Strategic divestment of KP Global to optimize the financial structure. The company recently announced 1) the strategic sale and privatization of KP Global (Gashway and Palatin brands) at a transaction price of US$151 million; 2) the company plans to pay a special cash dividend of US$151 million to shareholders; 3) To offset the company's receivables to KP, KP will issue an eight-year convertible bond worth US$154 million to the company, with an annual interest rate of 3.5%, and US$154 million equivalent to KP's cumulative losses since it was acquired in 2019 and capital expenses and working capital as of the end of March 2024. At the same time, the company has the right to convert this bond into 30% of KP's equity within the next eight years.
The divestment of KP will help the company increase reporting profits and focus on the running market. Due to the impact of factors such as the pandemic, KP has continued to lose more than 100 million US dollars in total since it was acquired in 2019, and 2024Q1KP lost 9 million US dollars. The divestiture of KP is expected to increase reporting profits. The company's cash flow and profit situation are expected to improve. In the future, the company's resources and energy can further focus on the running field. The main brand (positioning Volkswagen), Sony (positioning the high-end), and Mille (positioning off-road) are expected to have stronger synergy. There is more content to look forward to in terms of channel expansion, product line expansion, etc.
Investment suggestions: The company's main brand is deeply involved in the field of running, and channel and product upgrades are progressing steadily to continue to consolidate the competitiveness of the running track; Sauconi's cultivation results are gradually showing, and it is optimistic about medium- to long-term development potential. We forecast net profit for 2024-2026 to be 1,217/13.38/1,581 billion yuan, corresponding EPS of 0.46/0.51/0.60 yuan, and PE corresponding to the current stock price is 9.89/8.99/7.61 times, respectively, maintaining the “gain” rating.
Risk warning: The macroeconomic downturn has led to weak consumption; the cultivation of new brands falls short of expectations; and market competition intensifies.