Incident Overview
In 2019, Trap Group acquired the “Gastway” and “Paladin” brands for US$260 million. After the acquisition, the cumulative operating losses of the two brands exceeded US$100 million since 2019, and in the first three months of 2024, the two brands have already lost about US$9 million. In order to eliminate the impact of KP brand losses on Special Step, 2024/5/9 Company Announcement: 1) The company plans to sell KP Global, which owns the “Gastway” and “Paladin” brands, to the controlling shareholder Ding's family for US$151 million; 2) After the sale is completed, it is proposed to declare a special dividend of approximately US$151 million, corresponding to HK$0.447 per share; 3) In 2021, KPGlobal issued US$65 million convertible bonds to investors (GSUM IV Holdings Limited, exclusively managed by Gao Lin), and KP Global agreed to redeem a total of US$65 million Gesway convertible bonds at the redemption price; 4) HK$500 million 6-year Special Step convertible bonds with an interest rate of 3.5% per share. HK$5.50 for shares; 5) In order to maintain a long-term relationship with Gao Lin, Ding Shun Investment will grant subscription options to Gestway convertible bond investors, requiring Ding Shun Investment to sell 20% of KP Global's shares at a total option price of $65 million within five years; 6) To complete this transaction, KP Global will issue 3.5% convertible bonds due in 2032 with a capital amount of US$154 million, corresponding to KP 30% of Global's shares.
Analytical judgment:
According to our analysis, the significance of this sale of the two brands is: (1) Reducing the burden on reporting. Fashion sports lost 184 million yuan in '23, and 24Q1 has already lost 9 million US dollars. It is expected that the shareholders' meeting will still require approval and other processes to complete the divestment. Assuming completion in August, we expect a 24/25 profit increase of 0.6/180 million yuan, that is, the net profit for 24/25 will increase to 1.241.56 billion yuan; (2) After selling the business, the company will focus more on professional running tracks in the future, and the main brand will focus more on professional running tracks. The mass market, Saucone focuses on the high-end market, and Melody focuses on the outdoor market.
Investment advice
Our analysis: 1) In the short term, under a high base, Q1 benefits from new product sales exceeding expectations, and Q2-Q4 is expected to achieve double-digit growth when the base declines; 2) Currently, the industry is affected by pressure such as inventory and deepening discounts, but the XTEP brand is relatively cost-effective, benefiting from the downturn in consumption in the low-tier market, and the cost performance advantage is expected to become more prominent; 3) In the future, Sauconi will further develop retro and commuter categories to meet different consumer needs, continue to open high-end stores in Tier 1 and 2 cities, and increase gross margin after acquiring JV; 4) After selling the KP brand, Reduce reporting delays and focus on the three major brands; 5) In the long run, if KP is successfully listed in the future, the company is expected to enjoy investment benefits with 30% of its shares. Considering that the sale of the KP brand will result in a revenue gap and reduce the drag on KP losses, the 24/25/26 operating income was lowered to 161.53/183.73/20.916 billion yuan
$155.11/160.65/18.146 billion, up 24/25/26 net profit of $1,178/13.82 billion to $1,613 billion to $12.38/15.62/17.72 billion, corresponding to an increase in EPS of $0.45/0.52/0.61 to $0.47/0.59/0.67 in 24/25/26, and a closing price of 5.4 HKD on May 9, 2024 corresponding to 24/25/26 PE 7 times 11/8/26 (1 HKD=0.92 RMB), considering the dilution of convertible bonds, corresponds to PE11/9/8X in 24/25/26, maintaining a “buy” rating.
Risk warning
Store opening falls short of expectations; brand marketing falls short of expectations; channel inventory processing falls short of expectations; systemic risk.