Description of the event

Taobo announced FY2025H1 results, with revenue -8% YoY to 13.1 billion yuan, net profit to mother -35% YoY to 0.87 billion yuan, and the company's mid-term dividend payout ratio of 99.4%.

Incident comments

Terminal discounts are under pressure, and the ability to control fees is maintained. FY2025H1's net profit margin was -2.7 pct to 6.7% year on year, mainly due to a significant drop in gross margin of -3.7 pct to 41.1% year over year, mainly due to 1) increased retail pressure to control inventory discounts, and better online growth rates, which contributed to the increase in gross profit; 2) the increase in inventory impairment was affected by the year-on-year increase of ~8kw. On the cost side, the sales/management expense ratio was only +0.3/-0.1 pct to 29.3%/3.8% year over year, mainly due to the rent rate -1.3 pct year over year, and the employee cost rate was only +0.5 pct to 10.4% year over year. Furthermore, the overall cost rate was also controlled due to the increase in the online share but the lower online fee rate.

Inventory is still under control, and the quality of operations is steady. The number of inventory turnover days for FY2025H1 companies was +7 days to 148 days year on year, and inventory levels are still relatively manageable. Furthermore, the reduction in the company's accounts receivable and the increase in accounts payable led to a good cash flow performance of 2.61 billion yuan from operating activities. The medium-term dividend of 99.4% maintained a high dividend ratio, and the company continued to maintain a steady operating quality.

Looking ahead, on the one hand, the company's previous orders have been adjusted. Nike's new CEO has taken over to repair dealer relationships to strengthen dealer support, and subsequent inventory is still manageable. On the other hand, demand in the sports industry has recovered since October, and the company continues the prudent fee control policy of dynamic store adjustments, which is expected to gradually recover under a low performance base. Furthermore, products launched by Nike's new CEO are expected to be launched in the second half of 2025, and the Greater China region is expected to resume normal growth. The company is expected to achieve net profit of 1.38/1.67/1.88 billion yuan in FY2025-2027. Currently, the corresponding PE is 11/9/8X, respectively. The valuation is still at a low level, giving it a “buy” rating.

Risk warning

1. Retail recovery falls short of expectations;

2. Overseas brands fall short of the expected risk;

3. Multi-brand integration falls short of expectations;

4. Dividends fall short of expectations.