Key investment points
1. One-sentence logic
Running is the number one leader in China, and market expansion combined with mentally-driven growth has exceeded expectations.
II. Logic that exceeds expectations
The number of domestic runners and serious runners is growing rapidly, and the brand mentality continues to rise, driving the TEP brand revenue to exceed expectations
Market expectations: In terms of the competitive landscape, whether it is international brands Nike, Adidas, or domestic brands Anta and Li Ning, they all focus on running shoes. In the future, TEP International faces increased competitive pressure in the industry, and the future revenue growth center of the XTEP brand is the number of low to medium units. On the demand side, although the popularity of running is increasing year by year, it faces the diversion of sports such as tennis, hiking, and mountaineering, and is concerned about the continued growth of running activities such as marathons.
Basis:
1) Looking at the competitive pattern of running shoes, the growth rate of Li Ning's retail running products reached 25% in '24, and overall product sales remained flat. As a result, sports brands all increased running products, and competition for running shoes increased 2) Looking at the demand side of running shoes, according to statistics from the Marathon Association website, the number of participants in road running events in '24 was 7.05 million, slightly lower than 7.13 million in '19
We predict: The reason why the number one running brand in China has been established and the running shoe market has expanded beyond expectations:
1) Supply-side trek formed the mentality of China's number one running brand, and sales of running shoes grew rapidly:
Judging from the brand mentality, in 2024, the XTEP brand had a running shoe wearing rate of 32.1% among all domestic marathon runners, an increase of 4.9% over the previous year. After surpassing Nike for the first time in 2023, it once again defended its championship status, and had an absolute leading position in domestic marathons. The XTEP brand had the highest overall wear rate in the unsponsored 2025 Wuxi Marathon, accounting for 27.3%. In the sponsored 2025 Chongqing Marathon, the XTEP clothing rate reached 42.2% among the top three runners, leading the market share among serious runners. The strategy of steadfast professionalism to influence the public saw initial results. Running shoe sales led, and 25Q1 functional running shoes achieved double-digit growth.
2) The demand-side running shoe market expanded beyond expectations:
Judging from the number of marathon registrants, the number of participants for the Chongqing Marathon, Wuhan Marathon, Wuxi Marathon, Yangzhou Marathon, and Lanzhou Marathon was +43%, 72%, 61%, 129%, and 75%, respectively, to 24, 45, 0.43, 0.094, and 0.31 million, respectively. The number of runners increased rapidly;? Judging from the number of people who broke 3 in the marathon, the number of people who broke 3 in the 2024 Wuxi Marathon increased 22 times compared to 2016 to 3,423, and the number of serious runners continued to expand;
In terms of spending power, professional runners spend an average of 1,800 yuan on running shoes, and beginning runners spend an average of 300-500 yuan per year. The number of running enthusiasts+serious runners is growing rapidly, driving the expansion of the running shoe market to exceed expectations.
III. Inspection and Catalysis
1. Number of marathon event registrants, number of participants, and number of people breaking 3 to observe running activity 2, marathon event special step, and Sauconi brand wear rate
3. Sales situation of Xtep's main brand fist running products
4. New opening of Sauconi stores and store performance
IV. The value of research
Distinctive understanding: As one of the top four running shoe brands in the world, Saucone's profit margin has exceeded expectations. As one of the top four running shoe brands in the world, the brand itself is of high quality. Coupled with the rapid increase in revenue and profit margins, the profit contribution is worth looking forward to. The market believes that Saucone is less well-known domestically than internationally, growing rapidly under a low brand base, but the profit margin is significantly lower than that of the main brand. The profit contribution is limited
Basis:
Sauconie and Miley contributed 1.2 billion yuan in revenue to the company in 24 years, with an operating profit margin of only 6%, significantly lower than the TEP brand by 16%, lowering the Group's overall profit margin and contributing less to profits. We believe that Sauconee is one of the top four running shoe brands in the world. The brand itself is of excellent quality and is in line with the company's tone. Empowered by running shoe clubs and running club members, profit margins have increased dramatically
Basis:
1. Another rock: Taking Anta Sports as an example, Anta Sports acquired FILA's Greater China business in 2009, and its operating profit margin reached 25% in 2018. The acquisition of Descente's China business in 2016 and Kolon's China business in 2017 turned a loss into profit for the first time in 2020. The operating profit margin reached 8%, the 18-24 revenue CAGR reached 42%, and the 24-year operating profit margin reached 29%, leading the group's brands.
Trap International began operating the Sauconee and Mille brand business in Greater China through the establishment of a joint venture in '19, and fully took over the Sauconee and Mille business in China on 24/1. The operating profit margin of Sauconie and Mille was only 6% in '24, so there is plenty of room for subsequent profit growth
2. The Sauconi brand has excellent quality and can effectively use special running industry resources to enhance popularity and penetration rate in China. 1) In the Chicago Marathon in '24, the overall wearing rate of Sokoni ranked second, reaching 16%, an increase of 1.2pp over the previous year. As one of the top four running shoes in the world, the Sauconee professional running shoes had a deep mentality, excellent brand texture, and in line with the company's focus on running; 2) At the end of 24, 72 running clubs, 2.2 million running members, firmly established a high consumer base for running shoes, creating a professional one-stop running service platform integrating “service, training, social networking, events, and equipment”. The club also sold Trek and Sony products 25. Q1 Saucone The flow rate increased by over 40%.
3. We expect Sauconi's operating profit margin to +2pp to 8% year on year. In the future, due to Sauconi's higher positioning than the SCP brand, the medium- to long-term operating margin is expected to exceed 16% of the SCP main brand. At the same time, Sauconi's penetration rate in China will increase. Under a low base, the revenue CAGR is expected to reach 30% over the next 3-5 years, and the profit contribution exceeds expectations.
5. Profit prediction and valuation
We expect 25/26/27 net profit to be +11%/+11% to 1.37/1.53/1.7 billion yuan, corresponding to the current market capitalization PE of 9/8/7X. The company's brand matrix is clearly positioned. As a leader in the field of popular running, the Xtrek brand continues to be favored by consumers for its professionalism and high cost performance. The star running shoes represented by the 160X series and rich running-related events and athlete resources continue to drive the brand out. As high-end and cross-country running brands, Saucone and Merrell continue to expand the group's target customer base and continue to be optimistic about the medium- to long-term steady growth trend. The dividend rate is expected to be 50% in 25, corresponding to a dividend rate of 5.4%, maintaining the “buy” rating? 6. Target price and space
Considering that the company is a leader in domestic running, the main brand expertise affects the steady growth of the public. Under the low base, the profit margin continues to rise, and compared to the companies Anta Sports and Li Ning's 25-year PE, 18X and 14X, respectively, gave the company a 25-year target PE13X, corresponding to a target price of 7 HKD, corresponding to a target price of over 40%.
7. Risk Factors
The popularity of the running market has declined, competition has intensified in the technological revolution of running shoes, and the improvement in the efficiency of the Sokoni store falls short of expectations
