Xtep International (1368 HK)

Rating Maintain BUY

Core brand on track, new brands take time Target price HK$4.75 From HK$3.22

Current HK$4.00 Upside.+18.8% price FY20 net profit beats on cost control, retail sell-through expects to see back to back quarterly improvement Result Takeaway

Though Xtep’s FY20 revenue was largely flat Yoy and in-line with our estimates, 23 March 2021 it’s net profit (-29.5% Yoy to RMB513mn) arrived at 10% above our forecasts,

thanks to lower SG&A ratio (18.8% vs. 21.0% in FY19) and effective tax rate. However, Xtep’s GM fell short of our forecast (-4.3ppts Yoy to 38.1%), due to i) Hayman Chiu Xtep’s proactively shed distributors 3Q20-1Q21 orders to ii) Xtep provided [email protected] additional support to distributors, including rental reimbursement in the (852) 2235 7677 form of sales rebates and lengthened their AR terms by ~ 1 month, 1Q20 inventory buyback. These factors brought 5 ppts negative impact on blended GM, while new brands GM contribution set off part of the decline Trading Data (+70bps impact on GM). 52-Week Range (HK$) 4.35/2.04 3 Mth Avg Daily Vol (m) 7.54 rd Xtep core brand ’s 4Q20 operation delivered the 3 consecutive back to back No of Shares (m) 2,546.9 quarterly improvement, with retail sell-through accelerated to +ve high single digit, Market Cap (HK$m) 10,187.9 while retail discount maintained at 30-35% and inventory turnover stood < 5 Major Shareholders (%) Group Success months vs. (~5.0 mths in 3Q20). Xtep provided that 2M21 growth momentum (54.1%) continues with retail sell-through soared 50% Yoy due to low base (+mid-single digit vs. same period in 2M19), while retail discount further narrowed to ~30%. We Auditors Ernst & Young stick to our previous view that core Xtep brand ‘s recovery is on the right track, as Result Due 1H21E: Aug 2021 both employment and consumer sentiment would further improve on the back of China’s economy. We expect both retail discount and retail channel inventory Company description would gradually resume normal in the coming quarters. Founded in 1999, Xtep is a leading PRC-based As mentioned in our last update in Aug 2020, ANTA will shift towards DTC model fashion sportswear brand enterprise, which going forward, and Xtep shared during the result call that similar move for Xtep principally engages in the design, development, core brand was also on their agenda, but ramping up international brands in manufacturing, distributing and marketing, as well FY21E will still be the main objective. Xtep targets to open 200-300 core brand as brand management of its branded sports stores in FY21E and would see sales to grow by low-mid teens /year in the footwear, apparel and accessories. As of Dec 31, coming 5 years. 2020, Xtep’s retail network comprises of 6,021 Xtep brand POS. International brands’ ramp up still takes time, booming online sales thanks to COVID-19 Price Chart In FY20, athleisure (K-Swiss & Palladium) and professional segment (Saucony & Merrell) revenue soared 114%/609% respectively and accounted for 13.1% of total revenue (vs. 5.8% in FY19) and they are still ramping up. There were 43/57 self-operated stores in Asia-Pacific under K-Swiss & Palladium during the period, while there were 32 Saucony and 6 Merrell self-operated stores in 1st and 2nd tier cities in China. Both Saucony and Merrell achieved a robust growth in online sales during Double 11 Global Shopping Festival (Saucony: +3x Yoy; Merrell: +38% Yoy)

Xtep targets to open 30-50 stores (mainly Saucony) in FY21E and expects new store openings would lead to RMB 45-50mn loss (i.e. RMB90-100mn loss on JV Sources: Bloomberg, CIRL and Xtep currently holds 50% stake).

Meanwhile, athleisure segment posted a net loss of RMB104mn in FY20 due to COVID-19 outbreak which halted business operations in America and Europe most of the time. Xtep would continue to focus on optimizing Palladium and K-Swiss, and delayed its store expansion plan to 2022. Xtep expects this segment would still post a loss in FY21E, but would be less than that in FY20. Xtep also stated that it did not see the need to make impairments on the book value of its new business acquisitions in the foreseeable future, however, due to prolonged COVID-19 impact on economy and hence the retail sales in Americas and Europe, we remain cautious on this issue.

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Lift FY21E-22E EPS, Maintain BUY on solid core-brand and expects gradual improvement in new brands

We raised Xtep’s FY21E-22E EPS by 13.0%/10.7% to factor in gradual improvement from new brands as well as to better reflect GM of mass market, athleisure and professional segment, we also introduce FY23E forecasts. With Xtep’s EPS expected to grow 25.6% CAGR in FY19-FY22E, Xtep’s current FY21E 12.4x PE (trading at 66% discount to ANTA), and its 6.5% FY21E yield still looks undemanding to us, as we expect core Xtep brand fundamental continue to stay solid, while ramp-up pace of new brands remains a near term overhang on valuation . We arrive Xtep’s new TP at HK$4.75 based on 14.7x (vs.11.9x in our last update) forward PE (~40% discount to ANTA) and FY21E EPS. The valuation is near the top end when Xtep announced the acquisition in May 2019, we maintain Xtep’s rating at BUY.

