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info@muddywatersresearch.com Director of Research: Carson C. Block

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ANTA Part 5: “Controlled Major Supplier and Another Fila Lie”

So far, we have focused on ANTA’s operating margin outperformance, presenting evidence that ANTA secretly controls its distributors and shifts costs to them. However, in this part, we focus on ANTA’s seemingly largest purported “third party” supplier, which is also a secretly controlled counterparty. We believe that ANTA shifts costs from its production entities onto this supplier. The supplier is owned by a proxy we mentioned in Part 1, Peng Qingqi. Mr. Peng is a senior ANTA employee. Once again, ANTA’s financials cannot be relied upon. By secretly exercising control of counterparties, ANTA keeps these entities outside of its integrated audit. We believe that without these controlled entities, ANTA’s financials would show materially lower margins, belying the notion that ANTA is a strong operator. The reality of ANTA is much less flattering than what it presents. In this report, we also reveal Peng Qingqi’s ownership of four online stores, including two called ANTA Ruidong and Jinjiang Dingdian. This revelation shows yet another bald-faced lie about ANTA’s operations, and reinforces that ANTA’s financials and Fila’s numbers cannot be relied upon. Secretly Controlled Significant Supplier In Part 1, we introduced the Peng brothers, Peng Qingyun （彭清云） and Peng Qingqi （彭清其). However, we only detailed Peng Qingyun’s involvement in Chairman Ding’s secret distributor management company, Yundong, and two of the “subsidiary” distributors.1 In this report, we show that his brother and ANTA employee, Peng Qingqi, owns ANTA’s largest purported third-party supplier, Henan Ruili Sporting Goods Co. Ltd. (河南锐力体育用品有限公司). Peng Qingqi beneficially owns 95% of Henan Ruili through Fujian Ruidong Co. Ltd. （福建省锐动有限公司). At the same time, he is the legal representative and general manager of ANTA consolidated companies Sprandi China and Xiamen Sprandi, each of which are 85% owned by ANTA. Peng Qingqi also has been a Vice President at ANTA Capital （福建安踏投资有限公司）, which is the founding families’ private investment business.2,3

1 Part 1, pp. 60-65. Peng Qingyun is the Legal Representative and Executive Director of Jinjiang Yundong, and is the majority shareholder of two purportedly independent distributors, Guiyang Ankai Sporting Goods Trading Co. (GY Ankai), 贵阳安凯体育用品贸易有限公司 (GY Ankai), and Shanghai Sijie Yuehe Sporting Goods (SH Sijie), 上海思捷悦合体育用品有限公司. 2 http://www.ycs.gov.cn/doc/2011/11/28/64650.shtml 3 ANTA Capital is privately held by the big five founders of Anta: Ding Shizhong, Ding Shijia, Lai Shixian, Wu Yonghua, and Wang Wenmo

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Peng’s holding company for Henan Ruili, Fujian Ruidong is not part of the Ruidong or “Reedo” group of companies ANTA lists as subsidiaries in its 2016 bond prospectus: Ruidong Sports, 锐动体育用品有限公司, Ruidong International,锐动国际有限公司, and Ruidong (Hong Kong) 锐动(香港)有限公司. 4 ANTA acquired the Ruidong Hong Kong company from Peng in March of 2016.5 The other two were newly established in the BVI.6 Based on Peng’s employment at the consolidated Sprandi subsidiaries of the ListCo, his sale of similarly named entities to ANTA, and his role in ANTA Capital, where he led an ANTA delegation to scout our new factory locations, Henan Ruili appears to be a captive, not an independent supplier.7 ANTA appears to be shifting costs from other production entities onto Henan Ruili. In the table below, the first three companies listed are Anta’s ListCo owned manufacturers. Over 2015-2017 their net profits were for the most part in the high 20% to mid 30% range (2016 was an exception for Xiamen ANTA Sports). Henan Ruili’s net margin approximated 2% during this time. According to media sources, industry net margins approximate 5%.8 Henan Ruili’s gross profit margins appear notably low (we were unable to obtain credit report data for the 2015 gross margin.) We believe the cost shifting could even include raw materials that are used by ANTA’s other production companies. Henan ANTA Sports is the trading company owned by the ListCo. We believe that Henan Ruili sells most, if not all, of its production to this trading company. We believe these two companies are closely intertwined because the trading company was formed three years after the shoe

4 ANTA2016 Bond Prospectus, p. 93. According to Hong Kong’s corporate registry, Ruidong Sports and Ruidong International are BVI companies and registered in Hong Kong as “registered non-Hong Kong companies.” In English, these are listed as or “Reedo”, such as Reedo Sports, Reedo International, and Reedo Hong Kong. See Appendix. 5 See Appendix for copy of HK share transfer record from Peng Qingqi to Reedo International Ltd. (BVI). 6 ANTA2016 Bond Prospectus, p. 93. 7 See also https://company.zhaopin.com/CC532625927.htm and http://www.lyqzgh.org/Item/Show.asp?m=1&d=3708 8 See https://www.chinanews.com/cj/2018/03-16/8469170.shtml and https://zhuanlan.zhihu.com/p/21386831

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manufacturer, and is registered at a location inside the industrial compound set up specifically for Henan Ruili’s shoe production. In comparing the gross margins of the trading company to Henan Ruili, it is even clearer that Henan Ruili’s margins are problematic.

