On June 15, Xtep International (01368.HK) announced that Hillhouse had injected about HK $1 billion into Xtep Group and its subsidiaries at one time. Affected by the news, Xtep International rose for three consecutive days. On June 17, Xtep International rose more than 15% again, and its share price reached its highest level so far this year.

Since this yearXtep International has increased by more than 200%, comparable to star companies such as Anta Li Ning Co. Ltd..Hillhouse has been investing in consumer retail for a long time. To the outside world, Hillhouse is a company that creates value crazily by discovering, helping, and nurturing crazy value-creating companies.

So what kind of new value does Hillhouse see in Xtep, which has been developing for 33 years?

01 the Ding family behind Xtep

Many Chinese companies whose families have become rich under the wave of reform and opening up are family businesses, and Xtep is no exception.

Behind Xtep, the Ding family holds 53.82 per cent of the shares. The actual controller of the company is Ding Shuibo, Chairman of the Group Board and CEO.

Ding Shuibo, Ding Meiqing and Mr. Ding Mingzhong (Ding Shuibo is the brother of Ms. Ding Meiqing and Mr. Ding Mingzhong) hold 51.44% of Xtep International indirectly through the UBS family trust, and the founder Mr. Ding Shuibo also directly holds about 2.38% of the shares of the company.

The family wealth of founder Ding Shuibo is also closely related to the developed shoe manufacturing enterprises in Fujian.

In 1987, in a village in Chenfeng, Jinjiang, Fujian, a large number of people poured into the ranks of shoe factories to get rich. Ding Shuibo, 17, also set up a small slipper workshop with a start-up capital of only a few hundred yuan. The company is very humble. It sets up a small shed by a small river in Chenfeng, Jinjiang, and produces more than a dozen pairs of slippers every day. This is the embryonic form of "Sanxing Company" in the future.

Shortly after starting a business, a businessman as far away as Chengdu, Sichuan, gave Ding Shuibo a chance. The businessman, who only met Ding Shuibo's father, ordered a large quantity of Ding Shuibo's goods, but asked to deliver the goods first and then pay after the goods were sold. Ding Shuibo decided to send the goods first, and then flew to Sichuan for the first time in his life.

In the first year, the factory sold a total of 2000 pairs of shoes, but in the second year, it sold 50, 000 or 60, 000 pairs. By 1990, the shoe factory had made great progress, and the market had rapidly expanded to major cities across the country, with an annual output value of more than 30 million yuan. In the early 1990s, Ding Shuibo found that his products were very popular overseas. he took orders with overseas villagers through the exhibition and began to manufacture and design sports shoes for a number of international brands.

During the same period, Ding Shizhong, a classmate of Ding Shuibo, opened a small workshop with his father and brother across the river from Ding Shuibo, which led to the later Anta Group. In 1993, Sanxing Company became the first enterprise in Jinjiang to enter South America and Africa.

Since then, Sanxing has set up branches in the United States, Spain and Chile, and its products are exported to more than 40 countries and regions. In 2000, the business of Ding Shuibo's Sanxing Company was like a day in the sky. In the export market, Sanxing is already an invisible champion in the industry.

At this time, the world retail giant Walmart Inc took the initiative to find Ding Shuibo, and offered quite favorable terms, hoping to become a partner of Sanxing Company, but Ding Shuibo chose to give up, he believes that once joined, no matter how good the conditions, its company brand will also be subject to a lot of restrictions.

In 2001, Ding Shuibo founded the "Xtep" brand, which transferred from a long-term enterprise of labeling and processing for others to operating its own domestic market, which is a test for Xtep.

In 2001, Xtep's output value was just over 90 million. In 2002, the annual output value reached 250 million, nearly tripling.

Xtep's sales in the domestic market reached 1 billion yuan in 2005 and 1.5 billion yuan in 2006. With the holding of the 2008 Beijing Olympic Games, China's sporting goods industry has also ushered in a golden period of development.

In this environment, some Chinese sporting goods companies, such as Li Ning Co. Ltd., Anta, Xtep, 361o, etc., have decisively seized the opportunity and opened the road of expansion.

Various enterprises continue to invest a large amount of advertising and marketing expenses to expand the number of stores, but behind the barbaric development is full of dangers.

02 learn from Anta with the left hand and Li Ning Co. Ltd. with the right hand

After four years of rapid growth, the bubble of China's entire sporting goods industry disappeared in 2012, profits fell sharply and a serious inventory crisis broke out in the industry.

The emergence of inventory crisis is closely related to the business models of companies in China's sporting goods industry.Before 2012, the business model of most Chinese sporting goods companies is brand wholesale model, in which the company is responsible for brand building and product manufacturing, and dealers place orders through order meetings. the company will then send the product to the dealer according to the order meeting to complete the sale.

Anta took the lead in transforming the company from the brand wholesale model to the brand retail model, implemented single-store ordering, strengthened the application of information technology and the coverage of all channels of retail standards, and successfully walked out of the crisis.

Li Ning Co. Ltd. also transformed the brand wholesale business model to the retail model, found his own brand positioning, realized brand reshaping, and came out of the predicament.

Xtep's net operating interest rate in 2014 was the lowest since 2010. in order to boost its performance, the company began to transform its "product +", "sports +" and "Internet +" strategy in 2015.

In contrast, the 361-degree company still maintains the traditional brand wholesale model, which is divorced from the current market environment, but also faces high-cost pressure due to too many levels between the company and the final consumer.

In 2018, after the completion of the transformation, Xtep's performance grew strongly, its operating income increased by 25% compared with the same period last year, and the net profit rate of sales rose to 10.5%. 2019 continues the development momentum of 2018. In 2020, Xtep earned 8.172 billion yuan and returned to his mother with a net profit of 513 million yuan.

