The current situation of the company

Company 2QFY24 (July-September) Kappa brand retail pipeline year-on-year growth in low and medium units, same-store sales growth in the number of units. As of the end of September, there were 1002 Kappa-branded stores.

Comment

Affected by the adverse weather and base figures from July to August, the retail flow of the Kappa brand increased by medium and low units compared with the same period last year. The retail environment in many places improved from July to August in 2022, bringing a relatively high base for terminal sales in the short term. At the same time, from July to August this year, unfavorable factors such as heavy rain in many places in China affected terminal sales. Kappa brand 2QFY24 retail sales grew by medium and low units compared with the same period last year, and the growth rate slowed down slightly. The company adheres to the brand positioning of middle and high-end fashion sports, continues to strengthen brand and product reform, and pays attention to channel optimization and retail operation to improve efficiency. Same-store sales in the quarter increased in the number of units compared with the same period last year, with 18 to 1002 Kappa brand stores.

4Q23 low base is expected to usher in accelerated growth. With the gradual decline of base pressure from July to September, and the gradual improvement of weather conditions in September, domestic clothing, shoes and hats, and knitted textiles increased by 2.3%, 4.5% and 9.9% respectively over the same period last year, and the growth of terminal consumption gradually accelerated. We believe that although the terminal demand is still in the stage of weak recovery, sports shoes and clothing is still a sub-sector with high bearing in the industry, and residents pay more attention to sports consumption after the epidemic. Entering the fourth quarter, the industry base dropped further. From October to December 2022, clothing, shoes, hats and knitted textiles fell by 7.5%, 15.6% and 12.5% respectively compared with the same period last year. We expect the sales of sports shoes and clothing industry to accelerate growth at a low base. In addition, a number of sports shoes and clothing companies plan to cooperate with Singles Day and other major nodes to clean up part of the inventory backlog caused by last year's epidemic. We expect the industry channel inventory to be further improved.

The optimization and improvement of channel operation and the continuous promotion of product innovation. The company takes digitization and omni-channel as one of its core strategic goals, continuously pays attention to the direct operation mode, pays attention to individual store management offline, combs and strengthens the matching of commercial canals online, coordinates with online marketing layout, carries out one-stop resource integration and omni-channel management of commodities, strengthens the organic combination of online and offline channels and improves operational efficiency. We believe that product innovation also promotes the continuous improvement of product strength. Kappa 1916 series dig deep into the brand's 100-year history and reshape classic sets; Kappa Player series combines fashion sports culture and Kappa brand genes to convey street trends and youth culture; and Kappa Sports series combines advanced sports technology to provide consumers with high-quality, fashion-leading sports products.

Profit forecast and valuation

Maintain the company's FY24/25 annual EPS forecast of 0.05max 0.06 yuan, the current share price corresponds to 5pm 4 times FY24/25 annual price-to-earnings ratio, maintain outperform industry rating. Considering the decline in industry valuation, we give the company's clothing business a price-to-earnings ratio of 6.5x FY24 (previously 7 times). Taking into account the value of the investment business after the valuation discount, we lower our target price based on segment plus total valuation of 12% to HK $0.34, with 33% upside room.

Risk

The competition in the industry intensifies, the terminal retail environment is not as expected, the reform is not as expected, and the investment income fluctuates.