Now 6, 2015 ACTION BUY PH cure | Investment Fund Nike Inc, (NKE) Price: $131.78 Price Target: $140.00 A Equity Research Impressive Qi performance, Ample room for growth . OW Recommendation ‘We are resuming coverage of Nike with a Buy rating and Dec 206 target price of $140. We believe Nike's unique comparative advantages and its strong brand equity is the source for the sustainable growth in the future. As a result, we ‘expect revenue and earnings expectation to continue to trend upward, and we view the shares as attractive at current levels. Analysis © Nike produced strong Q1 EPS, which grew 23% to $1.34 despite significant FX headwinds. EPS growth was driven by strong topline growth and effective financial management aeross all levers of the business. Q.1 reported revenue for NIKE, Inc, increased 5% and grew 14% on a currency-neutral basis together with gross margin expanded 90 basis points to 47.5%. + Demand for the Nike products continued to be strong and healthy across kkey categories. Worldwide future orders grew 17% on a currency neutral basis. All geographies grew double digits except emerging markets, which Brew 6%, Especially, demand in China was extremely impressive a5 future: orders grew 27% despite its macroeconomic volatility. Valuation ‘Our Dec 2016 price target of $140 reflect a 27x multiple on our CYI7E EPS of $5.18 in neutral currency basis and is based on the assessrnent of DCF and P/E model. (MIKE, Ing, (NKE: NKE US) ‘202A 213A 2014A 205A 2016 20176 068 063 O86 109 1344 Q2 (Nov) 051 057 059 078 0.86 a3 (Feb) 061 073 076 089 1.03 4 (tay) 060 076 078 096 100 - ny 243° 269° 298 3.70 423° 4.79 o 241° (293° 336 406 451 5.18 Bloomberg ePsFv(S) 2.47267 296 3.55 Sources: Company Dala, Bloomberg, Queen Mary Students estimation. 478Now 6, 2015 NIKE tne. (NKE) Table of Contents Investment Thesis ...nsnsnnnnentinintnninin recast ‘Company Overview. Product Analyis ‘Geographic Analyls.. Drivers af Grawth noon snus tnsitrnmeman neni Technology Partnership Wooeren (a thet in suiniintiiscnirniietiingi canna ainingsaucaispnpicinall E-Commette & DIC. iene Industry Overview.evnnnnnernnnnnn eset nerpninnpnr imo renall Financial Analysis & Outlook : ttt tc Valuation occ sna nnn nani ssn 36 ‘Technical Analysis & QutlOOk ..:..sriisiiessrtniiniesn asnaacisncanitenna nein A®, RS caicaicibitlin iE aaa eM Gaal ean Appendix 1: DCF Model 0 ics i aeNov, 2015 NIKE tne. (NKEP Investment The We are vesuihing couerage of NIKE with a Buy rating and Dec 2016 target price of $140, Nike is currently trade at 29.22 times our calendar 2016 EPS estimate. We believe Nike's price will increase in the further based on potential earnings upside over the next three years. The likely earnings im future are derived fram sustainable high-single-digit top line, potential upside of gross margin and share repurchases. ‘Our Dec 2016 price target of $140 reflect a 27x multiple on our CYI7E EPS of $5.18 in neutral currency basis. We fank Nike's brand the best-in-class among other competitars based on its lirgest market capital and huge market shares in big market including US and Chin For Nike, infiovation has been key to the company’s first-mover advantage antl to: the sustainable growth in the future. By integrating mew technologies across. Products and multiple dimensions, Nike is able to earn higher premium on footwear and apparel (pricing power with Free, Flywire and Luna integrated technology), which reflects higher gross margin in Q1 result. Moreover, we are impressed with the success of Nike's unique strategy - “Category Offense”, 2 one-to-one relationship with customers through the lens of their favorite sports, driving growth inal key categories, from Sportswear, Running to Basketball, We contend that this unique approach to customer is 3 comparative advantage of Nike, providing Increased long-teren profit potential, andl enabling Nike to expand growth into a large and relatively untapped total availabie market opportunity. Nike reporteda strong financial result for its QL ended August 31, 2025. Diluted EPS raised 23% due to broad-based revenue growth, gross margin expansion, selling and administrative expense leverage, alower effective tax rate and a lower average share count. We believe this Q1 results clearly demonstrate Nike's ability to Coritinue to dtive sustainable, profitable growth despite intensive competition fram peers recently.Nov 6, 2015 NIKE