Exhibit 1: Earnings forecast revision Exhibit 1: FY21E (old) FY21E (new) Diff FY22E (old) FY22E (new) Diff FY23E Yoy RevenuePork 8,550 9,403 10.0% 9,244 10,805 16.9% 12,640 17.0% products GP 3,503 3,851 9.9% 3,790 4,474 18.0% 5,275 17.9% sold in

GPMsupermark 41.0% 41.0% 0bps 41.0% 41.4% +40bps 42.3% +100bps et counters Net Profit 584 680 16.5% 732.8 837 14.2% 1,025 23.0%

EPS 0.242 0.274 13.0% 0.304 0.337 10.7% 0.412 23.0%

Source: CIRL estimates

Exhibit 2: Xtep revenue and GM assumption ExhibitYear to Dec1: (RMB mn) FY18A FY19A FY20A FY21E FY22E PorkSegment Revene (By type) productsShoes 3,925 4,653 5,047 5,778 6,673 Apparel 2,327 3,344 2,964 3,453 3,943 sold in Accessories 131 185 161 173 189 supermarkGroup 6,383 8,183 8,172 9,403 10,805 et counters Segment Growth Shoes 20.5% 18.6% 8.5% 14.5% 15.5% Apparel 32.3% 43.7% -11.4% 16.5% 14.2% Accessories 36.5% 41.1% -12.9% 7.2% 9.3% Group 24.8% 28.2% -0.1% 15.1% 14.9%

Revenue (By brand) Xtep brand (Mass Market) 6,383 7,707 7,101 7,811 8,436 K-swiss & Palladium (Athleisure) 0 466 999 1,499 2,248 Sacouny & Merrell (Professional) 0 10 72 93 121 Group 6,383 8,183 8,172 9,403 10,805

Brand Gross Margin Xtep brand (Mass Market) 44.3% 43.8% 38.9% 41.0% 41.5% K-swiss & Palladium (Athleisure) 0.0% 36.7% 40.7% 40.7% 41.0% Sacouny & Merrell (Professional) 0.0% 43.2% 41.6% 41.6% 42.0% Group 44.3% 43.4% 39.1% 41.0% 41.6% Sources: Company Data, CIRL estimates

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Exhibit 3: Xtep’s retail sales value further improved in 4Q20 Exhibit 1: Pork products sold in supermark et counters

Sources: Company Data, CIRL (ANTA disclosed retail sales value from 1Q16, and 361 Degree began similar move from 2Q17)