Strategically, Xtep learns from Li Ning Co. Ltd. with his left hand and Anta with his right hand.

In 2019, Xtep launched a multi-brand and international strategy to form a diversified sub-brand and Xtep's own brand."Mass Market-Xtep, Professional Market-Soconi, Mailer, Fashion Market-Galaxy, Paladin"The three major sports market brand matrix, specifically, first through joint ventures to operate Soconi and Mayer, followed by the acquisition of 100% stake in Galesway and Paladin brands.

In the official introduction, Saucony is considered to be a century-old brand of running shoes, known as Rolls-Royce in running shoes. Merrell specializes in the outdoor field and is a global leader in hiking shoes.

K-Swiss, which has a brand history of more than half a century, is well known by consumers around the world for its fashionable online shoes, leisure and fitness footwear products.

Palladium (Paladin) is one of the most famous brands of military boots in the world.

In learning from Li Ning Co. Ltd. 's national tide strategy, Xtep chose to implement the brand rejuvenation strategy and cross-border Shaolin joint cooperation to hold the Mountain Gate Show at the Shaolin Temple in June 2020. in October, Xtep X Shaolin Union famous generals moved to Shanghai Fashion week. On the product side, Xtep and Shaolin jointly launched three new products: professional kung fu shoes, limited edition magic platform, and Zen Luohan shoes.

From this point of view, Xtep wants to harvest a wave of exposure through Shaolin, a well-known IP, so as to enable IP's own kung fu culture and monk spirit to empower his own brand. It is not difficult to take advantage of the national trend, but it is not difficult to precipitate the effect of cooperation.

03 Nuggets sports shoes and clothing market

At present, from the perspective of competition, the sports shoes and clothing industry is gradually forming a "double super multi-strong" pattern. China's sports shoes and clothing market has attracted many enterprises to join the bureau, and the three companies with the highest market share are Nike Inc, Adidas and Anta.

International clothing giants Nike Inc and Adidas are in the leading position in the Chinese market, both of which have occupied 40% of the market share. Nike Inc's market share of sportswear in China topped the list with 22.9% in 2019, followed by Adidas with 20.4%, according to Euromonitor. Anta, the leading domestic brand, ranks third with a market share of 16.4 per cent, Li Ning 6.3 per cent and Xtep 4.9 per cent, 361 degrees 3.1 per cent.

The trend of head concentration in China's sports shoes and clothing market continues to rise. According to Euromonitor, China's sportswear market CR5 rose from 51 per cent to 72.8 per cent in 2010-2019, from 72.2 per cent to 86.2 per cent. Market share is concentrated in a small number of large enterprises, such as Nike Inc, Adidas, Anta and other industry giants. With the continuous improvement of industry concentration and resources moving closer to the head enterprises, the industry will show the Matthew effect of "the stronger the strong, the weaker the weak" in the future.

In terms of the proportion of sports brands at home and abroad, from 2010 to 2019, the penetration rate of foreign brands of the top 20 brands in the market share showed an upward trend, while that of domestic brands showed a downward trend, with the proportion stable at about 38% for three consecutive years. On the one hand, the excellent local brands represented by Anta / Li Ning Co. Ltd. / Xtep accelerated the rise, on the other hand, overseas brands with good growth momentum in previous years, such as New balance and Asics, slowed down in recent years.

At present, the market potential of sports shoes and clothing industry is huge, and the market concentration is further improved. from the point of view of market scale, China's sports shoes and clothing market has a large volume and has maintained rapid growth in recent years.

According to Euromonitor, the retail size of the sports shoes and clothing market increased from 79 billion yuan in 2007 to 316.6 billion yuan in 2019, corresponding to 12.3% of CAGR. It is estimated that the market size of China's sports shoes and clothing will be close to 600 billion yuan in 2025.

Since 2015, Xtep has returned to professional sports, helping to run the Zhongkang Marathon.Xtep's main brand continues to be the preferred brand for Chinese runners, continues to consolidate its leading position in the market, and ranks first among domestic brands in the international marathon in mainland China in 2020.

Xtep's running strategy forms a runner service matrix with running club, special running group and 321 running festival as the closed loop. From the equipment, events, social, service and other dimensions.

Since 2007, Xtep has joined hands with marathons in more than 30 cities and sponsored more than 1000 marathons and events. In 2019, Xtep sponsored 52 mainland marathons and one marathon in Hanoi, Vietnam, with more than 800000 participants.

Even in 2020, which was affected by the epidemic, Xtep sponsored 12 offline marathons and 9 online marathons, attracting more than 1.5 million participants.

In the Xiamen Marathon in April 2020, Xtep 160X running shoes reached the top with a 51% advantage, and the wearing rate of domestic running shoes exceeded that of international brands for the first time. In Xuzhou Marathon, the top three runners also wore Xtep 160X PRO to achieve excellent results and will go straight to the Olympic Games. Huaian Marathon Xtep 160X PRO once again won the top three. 70% of the men's top 10 runners in Beijing Marathon wear 160X series running shoes.

From a variety of cases, before the transformation, Xtep's business model was brand wholesale. Brand wholesale business model lacks retail thinking, all the company's business decisions are not carried out around consumers, the company delivers the product to the wholesaler even if the sale is completed.

With the change of business environment and the upgrading of consumer demand, the shortcomings of brand wholesale business model are gradually exposed. There are layers of middlemen between enterprises and consumers, and the communication between enterprises and consumers is not smooth, which is not conducive to the grasp of the needs of sellers and increases the cost of business operation.

The brand retail business model attaches importance to the experience of consumers and emphasizes the orientation of retail thinking. In this mode, the sale is completed only when the product is finally in the hands of consumers, which may also be the reason for Hillhouse's heavy investment in Xtep.