Ine. (NKE} ‘Company Overview Company History Nike, Inc. is an American multinational corporation that is engaged in the design, development, manufacturing and worldwide marketing and sales of footwear, apparel, equipment, accessories and services. Today, Nike is the world's largest suppliers of athletic shoes and apparel. It majorly offers products ia Running, Basketball, Football, Men and Women's Training, Action Sports, Sportswear and Golf, Management The reputable managernent team gives crédibility. ‘Nike today has 62/600 employees worldwide; including retail and gart-time employees. Management considers its relationship with employees to’be excellent. The Board and the Advisory Board are strong, Philip H. Knight, Chairman of the Board of Directors and Mark G. Parker, the President and Chief Executive Officer have worked together since 1970s. Under CEO Mark Parker's lead, shares of Nike have risen 46% in the past year. Nike has rewarded Mr Parker $20 million worth of stock as ah incentive. Donald W. Blair, Executive Vice Presidant and Chief Financial Officer has retired from NIKE and succeeded by Andrew Campion, previous Senior Vice President, Finance, Strategy and investor Relations for NIKE, Inc. The team work closely together and cantinue to drive profitable growth in Nike's business worldwide. Tien Cook, ChieF Executive Officer of Apple Ine, has joint ahd becorhe the Leader of the Compensation Cammittee of the Baard of Direetors of NIKE, Ine. since 2005. Mr Cook leads the team and helped to build! a Nike-Apply elationship since 2005,Now 6, 2015 NIKE Inc. (NKE} Product Analysis Product overview: Nike markets its products under its own brand, as well as Nike Golf, Nike Pro, Nike+, Air Max, Air Jordan, Nike Blazers, Air Force 1, Nike Dunk, Foamposite, Nike Skateboarding and subsidiaries including Brand Jordan, Hurley and Converse that specialise in different sports. Jordan Brand offers athletic and casual footwear, apparel and accessories but predominantly focuses on Basketball. Sales and operating results for the Jordan Brand contribute to the Nike Grand Basketball category and to respective Nike Brand geographic operating segments. Hurley offers collection of action sports apparel for surfing, skateboarding, and snowboarding, and youth lifestyle epparel and accessories. its sales and operating results contribute to the Nike Brand's North America geographic operating segment only. Converse offers sneakers, apparel and accessories and its sales and operating result are reported ona stand-alone basis. Iroduct analy Footwear is the most important and thus leading revenue business across all regions, where sales of footwear increased 13% overall in 2015 fram 2014. Apparel, Nike's second leading revenue business, has a 6% increase in sales whereas Equipment a Global Brand Division declined 2% and 8% respectively. Exihibit 1: Nike Revenue by segments FY 2015 {Dollars in millions) Fiscal 2014 Nike Brand Revenue by: Footwear $16,208 13% Apparel 8,109 Equipment 1,670 Global Brand Divisions Global NIKE Brand Revenues 125, “Source: Company DateNov 6, 2015 NIKE Inc. (NKE} A full range of Nike's product across each segment generate a tremendous revenue, allowing Nike to maintain the world's largest supplier of athletic footwear and apparel, Exhibit 2: Nike’s product segments distribution to revenue in North America, Western Europe and Greater China FY2015 Source: Company Bato, 40R- 2035 yroduct competition: Foot Locker and DICK'S Sporting Goods (OKS) are Nike's largest wholesale partners. Fiscal 2015 showed weak performance of DICK’S Golf Galaxy stores, where comps declined by 2.9% and Nike faced challenges in the golf category. Onthe other hand, Jordan Spleth who is sponsored by Under Armour, has promoted the golf category significantly for Under Armour. However, Nike has recently released new golf products, including the Golf Aeroloft jacket and golf footwoar such as the Air Jordan VI Retro Golf Shae, aiming to boast sales in its golf category.Nov 6, 2015 NIKE Ine. (NKE} Geographic Analy: Exhibit 3: Nike revenue by region Source: omwony oto Developed geographies Infiscal2015, North America revenue increased 123 despite congestion at ports.on the West Coast of the United State, which affectod the company's supply chain. Sales in Western Europe continue to grow tremendously. Revenue grew 14 % in Qt in Western Europe and this growth is expected to