Investor net Xie Yingjie

Editor Wu Yue

In recent years, driven by many international and domestic factors, domestic sports brands have become sought after by many young people, and relevant listed companies have also benefited. Xtep International Holdings Limited (01368.HK, hereinafter referred to as "Xtep International") is one of them.

As early as mid-2021, Xtep International's share price soared to HK $15.90 per share, still fluctuating in its high range for nearly a year, while the company's share price stagnated for a long time from 2010 to 2020, peaking at HK $5.80 per share.

The company expects revenue and net profit to grow by more than 35% in the first half of 2022 compared with the same period last year, but some research institutions have still lowered their profit forecasts for the company. On the news side, the controlling shareholders decided to reduce their holdings by 3%. About 60 million shares were sold to long-term investment funds because the company's limited number of freely tradable shares limited large-scale purchases by investors.

A variety of factors push up the stock price

In August last year, the State Council issued the National Fitness Program, which aims to reach 38.5 percent of people who regularly participate in physical exercise by 2025, driving the total scale of the national sports industry to 5 trillion yuan.

With the concept of healthy China deeply rooted in the hearts of the people, the size of the sports market is growing rapidly. According to the forward-looking Industrial Research Institute, the retail size of China's sportswear market will be 371.8 billion yuan in 2021, an increase of 19% year-on-year and a compound annual growth rate of 7.8% from 2019 to 2021.

The share price of Xtep International, which has been traded for a long time, has finally improved. As of August 11, the stock closed at HK $12.5 per share, with a market capitalization of HK $329 and a rolling price-to-earnings ratio of 30 times.

According to public information, Xtep International was founded in 1987 and founded the Xtep brand in 2001. Hong Kong shares were listed in 2008. At present, the sports multi-brand matrix has been established and has become one of the three major sporting goods brands in China.

According to Wind, the company's net profit reached 966 million yuan in 2011 and has not exceeded that value since. From 2019 to 2021, Xtep International's revenue reached 8.2 billion yuan, 8.2 billion yuan and 10.06 billion yuan respectively, and its net profit was 728 million yuan, 513 million yuan and 908 million yuan respectively.

Xtep International said: "Xtep joined the new brand in 2019, and the new brand is also in the stage of development, which requires a lot of resource investment in R & D channels, product innovation, brand building and so on. as a result, the new brand will cause a loss of no more than 150 million in 2020 and 2021, affecting the group's net profit. It is expected that in the next few years, the loss range of the new brand will gradually narrow. "

It turns out that the company's multi-brand matrix is located in different consumer groups. Among them, the main brands are specifically targeted at mass sports, focusing on cost-effective; sokoni and Maile for professional sports market; Geschweil and paladin comply with the trend of fashion sports for young people.

According to the latest announcement, the company expects revenue and net profit to grow by more than 35% year-on-year in the first half of 2022. "the main brands of Xtep and Xtep's children's business have made breakthroughs in product innovation, retail channel upgrading and brand awareness enhancement; sokoni has strong sales in the professional sports sector."

Institutions cut their profit forecasts

Before and after the announcement of the first half of 2022 results, many agencies gave the company an "overweight" rating.

Tianfeng Securities said that the company adheres to the multi-brand and globalization strategy, the main brands focus on operation, the market segment remains in the lead, the product band is broadened, the growth matrix is rich, and the children's business continues to grow; professional sports and sports fashion are expected to gradually release increments.

At the same time, some institutions have lowered their target prices for the company. Credit Suisse cut its 2022-24 earnings forecast by 7 per cent per share by 8 per cent, and its target price fell 14.7 per cent from HK $17.6 to HK $15.

Huili Securities downgraded Xtep's international rating to "neutral", with a maximum target price of HK $13.01, down 8.06 per cent from its previous target price, while Daiwa lowered its target price from HK $16.70 to HK $15.80.

One of the reasons is that although Xtep's international performance has resumed growth, the company's market share has not increased.

According to China Research Network, the market share of Anta and Li Ning Co. Ltd. increased by 0.7% and 1.4% respectively to 9.3% and 8.2% in 2021, while Xtep's international market share was 4.4%, down 0.1% from the same period last year.

In terms of revenue growth, from 2017 to 2021, Anta had a compound revenue growth rate of 31%, Li Ning Co. Ltd. reached 26.3%, and Xtep International ranked lowest among the three companies with 18.3%.

