Soochow Securities released a research report stating that it maintains a 'buy' rating for Topsports (06110). The company is the largest domestic sports footwear and apparel retailer. Due to the impact of a sluggish domestic retail environment in FY25H1, the performance is under pressure. The forecasted net income attributable to the mother for FY25-26 has been lowered from 2.75/3.15 billion yuan to 1.33/1.64 billion yuan. An increase in the forecast for FY27 to 1.91 billion yuan has been considered. Considering the company's long-term growth potential in the sports industry and its stable cash flow with high dividends, the current valuation of the stock price is relatively low after adjustments.

The main viewpoints of Soochow Securities are as follows:

The company announced its FY25H1 performance:

FY25H1 (2024/3/1/-2024/8/31) revenue was 13.055 billion yuan, down 7.9% year-on-year, with a net income attributable to the mother of 0.874 billion yuan, down 34.7% year-on-year. Revenue experienced a slight decline in the fluctuating retail environment, while the profit decline was significant due to increased promotional efforts, deeper discounts leading to a decrease in gross margin. An interim dividend of 0.14 yuan per share was issued, with a payout ratio of 99%.

Enhancing brand portfolio, optimizing offline stores, and strengthening membership operations.

1) Looking at individual brands, the main brands (Nike & Adidas) and other brands in FY25H1 saw revenue declines of -8.1% and -6.5% respectively, accounting for 87% and 12.3% of total revenue. Over the past 23 years, the company has continued to increase collaborations with brands like HOKAONEONE, KEEN, and the premium Canadian off-road running brand Norda, among others, resulting in a slightly smaller revenue decline for other brands compared to main brands.

2) Looking at different modes, retail and wholesale revenues in FY25H1 declined by -8.9% and -2.2% respectively, with retail and wholesale revenues accounting for 83.7% and 15.6% respectively. The retail revenue decrease was relatively significant, mainly due to store adjustments. By the end of FY25H1, the total number of directly operated stores dropped to 5813, down 6.4% year-on-year and 5.4% sequentially, with total sales area decreases of 1.9% and 2.7% year-on-year and sequentially respectively.

3) Looking at online and offline operations, ① Online aspect: the company continues to utilize online communities to boost user engagement, communicates one-on-one with users via WeChat for Enterprise, increases traffic exposure through Douyin and short video platforms, completes transactions via mini-programs, and builds a closed-loop user ecosystem. Direct live sales on Douyin in FY25H1 grew by approximately 200% year-on-year, with direct online sales accounting for around 30% of total direct sales. ② Offline aspect: stores faced pressure from low foot traffic, prompting the company to accelerate the elimination of inefficient stores. Stricter standards for opening and renovating stores have been set. Meanwhile, there is a focus on expanding store live streaming business. By the end of FY25H1, the number of mini-program stores exceeded 2500, with a significant year-on-year growth, and the number of store live streaming accounts exceeded 300, nearly doubling year-on-year.

On the member operation side, in FY25H1, the company's cumulative number of users was 81 million, +10.8% year-on-year, with repeat customers accounting for about 60-70% of the overall consumer expenditure, and high-value customers accounting for a small number but contributing close to 40% of consumption.

Gross margin under pressure, inventory pressure has increased.

1) Gross margin: FY25H1 decreased by 3.6 percentage points to 41.1% year-on-year, mainly due to ① increased promotional efforts, deeper discounts both online and offline, ② higher online discounts compared to offline, increased online proportion, ③ increased proportion of wholesale with relatively low gross margin.

2) Expense ratio: FY25H1 sales and distribution expenses / general and administrative expenses ratio increased by 0.3 percentage points / decreased by 0.1 percentage point year-on-year to 29.3% / 3.8%, mainly due to the negative operational leverage impact of declining customer traffic on offline stores.

3) Net margin attributable to shareholders: FY25H1 decreased by 2.7 percentage points to 6.7% year-on-year.

4) Inventory: As of FY25H1, inventory was 6.12 billion yuan, +6.4% year-on-year, with inventory turnover days increasing by 7 days to 145 days year-on-year.

5) Cash flow: Operating cash flow in FY25H1 was 2.61 billion yuan, +2.5% year-on-year, with cash and cash equivalents of 2.84 billion yuan as of the end of FY25H1, ensuring sufficient funds.

Risk warning: Domestic consumption continues to be weak, and competition intensifies.