On May 9, Special Step issued a major announcement announcing the sale and privatization of KP Global and launching a series of capital actions. Seen from a global perspective, this shows TEP's “heart for running”, and its deployment is ingenious.

Focus on competitive tracks to unleash performance momentum

KP Global owns the Gashway and Palatine brands and is completed with the sale, Special Step's business structure will be more streamlined, and iterative will form a brand matrix focused on running. That is, the main brand of Xtrex targets mass consumers; Sauconi serves high-end professionals; Mille serves trail running and outdoor activities, covering a deep range of runners and scenes.

Behind this, the strategic connotation can be understood from two directions.

The field of running is a competitive track for TEP, and has great potential, and has become an important driving force for the growth of TEP's performance.Business focus helps to better grasp the window of opportunity and realize short-term results and long-term growth.

Today, TEP has been deeply involved in running tracks for 17 years and has gradually established the recognition of “China's No. 1 running stock” in the market. TEP is also the sports brand that sponsors the most marathons in China, and a domestic brand with leading clothing rates. In 2023 alone, Special Step helped more than 500,000 people participate in marathons. The wearing rate of the most famous marathon in mainland China was the highest among all participants and three-runners, surpassing all international and local brands.

At the market level, the domestic marathon market is still in a state of blowout, gradually developing into a national form of sports and fitness. The 2024 government work report clearly proposed cultivating sporting events as a new consumption growth point. According to iResearch's estimates, China is becoming the second largest running market in the world, and the proportion of core runners is constantly growing, which also means that demand for professional equipment is expected to continue to grow.

In addition, according to the 2023 financial report, the main brand of Xtrex, Sauconie and Mille contributed about 11.9 billion yuan and 800 million yuan in revenue, as well as operating profit of 1.89 billion yuan and 80 million yuan respectively. Among them, Sauconi nearly doubled over the years and achieved profit for the first time, and the results of the layout of the running sector continued to be unleashed. Meanwhile, Gestway and Palatine still recorded losses.

Looking at it from a broader perspective,In recent years, the footwear industry has entered a period of transformation and adjustment, differentiation,The ability to refine operations becamerelatesventuresThe core competency.The core of multi-brand management is no longer simply pursuing business diversification, but rather creating synergy effects based on multiple brands.

In particular, with changes in the main consumer population and attitudes, and the rise of rational consumption, consumers place higher demands on high-quality products and services, and the brand side needs to be deepened and refined.

Through the above deployment, Xtep can concentrate resources to develop a competitive circuit, including the ability to better use the cash flow generated by the main SCP brand to support the development of Sauconie and Mille, further enhance the synergy between the brands, and consolidate the leading market position, thus achieving sustainable growth.

Selling KP Global, opening up imagination in multiple dimensions

At the same time, there are multiple favorable factors behind the sale of KP Global by Special Step. It follows the logic of “there is a guarantee below, no cap on top” to fully open up the market's imagination.

First, as mentioned above, Geshway and Palatin are still recording losses.This move meant divesting its loss-making business, and in the future, Special Step could go to battle lightly.

Specifically, since the acquisition of KP Global by TEP in 2019, the market environment has continued to be complex, affecting to a certain extent its operations and the overall profitability and cash flow performance of TEP. Today, TEP has signed a final agreement with its controlling shareholder Ding Shuibo and his family to sell and privatize KP Global at a transaction price of US$151 million (KP Global's book value as of March 2024), completely solving this historical problem and retaining only profitable assets. The future strategic layout is expected to be more flexible.

Second,After the sale is completed, Special Step plans to distribute a special cash dividend of US$151 million to shareholders.The plan is subject to approval by the upcoming Extraordinary General Meeting of Shareholders.

As can be seen from this, the plan is to give back all of the proceeds from this transaction to shareholders. On the one hand, it shows that Special Step values shareholder returns, and on the other hand, it shows that TEP's steady financial situation and abundant cash flow.

Third, Special Step will carry out a series of financial reporting operations.It is expected to beKP GlobalAcquire again after making a profitthereofshareholding，Share the results.

TEP has reached a supporting agreement with Gao Lin Capital to optimize the financial structure and growth prospects through financial instrument restructuring.

To streamline financial arrangements, KP Global will issue $154 million worth of eight-year convertible bonds to Special Step.The bond amount is equivalent to KP Global's cumulative losses since it was acquired in 2019, as well as capital investment and working capital up to the end of March 2024; the annual interest rate is 3.5%, which is in line with the interest rate provided by Special Step to Gao Lin.TEP has the right to convert this bond into 30% of KP Global's shares over the next eight years.

This means that the capital is confident in KP Global's potential for growth after privatization, while allowing XTEP and its shareholders to intermittently benefit from its future success. For example, if KP Global succeeds and goes public independently, Skystep's shareholders will also benefit. In other words, Special Step not only isolated risks in this transaction, but also secured many benefits.

epilogue

Overall, this strategic adjustment of XTEP is full of money, which has not only brought stronger performance support, but also consolidated the financial health of TEP. This has also increased the intrinsic value of XTEP, and the overall future market performance is optimistic.