20240319-招银国际-特步国际-01368.HK-Stay_prudent_as_channel_health_is_the_priority_9页_1mb

Xtep (1368 HK) Equity Research Summary

🔍 Overview

• Recommendation: Maintain BUY rating, but revised target price from HK$7.07 to HK$6.31 (representing 39.0% upside/downside).
• Key Reasoning: Although Xtep may not be the top pick in the sector due to macro uncertainty, high base, and competition, its conservative valuation (9x FY24E P/E, 6% yield) remains attractive. Management has shelved its 5-year growth plan and focused on channel health.

📊 Financial Performance & Outlook

• FY23 Results:
  • Sales increased by 11% to HK$14.3B, net profit rose by 12% to HK$1.0B.
  • Missed slightly by market estimates primarily due to slower sales growth (especially online) in H2 FY23.
  • NP margin was flat at 7.2%. Key factors: Normalizing gross margin, increase in other income, aggressive staff cost control. Offsetting factor: Operating de-leverage (A&P, R&D grew faster than sales).
• FY24E Guidance & Forecasts:
  • Management provided conservative guidance of low single-digit sales growth and slightly faster net profit growth due to channel health priority (high base, macro uncertainty, consumption slowdown, competition).
  • Estimated 10%-plus sales growth is considered highly achievable via: 1) Pushing entry-level/value products on all channels, 2) ~100-200 net new-store openings (kids + adults).
  • Revised Forecast: Analyst downgrades FY24E/25E net profit by 1-2% compared to previous consensus to reflect slower sales and less-than-expected operating leverage. CAGR for sales and net profit over 2023-26 (7.2%-7.7% margin) is more conservative than previously expected.
• Financial Glance:
  • Revenue growth has moderated from strong double-digit gains pre-pandemic to single-digit growth expected for FY23-FY26E.
  • GP margin is expected to improve to 43.0% in FY23E but then face minor pressure in later FYs due to competitive pressures.
  • Higher new product mix for e-commerce and rationalized A&P expenses contribute positively to profitability in FY24E.
  • Net debt/equity ratio remains low, profitability metrics (OP margin, EBITDA margin, ROE) expected to improve modestly.

🧭 Key Challenges & Risks

• Macro Uncertainty: China's reopening high base makes future comparison difficult.
• Consumption Demand: Potential for sluggishness amidst challenging economic conditions.
• Competition: Intense rivalry from peers in both running (-K-SWISS, PALLADIUM) and casual/shoe segments.
• Channel Health: A primary focus, impacting growth momentum potentially.
• New Brand Performance: K-SWISS and PALLADIUM growth expected to remain slow in the US despite China expansion, though K-SWISS/Palladium segment losses narrowed (to HK$160mn from HK$220mn).

🖥️ Valuation & Dividend

• Target Price: HK$6.31 (lower than previous HK$7.07).
• Upside Risks: Higher FY24E P/E multiple (12x vs. previous 13x).
• Current Valuation: Shares trade at ~8x FY24E P/E, still attractively low vs. multi-year average (15x). 6% FY24E dividend yield is strong.
• Dividend Sustainability: Dividend payments remained robust despite earnings pressure in FY23.

💎 Conclusion

Maintain the BUY recommendation based on Xtep's relatively low valuation, strong balance sheet (good cash position), and attractive dividend yield. Further upside from the target price reduction is unlikely given reassessments of 2024E performance and reduced PCAGR expectations. The stock's potential is tied to a positive profit margin and earnings outlook stemming from channel health focus and operating leverage. Perception of its valuation may rise if the company maintains acceptable execution and growth rates.