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4Q23 是内联的，但宏仍然具有挑战性

2024-01-10 Walter Woo 招银国际程思齐Sophie

Xtep Company Update: Navigating Macro Challenges

Executive Summary:

Xtep, a leading Chinese sportswear company, reported 4Q23 results that were in line with expectations, marking an acceleration from the high-teens growth seen in 3Q23. However, the company faces challenges in its non-running segment, ASP increases, and e-commerce growth, prompting a cut in net profit forecasts by 7-9% for FY24E-25E. Despite this, Xtep's stock retains a "BUY" rating due to its depressed valuation and potential for GP margin expansion.

Key Financial Highlights:

Revenue: FY23 saw a revenue increase of 14.4% to 14,787 million RMB, projecting growth to 16,440 million RMB in FY24E and 18,457 million RMB in FY25E.
Net Profit: Net profit for FY23 reached 1,058.1 million RMB, expecting a further rise to 1,266.6 million RMB in FY24E and 1,575.3 million RMB in FY25E.
Valuation: The stock trades at 8x FY23E P/E, offering a compelling investment opportunity.

Operational Performance:

Retail Sales Growth: 4Q23 retail sales growth was more than 30%, exceeding management's guidance, attributed to a mix of a low base, warmer weather conditions, and relatively weak e-commerce growth.
Inventory Management: Inventory levels have returned to a favorable level, with the inventory to retail sales ratio at 4 to 4.5 months, improving from 4.5 to 5 months in 3Q23. This indicates effective inventory clearance strategies.
Brand Performance: The running segment shows strong performance with new product launches like the 160X 5.0 series. In contrast, the non-running segment faces cautious outlooks regarding sales, ASP increases, and e-commerce growth.

Outlook and Strategy:

Guidance for FY24E: Management remains optimistic, expecting 10%+ listed-co sales growth, assuming the current growth momentum sustains. However, the report adopts a more conservative stance, forecasting only 10%/11% retail sales/listed-co sales growth in FY24E.
New Brand Strategy: Xtep aims to sell more value products both online and offline, exemplified by the 260X, a carbon plate running shoe priced at RMB799, highlighting the brand's commitment to affordability and market adaptability.

Valuation and Rating:

Target Price: The target price has been adjusted to HK$7.07, based on a 13x FY24E P/E, maintaining the "BUY" rating despite the cut in forecasts.
Market Positioning: Xtep may not be the top pick in 2024 due to competitors' potential benefits from the Olympic year and stronger exposure to global brands like Nike and Adidas. However, the stock's depressed valuation makes it attractive for investors seeking undervalued opportunities.

Conclusion:

Despite facing macroeconomic challenges and specific segmental hurdles, Xtep demonstrates resilience through strategic inventory management and targeted brand growth. The company's focus on value products and new brand development positions it well for future growth, supported by a favorable valuation.

Xtep (1368 HK) 4Q23was inlinebutmacro is still challenging TargetPriceHK$7.07(Previous TPHK$7.62)Up/Downside85.5%Current PriceHK$3.81 4Q23 resultswereinline withmanagement guidance. Despite the improvedinventory level, we are still conservative on Xtep’s non-running segment, ASPand e-commerce growthin FY24E. Asa result, we have further cut our NPforecasts by 7-9%in FY24E-25E. But due to its fairly distressed valuation of 8x/7x FY23E/ 24E P/E, we maintain BUY. China Consumer Discretionary 4Q23 retail sales growth inline.Xtep’s 4Q23 retail sales grew more than30%,slightlybetter than CMBI est. of 29% and inlinewith management’sguidance. Such growth was an acceleration vs the high-teens growth in3Q23, but we believe it was a mixture ofalow base, warm weather andrelatively weak e-commerce growth. In terms of segment, offline growthoutperformed online growthwhile Xtep kids growth remained fast at morethan 30%. Walter WOO(852) 3761 8776walterwoo@cmbi.com.hk FY24E guidance has not been finalized but we are conservative.Managementhasgiven no concrete guidance for FY24E but still think 10%+listed-co sales growth is reasonable if the current growth momentumsustains (retail sales growth should be similar, as inventorygraduallyreturnsto normal). Even though management thinkgrowth inFY24E couldbe normalized, after the inventory re-set in FY23E, we are still somewhatprudent and forecast only 10%/ 11%retail sales/listed-co sales growth inFY24E.On the positive side, we are still confident on Xtep’s runningsegment, as new products like 160X 5.0havebeen hot selling sincetheirlaunch in 3Q23. Also, undera weak macro, Xtep’s management hasdecided tosell more value products both online and offline (such as the260X, a pair of carbon plate running shoes priced at RMB799,which is oneof the most value-for-money productson the street). But on the other hand,we are quite cautious and conservative aboutits non-running segmentsales, ASP increases and e-commerce sales growth.Moreover, we doexpect GP margin and OP margin to expand in FY24E, thanks totheramp-up of those new brands (less losses onwards). MaintainBUY but trim TP to HK$7.07,based on 13x FY24E P/E(unchanged).Westill expect theindustryto be under pressurein1H24Ebefore a turnaround in 2H24Eand Xtepmay not be our top pickin 2024, asAnta, Topsports and Pou Sheng (thanks to exposuretoNike/Adidas) arelikely to benefit more in anOlympic year.However,thanks to Xtep’sratherdepressed valuation, at8xFY23E P/E, we reiterate our BUY rating.Wefine-tuneour FY23E/ 24E/ 25E NP forecasts by+1%/-7%/-9% to factorin theslower sales growth andmore prudent margins. Source: FactSet Recent Reports:Anta(2020 HK)–An inline but resilient4Q23; Amer filed for IPO(8Jan24) Topsports (6110 HK)–Turnaroundcontinues after a resilient 3Q24(18 Dec 23) Topsports (6110 HK)–Turnaround is ontrack despite bumpy sales(24 Oct 23) Anta Sports (2020 HK)–2023 InvestorDay and the new 3 years targets: excitedabout Anta brand's new strategies(19 Oct 23) Xtep (1368 HK)–An inline 3Q23 andstrong FY24E guidance(18Oct 23) Anta Sports (2020 HK)–Earnings cutand de-rating may end here(13 Oct 23) Retail discounts widened QoQ in 4Q23, but inline with guidance.Xtep’s retaildiscountswereat 30% in 4Q23,upfrom 25% to 30% in 3Q23, inline with guidanceand mainly due to the active inventory clearance on different e-commerce channels. Channel inventory was back to a favourable level.Xtep’sinventory to retail salesratio was at 4 to 4.5 months in 4Q23, improved from 4.5 to 5 months in 3Q23 andwas inline with guidance.Moreover,theaverageage of inventory is quite decentalready (more than 70% ofthe inventories arenew products launchedwithin 6months). Also,aspointed out by management, listed-co level inventory may drop toaround RMB1.8-1.9bn in 2H23E, from around RMB2.4bn, better than their previousexpectation. Ramp-up of new brands, as a whole, is still on track.For S&M, the retail salesgrowth was very robust at around 100% in FY23E and 30%+growth inFY24Eisexpected from the management. For K&P, retail sales growth was at about mid-teens in FY23E (doubled in China but still weak overseas) and therefore only 10%+growth is expected in FY24E. Palladium is likely to be the next brand to achievebreakeven (hopefully in FY24E).Hence, we thinklosses from all these brands, as awhole, should continue to narrowgoing forward. Earnings revision Operating numbers Assumptions Valuation Source:Bloomberg,CMBIGM estimates Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in thisreport: (1) all of the views expressed accurately reflect his or her personal views about the subject securitiesor issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed bythat analyst inthis report.Bes

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