On May 9, the company announced that it plans to strategically sell KP Global, which owns the “Gastway” and “Palatin” brands, to the majority shareholder Ding's family for US$151 million, and use all of the proceeds to pay special dividends. Trap acquired the “Gestway” and “Paladin” brands for US$260 million in 2019. After the acquisition, the two brands were affected by repeated epidemics and the slowdown in economic growth after the epidemic. The business of the two brands has continued to lose money since 2019, and the total cumulative operating loss has exceeded 100 million US dollars. To eliminate the negative impact on the company's performance, the company signed a final agreement with its controlling shareholder Ding Shuibo and his family to sell and privatize KP Global assets. The transaction consideration was $151 million, and the valuation was based on KP Global's book value as of March 31, 2024.

The restructuring of financing instruments optimizes the financial structure. Since KP Global issued 65 million dollars of convertible bonds (which can be converted into 20% of KP Global's shares) to Gao Lin Capital in '21, the company proposed exchanging KP Global's convertible bonds with Special Step International's convertible bonds in order to obtain approval from Gao Lin Capital and streamline financial arrangements. The arrangements involved are as follows:

1) KP Global will repurchase the $65 million convertible bond issued to Gao Lin in '21 at the original price. 2) Special Step issued a six-year convertible bond worth HK$500 million to Gao Lin. The annual interest rate is 3.5%, and the exchange price is HK$5.5 per share (if Gao Lin switches shares, about 90 million shares can be converted, accounting for about 3.4% of the company's currently issued share capital). At the same time, it also gives Gao Lin the right to purchase 20% of KP Global's shares for 65 million US dollars within the next five years. 3) Due to KP Global's past development, KP Global has received financial assistance from Special Step International. During this sale, KP Global issued US$154 million convertible bonds to Tep International to settle past debts to Special Step. US$154 million is equivalent to cumulative losses since the acquisition in 2019 and capital investment and working capital as of the end of March 2024. The bond has an annual interest rate of 3.5% for a period of 8 years. Special Step has the right to convert 30% of KP Global's shares over the next 8 years.

We believe that this transaction contains multiple benefits. While the special dividend brings direct high returns, the divestment of the loss-making business will also enhance the performance of listed companies. In the future, the company will focus on running tracks, concentrate more resources to develop the running business, and consolidate its dominant position.

1) Special dividends correspond to high dividend rates. The company received all of the dividends of US$151 million from this exchange, corresponding to approximately HK$0.447 per share. At the latest closing price, the dividend ratio is about 8.2% (7.9% even when considering Gao Lin's share conversion), which will bring rich returns to shareholders. 2) Divestment of loss-making businesses and directly enhancing reporting performance. KP Global's after-tax losses in 22-23 were US$2303/31.76 million, respectively. After this sale, it will directly improve the performance of listed companies. The deal is expected to close in the second half of the year, so 24 will partially benefit, and the 25-year performance improvement will be even more pronounced. 3) In the long run, the company focuses on the main line of the running business, and brand synergy continues to improve. Subsequent companies will focus on running tracks, target the mass market with the main brand Xtrex, serve high-end people with Sauconi, and focus on trail running and outdoor activities. Overall, the company's business structure will be more streamlined, which will help the company invest more resources, accelerate the development of new brands, further enhance the synergy between brands, and consolidate its dominant position in the field of running.

As far as fundamentals are concerned, terminal sales are currently growing steadily, maintaining a double-digit turnover target throughout the year. The number of units of omni-channel sales of the main brands in 24Q1 increased year-on-year. According to the company's public performance exchange meeting, the number of units in omni-channel sales increased in January-January, and sales accelerated in March, driven by the introduction of new products such as Volkswagen's 360X carbon board running shoes. In the future, terminal sales are expected to show an improvement trend, driven by factors such as relieving high base pressure and the Paris Olympics in July. The company currently maintains a double-digit growth target for the whole year's turnover.

The company's asset divestment will optimize the multi-brand matrix, focus on the core running business, consolidate its dominant position, and maintain a “buy” rating. Since the deal has not yet been reached, we are temporarily maintaining our profit forecast. We expect net profit for 24-26 to be 11.5/13.0/1.46 billion yuan, respectively, corresponding to 11/10/9 times PE. We are optimistic about the company's development potential and performance flexibility after focusing on its business, and continue to maintain a “buy” rating.

Risk warning: transaction progress is uncertain; consumption recovery falls short of expectations; inventory risk increases; market competition increases risk.