[Into the Stocks] You Play Golf, You Wear BTS Sneakers... The Charm of Fila Holdings

[Asia Economy Reporter Lee Seon-ae] The golf industry is booming due to the influx of younger generations, leading to an optimistic outlook for investments in related stocks. This boom in the golf industry is not limited to the domestic market but is a global trend. This is why FILA Holdings, a leading domestic golf industry-related company with a balanced proportion of domestic and overseas business, is considered attractive. In particular, the 'FILA' brand loyalty, which features BTS as its model, is expected to strengthen further, driving performance growth.

FILA Holdings' core business is the domestic and international sales of the FILA brand and royalty collection. In addition to its core business, it holds a 52% stake in Acushnet. Acushnet, listed on the New York Stock Exchange, became a subsidiary of FILA Holdings in November 2016. It operates various global golf brands such as 'Titleist' and 'FootJoy.' As of the end of May, the value of Acushnet's shares is approximately KRW 2.29 trillion, accounting for 68.7% of FILA Holdings' total value. When combining golf-related sales within FILA Holdings, they account for 64.7% of the total.

◆ Target Price Exceeds KRW 70,000 = As of the 25th, most domestic securities firms have set FILA Holdings' target price above KRW 70,000.

Researcher Shim Ji-hyun of Ebest Investment & Securities raised FILA Holdings' target price to KRW 73,000, estimating an upside potential of about 34.4% compared to the current price (closing price on the 24th). He stated, "With strong domestic and international golf demand and the effect of new products, the consolidated performance impact of Acushnet is expected to be significant. Additionally, the core business is expected to see steady annual growth due to high growth in China, the U.S. and Europe entering a full recovery phase in the second half, and expansion of new domestic performance line products and Keds. If new product lines in the domestic market become visible, upward revisions of earnings estimates are also possible."

Korea Investment & Securities resumed coverage with a target price of KRW 70,000. Since the company operates in multiple regions, they used a Sum of the Parts (SoTP) valuation, applying target price-earnings ratios (PER) to regional NOPLAT. For the domestic market, they applied a 9x PER, which is a 20% discount to the average domestic brand company. For the U.S., a 15x PER was applied, reflecting a 50% discount to the global sportswear average. For China, a 20x PER was applied, which is a 50% discount to Anta Sports' 12-month forward PER of 40x, considering fees, equity method, and dividend income from the joint venture with Anta Sports (Full Prospect). The Acushnet stake was reflected at 49.84% of market capitalization with a 30% discount rate.

Researcher Park Ha-kyung of Korea Investment & Securities said, "The target price of KRW 70,000 corresponds to a 12-month forward PER of 14x, which is 45% lower than the peak valuation of 25x during the disruptor craze in 2018. Although there is no hit item to replace the disruptor yet, stock price gains are expected this year as brand rebuilding efforts are actively introduced amid consumer improvement."

◆ Stock is Undervalued = Securities firms view FILA Holdings' stock as undervalued. While FILA Holdings' operating profit is expected to grow at an average annual rate of 22% over the next two years, the current stock price is only about 10x on a 12-month forward PER basis, nearly a 70% discount compared to the global sportswear average of 32x.

This reflects investors' concerns about FILA brand positioning in the domestic and U.S. markets. In Korea, FILA consumers are concentrated in their teens and twenties, resulting in a low average selling price (ASP). In the U.S., there is no follow-up hit item to the 2018 disruptor. Therefore, brand strength in the domestic and U.S. markets is expected to determine the stock's direction.

As one of the few global brand companies in Korea, FILA is expected to regain competitiveness this year through recovery in the apparel market and brand rebuilding efforts. To strengthen the FILA brand, increasing ASP and expanding the consumer base are essential, and brand value reestablishment will begin in earnest, led by lineup expansion this year. First, the FILA sneaker lineup, which was previously focused on lifestyle, has been expanded to performance (functional) this year. Performance sneakers include running shoes, cycling shoes, and tennis shoes, and are priced higher than lifestyle lines. ASP will rise and the customer age group will expand through lineup expansion in the domestic and U.S. markets.

Researcher Park Ha-kyung of Korea Investment & Securities emphasized, "We believe strategies such as category expansion and brand collaborations are possible in the future. As brand strength improves and earnings increase simultaneously, increasing weight in the mid-to-long term is valid."

◆ Earnings Recovery Expected This Year = Korea Investment & Securities forecasts FILA Holdings' sales at KRW 3.45 trillion (+10% YoY) and operating profit at KRW 467 billion (+37% YoY, operating margin 13.5%) this year. This is based on the expectation that Acushnet's profit contribution will increase due to the golf industry's boom, alongside a gradual recovery in FILA's core business. Acushnet's operating profit is expected to reach KRW 264 billion (+61% YoY), and FILA's operating profit KRW 203 billion (+15% YoY). FILA's operating margin is expected to remain at 14.8%, similar to last year. Profitability is conservatively estimated due to expanded marketing and increased share of low-price channels in the U.S. Domestic sales are forecast at KRW 582 billion (+10% YoY). Among this, royalties from China are expected to reach KRW 52 billion (+12% YoY) due to recovery in Chinese consumption and high growth in the sportswear market, strengthening the FILA brand. Pure domestic sales are expected to increase 10% YoY to KRW 530 billion. Recovery in domestic consumption, expansion of new lineups such as FILA performance line, and brand expansion including Keds will contribute. U.S. sales and royalty revenue are forecast at KRW 581 billion (+15% YoY) and KRW 73 billion (+10% YoY), respectively. Researcher Park Ha-kyung said, "Although uncertainties from COVID-19 remain in Europe and Japan, which have a high royalty proportion, recovery is expected to accelerate in the second half."

Ebest Investment & Securities projects FILA Holdings' 2021 consolidated annual results at sales of KRW 3.6222 trillion (+15.8% YoY), operating profit of KRW 520 billion (+52.5% YoY), and operating margin of 14.4% (+3.5%p). Researcher Shim Ji-hyun explained, "China's consumption rebounded most proactively among global regions, and this trend is expected to continue through the second half. In the U.S. and Europe, recovery is expected to begin in the second half as vaccine distribution expands."

◆ FILA Brand Soars = The rising awareness of the FILA brand is a driving force behind the valuation increase of FILA Holdings. FILA Holdings sells shoes and apparel under the FILA brand in Korea and the U.S., and also collects global license royalties for the FILA brand.

Additionally, it collects 3% of sales as design fees from the Chinese corporation (Full Prospect) and recognizes equity method income for its 15% common stock stake. Therefore, brand awareness significantly impacts FILA Holdings' valuation. Improved performance means brand awareness is rising. Especially this year, with expected performance improvement, brand awareness is likely to increase, enabling a virtuous cycle by expanding product categories based on this.

Above all, in the Chinese business, continuous high growth is expected based on Anta Sports' sales capabilities, further strengthening brand value. Such performance improvement and brand awareness growth are key drivers of FILA Holdings' valuation increase.

Researcher Lee Sang-heon of Hi Investment & Securities said, "We raise the target price to KRW 70,000, expecting valuation rerating due to this year's performance improvement and brand awareness increase. In the first half, Acushnet and in the second half, reopening are expected to drive performance improvement, and valuation rerating is possible due to rising brand awareness."