According to the report released by TianFeng International on the Zhitong Finance App, the company maintains a “buy” rating for Xtep Int'l (01368), and continues to be bullish about the company's strengthened position in the running market, with its financial performance expected to further optimize after this brand divestiture. It is anticipated that the business will further focus on the running track and there will be accelerated growth for the Saucony and MBT brands. Considering that the transaction is not yet complete, the company has not adjusted its earnings forecast. It is expected that Xtep's revenue for 2024-2026 will be 16/17.9/19.8 billion RMB, with net profit attributable to its parent company of 1.17/1.34/1.51 billion RMB, and corresponding EPS of 0.44/0.51/0.57 RMB per share.

Here are the main opinions of TianFeng International:

It plans to sell the Globe-Trotter and Palladium brands for $150 million to lighten the burden of losses from the brands.

The company previously announced the strategic sale of its wholly-owned subsidiary KP Global Investment Limited, which owns the Globe-Trotter and Palladium brands, and a series of refinancing tools to optimize the group's investment portfolio and strengthen the core business operations, including:

1) Xtep and its controlling shareholder, Ding Shuibao and his family signed an agreement to sell and privatize the company based on the book value of KP Global as of March 31, 2024. The transaction price is $150 million.

2) After the sale is completed, the company's board of directors plans to distribute a special dividend of approximately $150 million as a return to investors.

3) KP Global will issue $154 million worth of convertible bonds to Xtep, with a term of 8 years and an annual interest rate of 3.5%. Xtep has the right to convert the bond into 30% equity of KP Global within the next 8 years, offsetting the losses and capital investments in KP Global since its acquisition in 2019 until the end of March 2024.

4) Xtep and GGV Capital reached a supportive agreement. KP Global redeemed $65 million worth of convertible bonds issued to GGV in 2021, and Xtep issued $500 million Hong Kong dollars worth of convertible bonds to GGV, with a term of 6 years, an annual interest rate of 3.5%, and a conversion price of HKD 5.5 per share. GGV also reserves the right to purchase 20% of KP Global's equity for $65 million within the next 5 years.

Optimizing the financial structure and focusing on the running track.

This sale and privatization of KP Global is mainly due to weak consumer demand for the Globe-Trotter and Palladium brands, which has had a significant negative impact on their business performance, with the two brands losing an estimated $9 million in the first quarter of 2024. The company expects that the losses for 2024 will be similar to those of 2023, so the strategic sale of assets is aimed at eliminating the continued impact of KP Global's losses on Xtep's profit and cash flow.

On the one hand, this sale is expected to reduce the impact of the two brands on the company's performance, consolidate Xtep's financial health, continue its profitable operations, and return a special dividend to investors. On the other hand, it will streamline the business structure, focus on the running sector, and exert further synergies among the brands. The Xtep brand targets the mass market, while Saucony serves a more high-end and mature customer base. MBT focuses on cross-country running and outdoor activities, and the strong cash flow generated by the Xtep brand may be used to support the accelerated development of Saucony and MBT, thus further enhancing the synergy between the brands.

Risk warning: Increased market competition, lower-than-expected acceptance of new products, and lower-than-expected consumer demand.