So, does the red performance in the first half of this year have anything to do with a low base? "We have captured the consumer concept of the younger generation-our enthusiasm for Chinese brands," the company said. Attach importance to scientific and technological research and development, in shoes, clothing categories to accumulate a number of advanced scientific and technological achievements. Xtep brand running shoes matrix has a comprehensive horizontal and vertical development, and the professional performance of 160X series of representative products is outstanding. "

It is worth mentioning that Xtep International spent 250 million yuan on R & D in 2021, while Anta and Li Ning Co. Ltd. spent 1.1 billion yuan and 400 million yuan respectively in the same period.

Correspondingly, Xtep International's accounts receivable and inventory are increasing. Wind data show that from 2020 to 2021, the company's accounts receivable increased from 3.2 billion yuan to 3.5 billion yuan, and inventory increased from 970 million yuan to 1.5 billion yuan.

Does this mean that bargaining power has been reduced? The company responded: "the expansion of operations has led to higher receivables and inventories than in 2020. Inventory growth also needs to increase inventory as new brands begin to expand in China, and the inventory seen in the annual report is only products in warehouses that have not yet been sent to dealers. The working capital turnover days of the Group will be 64 days in 2021, a decrease of 23 days compared with the same period last year; therefore, it will not pose a risk of bad debts or impairment. "

New brands are a drag on operational efficiency

Research institutions generally believe that as far as Xtep International's own development is concerned, the medium-term growth space also lies in the improvement of expense rate, price increase and the increase in the proportion of middle and high-end products to increase gross profit margin and jointly contribute to the improvement of net profit margin. In the long run, the growth space is constantly optimized in the channel structure, offline from wholesale to terminal flow growth, further channel sinking, online and offline coordinated development.

According to Wind, Xtep International's gross profit margin in 2021 is 41.7 per cent, which is lower than Anta (61.6 per cent) and Li Ning Co. Ltd. (53 per cent). The company's net profit margin is 8.8 per cent, compared with 16.6 per cent and 17.7 per cent for the latter two companies, respectively, twice that of Xtep International.

The company responded: "the new brand is in the stage of development and requires a lot of resource investment in R & D channels, product innovation, brand building and so on. Xtep put forward the Fifth five-year Plan last year, aiming to achieve the 24 billion group revenue target by 2025, which is more than double that of 2021, which shows that management still has considerable confidence in future growth."

In 2021, the sales cost of Xtep International was 1.89 billion yuan, with a sales expense rate of 18.8%, while that of Anta and Li Ning Co. Ltd. was 17.75 billion yuan and 6.34 billion yuan, respectively, and the sales expense rate was 35.9% and 27.1%, respectively.

In other words, the industry leader through higher marketing investment, in exchange for the promotion of brand image, further enhance the profitability. This is also reflected in the turnover of the three companies. In 2021, the total asset turnover of Xtep International was 0.74, which was lower than that of Anta (0.86) and Li Ning Co. Ltd. (1).

Loose cash flow means that enterprises have more development capital. In 2021, Xtep's international cash and cash equivalents reached 3.9 billion yuan, while short-term loans and current loans mature to 400 million yuan, and long-term loans totaled 2.1 billion yuan, an increase of 600 million yuan compared with 2020.

In theory, corporate bank deposits are high, indicating that the company is very rich in funds, but the company is still increasing its borrowing and external fixed growth. In addition, Xtep International's net present ratio (the ratio of net operating cash flow to net profit) is 0.79, which is lower than that of Anta and Li Ning Co. Ltd., which reflects the strength of upstream and downstream bargaining power of different enterprises. The higher the value, the higher the bargaining power.

"the new brand has a considerable wholesale business overseas, and overseas needs working capital investment. The cost of borrowing by overseas banks has always been low, and the interest rate on bank deposits is also relatively satisfactory. With the increase of the scale of business, we need to increase certain loans to cope with the development of overseas business. In addition, it is necessary to maintain a certain amount of working capital in the mainland. At present, Xtep has ample cash flow, and when the corresponding operation and expansion begin to mature, borrowing will be reduced. " The company explained.

Fundamentally, Xtep International's current growth driving force is still the main brand, the scale of the new brand business is still relatively small, but the pre-market cultivation costs a lot of working capital.

Xtep International is still confident about the future: "the new brand still accounts for a small proportion of business, but it will develop rapidly in China in the next three to five years. It is expected that the revenue of the new brand will reach 4 billion in 2025, with an annual compound growth rate of more than 30%. When the scale of the new brand expands, the loss will also be narrowed, and at the same time, it will bring economies of scale, bring long-term sustainable development to the group and improve profit margins. " (produced by thinking Finance) ■