Description of the event
Special Step International plans to divest KP Global (Fashion Sports Division). Special Step issued an announcement. 1) In 2019, Trap International acquired Gashway and Paladin brands to establish the fashion sports division KP Global (hereinafter referred to as KP), but due to consecutive losses dragging down the company's performance, the Ding Shuibo family Ding Shun Investment will acquire KP at a price of 150 million US dollars, divest it from the listed company system, and distribute 151 million US dollars to shareholders in special cash dividends; 2) KP used 65 million US dollars to redeem the convertible bonds previously issued to Gao Lin in 2021. International issued HK$500 million of 6-year convertible bonds to Gao Lin, with an interest rate of 3.5% and an exchange price of HK$5.5 per share (equivalent to 3.3% of the company's total share capital after the share transfer). At the same time, Gao Lin reserved the right to purchase 20% of KP's shares at US$65 million over the next 5 years; 3) Trap International acquired the Gashway and Palatin brands in 2019 to support brand development. The cumulative losses since the acquisition in 2019 and the total value of capital expenses and working capital at the end of March 2024 were US$154 million. To offset this amount, KP issued an 8-year convertible bond of US$154 million to Xtep with an interest rate of 3.5%. TEP has the right to convert the bond to 30% of KP's shares within the next 8 years. If shares are not converted, TEP will recover this debt with capital and profit after 8 years.
Incident comments
Divestment of KP, improvement of profits. In 2022/2023, KP Global achieved a loss of 233/31.76 million US dollars, the profit affected by listed companies at the reporting level was a loss of 189/184 million yuan, and 2024Q1 achieved a loss of ~ 9 million US dollars. The company expects to achieve the same level of loss in 2024 as in 2023, so the divestment of the fashion sports division is expected to increase the company's performance this year and next year. Furthermore, the company's cash flow has been optimized, and it is expected that it will further focus on professional running tracks to achieve collaborative development between the main brand of Xtrex and Saucone.
In the short term, the company's inventory has returned to a relatively healthy level. In 2024, there is still room for optimization of the main brand's gross margin and A&P expense ratio, and professional sports brands continue to grow at a high level. In the medium to long term, Sauconi is on the right track, forming differences and complements with the main brand of TEP in the field of running. After the divestment of fashion and sports, it further focused on the running track to strengthen the company's competitive advantage. In the short term, based on the divestment of the fashion sports division and short-term enhancement of the company's performance, we raised the company's annual performance forecast. It is estimated that in 2024-2026, TEP International will achieve net profit of 12.4 billion yuan, 15.2, and 1.67 billion yuan, respectively. The current price of PE is 12/9/9 times, respectively, maintaining a “buy” rating.
Risk warning
1. Retail recovery falls short of expectations;
2. The development of other brands falls short of expectations;
3. The divestment of the fashion and sports division fell short of expectations.