expand due to. elevated executions at intersport, the new Oxford Street's location with JD Sports in London, and the expansion af the House of Hoos with Foot Locker in Berlin. For North America, Western Europe and Japan, Nike expects to generate average annual growth at a high single-digit rate over the next five years. Especially in particular for North America, Nike expects it to ceach $20 billion in revenue by the endof fiscal year 2020. The great China Despite the impact of the macroeconomic volatility in China, in Qi revenue increased 30%, EBIT grew 51%, and its future order incremented by 27%, almost double the estimated rate. This gain was driven by strong performance across all key categories and boosted by Nike's e-commerce in China.Now 6, 2015 NIKE Inc. (NKE} Throughout Q1, athletes like Michael Jordan, LeBron James, Kobe, Anthony Davis, and Paul George all participated in NIKE events throughout China to encourage youth sports, Most importantly, Nike's category offense has only affected 20% of the market, hence the growth in this critical geography is expected to continue in long term when aggressive expansion takes place after currency headwinds moderate. Exhibit 4: Nike Greater China Currency Neutral Growth 38% a8) 2m | ate | 1% 10% | md m% om 10% 4 18% 2 3012 e012 1013 2013 30N9 41S 19H 2014 20M 4a HONS 2015 SONS 4OKS 1018 Source: iP Morgan, Company bate Out ofall Nike's peers, Under Armour and Lululemon Athletica are having aggressive expansion plans in China too. By the end of the year, two new stores will open in Hang Kongwith one expected ta be LULU's mast productive international store, and Under Armour plans to open most of its new stores in China this year.Nov 6, 2015 NIKE Ine. (NKE} Nike Technology Nike continues to emphasis and rely heavily an technical innovation to achieve their forecast. It recently announced the opening of an “Advanced Product Creation Center” to improve the design and manufacturing process of the shoes and apparel it makes. Footwear: NIKE launched the Pegasus 32 in June that featured high- performance Zoom Air technology to help athletes achieve their fastest run. In the Jordan Brand, Nike introduced the Super Fly 4 with 'FlightSpeed” ‘technology that offers great impact protection. Last but not least, Nike has recently announced that the very popular Self-lacing shoes, an idea made popular in the 1989 movie "Back To The Future Part I!" will be produced and released in Spring 2016. Nike is proud to turn fiction into fact and tis going to introduce this product to the market in a major way. Performance apparel: Therma-Sphere Max and AeroReact were newly designed to achieve body temperature regulation in a whole new level for athletic training. Similarly for Hurley, Jordan, and Converser also utilise Nike Technology to create new innovative products. Partnership fe relationship: One year after Tim Cook, the CEO of Apple joint Nike in.2006, the two companies collaborated on Nike+iPod, which became one of the most popular connected fitness trackers. Today Nike's fitness appsinclude the Nike+ Run Club, Nike+ Fuel, and Nike+Tratning Club, which have more than 60 million people users now. These apps have helped to build a potential poo! of current and future customers. Nike continues to develope new fitness apps and it-aims to be part of the "Apple Watch”. Apparel contract with athletic programme; In 2000, University of ‘Texas|UT) started a seven-year, $17 million contract with Nike. Texas and Nike have since extended that contract three times. Recently, Nike outcompeted its rivals including Under Armour Inc.(UA) and Adidas AG {ADDYY), and reached a 15-year agreement with UT, the richest athletic programme in the country now. The contract is of a total value approaching $250 million. Nike has then agreed to create a new signature line of apparel featuring the brands of UT-Austin and its famous farmer basketball player Kevin Durant.Nov 6, 2015 NIKE Inc. (NKE} ‘+ Partnership with Flextronics International Ltd {Flex}: Nike has recently announced to partner with Flex, a world-class global manufacturer, Flex is ‘expertise in innovative design, engineering and manufacturing in industries such as autamative, medical and consumer electronics for a connected ‘world, Nike will work with Flex to deliver footwear innovation, which will facilitate faster delivery or products to consumers, Even tailor made products