Despite better retail sales trend and discounts environment in 2H20E onwards, the act to raise wholesale discount is a drag on margins. Providing limited near-term catalysts, we maintain HOLD and adjusted TP to HK$2.73, based on a 10x FY21E P/E (up from 5 years avg. of 9x because of general industry re-rating).
- 1H20E results roughly inline. The Group’s net profit fell by 46% to RMB 248mn in 1H20, 2% above CMBI est. and slightly better than the “45% to 55% drop” in its pre-announced profit warning. However, the results quality, in our view, is dampened by: 1) higher other income, 2) higher opex, 3) higher finance costs as well as 4) need of receivable provisions.
- Retail sales growth in Jul-Aug resumed to +ve MSD and expect faster online growth and better retail discounts in 2H20E. Management cited retail sales growth in Jul-Aug 2020 had improved to ~+ve MSD (vs -ve LSD in 2Q20). They also expect online to speed up in 2H20E (vs flattish in 1H20) and retail discounts to be 25-30% off in 2H20E (vs 30-35% in 1H20).
- We are more concerned about receivable than inventory. Xtep’s inventory days went up by 22% HoH to up to 94 days in 1H20 (vs 77 days in 2H19), which is somehow better than Anta’s +55% HoH to 135 days (included effect of more direct retail/ FILA sales though) and Li Ning’s +23% HoH to 84 days. However, we are more concerned on Xtep’s receivable days, which went up by 41% HoH to 137 days in 1H20 (vs 96 days in 2H19), vs Anta’s +35% HoH to 46 days and Li Ning’s +5% HoH to 22 days.
- Raising wholesale discounts will help its distributors but negative for Xtep’s margins. The Company has decided to raise its wholesale discounts since 4Q20E, which should help improving distributors’ profitability and reducing chances and needs for further provisions on receivables. However, this would result in a decline in Xtep’s GP margin, to ~40-41% from 4Q20E onwards and we estimate ~1ppt negative impact for NP margin in FY21-22E.
- K-Swiss & Palladium’s turnaround may be longer and initial losses for Saucony & Merrell continue. Due to disruption by COVID-19, management believed it may take 3.5 years (vs 3 years previously) to achieve an operating breakeven for K&P. For K&P, we forecast a 22% sales decline and US$ 15mn (~RMB 100mn) loss in FY20E. For S&M JV, we expect 35/ 10 new Saucony/ Merrell stores, RMB 48mn sales and RMB 36mn losses in FY20E.
- Maintain HOLD and adjusted TP to HK$ 2.73. We cut our FY20E/ 21E/ 22E EPS estimates by 4%/ 9%/ 6%, to factor in 1) faster online sales, and 2) lower GP margin. Our TP is based on 10x FY21E P/E (up from 9x) and we maintain HOLD. Current 9x FY21E P/E is not attractive given lack of growth.
