Investment positives

We initiate coverage on China Sports Industry Group (China Sports) with a NEUTRAL rating and a target price of Rmb12.88 (60x 2023e P/E).

Why a NEUTRAL rating?

The sports industry will generate estimated revenue of Rmb5trn by 2025; policy tailwinds drive sector expansion. We believe the development of sports is good for China and Chinese people. The sports industry’s contribution to economic growth has grown recently to become a significant driver of the economy. In the sports development strategy of the 14th Five-Year Plan (FYP), China seeks to expand its sports industry to Rmb5trn as of 2025 (vs. Rmb3trn at present) with sector growth contributing 2% of GDP and Rmb2.8trn from consumer spending.

SOE background: China Sports is the only A-share stock with the General Administration of Sport of China as a holding company. We believe the development of China’s sports industry needs government support. We expect the shareholder’s rich resources in the sports industry to fuel the long-term growth of the firm’s sports business.

China Sports’ presence in the sports industry’s core value chain builds a competitive advantage. The firm covers multiple businesses, including sports events, sports communication, education and training, sports lottery, offline sports room platform, online digital technology platform, brand operation, capital operation, standard certification, research and consulting, and sports and real estate. Its businesses create synergies, fueling transitions and upgrades, in our opinion. The firm will also benefit from the growth of the sports industry.

Concerns over earnings fluctuations. China’s sports industry is in its infancy and we think it will take time for companies to benefit from the reforms of the sports industry. The firm hasn’t built solid barriers to entry in subsegments, in our view. COVID-19’s impact on the offline sports business hasn’t disappeared. We think regulations on the real estate and lottery ticket industries will also affect the firm’s earnings.

How do we differ from the market　　We think strict regulations over the lottery ticket industry bring high uncertainties to the sports industry’s earnings. We focus more on the development of China Sports’ other sports business and we are more confident about the development of its sports business in the medium and long term.

Potential catalysts: As the Beijing 2022 Olympic Winter Games nears, the investment value of the sports sector may emerge.

Valuation and recommendation

We estimate 2021, 2022, and 2023 EPS at Rmb0.028, Rmb0.095, and Rmb0.215, with a CAGR of 179%. Given the fluctuations in the firm’s earnings in the near term, we assign 60x 2023e P/E, implying a market cap of Rmb12.4bn and a TP of Rmb12.88 with 7.4% downside potential. We initiate our coverage with a NEUTRAL rating.

Risks

COVID-19 deteriorates; business expansion disappoints due to changes in regulatory policies; changes in the management; regulations on lottery ticket and real estate industries tighten.