Description

Background
Fila Holdings is a company with a esoteric background and structure. For starters, it is a Korean domiciled company, listed in Korea, but owns the 110 years old Italian sportswear brand Fila. The company is ~25% owned by its founder Gene Yoon and his son Kevin Yoon. To understand the valuation context and how the company got to where it is today, we need to go through Gene's entrepreneurial story.

In the 80s Gene was working as a sourcing agent exporting Korean manufactured good to the US. During his business trips he came across Fila branded apparel in the US and had the idea of sourcing shoes in Korea under the Fila brand to sell in the US. He went to Fila's Italian headquarter as well as Fila's US licensee at the time, and was able to convinced them of the idea. After having success exporting Fila shoes to the US, and seeing the Korean economy's growth and the rising middleclass wealth, he developed the conviction that a foreign brand like Fila will be increasingly in demand in Korea. He again went to Fila's headquarter and was able to convince them of the idea, and he was made Fila's Head of Korea and with skin in the game as he had to invest his own money to own 10% of Fila Korea. Gene was proven right, as Fila became wildly successful in Korea and Gene was paid handsomely for it as a Fila employee (at one point he was the highest income tax payer in Korea). Fila however soon got itself into trouble, as it over-extended itself financially, and was acquired by distressed PE firm Cerberus Capital in 2003. With Fila on the ropes, Gene was able to buy Fila Korea from Fila in an Management Buyout. As Fila Korea continues to grow and Fila continues to struggle, Fila Korea ended up buying and owning the global Fila brand in 2007, establishing Fila Holdings as it exists today.

Fila has also found wild success in China, firmly establishing itself as the 3rd foreign sportswear brand behind Nike and Adidas. Fila Holdings has two stream of exposure to the China business: 1) it owns 15% of the company that operates the Fila brand in China (the JV name is "Full Prospect"). Anta Sports, the largest domestic sportswear company in China, acquired the other 85% in 2009 and has since taken the Fila brand to new heights in China. 2) Fila Holdings takes 3% revenue royalty of Fila in China.

The third piece of Fila Holdings today is its 50% stake in Acushnet, which houses top tier golf brands such as Titleist and Footjoy. In the early 2010s the golf business was pretty out of favor - declining interest in the sport from younger demographics and Tiger Woods' retirement/subsequent issues further dampen interest in the sport. Gene/Fila however saw this as an opportunity as it see potential for sport to reinvigorate itself as well as the growth that's already happening in Asia markets (mainly China and Korea). Fila teamed up with several PE firms and bought Acushnet from Fortune Brands in an LBO carve-out. The consortium IPOed Acushnet in 2016, and Fila turned ~$565m of investment into a holding that's worth $1.85bn today. Acushnet has been previously written-up at VIC, so for the sake of brevity I will not add too much about the business here, other than say my opinion is it is not overvalued and has significant opportunity to continue to grow.

Fila Korea and Fila USA is directly-operated business of Fila Holdings. Global presence for the Fila brand is through licensees with Fila Holdings taking a revenue royalty.

Investment Thesis
Because of its Korean listing and the domestic oriented shareholder base, the market focuses its attention mostly on Fila's Korea business and to some extend the US business. Fila Korea and Fila USA are both currently suffering from post-COVID related shut down/inventory issues, as well as the company is going through a brand repositioning in these two markets that's hurting results in the short term (closing down lower value distribution points to raise brand positioning, taking more control of e-commerce), but is expected to pay off in the long term.  The China business also is under a cloud of uncertainty as China continues to deal with COVID through rolling lockdowns.

The over-focus on Fila Korea/USA have caused the market to missed the significant value that's embedded in 1) the China business; 2) Acushnet; 3) the global Fila brand royalty which is growing. Each of Acushnet or Fila China is probably worth Fila Holdings current market cap. The core Fila business (Fila Korea, Fila USA, the global brand royalty) is just icing on the cake.

Fila Holdings have demonstrated improved shareholder friendliness and corporate governance as it transitions into a global brand company. They started paying a respectable dividend last year at 30% payout (dividend up 20x last 2 years), and have communicated target to get to 50% payout along with share buybacks.

The Yoon family have recently increased their holdings in Fla Holdings through open market purchases (going from 21.5% to 26%) at around W30,000 stock price.

Valuation
SOTP approach is required here to get a sense of value. I generally value the core Fila business at 12x NOPAT, which I feel is a conservative multiple and huge discount to global sportswear brands, but somewhat justified as Fila brand is still going through a reinvigoration that's not proven out yet. For the China business (revenue royalty and 15% of Full Prospect earnings), I use a higher 15x multiple but again I feel that's not the best case multiple as Anta Sports trades at 25x and Fila China is roughly ~50% of their business. Acushnet I just used market value for simplicity sake. That shakes out to a share value of ~W90,000 per share or ~3x current share price.

Fila Korea NOPAT W41bn @ 12x = W495bn (W8,141/shr)
Fila USA NOPAT W26bn @ 12x = W315bn (W5,188/shr)
Fila Global Royalty NOPAT W53bn @ 12x = W632bn (W10,392/shr)
China Royalty NOPAT W52bn @ 15x = W773bn (W12,712/shr)
Full Prospect 15% NOPAT W62bn @ 15x = W927bn (W15,254/shr)
Acushnet @ market value = W2,405bn (W39,556/shr)
Net Debt/Others = W76bn (-W1,252/shr)
Total = W5,471bn (W89,991/shr)

Catalyst

Completion of channel restructuring/brand repositioning in Korea/USA in 2023.
Fila China normalizing from COVID-related shutdown
Continue increase in payout in both dividends and buybacks as communicated in their medium-term target.
Upstreaming capital from Acushnet through dividends and share buybacks (Fila has been selling into the buybacks) to further increase its own payout.