Note that 2018 financials were unavailable in the credit reports accessed for Xiamen ANTA Sports, Xiamen ANTA Industrial, and Changting ANTA Sports Products Co. Henan Ruili appears to be ANTA’s largest purportedly third-party supplier. According to ANTA’s 2018 annual report, its largest supplier was 3.5% of purchases.9 Applying the 3.5% to ANTA’s RMB 11.4 billion 2018 cost of sales (which should be substantially all, but not exclusively purchases) equals ~RMB 400 million. According to Hunan Ruili’s Chinese credit report (shown below), the shoe manufacturer’s 2018 revenues were just over RMB 434 million, which slightly exceeds the RMB 400 million in purchases estimated from the largest supplier.

9 ANTA 2018 AR, p. 67

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Henan Ruili cannot be dismissed as a single anomalous operation. We strongly suspect there are other controlled suppliers that, combined with the controlled distributors, materially improve ANTA’s reported margins.

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Online Stores Peng Qingqi, again an ANTA employee, also owns ANTA and Fila brand online stores. This fact reveals yet another bald-faced lie about ANTA’s business, and once again reinforces that ANTA’s financials cannot be relied upon. Besides investing in shoe factories, Peng Qingqi’s company, Fujian Ruidong, is also operating several ANTA online stores, including “ANTA Ruidong” and “Jinjiang Dingdian” on Tmall. The latter of the two, “Jinjiang Dingdian”, is a 100%-owned subsidiary of Fujian Ruidong. Jinjiang Dingdian has one platform selling ANTA, and another selling Fila-branded sportswear. ANTA’s management credits the vast majority of core brand sales growth to online sales.10 Management projects that the e-commerce channel, its own self-operated e-commerce, will become 20% to 30% of the company’s total revenue.11 Without online sales, it is plausible that core brand sales would have been stagnant or even declined. While some outside distributors are permitted to engage in online sales, the company states that it runs its own “self-operated” online store with a dedicated in-house team for its ANTA products. In the prepared remarks made in the 2018 earnings call, ANTA Executive Director & Brand President, Jie Zhang stated clearly that:12

“…And for the overall business planning, we have our own team, in-house team for the e-commerce. In terms of the management of all the other aspects, we also continuously to consolidate. We believe in the e-commerce, in the future, it's going to be at least about 20%, 30% of the total revenue.”

- Jie Zheng, ANTA Executive Director & Brand President Fila has also benefitted from online sales. Like its retail operations, its online stores are also supposed to be self-run. In our interviews with former ANTA senior executives, we were informed that Fila is run by a separate team independent of the ANTA brand and channel management teams. Based on ANTA’s claim that Fila is an integrated, self-run operation, there is no reason for any outside parties to be running any official Fila online stores on any platforms. In December 2018, ANTA announced a new online store. The announcement provided the store’s Tmall web address and a general description that plainly states the online store is operated by Fujian Ruidong.13 When following the link to Tmall’s ANTA Ruidong Specialty Store’s landing page, the online store makes a special point to present itself as an “ANTA Group Self-Operated Specialty Store.”14 10 ANTA earnings calls FY2015-2018. For example: FY 2017 “In our channel, there is 1 important core, e-commerce.” 2016 1H, 2016-07-28: “ANTA Kids retails sales grew by over 30% year over year. E-commerce grew by over 50% y-o-y. The ANTA core brand’s growth is not very sales dependent because there’s actually shift of business to the e-commerce section.” 11 ANTA earnings call 2018 1H 12 ANTA earnings call 2018 1H 13 https://www.jenzone.cn/Mall/4331.html 14 https://antard.world.tmall.com/

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This “Anta Group Self-Operated” online store is clearly NOT being run by an “in-house team”, but by a private, non-ANTA company, owned by one of its employees. Through its subsidiary, Jinjiang Dingdian E-commerce, Fujian Ruidong has also owned and operated a Tmall online store since 2013. In addition to the Anta Tmall store, Jinjiang Dingdian ran a third ANTA online store run on JD.com.15 Below is Jinjiang Dingdian E-commerce’s 2013 and 2018 annual inspection reports on file with the SAIC list. They show Anta’s Tmall online store address as: https://antadd.tmall.com/.

15 https://mall.jd.com/index-62870.html

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Below is a recent screen shot of Jinjiang Dingdian E-commerce’s Anta Kids Tmall online store. Jinjiang Dingdian specifically markets itself as being an “Official Self-Operated Online Store.” Just as with the ANTA Ruidong online store above, ANTA does not own this online sales platform.

