Incident: The company announced on May 9 that it will strategically sell KP Global, a wholly-owned subsidiary of its Gashway and Palatin brands, and carry out a series of financial instrument restructuring aimed at optimizing the Group's investment portfolio and strengthening its core business operations.
From the strategic sale and privatization of KP, all proceeds will be distributed as a special cash dividend: the company previously acquired KP Group for US$260 million in mid-2019, but due to the three-year pandemic compounded overall consumption performance, its performance fell short of expectations and continued to lose investment. Therefore, the Group signed an agreement with the controlling shareholder Ding Shuibo and his family to sell and privatize KP for US$151 million (based on a book value of 2024/3/31 KP). At the same time, the Group plans to distribute a special cash dividend of US$151 million to shareholders, bringing immediate financial benefits to shareholders.
Optimize the financial structure, consolidate the Group's financial health, and preserve the possibility of future benefits: While selling KP, the Group and Gao Lin reached a supporting agreement, including KP's redemption of the $65 million convertible bond issued to Gao Lin in '21 and the issuance of a new six-year convertible bond worth HK$500 million to Gao Lin. The annual interest rate is 3.5%, and the share exchange price is HK$5.5 per share (if converted, it is equivalent to about 3.44% of the company's current issued share capital). Additionally, Gao Lin will reserve the right to purchase 20% of KP's shares for $65 million over the next five years. Meanwhile, KP will issue an eight-year convertible bond worth US$154 million (equivalent to KP Group's cumulative losses since it was acquired in 2019, and capital investment and working capital up to 24/3), with an annual interest rate of 3.5%. Special Step Group has the right to convert this bond into 30% of KP's equity within the next eight years.
Focus on running and focus resources on developing the main brands of Xtrex, Sauconnie and Mille: This strategic adjustment lays the foundation for the company's continued profitability and growth, eliminates losses caused by KP to the Group, and will also increase investment and accelerate development of the Sauconee and Mille brands. In the medium to long term, the company will focus on running, with the main brand of Xtrex targeting the mass market, Sonconi serving the elite, and Mille focusing on trail running and outdoor activities.
Investment advice and profit forecast: Considering that the main brand of TEP is in a period of rising brand potential, this adjustment is expected to accelerate the development of the Sauconee and Mille brands; at the same time, financial side profits will improve. In the medium to long term, the Group has further focused on running and has established a certain mentality on the running track. It is expected to benefit from the rapid development of the industry, and is expected to lead the industry in subsequent revenue and profit growth. We expect the company's net profit to be 1.28, 15.3, and 1.73 billion yuan in 24-26. The current stock price corresponds to a 24-year P/E of 10x, and the valuation has a certain cost performance ratio and safety margin. We maintain a “Highly Recommended” rating.
Risk warning: risk of trekking shoes falling short of expectations; risk of new brand development falling short of expectations; risk of channel expansion falling short of expectations.