 -73 -70 Dividends paid 0 0 -113 -349 -396 -469 Share capital 46 0 1,714 0 0 0 Net new borrowings -4 191 -202 0 0 0 Others 134 -15 -53 0 0 0 Financing cash flow 177 176 1,347 -349 -396 -469 Net change in cash 51 319 997 726 175 563 Cash at Start 51 102 418 1,413 2,140 2,315 FX impact 0 -3 -2 0 0 0 Cash and bank balances 102 418 1,413 2,140 2,315 2,878


05 January 2011


Appendix II � industry comparison Figure 32: YTD same store sales growth SSSG 1Q10 2Q10 3Q10Li Ning 5.0% 4.2% 4.0%Anta 10.0% 10.0% High single digitDongxiang 4.0% 0.4% 4.7%Xtep 0-5% 7-8% ~10%Peak 15.3% 12.5% 13.0%361 Degrees 16.0% 16.9% 16.2%


Figure 33: Sales order growth from trade fairs Order book growth 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11Li Ning 12% 15% 20% 20% 5.4% -6.0%Anta 18% 16% 18% 25% 23% 21%.Dongxiang 16% 22% 22% 23% 12% 2.8%Xtep 22% 20% 23% 25% 23% 25%Peak 30% 35% 34% 31% 25% 24%361 Degrees 22% 22% 23% 31% 20% n.a.


Figure 34: No. of stores - major domestic brands 2006 2007 2008 2009 1H10Li Ning 4,297 5,233 6,245 7,249 7,478Anta 4,108 4,716 5,667 6,591 7,052361 Degrees 1,391 3,126 5,667 6,693 6,927Peak 2,340 3,661 5,179 6,206 6,796Xtep 1,568 4,380 5,056 6,103 6,579Dongxiang 1,138 1,945 2,808 3,511 3,820Total 16,848 25,068 32,630 38,362 38,652


Figure 35: Product mix % of total Footwear Apparel AccessoryLi Ning 42% 47% 11%Anta 50% 47% 3%Dongxiang 21% 75% 4%Xtep 43% 55% 2%Peak 46% 52% 2%361 Degrees 35% 63% 2%

Source: Company data, as of 1H10

Figure 36: Average store size

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05 January 2011


Companies Mentioned (Price as of 03 Jan 11) 361 Degrees (1361.HK, HK$5.63, NOT RATED) Adidas AG (ADSGn.F, Eu48.94, OUTPERFORM, TP Eu55.00, MARKET WEIGHT) Anta Sports Products Limited (2020.HK, HK$12.32, OUTPERFORM [V], TP HK$17.40) China Dongxiang (3818.HK, HK$3.41, NOT RATED) China Hongxing Sports Limited (CHXS.SI, S$.17, NOT RATED) Exceed (EDS.OQ, $8.34, NOT RATED) Flyke (1998.HK, HK$1.70, NOT RATED) K-Star (KSTR.KL, RM0.45, NOT RATED) Li Ning Co Ltd (2331.HK, HK$16.68, RESTRICTED [V]) Meike (0953.HK, HK$1.78, NOT RATED) Nike Inc. (NKE, $86.09, OUTPERFORM, TP $100.00) Peak Sport Products Co.Ltd. (1968.HK, HK$5.16, OUTPERFORM, TP HK$6.40) Puma (PUMG.DE, Eu246.55, NOT RATED) Xtep (1368.HK, HK$5.54, NOT RATED)

Disclosure Appendix Important Global Disclosures Eva Wang & Kenny Lau, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 1968.HK 1968.HK Closing

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Initiation/ Date (HK$) (HK$) Rating Assumption 9-Nov-09 3.6 5 O X 15-Jan-10 5.25 6.3 19-Mar-10 5.95 6.4 4-May-10 6.48 8

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts� stock ratings are defined as follows: Outperform (O): The stock�s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock�s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock�s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock�s absolute total return potential to its current share price and (2) the relative attractiveness of a stock�s total return potential within an analyst�s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock�s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock�s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts� perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts� perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

05 January 2011


Analysts� coverage universe weightings are distinct from analysts� stock ratings and are based on the expected performance of an analyst�s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst�s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse�s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (61% banking clients) Neutral/Hold* 41% (60% banking clients) Underperform/Sell* 11% (52% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse�s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (1968.HK) Method: Our target price of HK$6.4 for Peak is based on 0.50x price/earnings to earnings growth ratio (PEG), which is the industry average for all Hong Kong-listed China sporting goods companies, and a 20.6% 2010-12E earnings per share (EPS) CAGR. Risks: Risks to our target price of HK$6.4 for Peak include channel stuffing or inventory build-up at the retail level, weak working capital management, insufficient control over the distributors (including lower IT system coverage) and rising raw material costs. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1968.HK) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: ADSGn.F, PUMG.DE. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. � Eva Wang, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. � Kenny Lau, CFA, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

05 January 2011Asia Pacific/ChinaEquity Research

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