are expected toreach customers more efficiently. Women Market ‘Nike's 8-year deal with the NBA begins in 2027, which is a key part ofits plans to boost annual revenue to $50 billion by 2020. Exhibit 5: ike revenue by customer's segment ‘Source: Company Oato, 10-" 2015 Nike has spotted the potential in women market, who make up half of the NBA's viewers. The companys already planning to make more basketball gear for wornen, including Jordan brand sneakers-for the first time. Nike opened several women's only stores and Is looking at $7 billion from women's products by fiscal 2017. Same of the new Nike stores also provide special stere services such as the Nike Run Club and Nike+ Training Club classes through digital booking system. One-off events will also be hosted in these stares to attract different and new costumers. These are value-added strategies that are likely to attract incremental revenue opportunities and market share. Similarly Nike's peers have spotted the potential in women's market. UA launched one of its largest campaigns ever target at woman called "I will what | want" and it plans to make $4 billion revenue fram women's praducts by 2016. Adidas opened three women's only stores in China last year and one in South Korea. It also launched new women-only lines such as the Adidas by Stella McCartney. VF Corporation has launched a new line under its North Face brand this year, also to boast sales from women’s products. In addition, LULU always has its revenue mostly 8Now 6, 2015 NIKE Ine. (NKE} coming from warnen’s products, It has three stores in London which algo offer services including yoga classes and run elubs, Like Nike, LULU also aims at a mare premium market, reflect from an average retail price of its product at $0 to 110 British pounds. LULU.products are very popular due to costumers’ crave for its ‘athleisurewear" design, which is thought to be more compelling and versatile than Nike's, E-commerce & Direct-to-customer Business Nike's OTC operations sell produets to consumers through e-commerce website, which are managed within each geographic operating segment. The quarter's revenue for e-commerce business shows an incredible growth of 46% a¢ross all of NIKE geographies ona constant currency basis. Nike's SNKRS app and customization ‘options available on NIKEIO are believed to be the steong driving forces for this incredible sales. Exhibit 6: Nike's E-Commerce Sales Souiee: Company Gate On the-other hand, Nike's rival Adidas AG bought Runtastic, a mobile fitness company in August 2015, Runtastic has.a portfolio of over 20 fitness apps with 140. million downloads and a strong user base of 70 million; Under Armour purchased Endomondo and MyFitnessPal in February 2015, These made the UA digital platform the largest connected fitness community in the world, with over 150 mtillion Unique Users. These acquisitions have significantly boosted Lia's year-over- year growth by 221% to $14.4 million.Nov 6, 2015 NIKE Ine. (NKE} Industry Overview ‘Nike has a dominant position in global footwear, apparel and equipment industry since its market capital ($111.96 Billion) is much higher than the sum of other competitors. Exhibit 7: Company market capital in the industry ‘Searee: Company Date Despite huge size, Nike still showed impressive performance, remaining one of the most attractive stock in the industry. Indeed, Nike performed better than average industry peers in almost key aspects: 180 basis point operating margin higher as well as 420 basis point ROA and ROE higher than the average. in addition, Nike showed the capability of handling large company size issue by growing revenue by 9.5% annually.Nov 6, 2015 NIKE Ine. (NKE} : Nike’s relative value to industry. Source: Co North America industry: North America is the largest market of Nike and it is also a market in which Nike competes intensively with its 2 major rivals: Adidas and Under Amour. Nike showed its market leader role as it accounts for about 58% of US athletic footwear market according to NPD Group. The industry showed positive signal with consistently ingle-digit (8%) growth in the first half of 2015 and itis likely to be benefited from improved labor market and income in US (15% decrease-in unemployment rate in May 2015). We believe Nike can remain strong growth in North America industry and gain larger market share in the future. 