We expect Xtep’s retail sales growth to remain fast with healthy inventory level, its GP margin to bottom out and drags from new brands to narrow in FY21E. Therefore, we find its risk reward attractive and expect a further re-rating. Maintain BUY and raise TP to HK$5.84, based on an unchanged 14x FY22E P/E. It is trading at 12x/ 9x FY21E/22E P/E.
- FY20 net profit beat, thanks to better cost control. Xtep reported 29% YoY decline in net profit in FY20E, beating CMBI/ BBG est. by 15%/ 13%, mostly due to lower than expected A&P and D&A expenses, despite slight miss in GP margin. Noted that, excluding one-off gains of subsidiary in 2H19 and Supra brand in 2H20, net profit in 2H20 would have increased by 24% YoY, which significantly improved from 47% YoY drop in 1H20.
- Retail sales surged by 50% YoY in Jan-Feb 2021 (also 5% increase vs 2019 level). Retail sales growth in Jan-Feb 2021 accelerated to 50% YoY, on track to beat CMBI est. of 31% growth in 1Q21 and way faster than HSD in 4Q20. Such impressive growth, in our view, was not only driven by 1) favorable weather, but also 2) strong e-commerce momentum, 3) upgrades in products (e.g. launch of signature running shoes “160X” equipped with carbon fiber plate) and marketing (e.g. crossover with Shaolin/ 少林 and Jiang Ziya/ 姜子牙) and 4) sales area growth as more larger sized stores being opened. Xtep is confident to achieve 10-15% retail sales growth for core brand in FY21E-23E.
- Improving retail discounts and inventory level. Retail discounts in Jan-Feb 2021 also improved to just ~30% off, vs 30% to 35% off in 4Q20. Company is expecting its channel inventory level to normalize to 4-4.5 months by FY21E, vs less than 5 months in 4Q20.
- Less drags from the new brands in FY21E. For Sauconcy, the Company is confident on its potential thanks to highly positive feedbacks from professional runners in FY20 and it plans to open 30-50 new stores with an initiate losses of ~RMB 50mn in FY21E. For Palladium, 30-50 self-owned stores will be opened in FY21E, while K-Swiss will not have large scale expansion before FY22E. All in all, the associated losses for new brands and JVs should narrow in FY21E vs FY20.
- Maintain BUY and raised TP to HK$ 5.84. We revised up our FY21E/ 22E EPS estimates by 9%/ 7%, to factor in: 1) faster-than-expected Xtep core brand growth, better-than-expected GP margin and opex, such as A&P for marathons. Given attractive valuation of 12x/ 9x FY21E/ 22E P/E, we maintain BUY and raised TP to HK$ 5.84, based on an unchanged 14x FY22E P/E.
