The sportswear industry is still under immense pressure. However, we are still confident in the mid to long run. Going into 2H24E, we still believe Xtep can continue its outperformance, supported by: 1) successful new products, 2) robust e-commerce sales and platform expansion, 3) relatively more wholesale business nature, 4) robust growth from the Saucony brand and 5) reduced losses after the sales of K&P. The stock's valuation is fairly attractive, at 10x FY24E P/E and 14% FY24E yield.
We are slightly more prudent about Xtep's retail sales trend in 2H24E, but more confident on the group level. According to management, the retail sales trend for Xtep brand in Jul-Aug 2024 continued to face certain pressure (e.g. bad weather, weak consumer sentiment), rather similar to that in Jun 2024, where offline/ e-commerce sales growth was roughly at LSD/ more than 20% (we estimated the overall growth to be at HSD). But thanks to different initiatives, such as: 1) a strong pipeline of new products (the 260X and 360X launched earlier this year, priced at RMB 799 and RMB 599, have been very hot-selling, and the 6.0 version of 160X will come to market in 3Q24E), 2) further penetration into new e-commerce platforms (more events with Douyin and expansion into more new platforms), 3) a re- focus of many of the company's resources on the core brand and running, after the strategic disposal of K&P, we think Xtep's retail sales growth could still be resilient, at roughly HSD in 2H24E (cut from the original target of 10% or above in FY24E). On the other hand, Saucony has performed well, registered 70% or more sales growth in 1H24, where SSSG/ sales per store went up by 30%; therefore the guidance on Saucony's sales growth has been lifted to 50% or above. We think the momentum will sustain, esp. after the appointment of its new spokesperson Eddie Peng in Jul 2024. In addition, sales growth of Merrell was blooming, at 80% or above.
But the listco level guidance was largely maintained (net profit growth could still be fast). The company has reiterated its FY24E guidance (HSD to low-teens sales growth and even faster net profit growth (the target now is 20% or above)), and we are more confident about its margin expansion because: 1) cost control has become one of the top priorities of the company (after the brand and channel healthiness), 2) greater economies of scale as sales volumes of star products continue to surge, 3) e-commerce OP margin could further improve, led by operating leverage and rising sales from the higher-margin new platforms, 4) A&P expenses (as % of sales) will fall YoY, as Xtep's advertisements around the Olympics are relatively less vs its peers, and 5) the strategic disposal of K&P. Noted that the net margin improvement is valid for all brands (from Xtep core to Saucony).
For FY25E, we are cautious, but still think moderate growth is achievable. The macro environment could still be uncertain in FY25E. However, thanks to Xtep's value-for-money position, leadership in running categories, and consistent product upgrades, we still expect it to outperform the industry. And supported by Xtep's healthy channel inventory, we are still forecasting HSD/ 30% or above sales growth for Xtep/ Saucony brand in FY25E.
1H24 results were roughly inline. Xtep's sales rose by 10% YoY to RMB 7.2bn in 1H24, 2% above CMBI/ BBG est., and the net profit increased by 13% YoY to RMB 752mn, missing CMBI est. by 3% but beating BBG est. by 15%. GP margin surged due to: 1) economies of scale led by increased sales of star products like the 360X, 2) Xtep kids' margin improvements, 3) limited retail discounts, and 4) acquisition of stakes in the Saucony & Merrell JV, etc., but that was mostly offset by a jump in A&P expenses (~12% increase) and staff costs (~19% increase). Noted that, if we adjust for the provisions this year and write-backs last year, the adjusted OP could have gone up by ~18% YoY. Inventory days dropped 7 days YoY to 100 days, while the receivables days increased by 8 days to 100 days in 1H24. We are really impressed by the net operating cash flow, which has rocketed by 211% YoY. In terms of segment, online sales continued to outperform, followed by kids than adults. Moreover, sales growth for Xtep/ K-Swiss & Palladium/ Saucony & Merrell were at 7%/10%/ 72%.
Maintain BUY and TP of HK$ 7.32, based on 14x FY24E P/E (unchanged). We have adjusted our FY24E/ 25E/ 26E net profit by 0%/ -4%/ -3% to factor in slightly slower sales growth but a much better GP margin. The stock is trading at 10x FY24E P/E, highly attractive vs its 8-year average of 15x, or vs its 15% 3-year operating income CAGR, let alone the 14% FY24E dividend yield.
