Supply chain problems have had a bigger-than-expected impact: Topsports International Holdings Limited released its 3QFY22 (September-November) sales figures on December 21. Due to the double whammy of supply chain problems and repeated outbreaks, Topsports International Holdings Limited's overall 3QFY22 sales (including retail and wholesale) fell 20-30 per cent year-on-year, more than we and the market expected. Supply chain problems caused a shortage of new products (products within 3 months), an increase in the proportion of old goods, an increase in short-term shelf life, and an increase in retail discounts. Looking at 4QFY22, we expect supply chain problems to persist, while the company's inventory of new products is likely to become more scarce than 3QFY22, and Topsports International Holdings Limited will face a higher base in 4QFY22. Given these disadvantages, we expect 4QFY22's retail performance to remain weak. With the support of brand partners, we expect the company's 2HFY22 gross margin to remain stable year-on-year. However, a sharp drop in sales is likely to lead to negative operating leverage, leading to a year-on-year increase in operating expenses.
FY23 is expected to welcome a strong rebound: while the negative impact of the supply chain is likely to persist at 4QFY22, Nike management says all affected factories reopened in October and production is now about 80 per cent of pre-closure levels. Nike management expects supply chain problems to begin to improve continuously early next year and fully recover in Nike's FY23 fiscal year. More importantly, Nike has gradually restarted its brand promotion and product marketing activities in China in the past few months (see Table 2 for details). We believe that in the face of a shortage of supply, the demand for Nike products will gradually recover in the coming months. This indicates that once the impact of the supply chain recedes, Topsports International Holdings Limited is expected to usher in a strong sales rebound after 2QFY23.
2HFY22 and FY23 profit forecasts: we expect Topsports International Holdings Limited 2HFY22's overall revenue to fall 22% year-on-year. Gross profit margin expanded 90bps to 41.0 per cent year-on-year, but operating margins fell 90bps and operating profit fell 30 per cent year-on-year due to rising expense rates. We expect FY23's revenue to rebound 17% year-on-year and return to higher-than-FY21 levels, and gross margin to expand 30bps slightly year-on-year. With positive operating leverage, we expect FY23's operating margin to increase significantly to 12.4% year-on-year.
Maintain buy rating: we cut our revenue forecasts for FY23 and FY24 by 8 per cent and profit forecasts by 5 per cent, given the uncertainty of our short-term business. Based on 16x CY22 Pamp E, we lowered the target price to HK$10.0. We continue to be optimistic about Topsports International Holdings Limited's digital ability and offline operation performance in the retail field. Its more open mind to brand cooperation is expected to bring more room for growth. Maintain a "buy" rating.
Investment risk: the demand of the industry slows down, the competition of domestic brands is greater than expected, and the epidemic situation is repeated.