1Q24 operating numbers were in line with both market and our expectation. But we have started to see retail sales growth acceleration since late-Mar 2024, after the launches of more entry-level or value-for-money products like the 360X running shoes. With that and the boost from e-commerce channel, we believe the company's guidance of faster growth, better discounts, and better inventory level from 2Q24E onward is achievable. Due to its undemanding valuation (9x FY24E P/E and 6% FY24E yield), we maintain BUY.

1Q24 retail sales in line with expectation. Xtep's retail sales increased by HSD YoY in 1Q24, slowing down from 4Q23, but in line with CMBI est. of 7%, as the base was high last year. In terms of retail sales execution rate, it was slightly above 100% for 1Q24. By segment, retail sales growth for offline/ online/ kids (offline + online) was at LSD/ 25%+/ 10%+. For the new brands, retail sales of all of those grew rapidly by 50% YoY.

Retail discounts narrowed vs last quarter while the inventory is likely to improve further. Retail discounts were at 25% to 30% in 1Q24, in line with the level back in mid-Mar 2024 but improved vs the 30% in 4Q23. Inventory to sales ratio was at 4 to 4.5 months in 1Q24, similar to that in 4Q23. But looking forward into 2Q24E, management do see some room for improvement for both retail discounts and inventory level (could be close to 4 months).

Management reiterated its FY24E guidance and expected growth rate to pick up in 2Q24E and onwards. We think the company's FY24E guidance (around 10% listco-level sales growth and slightly faster NP growth) is achievable, because: 1) retail sales growth improved meaningfully to 10%+ in late-Mar and mid-Apr 2024, from around MSD in Jan to mid-Mar 2024 (management is now foreseeing 10%+/ 20%+ in Apr/ May 2024), 2) there could be more re-orders, as the new products (introduced the 360X, which is a mass-market priced (at RMB599) carbon- plate running shoes) continue to be popular and hot-selling (over 500k pairs were sold in just a month's time, while the original plan was 3 months), 3) e-commerce segment should rebound healthily, as the company has scaled up the supply of more entry-level or value-for-money products.

Maintain BUY with TP of HK$6.31, based on 12x FY24E P/E (unchanged). We conservatively expect 10%/ 18% sales/ NP CAGRs during FY23-26E. The stock is now trading at 9x FY24E P/E, still attractive vs its 8-year average of 15x, let alone the 6% FY24E dividend yield.