Trimmed TP to HK$ 4.47 but maintain BUY due to low valuation, based on an 12x FY20E P/E (de-rated from 13x due to weak sentiment) and ~5% cut in FY20E/ 21E EPS. We believe that Xtep will be negatively impacted amid this virus season, given its major Central China positioning (Xtep is historical strong in Hubei and Hunan).
- Retail sales growth improved in 4Q19. 20%+ retail sales growth was achieved in 4Q19, beating CMBIS est. of high-teens and slightly quickening from its 20% growth in 3Q19. SSSG also improved to low-teens (vs 10% in 3Q19) and so as the retail discounts which was adjusted to 20%-25% (vs 22%-25% in 3Q19), while channel inventory level remained stable at 4 months (unchanged vs 3Q19).
- However, all eyes are on the coronavirus now. Frankly speaking, this set of 4Q19 data was fairly positive, given its high base in 4Q18 and a rather warm winter. However, investors’ primary concern, in our view, would certainly be the negatives impacted by the recent Wuhan coronavirus.
- Brands are less affected comparing to distributors, but still, future growth should be dragged. We believe brands (e.g. Xtep and other domestic names) are less affected, thanks to their wholesale business nature, therefore immediate impact on earnings would be greater for distributors (e.g. Topsports or Pou Sheng). According to our understanding, there should be meaningful negative impact on distributors’ net profit, due to decline in shoppers traffic during this virus outbreak period (including the 2020 Chinese New year), resulted from a major absence of sales and losses from fixed costs (e.g. basic salary plus D&A expenses), despite certain savings from rental exemption plans offered by the landlords. These losses, in our view, may mostly borne by distributors while the negative impact on brand owners would weaken future trade fair sales growth in 4Q19E and 1Q21E, which should drive down numbers in FY20E/21E.
- Roughly speaking, ~15% drop in 1Q20E retail sales growth should not be surprising (originally expect ~15% increase). If we assume the retail sales to fall by 50% for 1.5 month in 2020 (from late Jan to Mar with CNY counted), then the overall 1Q20E retail sales growth may go down by ~15% and translate into a ~8% decline in 4Q20E &1Q21E trade fair sales growth, leading to cuts in Xtep’s FY20E/21E sales & net profit (~5% EPS cut for FY20E/21E each), even though E-commerce may be boosted at the same time as consumers shift their demand to online.
- Maintain BUY but cut TP to HK$ 4.47. We lowered FY20E/21E EPS by 4.8%/ 5.5% to factor in the cut in trade fair orders (12x due to weaker investor confidence, from 13x FY20E P/E). The counter is trading at 9x FY20E P/E, below its 5 years average of 12x. Note that Xtep had already corrected by 23% from its peak in Jan 2020 (more than Li Ning/ Anta’s 19%/ 15%).