14Now 6, 2015 ala) EVE ee ae) NIKE Ine, (NKE) {fete} Revenue NIKE reported an impressive 59% top-line growth on a year-over-year basis from $7,788 to $8.418, above prior expectation, On a constant currency basis, NIKE, Inc revenue grew 14%, driven by 15% increase of NIKE Brand and 3% growth of Converse, Growth in NIKE Brand was strong across nearly every geography. North America, its largest region showed revenue up 9% on a currency-neutral basis as well as strang consumer demand (Future orders grow of 15%}, driven by nearly every key category. Even though this is its most developed market, Narth America proves that. NIKE plans and strategies can drive consistent revenue grawth. Besides, revenue in greater China was up a significant 20%, tremendous growth which reflected the success of NIKE strategies. In addition, Nike continues ta lead the market in Western Eurape and Japan with the growth of 14% and 35% respectively, Also ana currency basis, NIKE Brand total World-Wide future orders grew 17%, the highest rate since 2021, driven by an 11% increase in units and a 6% increase in average selling prices. All geographies grew double digits except emerging markets, which grew 6%. The strong future orders growth reflected the continued global momentum acrass the NIKE Brand portfolio, At Converse, Qi revenue grew 3% on a constant currency basis driven primarily by double-digit growth in the U.S, partially offset by dectines in certain European countries, primarily the UK. The Converse brand remains strong and was further enhanced by the launch of the Chuck it in the first quarter. We believe Nike's strategic focus on patential opportunities including wamen's and E-commerce will drive above-consensus revenue growth for the company in coming years. Specifically, for Q2, we expect reported revenue growth at a mid- single-digit rate, generally in line with the growth rate for Q4, reflecting low-teens. growth on a currency-neutral basis. For the full year, we expect that reported revenue growth will be squarely within the mid-single-digit range. In long term, we believe the plan to reach $50B revenue by 2020 (about 10.3% CAGR) can be possible given the tremendous opportunity for growth in China ~ a huge profitable market, 2Nov 6, 2015 NIKE Ine. (NKE} Exhibit 9: NIKE Revenue (2011 -2017E) ‘Source: Boomberg, Queen Mary's stedents Research estimates Gross Margin Gross margin performance was also noteworthy, expending S0bps to 47.5% and exceeding +50bps guide. Nike’s high gross margin was primarily driven by higher average selling prices in premium products (with Free, Flywire and Luna integrated technology) and continued strong growth ints higher-margin Direct-to-Consumer (OTC) business, partially offset by higher product inputs and warehousing costs. We expect gross margin for O? ta expand by about 25 basis points based on company’s efforts to expeditiously clear excess inventory in North America and keep the inline channel fresh. Since NIKE continued ta show its effective OTC business and efforts of attracting customers to high profit margin products, we expect gross margin to expand by about SO basis points for the full year. Given those: positive signals, we expect Nike can possibly return to peak gross profit margin (46.3% in 2010). aNov 6, 2015 NIKE Ine. (NKE) bit 10: Nike's Trail 12 — Month Gross Margin (%) Source: Bloomberg, Queen Mary Student Total selling, general & administrative expenses (SG&A) Total selling, general & administrative expenses (SG&A) leverage 44bps including 79% decline from Q1 demand creation and 10% increase from aperating overhead, Demand creation decreased due to the effect of extraordinary high investment from World Cup in the first quarter of fiscal 2015 while 10% increase of aperating overhead was driven by variable costs associated with continued strong grawth in our DTC business and operational infrastructure. We expect G2 and the full year to grow at a high-single-digit rate, reflecting continued investments in OTC, consumer-facing digital capabilities and infrastructure as well as key brand events including Euro Champs and the Summer Olympics in Rio. 14Nov 6, 2015 NIKE Inc. (NKE} Exhibit 11: Nike's demand creation in relationship with events Sas a A an \cl Peo y ect) cry ‘Source: Bloomberg, Queen Mary/s students Research estimates EPS Nike's 10 EPS came in at $1.34, which translated to 23% EPS growth despite significant FX headwinds. The