Teb International plans to divest KP Global's loss-making business;
After the divestment is completed, we expect the 2024 revenue/net profit to mother to increase by 9.0%/24.8% year-on-year to 156.4/1.29 billion yuan, respectively;
Maintain the buy rating and raise the target price by 8% to HK$6.72, corresponding 11 times the 2025 P/E.
Proposed divestment of KP Global's loss-making business: 1) Special Step International announced that it plans to sell KP Global, the parent company of the K-Swiss/Palladium brand, to Ding Shun Investment, the Ding family's wholly-owned holding company, for US$151 million, and is expected to complete the divestment in August; at the same time, TEP plans to issue a special dividend of US$151 million, converted to HK$0.447 per share, with a dividend rate of 8.0% based on the current closing price. 2) KP Global plans to redeem the $65 million convertible bonds issued to Gao Lin in 2021 in advance. At the same time, TEP International will issue HK$500 million convertible bonds (due in 2030; interest rate of 3.5%) to Gao Lin. If the full amount is converted, TEP International's total share capital will increase by 3.33%. At the same time, Ding Shun Investment signed a subscription option with Gao Lin, and Gao Lin retained the right to purchase 20% of KP Global's shares for 65 million US dollars within 5 years. 3) KP Global plans to issue US$154 million convertible bonds (due in 2032; interest rate of 3.5%). If shares are fully converted at that time, TEP Global will hold ~ 30% of KP Global's shares.
After the divestment is completed, we expect revenue and net profit to increase by 9.0%/24.8% year on year in 2024:1) The Southern Market was disrupted by torrential rain in late April but offset by the excellent performance of the North. We expect the XTEP brand's turnover to increase by ~ 10% year on year since the second quarter; the inventory ratio has improved to 4-4.2 times, and retail discounts to ~ 75% off. 2) As inventory continues to improve, the proportion of new online products has increased. On the product side, special steps have also increased the supply of cost-effective categories. In March, the 360X carbon running shoes with a price of 599 yuan were almost out of size, completing the sales plan of 500,000 pairs in the first half of the year ahead of schedule. We expect the online revenue of the XTEP brand to increase by ~ 14% year on year in 2024; the net opening of 180 offline stores to 6,751 stores is expected to continue to drive ~ 9% increase in store efficiency through channel structure upgrades and product optimization. Therefore, we estimate that in 2024, the offline revenue of the XTEP brand will increase ~ 10% year on year, and overall revenue will increase 11.0% year over year to 13.26 billion yuan. 3) Currently, Saucone has good potential. In the future, it will increase its expansion into the clothing category, and the efficiency of opening large stores will further increase from the current ~300,000 yuan/month. Under the forecast of opening 40 stores in 24, we expect the Professional Sports Division's revenue to increase by ~ 50% year-on-year to 1.19 billion yuan; considering that Step's consolidated KP Global report in the first 8 months of this year, we expect the overall revenue of the fashion sports division to drop by ~ 26% to 1.19 billion yuan in 2024. 15.64 billion yuan; excluding the impact of KP Global's publication, revenue for 24 years increased 13.4% year-on-year to 14.45 billion yuan under the same caliber. 4) As retail discount margins improve, we expect the overall gross margin to increase slightly by 0.4 pct to 42.6% in 24. Assuming that KP Global's net loss in '24 was flat at US$31.76 million and monthly losses were evenly distributed, the net loss for the fashion sports segment in '24 is expected to be ~150 million yuan, and the combined advertising and marketing expenses ratio is expected to drop 0.7 pct to 13.0% year on year. Exp's sales/management expenses ratio is expected to improve 0.9/0.2 pct to 22.6%/10.5% year on year, respectively. As a result, the net profit margin for 24 is expected to increase by 1.0 pct to 8.2% year on year Corresponding net profit to mother increased 24.8% year over year to 1.29 billion yuan.
Profit forecast and valuation: Considering the impact of KP Global's presentation, we lowered Teb International's 2024-26 revenue by 1.9%/8.6%/8.4% to 156.4/161.5/ 17.95 billion yuan; increased net profit to mother by 8.5%/9.6%/10.5% to 12.9/14.9/1.72 billion yuan. The divestment of KP Global helps the profit side in the short term, but the net asset contraction due to continued losses since the acquisition also intuitively shows that there is still room for improvement in the company's multi-brand operating capacity. Long-term development needs to be further observed. It will continue to give TEP International 11 times the 2025 P/E, corresponding to the new target price of HK$6.72, an 8% increase from the old target price, and there is still room for a 20% increase from the current target price. Risk warning: Divestiture plans blocked; new brand expansion blocked; macroeconomic downturn; competition intensified.