Performance overview for the first half of 2024: The company's revenue increased 10.94% year-on-year to 7.2 billion yuan (RMB, same), benefiting from the growth of all businesses, especially the development of new brands in mainland China. The footwear category grew by 14.3% and the clothing category by 4.3%. The gross margin increased by 3.1 pct to 46.0%; it mainly benefited from the increase in DTC's business contribution (its gross margin was higher). The SG&A fee rate increased by 1.7 pct to 34.6%, as advertising and promotion expenses and other expenses increased by 11.8% and 22.6%, respectively (the ratios increased by 0.1 pct and 1.3 pct to 13.3% and 12.3%, respectively). Operating profit and net profit to mother increased 10.9% and 13.0% year over year to 10.9 and 0.75 billion yuan, and the net profit margin to mother reached 10.4%; the results were in line with expectations. The Group announced an interim dividend of HK15.6 cents per share, with a dividend ratio of 50%.

Operating cash flow increased 211.6% year over year to 0.83 billion yuan. The balance and liability situation remained stable, with net cash holdings of 1.41 billion yuan.

The main brand of TEP maintained steady growth: the revenue of the main brand of TEP increased by 6.6% to 5.8 billion yuan, benefiting from the good performance of online channels (up 20% + year over year, accounting for 30% +). The number of children with special steps increased by about 18%. Gross margin increased slightly by 0.8pct to 43.9%. Operating profit increased 7.6% to 1.19 billion yuan. There was a net increase in the number of Xtrex brand and Xtrex children's stores, respectively, by 7 and 3 to 6578 (the share of 9th generation stores increased to 65%) and 1,706, respectively. Small stores will continue to be closed and big stores will continue to open this year; the number of stores is expected to level/increase slightly throughout the year. There are 67 treadmill clubs with over 2.1 million members. According to information, the July-August turnover performance is similar to that of June; it is estimated that there was a slight increase offline, while online growth was 20%.

The fashion sports business recorded 86% growth in the mainland: K-Swiss & Palladium's revenue increased 9.7% to 0.82 billion yuan; mainly benefiting from strong growth in mainland China (+86%). The gross margin increased by 11.4 pct to 53.4% (benefiting from the promotion of DTC's higher gross margin business in the Mainland). The loss for the period was -99 million yuan. KSWiss&Palladium has 105 (+4) and 114 self-operated stores (+20) in the Asia Pacific region, respectively.

The group announced a strategic divestment from K-Swiss & Palladium in May and focus on the running sector. The Extraordinary General Meeting of Shareholders will be held on August 23. If approved by shareholders, the Group will pay a special dividend of HK$0.447 per share.

The professional sports business grew 72%: Saucony & Merrell's revenue continued to grow rapidly (+72.2%) to 0.59 billion yuan, with e-commerce, retail and wholesale growing 62%, 70%, and 136% respectively; same-store growth reached double digits (estimated > 30%). The gross margin increased by 14.8 pct to 56.8%, and the acquisition of all interests in the joint venture between Saucone and Mille enabled the Group to obtain the full gross profit margin. Profit increased 65.8% to 32 million yuan during the period. Saucone's number of self-operated stores in the Mainland is 128 (+18). Since Saucony & Merrell also had a good increase, it is expected to grow by 50% for the whole year. Potential operating margins for new brands are expected to reach 20-25%. Retro and commuter products are expected to be launched in 2025.

Target price of HK$6.35, maintaining a buy rating: the results for the first half of 2024 are in line with expectations. The Group will continue to focus on the field of running and adhere to the development direction of the number one running brand in China. The Group's revenue is expected to grow in units throughout the year, and profit growth is expected to be faster than revenue growth. Since the Group has good main brands and products, and promotes the cultivation of new brands to improve the brand matrix to drive long-term growth momentum; we continue to be optimistic about the long-term development of the Group. Maintaining the buying rating, the target price is HK$6.35, which is equivalent to 12 times the predicted 2024 earnings per share.

Risk factors: industry competition, macroeconomic risk