The company's recent situation

The company announced the 4QFY24 (January-March 2024) business situation: retail sales of the Kappa brand fell by 10-20% year-on-year, and same-store sales fell by a high number of units over the same period last year. By the end of March, there were a total of 1,012 Kappa brand stores.

reviews

The high base led to a year-on-year decline in Kappa brand 4QFY24 retail sales. Although there are traditional peak consumption seasons such as the Spring Festival during the season, due to the high sales base brought about by the improvement in the retail environment in 1Q23 (4QFY23 retail sales increased 10-20% year-on-year in the middle to low range), the retail sales volume of the 4QFY24 Kappa brand declined by 10-20% year-on-year. The company continues to deepen its omnichannel strategic goals, optimize offline channel layout and strengthen business system collaboration, and enhance the effectiveness and efficiency of channel management. During the period, Kappa brand same-store sales declined by a high number of units year-on-year under a high base, and Kappa brand stores closed 3 to 1,012.

Clothing consumption in the first quarter was affected by fluctuations in the base figure, and the sportswear consumption boom is expected to gradually increase. The first quarter includes traditional peak consumption seasons such as the Spring Festival. Although driven by a festive promotional atmosphere, the improvement in the retail environment in early 2023 caused base disturbances. According to the National Bureau of Statistics, retail sales of clothing, shoes, hats, and knitwear increased by 1.9% and 3.8%, respectively, in January-March. If the influence of the base figure is excluded, the CAGR of textile and clothing companies in January-January and March compared to the same period in 2019 was 2.8% and 3.3%, respectively. Although consumer sentiment fluctuates occasionally, we believe that sports shoes and clothing are still a popular sub-sector in the industry, and consumers also pay more attention to sports and health. As the 2024 Paris Olympics approach, we expect sports brands to actively launch Olympic sales and launch new products. At the same time, as the base falls further, sports brand turnover growth is expected to gradually improve.

Deeply cultivate young consumers and strive to become a leading sports fashion brand. The company continues to cultivate the younger generation of consumers. Through innovative and diversified brand promotion activities and cross-border cooperation to launch joint products, the company continues to enhance the brand's core competitiveness and brand voice, and is committed to becoming the leading brand of Chinese fashion sports. The company plans to continue to enhance product strength through product innovation and application of technology, promote online and offline collaborative development, and enhance business capabilities and sales performance.

Profit forecasting and valuation

Keep the company's FY24/25 EPS forecast of 0.03/0.05 yuan unchanged, and introduce the FY26 EPS forecast of 0.05 yuan. The current stock price corresponds to 7/6 times the FY25/26 price-earnings ratio, maintaining an outperforming industry rating. The valuation was switched to FY25, giving the company's apparel business 6 times the FY25 price-earnings ratio. Recently, investment sentiment has improved. Taking into account the investment business value after the valuation discount, we raised the target price of 35% to HK$0.46 based on the segment plus the total valuation price, with 25% upside.

risks

Competition in the industry intensified, the terminal retail environment fell short of expectations, reforms fell short of expectations, and investment returns fluctuated.