Xtep International (1368.HK) is maintaining a cautious stance due to the health of its distribution channels being the top priority. The company's FY23 earnings were negatively impacted by weak e-commerce sales, but were in line with market expectations. The company's management has set a more conservative target for FY24E, with a target growth rate of 5% for the next five years. This aligns with our view that Xtep may not be the top choice in the industry in FY24E. However, the company's valuation of 9x FY24E earnings and 6% FY24E earnings is attractive, leading us to maintain a buy rating. Retail sales growth has slowed down, but discounts have improved since the beginning of the year. Management mentioned that retail sales growth has slowed down to 30% or above since the beginning of the year, compared to the high growth of 30% in the fourth quarter. However, the discount rate has increased to 25% to 30% and the inventory-to-sales ratio has remained stable at 4 to 4.5 months. The FY24E guidance is quite conservative, but we are not surprised as channel health should be the top priority. The company has faced challenges such as high base levels from the re-opening of China, weak consumption, and competition from different peers. The company is expected to expand more entry-level or value products in both offline and online channels, along with an increase in store numbers, which we believe is achievable. We now predict a HSD growth rate of 10% or above for adult, children, and e-commerce, and an expansion in NP margins due to an increase in the product mix and operational leverage from rationalized A&P costs and limited employee costs. We are maintaining a buy rating, but have lowered our TP to 6.31 HKD, based on a FY24E P/E multiple of 12x (from 13x), considering the uncertainty in the macro environment and the搁置 of the long-term plan by the management. We expect FY23-26E revenue/CNP compound annual growth rates of 10% / 18%, with FY24E/FY25E net profit being cut by 1-2% due to slower sales growth and lower operational leverage than expected. The stock currently trades at an FY24E P/E multiple of 8x, which is