EPS growth was driven mainly by strong top-line growth and effective financial management. We expect the EPS will grow at mid ~ teens level in the next five years to reach approximate $7.50 of EPS by 2020 (embedding 1-25 of EPS growth from tax and share repurchase) or 100% above today base. Balance Sheet Nike remained strong and healthy financial condition, especially in liquidity position. Specifically, it had $3.28 of cash on hand with $2.2B of short term Investments and the debt-to-capital of only 8.4%. During the year, Nike used $588M to repurchase 5.5M shares in 10. Total inventories globally was up 9.5% mainly due to the post congestion Issues on the West Coast {labor disputed issue) but we observed that issue is just anear-term Impact. With the upcoming plan to put Nike's North American distribution center fully online and the effort to clear excess inventory, we expect the healthy in-line channel back in 03, 1sNov 6, 2015 NIKE Ine. (NKE} We are resuming coverage on Nike with an Outperform rating and $140.00 target price in the next 12 months. Gur target of $140.00 is based an the assessment of our P/E, OCF methodology. Exhibit 12: Nike Football field ‘Source: Gleomberg, Queen Marys srudeats Research estiraates Discounted cash flow methodology (Our DCF estimate assumes a 7.5% cost of equity based on the 10-year GOC bond for a risksfree rate of 2.17%, an equity beta of 0.82, and a 2.3% after-tax cost of debt, for implied weighted average cost of capital {WACC) of 7.9% ( see APPENDIX 1). We have assumed a 5% terminal growth rate given the potential growth of footwear and apparel industry. 16NIKE Inc. (NKE} Exhibit 13: Nike discounted cash flow valuation Smiillions, except per-share data Terminal growth rate 5% ‘Cumulative present value of free cash flows 14,173 Present value of terminal value 103,509 Enterprise value 118,082 Net Debt (4,664) Value of equity 122,746 Diluted shares 8773 (Naluepershare 889.92 Current Price 178 Estimated Upside 6.17% “Source: Bloomberg, Queen Mary's students Reseorch estimates Scenario analysis We produced a sensitivity analysis to various terminal growth rate, discount rate, margins and exit EBITDA. We believe a WACC of 7.9% and terminal growth rate of 5% are appropriate. Exhibit 14: Target price sensitivity to WAC and terminal growth rate Terminal Growth Rate W711 211.29 280.16 Haoy 1423316837 2076027520 10872 12203 (EGGBRIEHT] 16529 204-00 8684 10694 1200113758 16248 sr4o 9529 1052011803 13528 wace “Source: Bloomberg. Queen Mary's students Research estimates ayNow 6, 2015 NIKE Inc. (NKE} P/E methodology With the average P/E FY2 among peers of 28.58 and CY2017 EPS af $5.18, we calculate the value of Nike at Oce 2016 will be $148.04 based on multiple methodology. Our Dec 2016 target price of $140 represents 9 multiple of about 27 times our calendar 2017 EPS estimation. We believe our target multiple is better aceurate-and justified given the positive earnings autiook over the next three years. Dinging in, the earnings growth will be driven by sustainable high-single-digit top- line, higher gross margins well as share repurchase ($8B buyback in place). Our target P/E C¥2017 is below average P/E amang peers reflecting the difference in company’s growth cycle: Nike is stepping into mature stage while most of its peers are in growing stage. We also believe P/E from growth companies including, Under Armour and Puma are overestimated, which push industry P/E upward, Exhibit 25: Nike P/E valuation methodology ‘Company Name ‘Market Cap. Enterprise P/E FY2 (usp) ‘Value ‘ADIDAS 19.618 20.158 20.25 UNDER ARMOUR, INC 20.298 20,948 65.06 VF eQRP 28,008 30,158 16.21 LULULEMON ATHUETICA, INC 6.698 6.148 18 PUMA 3.418 3.158 34.21 UNING CO, LTD 1.038 989.81M 16.72 “Source: Bloomberg, Queen Mary's students Research estimatesNov 6, 2015 NIKE Ine. (NKE} Ue eure Elliott Wave The Elliott Wave analysis of NKE shows that the stock is currently at cycle number 5. This means that the stock will be entering cycle A and that NKE's share price is predicted to take a tumbie. Our Elliott Wave model suggests that we wait until the end of cycle A befare entering into NKE, We believe that taking this position would allow investors to profit during cycle B, when the prices bounce back, We have set our limit price to $229/share because we believe that NKE will nat go below the level of wave 4 low ($102.70/share), Thus, with a target