Cut TP to HK$ 2.90 but maintain BUY due to attractive dividend yield of 7.5% in FY20E, based on a 10x FY20E P/E (down from 13x due to sector de-rating). We now revised our retail sales growth forecast to a 5% drop in FY20E (-16%/ +5% in 1H20E/ 2H20E), from 15% increase previously.
- FY19E net profit roughly inline. FY19 net profit grew by 11% to RMB728mn, 5%/ 3% above CMBI/ BBG’s est.. Noted that if we exclude exceptional items (including write back of receivable provisions, inventory provisions, gains from land sales for RMB 53mn and M&A expenses of RMB 100mn), adjusted net profit would go up by 14% YoY.
- Retail sales is much less negative in early Mar 2020. Management citied that retail sales growth was robust (20%+ YoY) in first three weeks in Jan, but plummeted since then into Feb (similar to industry, with deepest daily decline was at ~80% YoY) and improved meaningfully in first two weeks in Mar (down by ~40% YoY). They expect retail sales to decline by 25-30% YoY in 1Q20E as a whole. Noted that, e-commerce performed comfortably well with 40%+ growth YTD, because the Company adapted well to the virus outbreak by leveraging various online platforms (such as wechat mini programs, encouraging all employees to promote products online, live streaming promotions by staffs at distributors’ stores, etc.).
- Channel inventory surged and retail discounts widened. Also cited by management, channel inventory level is now at 5-5.5 months (vs 4-4.5 normally) and retail discounts YTD is 35-45% off (vs 25-30% normally).
- Policies to support distributors. To support the distributors, which are suffering from lack of cash flow in 1Q20E, Xtep decided to temporarily lengthen the credit period (from 120 days to 150 days), as well as allowing an one-off SKUs swaps (can delay 20% of 1Q20E SKUs shipment to 3Q20E, and cancel up to equal amount of orders in 3Q20E). Moreover, management estimated that over 80% of their retail stores had certain rental benefits provided by the landlords (both street level and shopping mall stores). All in all, we believe Xtep’s distributors will be able to survive this coronavirus crisis.
- Maintain BUY but cut TP to HK$ 2.90. We cut our FY20E/21E EPS estimates by 22.3%/ 15.2%, to factor in 1) reduction and cancellation of trade fair sales, and 2) higher-than-expected finance costs. The counter is trading at 8x FY20E P/E, below its 5 years average of 12x. Our TP is based on 10x FY20E P/E and we maintain BUY due to its high dividend yield of 7.5%.
