Incidents:

On August 20, Teb International announced its performance for the first half of the year: the Group's 2024H1 main business revenue was +10.4% year-on-year to 7.203 billion yuan. Net profit to mother reached RMB 0.752 billion, +13.0% YoY.

The gross profit margin was 46%, +3.1 pct compared to the same period last year, and diluted EPS was 29.18 cents RMB, +13.5% year-on-year. Interim dividend of HK15.6 cents per share, payout ratio of 50%.

Investment highlights:

Professional sports have performed well, and new brands are growing strongly. The Group's 2024H1 main business revenue was +10.4% YoY to 7.203 billion yuan. Net profit to mother reached RMB 0.752 billion, +13.0% YoY. 2024H1, 1) By brand: Popular sports business performance was steady, reaching RMB 5.8 billion, +6.6% year over year, accounting for 80.4% (yoy-2.8pct), fashion sports revenue 0.82 billion yuan, +9.7% year over year, accounting for 11.4% (yoy-0.1pct), professional sports revenue of 5.9 yuan, +72.2% year over year, accounting for 8.2% (yoy+2.9pct). 2) By category: footwear revenue was 4.45 billion yuan, +14.3% year over year, accounting for 61.7% (yoy+2.1pct), clothing revenue 2.61 billion yuan, +4.3% year over year, accounting for 36.2% (yoy-2.1pct), accessories revenue 0.15 billion yuan, +11.8% year on year, accounting for 2.1%. Sauconi is the Group's first profitable new brand, showing a strong growth trend. We are optimistic about the smooth development of the company's future professional sports brands.

Gross margin improved significantly, and business portfolio optimization raised the level of profit. 2024H1, the company's overall gross profit margin was 46.0%, compared with 2023H1+3.1 pct. By brand, mass sports 43.9%, compared to 2023H1 +0.8pct, fashion sports 53.4%, 2023H1+11.4pct, professional sports 56.8%, 2023H1+14.8pct, footwear 46.1%, 2023H1+4.4pct, clothing 46.5%, 46.5% compared to 2023H1+1.5pct, accessories 34.4%, compared to 2023H1 -3.4pct. Operating profit margin 15.2%, compared to 2023H1+0.1pct. The increase in overall gross margin was mainly due to the growth of the direct sales to consumer (DTC) business model, in particular the increase in e-commerce contributions to mass sports and the increase in the revenue share of the fashion sports and professional sports segment. The net interest rate is 10.4%, compared with 2023H1+0.2pct, accounting for 13.3% of advertising and promotion expenses. Compared with 2023H1+0.1pct, employee costs account for 10.8%, compared to 2023H1+0.

8pct, accounting for 2.2% of R&D costs, compared with 2023H1-0.5pct. Among them, the increase in the share of advertising and promotion expenses is mainly due to marketing expenses arising from the merger of professional sports divisions brought about by the acquisition of all interests in the joint venture between Saucone and Melle. Furthermore, it is also related to higher e-commerce channel platform fees and increased DTC business model costs, including depreciation of royalties (ROU) assets and store decoration costs.

The operation is steady, and the number of inventory turnover days has dropped significantly. 2024H1, the Group's cash and cash equivalents of $3.66 billion, +0.37 billion yuan compared to the end of 2023, inventory of $2.2 billion, and +0.4 billion yuan compared to the end of 2023. The Group's overall working capital turnover was 90 days, compared to 2023H1+2 days, the average inventory turnover days was 94 days, compared to 2023H1-21 days, the average accounts receivable turnover was 114 days, compared to 2023H1+8 days, and the average number of accounts payable turnover days was 123 days, the same as 2023H1. Overall operations were relatively stable, and inventory turnover returned to a healthy level.

Store upgrades create a brand image, and diversified brand strategies drive growth. As of 2024H1, there are 6578 stores for adults in mainland China and overseas, up from 7 in 2023, and TEP Kids has 1,706 stores in mainland China, +3 compared to 2023. As of 2024H1, Palatin and Gestway have 114 and 105 brand stores in the Asia-Pacific region, respectively, specialized sports series, and Sauconi has a total of 128 brand stores in mainland China. During the reporting period, with a larger average store area and diversified products, the average customer unit price and store efficiency of ninth-generation stores continued to grow. The company integrates technology and digital tools into retail stores to create customized and immersive shopping experiences for customers and enhance brand image and customer loyalty. At the same time, product innovation, channel upgrades, and sports event sponsorship promote brand growth through the signing of ambassadors.

Profit forecast and rating: Based on the external economic environment, we adjusted the profit forecast. We expect the company to achieve operating income of 148.0, 154.9 and 16.92 billion yuan in 2024, net profit of 12.6, 14.3 and 1.59 billion yuan, and a closing price of HK$5.00 on August 21, 2024. The corresponding PE valuation is 10/9/8X, respectively. We are optimistic about the healthy growth and continuous improvement of operational efficiency after the company's inventory returns to normal. The market share of new brands is expected to continue to expand and maintain a “buy” rating.

Risk warning: risks due to macroeconomic fluctuations; risk of industry competition; risk of changing consumer preferences; risk of product launch falling short of expectations; supply chain risk; risk of new brand growth falling short of expectations.