price af $140/share, this result in a capital appreciation of 17.65%. Exhibit 16: Elliot Wave ‘Suree: Bloomberg Terminal 19Nov 6, 2015 NIKE Inc. (NKE} Bollinger Bands (BOLL) Therred line above the average (grey) is the upper bound while the green line below the average is the lower bound. We can see that NKE has been touching the lower bounds from end of 2014 to early 2015, reflecting that the stock is oversold but it has recovered around mid-February 2015. Since then, NKE has been constantly near the upper bounds, indicating that the stock was a popular buy among investors. The exception was around middle of August when there was a short panic among investors which affected global stock markets. NKE dropped quite a few bps, touching the lower bounds for a few trading days. Since then, NKE has been above the moving average and touching the upper bounds, closing in on overbought levels. Thus, we believe that at the present moment, NKE is slightly overbought, However, overbought does not necessarily mean bullish, It takes strength to reach overbought levelsand ina strong uptrend, overbought conditions can extend. Since NKE broke resistance levels few times in the past year and kept touching the upper bounds, we beliove that NKE will cary astrong uptrend in the tong run. It is normal for NKE to converge to the average or lower bounds, in the "upcoming short run, we would like to see NKEto either bea litte closer'to the lower bounds or consistently around the moving average. Therefore, we recommend waiting for these trends or our limit price of $139/share since NKE is ikely to carry 3 strong uptrend and will racover san at higher price. Exhibit 17; Bollinger Bands Bollinger Bands (BOLL) “Source: Bloomberg Terminal 20Nov 6, 2015 NIKE Inc. (NKE} Relativity Strength Index (RS!) Since November 2014, NKE’s relativity strength index has went over 70.3 few times, indicating overbought, The only time NKE was under 30, indicating oversold, was 3 small period of time in the middle of August, The current refativity strength index for NKE is around 65, indicating that NKE is in a bull market and close ta being overbought at the moment. In the past manth, investors have been bullish on NKE, ving RSI close to overbought levels. Thus, we believe that investors should walt NKE’s RS! is below 60 or when NKE reaches our limit price of $119/share. unt Exhibit 18: Relativity Strength Index Relativity Strength Index aa Source: Bloomberg Terminal 21Nov, 2015 NIKE tne. (NKE} Investment Risk Competition Despite having the largest market share, Nike's is constantly being challenged by stiff competition such as Adidas and Under Armour Adidas has been focusing their market share in foatball by sponsoring high-profile players such 3s Lionel Messi while developing their market shiare for basketball Adidas has a strategic business plan called “Creating the New” which will be implemented until the year 2020. The first factor, speed, is very similar to Nike's strategy of focusing their business more on ecommerce while setting a target net income growth of 159 year on year for the next five years. This 15% growth is. achieved through constant tap line growth but also improving margins. Secondly, Adidas is planning to.focus on cities with the most total global GDP: Los Angeles, New York, Landon, Paris, Shanghai and Tokyo. Lastly, Adidas is also working together with established companies such a5 Google and BASF to improve their product lines. Under Armour has also copied Nike's marketing strategy of sponsoring high-profile NBA players by recruiting Stephen Curry, as their brand icon. However, UA is different because they sponsor athletes which were considered underdogs but are ccurcently rising in their respective sports. For example, Stephen: Curry has aow become an MVP and aaNBA champion but he was overlooked by sponsers because no one believed that he could bring significant revenues to their company. in aildition, UA is currently sponsoring Jordan Speith, the number one golf player in the warld while Nike's Tiger Woods has seen his image significantly decline. UA's market cop is significantly lower than Nike which’ makes its growth opportunities attractive to investors. In addition to Under Armour and Adidas, Nike's strategy of increasing its market share for women consumers |s being challenged by tailuleman Athletica, Lululemon has been the market leader for women appacel