Exhibit 4: Financial Summary ExhibitIncome statement 1: Cash flow Year to Dec (RMB mn) FY18A FY19A FY20A FY21E FY22E Year to Dec (RMB mn) FY18A FY19A FY20A FY21E FY22E PorkRevenue 6,383 8,183 8,172 9,403 10,805 Pre-tax profit 976 1,123 779 1,031 1,267 Gross profit (reported) 2,828 3,550 3,199 3,851 4,474 Taxes paid (309) (334) (325) (422) (470) productsEBITDA 1,136 1,370 1,084 1,334 1,593 Depreciation & amortization 104 141 170 183 198 Depreciation 92 136 166 178 193 Associates & Others (75) (91) 102 71 60 soldEBIT in 1,044 1,234 919 1,156 1,399 CFO bef. WC change 1,031 1,176 1,068 1,345 1,584 Net interest income (exp.) 68 111 140 125 132 Change in working cap (513) (39) (320) (871) (589) supermarkAssociates 0 0 0 0 0 Cashflow from operation 518 1,138 749 474 996 etExceptionals/others counters 0 0 0 0 0 CAPEX (72) (97) (207) (235) (272) Profit before tax 976 1,123 779 1,031 1,267 Free cash flow 446 1,041 542 239 724 Tax expenses 306 390 257 341 421 Dividends (459) (436) (279) (371) (458) Minority interest 13 4 (8) (8) (8) Balance sheet adj. (329) (815) (559) (211) (153) Net profit 656 767 513 680 837 Sharse issued 0 0 0 0 0 Dividends (391) (437) (299) (398) (487) Others 0 0 0 0 0 EPS (RMB) 0.29 0.30 0.21 0.27 0.34 Net cash flow (342) (210) (296) (343) 112 Net cash (debt) start 3,507 3,165 2,955 2,659 2,316 Balance sheet Net cash (debt) at year-end 3,165 2,955 2,659 2,316 2,428 Year to Dec (RMB mn) FY18A FY19A FY20A FY21E FY22E Cash & equiv 3,196 2,970 3,472 3,155 2,964 Ratios Trade receivables 2,115 2,910 3,236 3,723 4,279 Year to Dec (RMB mn) FY18A FY19A FY20A FY21E FY22E Other receivables 727 823 907 1,029 1,175 Growth rate (%) Inventories 836 1,046 975 1,218 1,393 Revenue 24.8% 28.2% -0.1% 15.1% 14.9% Other current assets 1,185 1,517 437 437 437 EBITDA 43.2% 20.6% -20.9% 23.1% 19.4% Fixed assets 972 1,112 1,257 1,393 1,560 EBIT 24.8% 28.2% -0.1% 15.1% 14.9% Intangible assets 8 809 709 709 709 Adjusted Net profit 24.0% 16.8% -33.0% 32.5% 23.0% Investment, associates etc 159 1,135 1,578 1,578 1,578 Fully diluted EPS 23.8% 1.7% -32.1% 32.5% 23.0% Total assets 9,199 12,323 12,572 13,244 14,096 Margins (%) Gross margin (reported) 44.3% 43.4% 39.1% 41.0% 41.6% Account payables 879 1,420 1,479 1,542 1,868 EBITDA 17.8% 16.7% 13.3% 14.2% 14.7% Other payables 861 981 1,052 1,052 1,052 EBIT 16.4% 15.1% 11.2% 12.3% 12.9% Short-term debt 1,483 1,086 642 642 642 Net margin 10.5% 8.9% 6.2% 7.2% 7.7% Other current liabs 55 185 161 161 161 Other ratios Long-term debts 461 1,269 1,516 1,664 1,506 ROE (%) 12.3% 11.8% 8.1% 9.2% 10.6% Deferred tax and others 129 423 423 423 423 ROA (%) 7.1% 6.8% 4.7% 5.3% 6.3% Other long-term liabs 0 0 0 0 0 Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash Total liabilities 3,868 5,362 5,273 5,485 5,652 Interest coverage (x) 15.3 11.1 6.6 9.2 10.6 Receivables days 112.1 112.1 137.3 135.1 135.2 Share capital 20 22 22 22 22 Payables days 90.1 73.1 86.8 86.6 84.4 Reserves 5,307 6,868 7,201 7,661 8,346 Inventory days 79.8 74.1 74.2 72.1 75.2 Shareholders' equity 5,327 6,890 7,223 7,684 8,368 Effective tax rate (%) 31.4% 34.8% 33.7% 33.7% 33.7% Minorities 5 70 75 75 75 Total equity 5,331 6,960 7,299 7,759 8,444 Net cash (debt) 3,165 2,955 2,659 2,316 2,428 Source: Bloomberg, CIRL estimates

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Exhibit 5: Peers valuation comparison Exhibit 1: bloomberg Share Price Movement (%) PER (x) P/B (x) Yield (%) code 1M YTD FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E

PRCPork - Sportswear peers

Brandsproducts LI NING CO LTD 2331 HK (1.9) (12.8) 187.6 132.3 66.2 61.0 41.7 32.5 16.5 15.2 13.4 11.4 9.2 7.5 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% ANTA SPORTS PROD 2020 HK 11.3 17.6 83.8 67.0 53.8 47.9 35.9 17.8 18.0 16.5 13.6 10.9 8.9 6.7 0.8% 0.7% 0.6% 0.6% 0.6% 0.8% 361sold DEGREES in 1361 HK 67.4 113.9 9.1 13.3 9.7 9.9 9.1 8.0 0.7 0.7 0.7 0.6 0.6 0.6 4.5% 0.0% 0.0% 0.0% 0.0% 0.0% HONMAsupermark GOLF LTD 6858 HK (6.7) 15.7 9.7 12.9 12.0 26.7 17.4 16.6 2.0 1.7 1.7 1.8 2.3 2.3 3.7% 3.9% 4.2% 1.9% 3.7% 3.9% Average 17.5 33.6 72.5 56.4 35.4 36.4 26.0 18.7 9.3 8.5 7.4 6.2 5.2 4.3 3.0% 2.3% 2.4% 1.2% 2.2% 2.4% et counters OEMs and Distributors

