Investment Summary

The Xtep Int`l main brand's retail sales (including online and offline channels) recorded HSD growth in Q4, and the discount level was flat quarterly, remain higher than normal level. Inventory levels have continued to improve quarterly, and retail inventory turnover has been reduced to less than about 5 months. The operating data for Q4 beats peers and is in line with our previous expectations. We expect the full-year revenue in FY20 to be similar to 2019, but EPS is expected to decrease by about 42% year-on-year, mainly due to the company's increased retail discount level when destocking and strategically adjust the gross profit margin of the main brand. At present, the company's valuation has a relatively large discount to its peers. With the development of new brands, the valuation discount is expected to be narrowed in the future.

The main brand recorded positive growth and performed better than its peers

Xtep announced the Q4 operating data of the Xtep main brand on January 15. The retail sales growth of the main brand recorded a HSD growth compared with the same period last year, which is in line with our expectations. The sales performance of other domestic sportswear brands continued to improve quarterly. In 1Q20/2Q20/3Q20, the main brand of Xtep grew by a negative 20%-25%/negative LSD / MSD over the same period last year. Inventory levels have continued to improve quarterly. The retail inventory turnover period in 4Q20 was about less than 5 months, which was a slight improvement from about 5 months in 3Q20, and gradually returned to the level of 4 months in the same period last year. In terms of discount levels, the retail discount level of the main brand has remained flat quarterly, maintaining at 30%-35%. It is expected that it will take 1Q21 to return to the normal level of 20% to 25%.

Double 11 sales ranks third in domestic sports products, attracting young consumers

During the Double 11 period, the company's all brands Double 11 online sales reached RMB 530 million, a YoY increase of over 50%. Among them, the total online GMV of the Xtep main brand reached RMB 430 million, and the performance of the Tmall flagship store exceeded CNY 240 million, an increase of more than 40% YoY, ranking third among domestic sportswear brands. Among the new brands, Saucony's sales in all channel growth rate increased by 300% year-on-year, while Merrell's growth rate was 38%. In terms of sales quality, the unit price of product increased by 10% year-on-year, among which the proportion of top-tier products increased by more than three times, and the sales of high-unit-price products increased by more than 200% year-on-year. Among them, Jeremy Lin's limited-edition shoe gift boxes were all sold within 18 seconds after the sale started. The company's sales structure is more diversified than before, with new members increasing by 69% year-on-year and sales contribution by 90%. During the Double 11 period, the Xtep brand used "Try it out" (¸Õ¸Õ¯à«ç¼Ë) as its promotion theme, and promoted the brand's 5 top-tier products through creative TVC, attracting the attention of young consumers to the brand. During Double 11, the number of users of Generation Z increased by 53 %.

Valuation and investment thesis

The impact of the epidemic on the company was continue to be digested in 2020. The sales and inventory levels of the main brands continue to improve quarterly, maintaining better performance than other peers, but other brands are the same as previously expected, due to the impact of overseas business, expected revenue reduction and overall recorded a loss to the company. The company's operating performance in the past two quarters has continued to outperform its peers. As the development of new brands helps the company expand its market share, the company's valuation discount with other leading peers is expected to narrow. The company's EPS for FY20/FY21/FY22 is expected to be CNY 17.86/27.79/37.21 cents, and the company's target price is raised to HK$4.25 (previously HK$3.45), which is equivalent to 13x FY 2021 PE (previously 11x FY21), corresponding to the FY20E/FY21E/FY22E P/E of 20.23x/13.00x/9.71x, the rating is upgraded to BUY.

(Closing price as of February 3rd)

Financials

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