Core views

Due to continued losses after the company acquired KP Global of the “Gestway” and “Paladin” brands in 2019 (net profit after tax was -0.23, -0.32 billion US dollars, 24Q1 loss of about 9 million US dollars, expected loss in 2024), the company plans to sell KP Global for US$151 million to the controlling shareholder Ding's family. It is expected that after the sale is completed, 1) The shareholders' meeting will still require approval of the shareholders' meeting. It is expected that Q3 will be completed and profitability will improve in the next two years and beyond; 2) The business structure will be more streamlined, and resources can be concentrated to develop the main SCP brand, Sauconie, and Millet. Looking forward to 24 years: 1) Since April, sales of main brands and Sokoni have accelerated compared to Q1, and the subsequent base is gradually declining, and the turnover growth rate is expected to accelerate in Q2 and the second half of the year; 2) The Group's overall revenue is expected to increase by 10% +. Among them, Xtep's main brand revenue grew steadily in 24, and professional sports targets increased by 30%-40%.

occurrences

On May 9, 2024, the company announced that it plans to sell KP Global, which owns the “Gestway” and “Paladin” brands, to the controlling shareholder Ding's family for US$151 million (approximately RMB 1,180 million). After the sale is completed, it intends to declare a special dividend of approximately US$151 million, corresponding to HK$0.447 per share.

Brief review

The company plans to sell KP Global, which owns the “Gestway” and “Paladin” brands. The company bought KP Group for $260 million in mid-2019, but it continued to lose money because its performance fell short of expectations. In order to facilitate the implementation of the divestment, the company mainly adopted: 1) the sale of KP Global: the Ding family, the controlling shareholder of KP Global, will acquire KP Global for US$151 million (the book value of KP Global as of March 31, 2024); 2) the proceeds will be distributed as a special cash dividend: after the transaction is completed, TEP will pay a special dividend of approximately US$151 million to shareholders, approximately HK$0.447 per share; 3) reached a supporting agreement with High House Capital: KP Global for US$65 million The price is to redeem the $65 million convertible bonds issued to Gao Lin in '21, and XTEP will issue HK$500 million convertible bonds with a total principal amount of HK$500 million for a period of six years with an annual interest rate of 3.5% and an exchange price of HK$5.5 per share. Gao Lin will reserve the right to purchase 20% of KP Global's shares over the next five years for $65 million; 4) KP Global will issue $154 million worth of convertible bonds for eight years to offset accounts receivable from KP Global (including 2019) Accumulated losses since the acquisition, as well as capital expenses and working capital value at the end of March 2024), TEP has the right to convert this bond into 30% of KP Global's shares within the next eight years.

Once the asset sale is completed, it is expected to help reduce losses and concentrate resources on the development of the main SCP brand & Sokoni and Millet. According to the company's announcement, KP Global's net profit (after tax) was -0.23 billion US dollars and -0.32 billion US dollars, respectively, and 24Q1 losses were about 9 million US dollars. The expected loss amount in 2024 is close to 23. The subsequent divestment of KP Global will drastically reduce the Group's losses. It is expected that the shareholders' meeting will still require approval and other processes to complete the divestment. It is expected that Q3 will be completed and profitability will be improved over the next two years and beyond. On the other hand, the business structure will be more streamlined, which will help the company concentrate resources to develop the main SCP brand, Sauconie and Mille. Among them, the main Xtrex brand targets the mass market; Sokoni satisfies high-end and mature running customers; and Mille focuses on trail running and outdoor activities. In addition to this, if KP Global succeeds in the future and is able to go public independently, XTEP's shareholders will also benefit from the results achieved by KP Global.

Q1 Traffic has grown steadily, and the quality of operations continues to improve. 24Q1's main brand turnover grew by a high number of units. The company's target achievement rate was over 100%. Among them, the offline growth rate continues to be faster than online. It is expected that the online growth rate will be 25% +, and the number of offline units will grow at a low rate. The discount rate was 7-75 percent off, the same as 23Q1, and an improvement of 30% off compared to 23Q4. The inventory sales ratio was 4-4.5 months, flat at the end of 2023Q4, and the overall inventory level was healthy. Since April, discounts on major brands have narrowed to around 7.5, and the stock sales ratio has dropped to close to 4. The company released the 360X series of cost-effective carbon running shoes in mid-late March, which led to a marked improvement in the flow rate in mid-late March. It is expected that Q2 sales will accelerate. Sauconi performed well, and the 24Q1 turnover is expected to increase by 50% +.

Follow-up outlook: 1) In terms of revenue, the company maintains an overall revenue growth plan of 10% + in 2024 (without considering asset divestment). Among them, the revenue of the main brand of Special Step grew steadily in 24 years, and professional sports targets increased by 30%-40%; 2) In terms of profit, the company's overall profit growth rate is expected to be no less than the revenue growth rate.

Profit forecast: The company's 2024-2026 revenue is expected to increase 7.8%, 3.8%, and 13.1% (if the impact of asset divestment is taken into account); net profit to mother is 12.47, 15.38, and 1.771 billion yuan (if the impact of asset divestment is taken into account), up 21.1%, 23.3%, and 15.1%, corresponding PE is 10.5x, 8.5x, 7.4x, maintaining a “buy” rating.

Risk warning:

The deepening retail discount rate affects the brand's profit margin: The current inventory of the main XTEP brand is still higher than the ideal level. If inventory is processed by increasing the retail discount rate in the future, it will have a certain impact on the brand's profit margin level.

The progress and magnitude of the revenue recovery falls short of expectations: It is expected that with the gradual recovery of travel and consumption, the company's brand's revenue performance will also directly benefit. If the company's brand's revenue recovery progresses or falls short of expectations, it will affect the company's operating performance.

Store development has fallen short of expectations: New store development is one of the important drivers of the company's offline channel revenue growth. If the company's store development progresses less than expected, it will directly affect the company's revenue performance.