Taobo is the largest sports shoe retailer in China. As of August '23, it opened 6209 direct-run stores nationwide, cooperating with 14 well-known sports brands at home and abroad. Among them, Nike and Adidas contributed more than 80% of total revenue, and the rest also covered Puma, Converse, Vans, Onitsuka Tiger, etc. At this point, we are optimistic about Taobo. The main reasons are: 1) consumption is picking up in the sports footwear industry, and international brands continue to be removed; 2) the company's performance is gradually recovering, channel optimization is coming to an end, and continuing to expand new brands on the new circuit; 3) efficient operation, good financial quality, and continuous high dividends to give back to shareholders.
The consumer boom in sports shoes and clothing is rising, and brand inventory has improved marginally. Looking at macro data, the cumulative retail sales of clothing, shoes, hats, and knitwear products above the limit in 2023 increased by 12.9% year-on-year. Compared with the retail sales growth rate of products above the limit of +7.4pct, compared with the total retail sales of social consumer goods +5.7pct, the textile and garment growth rate was significantly faster than the overall consumer market; judging from corporate microdata, the sales growth rate of Taobo's main cooperative brands in Greater China all showed a recovery trend, gradually breaking away from the BCI incident and the decline in offline passenger traffic in the past three years.
Nike FY24Q1 and Q2 (corresponding to June/8/23, September-November, respectively) grew +12% and +8% (vs market +2.0%, +0.5%) after excluding exchange rate effects, while Adidas 23Q2 and Q3 Greater China grew +16% and +6% (vs -4.5%, -6.4%) after excluding exchange rate effects. The average inventory level of the two major brands declined. Nike FY24Q2 was -14.4% year over year, -8.3% month over month, Adidas 23Q3 was -23.2% year over year, and -12.5% month over month.
Expand the brand matrix and upgrade channels to improve efficiency. In terms of brand cooperation, the company has been cooperating with Nike and Adidas for more than 20 years and has become important strategic partners. The company continues to increase the outdoor track layout, and has cooperated with two major brands, HOKA and Kaileshi, to enrich the matrix construction. In terms of channel optimization, as of August '23, the company operated 6209 direct-run stores, and the gross sales area decreased by 3.5%. The decline in the number of stores and total sales area slowed marginally, and is expected to reach a phased bottom. The store efficiency and floor efficiency of both main and non-main brands have improved. Benefiting from this, the company's FY24 H1 rental fee ratio decreased by 0.5 pct year on year, which helped increase operating profit margins.
Asset quality is good, cash flow is abundant, and dividends are kept high. As of FY24 H1, the company's accounts receivable turnover was 14.8 days. It was at a low level in the industry, had plenty of cash on its accounts, and the ROE level was leading in the industry.
Since its listing, the company's average annual dividend payout rate is 103.7%, and the dividend ratio has fluctuated in the 5-10% range, far exceeding the upstream and downstream industrial chain (about 0.5-2% of peers).
Investment advice: We are optimistic about the recovery and profit growth of Taobo's retail business, as well as its expansion and optimization on new tracks, new brands and channels. We expect FY2024 to FY2026 to achieve revenue of 298/333/36.9 billion yuan, an increase of 10.1%/11.8%/10.7% year-on-year, and achieve net profit of 20.9/26.6/3.14 billion yuan. Referring to comparable companies in the industry, Taobo FY2025 was valued at 13xPE, corresponding to a market value of HK$38 billion and a target price of HK$6.1 billion. It was covered for the first time, and a “recommended” rating was given.
Risk warning: Consumer spending intentions have declined, the pace of brand removal falls short of expectations, new brand expansion is slow, and brand public opinion events are breaking out.