YUE YUEN IND 551 HK 10.0 17.3 7.7 12.8 13.0 -33.5 15.9 10.8 0.9 0.9 1.0 1.0 1.0 0.9 7.9% 7.9% 5.9% 1.5% 4.2% 5.4% STELLA INTERNATI 1836 HK 1.3 6.1 12.0 15.7 14.7 10.1 76.5 12.2 1.0 1.0 1.0 1.1 1.0 1.0 6.3% 7.8% 8.9% 1.7% 5.7% 7.6% TOPSPORTS INTERN 6110 HK 8.6 11.2 40.1 28.1 28.7 28.9 21.5 20.8 11.8 15.2 29.6 5.8 5.8 5.7 0.0% 0.0% 0.0% 1.8% 5.1% 2.2% POU SHENG INTL 3813 HK 4.7 (3.3) 20.4 14.7 9.9 24.0 8.2 1.3 1.1 1.1 1.0 0.8 0.8 1.1% 1.4% 0.0% 0.0% 0.0% 0.0% Average 12.5 22.2 20.1 17.8 16.6 21.0 30.5 14.6 3.7 4.6 8.2 2.2 2.2 2.1 5.1% 5.7% 7.4% 1.7% 5.0% 5.1%

XTEP INTL 1368 HK 6.2 (37.7) 14.0 11.8 12.0 16.6 12.4 7.1 1.5 1.5 1.2 1.2 1.1 1.0 5.7% 5.2% 5.1% 3.5% 4.6% 5.7%

International - Sportswear peers

NIKE INC -CL B NKE US 1.6 (2.3) 54.1 115.4 53.7 60.7 44.3 34.9 18.3 22.3 23.8 27.4 20.2 18.0 0.5% 0.6% 0.6% 0.7% 0.8% 0.8% ADIDAS AG ADS GR (5.1) (7.3) 53.4 32.6 29.1 127.7 35.6 27.3 9.2 8.9 8.4 7.7 7.2 6.4 0.9% 1.2% 0.0% 0.7% 1.2% 1.5% UNDER ARMO-C UA US 6.2 30.6 - - - -45.3 144.2 64.9 ------0.0% 0.0% 0.0% 0.0% 0.0% 0.0% LULULEMON ATH LULU US (2.9) (9.9) 142.0 164.4 85.6 64.2 68.3 46.8 31.6 26.4 28.1 21.5 16.9 14.3 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR (0.5) (7.5) 98.5 67.9 51.1 144.9 49.9 33.5 7.7 7.7 7.2 6.5 6.5 5.9 1.4% 0.4% 0.0% 0.3% 0.6% 0.9% ASICS CORP 7936 JP 7.4 (3.6) 28.8 -17.9 50.2 -29.3 61.4 32.1 1.9 2.2 2.3 2.5 2.7 2.6 1.2% 1.2% 1.6% 1.3% 1.4% 1.4% MIZUNO CORP 8022 JP 4.2 15.5 82.4 12.2 9.9 9.9 -307.9 17.2 0.7 0.6 0.6 0.6 0.6 0.6 2.2% 2.1% 2.1% 2.2% 2.2% 2.2% DESCENTE LTD 8114 JP 8.6 8.0 25.6 25.5 37.2 - - - 2.1 1.8 1.9 - - - 1.2% 1.2% 1.3% 0.0% 0.0% 0.0% COLUMBIA SPORTSW COLM US 4.0 24.4 71.8 28.0 22.1 76.2 26.7 22.3 4.7 4.4 4.0 4.0 3.5 3.2 0.7% 0.8% 0.9% 0.2% 1.0% 1.1% Average 2.6 5.3 69.6 63.7 42.4 80.6 61.5 34.9 9.5 9.3 9.5 10.0 8.3 7.3 1.3% 1.2% 1.5% 0.9% 1.3% 1.4%

XTEP INTL 1368 HK 6.2 (37.7) 14.0 11.8 12.0 16.6 12.4 7.1 1.5 1.5 1.2 1.2 1.1 0.8 5.7% 5.2% 5.1% 3.5% 4.6% 5.7%

Source: Bloomberg, CIRL estimates (As of Mar 23 market close, ANTA, Topsports and Pou Sheng are CIRL estimates)

Exhibit 6: Xtep’s 12 month forward P/E Ratio

Exhibit 1: 20 12 mths Forward P/E Ratio Pork 18 avg. products 16

sold in +1std. 14 supermark 12 et counters a 10 -1std. 8 -

6

4

2

0 Dec-17 Dec-18 Dec-19 Dec-20

Source: Bloomberg, CIRL

R isk Factors

Downside risks include: 1) Slower than expected sales retail sales recovery; 2) Inventory de-stocking longer than expected in distribution channels; 3) longer than expected product mix transition, 4) rising production costs, 5)

increasing competition from international and PRC peers and 5) Unsuccessful ramp up in JV with Wolverine, newly acquired brands (K-Swiss and Palladium)

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Rating Policy

Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected]

Lewis Pang Associate Director (852) 2235 7847 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected] Edith Li Research Analyst (852) 2235 7515 [email protected]

Analyst Certification I, Hayman Chiu, Research Director of Cinda International Research Limited., hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International Research Limited cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so may contain uncertainty. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, and it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International Research Limited will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.

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