byemphasiting on quality and style. Lululemen targets sophisticated and educated women who are aiming for a fun and healthy lifestyle while balancing work as welll as family. The:compahy’s well known ‘yoga apparels have become a fashion statement for women Overail, NKE is the biggest out af the three in terms of market cap and have the least room for organic growth. Future Orders ike has mentioned that the company has tried to focus on future orders. However, the company mentioned that future orders might not be indicative of future revenues because some deliveries might not be completed due to unforeseen 2Now 6, 2015 NIKE Ine. (NKE} circumstances. In addition, Nike has also mentioned about the possibility of having. too much inventory and not being able to clear them, Overseas Markets Nike's overseas business does bring 2 lot of revenue to the company but it also beors some risks inclading import duties, tariffs, quotas, political and economic instability and teerorism. In addition, Nike's manufacturing are outsourced and ‘based in emerging markets such as China, indonesia and Vietnam, These countries have different labour lays from the United States and eosts are starting to inflate 35 minimum wages in several countries have heen inereased, In auidition, some complaints regarding the working conditions of these factories have ralsed concerns among different groups of pebpie. Currency ‘As mehtioned eariier in our repart, a significant portion of Nike's revenues comes from outside of the United States. This means that any significant fluctuations in the US. Dollar would ditectly affect Nike's top line and bottam line. in the current state of economy where the U.S. Federal Reserve seems to be raising interest rates soon along with the depreciating commadity prices, it appears that the U.S. Doliar is bound to continue te strengthen against ather currencies, especially thase of emerging markets. Thus, a strong {85. Dollar means that Nike's top line and bottom line might look deflated, depending on the amount of revenue generated overseas as well as the currency change. The expected increase in interest rates by the Fed would mean less money supply because many would be attracted to put their money into government bonds. The decrease in money suipply would also: mean that the U.S. Dollar would continue its trend and strengthen. Thus, the increase in US. Dollar will make the U.S. markets seem expensive to foreign Investors which would decrease capital fiow to the U.S. markets. This would mean that the US. market may become stagnant oreven slightly decrease until the U.S. Dollar reaches a point when its attractive enough for overseas investors toinvest back to the U.S. markets. Nike has plans to hedge its exposure to forex risk and reduce the volatility of its cash flow. However, Nike does not disclose specific strategies in the future as they usually pian strategies based on dynamic economic conditions in various countries of aperations. Credit Risk \NKE does not possess much credit risk as the company only a relatively low debt- to-capital ratio of 8.4% and a cost of debt of around 2.3%. Customer preference Consumer preferences in different markets are constantly changing along with the advancement af technology. This pushed Nike to be more innavetive with their product functions as well as styles inorder to maintain their market share, 23Now 6, 2015 NIKE Inc. (NKE} Cannibalization \Nike’s focus on increasing ecommerce traffic is predicted to cannibalize its brick and mortar sales. This will negatively affect the financial health of these stares and might even force them to shut down. ‘Online Orders Nike has mentioned that the company is focusing on expanding its e-commerce traffic. However, Nike also reported that the company has encountered many online frauds through its website. 24Now 6, 2015 NIKE Ine, (NKE} Appendix 1. DCF methodology May = May May May May May May May 2O1S___2016 201720182019 202020212022 Free Cash Flow 21242571 2,71k 3,412 3,702—4260_—4,22——«4,197 Discount Factor ~ 0980.92 086 0.79 0.74 O77 PV of FCF ~ 1369 «2504 2,921 2,937 3,133. 1,209 Long term growth —-$.00% rate PV of terminal 103,909 valve Sum of PV of FCF 14,173 Enterprise Value ‘118,082 Net Debt Equity Value Diluted Shares WACC Calculation 10- year government bond Beta Market premium Cost of equity Equity-to-eapital Cost of debt 2.3% Debt-to-capital 8.4% 25