However, even more troubling was the discovery that Jinjiang Dingdian has also been selling Fila products online. Management has stated that Fila is a directly operated business. Even after our Part 3 forced ANTA to concede that 20% of its Fila sales are made to distributors, management has no good reason for allowing a non-ListCo entity, let alone an ANTA employee, to run a private Fila online store on a major e-commerce platform.

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A 2017 report conducted by the city of Hangzhou, which was inspecting the legitimacy of brands sold online, reported that Jinjiang Dingdian is also operating a Fila store on Tmall.16

We checked Tmall for the store name listed in the report above and found that the Fila Dingdian store is still operating.17 According to the Tmall’s Fila Dingdian home page, the store has been operating for 7 years.

The store was selling some products at normal retail price discounts of about 20% as well as with discounts of 30-40% off and higher.

16 www.hzscjg.gov.cn/web/Resource/News/sjadmin/2018/10/2017年轻纺产品总表.xlsx 17 https://feiledd.tmall.com/?spm=a312a.7700718.0.0.f4566c4eMHpxwM

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The case of the Peng brothers’ complicated related party relationships reveals the extent to which the “left-hand, right-hand” cancer has metastasized throughout all aspects of ANTA’s operations. ANTA’s financials and Fila’s numbers cannot be relied upon.

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Appendix:

Fujian Ruidong Basic Registration Information & Reedo Trademark Registration

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Appendix:

Henan Ruili Basic Registration Information, Job Ad, & Location

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Page 14 of 20

Appendix:

Henan Anta Sports Products Co., SAIC Basic Registration Information

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Appendix:

The New “Reedo”/Ruidong Companies Listed in the 2016 Bond Prospectus

Company Acquisitions & Additions Made to the Financial Reports: 2016 Months Jan-June

The Ruidong companies listed above also the same as the those included in the list of principle subsidiaries in the 2016 AR, where they are listed under the English names REEDO (Hong Kong) Limited, REEDO International Limited (BVI/HK) and Reedo Sports, REEDO Sports Products Limited (BVI/HK).18 The names are very similar, but not identical and the registration and ownership show they are completely different. The similarity of their names is not a coincidence. Peng Qingqi established Reedo Hong Kong and sold it to the newly established Reedo International (BVI) in March 2016.

Below: Image from the Hong Kong Corporations Registry Showing the Share Transfer

18 ANTA2016 AR, pp. 128-131

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In the corporate structure Reedo now owns Sprandi, which employees Peng Qingqi, who in turn owns the real Fujian Ruidong. Fujian Ruidong owns the China trademark for the name, “Reedo”.19 See below. 19 Fujian Ruidong applied for the China trademark for “Reedo” in 2007 and received the mark’s registration in 2010.

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Below: The On-line Hong Kong Corporate Registrations for the three Reedo Companies

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Below: The Anta 2018 corporate structure below shows Sprandi held by Reedo BVI, as a JV that is 85% owned by ANTA.

Moreover, as can been seen in the SAIC file for Fujian Ruidong (福建省锐动有限公司), it also operated under two previous names, the first of which, Jinjiang Yuandongli 晋江原动力 translates into English as “Motive Force Import Export Co.”, was used at the time of registration and changed after a few months. Motive Force is also the name of the ANTA ListCo BVI company at the time of the IPO (see prospectus pg. 20, et alia) and which later also produced two notable Fila subsidiaries, Motive Force Singapore and Motive Force E-commerce (HK).

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Appendix:

Additional Connections between Ruidong, Dingdian, the ListCo and the “Group”

1. In Part I we produced the Quanzhou Provident Fund registrations for two “former” ANTA employees who now own Kunming Anzhi. Therein we demonstrated that both Zheng Jiayuan and Yao Qingdi were former employees of ANTA(China), a member of the ListCo, and active managers in their network of controlled subsidiaries. However, besides just working for ANTA(China) they both are listed as presently working for Peng Qingqi, with Zheng Jiayuan working at Jinjiang Dingdian E-commerce and Yao Qingdi at Fujian Ruidong.

Quanzhou City Housing Provident Fund Online Records20

2. Peng Qingqi is the 95% owner of Fujian Ruidong. The other 5% is held by Zhang Chang （张昌）. In addition to being involved with Fujian Ruidong, Zhang Chang is also a listed as a legal representative, executive director, and/or supervisor in a number of other ANTA ListCo companies. Zhang Chang’s appointment at these 7 ListCo subsidiaries establishes his status as a trusted manager of the company. Company Position Henan ANTA Material Supply Ltd. Supervisor Henan ANTA Sports Products Ltd. Manager Xiamen ANTAE-commerce Co., Ltd. Supervisor Chanting ANTA Sports Products Co., Ltd. Legal Rep, Executive Director, GM Chenfeng (Fujian) Material Supply Co., Ltd. Supervisor Ningbo Qunli Fashion Co., Ltd. Supervisor Shanghai Yaosheng Industrial Development Co., Ltd. Legal Rep, General Manager

His position, holding just a tiny stake in Fujian Ruidong, is in keeping with the management model described in Part I, wherein Chairman Ding is able to oversee and therefore exert control by use of a trusted proxy.

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