The COVID-19 outbreak, to some extent, is a stress test for consumer brands. Unlike Anta and Li Ning, Xtep is suffering more as a second tier brand. We believe more time is needed for its recovery, hence cutting EPS by 13-27% in FY20-22E. Given lack of near-term catalysts, we downgrade to HOLD and cut TP to HK$2.70, based on a 9x FY21E P/E (equal to 5 years avg. and rolled over from 10x FY20E).
- We forecast net profit to fall by 48% in 1H20E. Sales in 1H20E will grow by 6% YoY, but that was only because of the consolidation of K-Swiss & other new businesses (core brand sales to fall by 8% in 1H20E). We forecast NP to plummet by 48% YoY in 1H20E, due to: 1) softer-than-peers online sales, 2) lower GP margin led by higher rebates to promote distributor’s de-stocking, 3) operating deleverage as most of the opex are fixed and 4) higher inventory or receivable provisions. We also believe 1H20E cash flow to be under pressure, as credit period with distributors was likely to be lengthened.
- 2H20E outlook hindered by soft retail sales and excessive inventory. According to our research, Xtep’s retail sales could fall by 5% in 2Q20E, vs positive growth by all other peers (CMBIS est. of 16%/ 6%/ 1%/ 0% for FILA/ Anta/ Li Ning/ Pou Sheng). We are not surprised because it is much harder for second tier brand like Xtep to clear inventory effectively (neither offline and online), at the time that first tier brands like Adidas/ Nike/ Li Ning/ Anta are giving out more discounts. Xtep’s channel inventory, in our view, would still be high at 5-5.5 months by 2Q20E, only at the same level as 1Q20E. We therefore expect inventory pressure to sustain into 3Q20E and will hinder future trade fair orders growth (4Q20E and perhaps onwards). All in All, we now expect 2H20E to remain stagnant with sales/ net profit decline of 8%/ 15% YoY. Moreover, rebates and other forms of subsidies for distributors could last longer into FY21E, which is adverse for margins.
- More drags from K-Swiss & Palladium, as well as Saucony & Merrell. Amid COVID-19 outbreak, K&P is suffering heavily because of its low e-commerce penetration and broad US & EU exposure. Therefore we now forecast a 22% sales decline and US$ 15m (~RMB 100mn) loss for FY20E. For S&M JV, we now expect 35/ 10 new Saucony/ Merrell stores, and RMB 48m sales and RMB 36m losses in FY20E.
- Downgrade to HOLD and cut TP to HK$ 2.70. We cut our FY20E/ 21E/ 22E EPS estimates by 27%/ 20%/ 13%, to factor in 1) weaker e-commerce sales, 2) lower GP margin, 3) higher operating deleverage and 4) greater drags from new businesses. Our TP is based on 9x FY21E P/E (rolled over from 10x FY20E) and we downgrade to HOLD due to lack of catalysts. Current valuation of 8x FY21E P/E and 5% FY20E dividend yield is not very attractive.
