Description of the event

The company released its 2024 semi-annual report. 2024H1 achieved revenue of 7.2 billion yuan, +10% year-on-year, and net profit to mother of +13% to 0.75 billion yuan.

Incident comments

Sauconi's growth exceeded expectations, and inventory & discounts remained healthy. H1's main brand/fashion sports/professional sports revenue was +7%/+10%/72%, respectively. Sauconi's growth rate exceeded expectations. It is expected mainly due to improved same-store efficiency & net store opening contributions. Fashion Sports expects overseas wholesale to remain weak, and the growth is mainly driven by domestic DTC. Special Step's main brand inventory sales ratio is ~ 4 months, and the discount is 25% off to maintain a healthy level.

Increased gross profit & improved cash flow, H2 focuses on fee control. The gross margin of the main H1 brand was +0.8pct to 43.9% year-on-year. It is expected that the gross profit margin of Volkswagen's 360X carbon board running shoes and that the gross profit of fashion sports will improve due to the increase in domestic DTC share.

The H1 sales expense ratio is +0.3 pct year over year on a high basis. It is expected to be mainly due to increased advertising by Sauconi and an increase in store opening costs under the DTC model for new brands. The increase in management expenses is expected to be mainly due to weak growth in fashion sports brands and an increase in inventory provisions. H1's net operating cash flow of 0.83 billion yuan was +212% year over year, with a significant improvement in the net present ratio of 1.1. H2 aims to control expenses as a key goal.

Looking ahead, the KP divestment is imminent. After the divestment, a special dividend of $0.151 billion corresponds to a dividend rate of ~ 9% (excluding the net date of September 3, the dividend date is expected to end of October), highlighting the high dividend cost performance ratio. On the other hand, in a weak retail environment, the growth rate is expected to slow down throughout the year. Considering that there is still room for optimization of the main brand's gross margin and A&P expense ratio, professional sports brands have increased rapidly and profit margins have improved, and performance has also increased after the divestment of KP. Overall, we expect that in 2024-2026, XTEP International will achieve net profit of 1.27 billion yuan, 14.6 billion yuan, and 1.62 billion yuan, an increase of 24%/15%/11% over the previous year, and the PE corresponding to the current price is 10/9/8 times, respectively, maintaining the “buy” rating.

Risk warning

1. Retail recovery falls short of expectations;

2. The development of other brands falls short of expectations;

3. The KP divestment progress falls short of the expected risk.