Stronger demand recovery into 2021. We turn bullish on the sportswear sector on

secular trends such as increasing health consciousness among consumers and accelerated

DTC channel shifts by brands post COVID. Moreover, sports events are likely to restart in

2021. We expect the sector to recover from low-mid single-digit growth in 3Q20 to 8-10% growth in 4Q20, followed by growth of 20-25% in 2021 on a low base. While brands have sharply discounted their products to clear inventory and we expect discounts to be higher YoY into 2021 as industry inventory levels are 1-2 months higher than normal levels, we expect the market to overlook this, should growth improve sequentially.

Accelerated direct-to-channel (DTC) shift during COVID a positive for long-term margins. COVID has accelerated brands shift towards the DTC channel, particularly on the e-commerce platforms, and we expect this trend to continue. Nike expects a 50% DTC contribution in the future and Anta is transiting 2,100 stores to DTC. We estimate that well managed direct retail stores and e-commerce platforms should have a higher operating margin profit of 2-3 pp than the wholesale channel. As such, an increase in e-commerce contribution would be a long-term positive as (1) brands understand consumers better and can capture the constantly evolving trends; and (2) a margin expansion driver.

Prefer brands>OEM>retailer. We upgrade Li Ning and Anta to OUTPERFORM (from Neutral) as we turn more positive on sector recovery. Li Ning is our top pick, with an estimated highest earnings growth profile at 42% over the next two years, on strong sales momentum and margin expansion. We like Anta for Amer long-term potential and DTC channel shift despite near-term margin pressure. We view Shenzhou, rated OUTPERFORM, as a defensive play into the sector on market share gains. We maintain our NEUTRAL rating for Xtep and Topsports; Yue Yuen is rated UNDERPERFORM.