High bases are tough for both industry and Topsorts and we are cautious about 1Q25E. However, the turnaround in next few quarters is still an important catalyst. Also, thanks to the 7% FY2/25E yield, we think the downside is limited.

4Q24 retail sales growth was slow and there are still some pressure in 1Q25E. Topsports' retail sales growth was only at LSD in 4Q24 (Dec 2023 to Feb 2024), slowing down from low-teens in 3Q24. However, given the weak macro and high base, we believe investors should have certain expectations already. In fact, this is already better than Pou Sheng's 7% drop. For 1Q25E, we would not be surprised to see certain pressure, because of the high base and delay of some new product launches, and the retail sales trend could even be negative in Mar to Apr 2024. Thanks to a much healthier inventory level (around 4 to 4.5 months), the pressure on retail discounts was less, however. Recently, retail discounts were flattish in offline channels but widened in e-commerce channels (mostly affected by the traditional and content-driven e-commerce platforms).

We still think a turnaround in FY25E is likely (even the growth was slower than expected). After the slowdown in recent quarters, we have turned more conservative about FY25E. However, we still think the trend is constructive, because: 1) online sales growth could accelerate (esp. for traditional platforms), as the base is lower this year and the growth in content-driven e-commerce (e.g. XHS and Douyin) is still rapid; 2) offline sales growth could also speed up (SSSG could be positive and gross selling area growth could be resumed), as the one-off drags from closures of Adidas NEO stores will fade out and store productivity may continue to improve, supported by improvements in private domain operations (e.g. Wechat and livestreaming sales) and engagement with members and customer communities; 3) of the potential benefits from greater investment from brands on product launches and marketing for the Paris Olympics. For margin, we expect GP margin to be stable, as the improvement in retail discounts is partially offset by the increase in e-commerce sales mix, and net profit margin could mildly improve, helped by potential operating leverage.

Maintain BUY but cut TP to HK$6.78, based on 15x FY2/25E P/E (cut from 18x). We revise down net profit by 10%/ 13% in FY25E/ 26E, in order to factor in: 1) a slowdown in industry sales growth, 2) less-than-expected retail discounts improvement, and 3) weaker operating leverage. We have turned more conservative, but a turnaround in FY25E and onwards is still possible, plus the 7% FY25E dividend yield is fairly protective; we thus maintain our BUY rating. The stock is trading at 12x, still below its 4-year average of 13x.

Topsports reported inline FY2/24 results and dividend is still attractive. In FY2/24, sales increased by 7% to RMB28.9bn, in line with BBG and CMBI est.; net profit jumped by 21% YoY to RMB2.21bn, 3%/ 2% below BBG/ CMBI est.; GP margin was flattish at 41.8%, only up 0.1ppt vs last year, but NP margin jumped to 7.6%, up 0.8ppt from last year, driven by closures of Adidas NEO stores, rigid control on staff costs (+1% YoY only) and the drop in D&A expenses (-21% YoY), which in our view is rather impressive, esp. when other income dropped significantly (-41% YoY). Inventory days fell meaningfully by 13 days to 136 days. Final dividend (RMB0.05) and special dividend (RMB0.16) were also announced, the same as last year's, but the payout ratio is still high at 101%. Based on current market cap, the yield is attractive at 7.3%.

Direct retail and e-commerce sales outperformed while sales growth for both principal brands was resilient. In FY2/24, direct retail sales growth was fast at 9% while wholesale sales had dropped by 3%. Also, e-commerce sales growth (CMBI est. +21%) was way faster than offline (CMBI est. +5%), as the share of e-commerce sales increased to mid-20% (from low-20% in FY2/23). Moreover, sales growth for leading/ lagging brands maintained at mid-teens/improved to negative LSD in FY2/24 vs mid-teens/negative MSD in 1H2/24.