Xtep International Holdings Ltd Target Price: HKD4.90 Price: HKD3.72 Still Represents Good Value Market Cap: USD1,064M Bloomberg Ticker: 1368 HK

Hong Kong Results Review FY16: missed expectations

20 March 2017 Consumer Cyclical | Sportswear Buy (Maintained) Xtep International Holdings Ltd Target Price: HKD4.90 Price: HKD3.72 Still Represents Good Value Market Cap: USD1,064m Bloomberg Ticker: 1368 HK

We keep our BUY but with a lower HKD4.90 TP (vs HKD5.20, 32% Share Data downside) due to a weaker sales outlook. We expect FY17 sales growth to Avg Daily Turnover (HKD/USD) 11.2m/1.44m stay in the low single-digits, as Xtep continues to cut trade fair order deliveries, while more provisions (albeit at a smaller quantum) may 52-wk Price low/high (HKD) 3.15 - 4.64 continue to hurt NP. We stay positive on Xtep in the longer term as it still Free Float (%) 40 offers significant value due to its high net cash and free cash flow (FY17F Shares outstanding (m) 2,149 dividend yield: 5.5%). However in the short to mid term, slower sales Estimated Return 32% growth, lower visibility and broker downgrades may keep stock price depressed. Shareholders (%) Mr Ding Shui Po 60.3 FY17 sales to be subdued. Xtep may continue to reduce trade fair deliveries in 2017, after it did so several times in 2016. Our FY17F sales may likely grow by the low single digits (SD) after we apply a discount to 1Q17F, 2Q17F and 3Q17F trade fair orders growth of mid SD, low SD and low SD respectively. Share Performance (%) No more disclosure of trade fair data? It is considering to stop reporting trade YTD 1m 3m 6m 12m fair figures from the 2018 collection onwards, as it regards trade fair numbers as “becoming less representative” due to higher replenishment orders taken, its Absolute 14.1 6.0 8.8 0.0 (5.8) growing e-commerce business and reduced order deliveries. We feel investors Relative 3.6 4.9 (1.6) (4.2) (24.4) may not like the subsequent lower visibility, which would affect sentiment. Source: Bloomberg

More provisions to come. We expect Xtep to make more accounts receivable (AR) provisions for Xtep Kids, as 10% of the CNY1.9bn AR pertains to Xtep XTEP International Holdings Ltd (1368 HK) Price Close Relative to Hang Seng Index (RHS) Kids distributors. We deem AR provisions as operational and recurring as Xtep has been impacted by it over the last two years due to sell-through challenges. 4.5 114 We have not, however, factored in provision write-backs, should those 4.0 97 distributors repay their bills. 3.5 81 3.0 64 18 FY16 results announced 17 Mar 2017 – missed expectations 16 14 FYE Dec (HKDm) FY15 FY16A YoY 2H16 YoY Comments 12 10 Sales Revenue 5,295 5,397 2% 2,862 -1% 2H trade fair orders cut 8 6 Gross Profit 2,237 2,331 4% 1,233 0% 4 2

EBIT 921 917 0% 334 -21% AR provisions Volm

16 16

- -

Net Profit (recurring) 623 528 -15% 148 -47% -

Jul

Jan

Mar

Sep Nov May DPS (CNY) 0.17 0.14 -17% 0.05 -40% Source: Bloomberg As % of Sales GP margin 42.2% 43.2% 1.0ppt 43.1% 0.5ppt Functional products drive GPM EBIT margin 17.4% 17.0% -0.4ppt 11.7% -2.8ppt NP margin (recurring) 11.8% 9.8% -2.0ppt 5.2% -4.4ppt

Source: Company data, RHB BUY. We cut FY17F-18F EPS by 9% and 11% respectively on the more tepid growth outlook and the likelihood of more provisions. We cut our DCF-based TP to HKD4.90 (from HKD5.20), implying 15x FY17F. Xtep is trading at 11x FY17F P/E, in line with the sportswear sector average. In the near term, its share price may be depressed as the market may focus on the softer FY17 outlook, and we see little positive catalysts for the rest of 2017. However, it offers strong intrinsic value from FCF and high net cash positions (CNY1.30/share) and is supported by a respectable FY17F dividend yield of 5.5%.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (CNYm) 5,295 5,397 5,591 5,830 6,123 Reported net profit (CNYm) 623 528 666 732 804 Recurring net profit (CNYm) 623 528 666 732 804 Recurring net profit growth (%) 30.3 (15.2) 26.1 9.9 9.9 Recurring EPS (CNY) 0.29 0.24 0.30 0.33 0.36 DPS (CNY) 0.17 0.14 0.18 0.20 0.22 Recurring P/E (x) 11.4 13.9 11.0 10.0 9.1 P/B (x) 1.47 1.48 1.40 1.33 1.25 P/CF (x) 10.6 24.5 10.7 10.0 9.2 Dividend Yield (%) 5.2 4.4 5.5 6.0 6.6 Analyst EV/EBITDA (x) 5.00 5.17 4.39 3.92 3.46 Robin Yuen, CFA Return on average equity (%) 13.0 10.8 13.1 13.6 14.2 Net debt to equity net cash net cash net cash net cash net cash +852 2103 9202 Our vs consensus EPS (adjusted) (%) (11.9) (11.2) (6.7) [email protected]

Source: Company data, RHB

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Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Financial Exhibits

Financial model updated on : 2017-03-19. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (CNY) 0.29 0.24 0.30 0.33 0.36 Consumer Cyclical EPS (CNY) 0.29 0.24 0.30 0.33 0.36 Xtep International Holdings Ltd DPS (CNY) 0.17 0.14 0.18 0.20 0.22 Bloomberg 1368 HK BVPS (CNY) 2.26 2.24 2.36 2.49 2.64 Buy Weighted avg adjusted shares (m) 2,149 2,210 2,210 2,210 2,210

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F DCF Recurring P/E (x) 11.4 13.9 11.0 10.0 9.1 P/E (x) 11.4 13.9 11.0 10.0 9.1 Key drivers P/B (x) 1.47 1.48 1.40 1.33 1.25 i. Product mix upgrade; FCF Yield (%) 8.6 2.8 7.3 7.9 8.8 ii. Improving sports participation rate. Dividend Yield (%) 5.2 4.4 5.5 6.0 6.6

EV/EBITDA (x) 5.00 5.17 4.39 3.92 3.46 Key risks EV/EBIT (x) 5.37 5.55 4.66 4.14 3.64 i. Channel oversupply; ii. Homogenisation; iii. Competitive prices. Income statement (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover 5,295 5,397 5,591 5,830 6,123 Company Profile Gross profit 2,237 2,331 2,430 2,551 2,696 Xtep is one of the top three domestic sportswear EBITDA 833 878 1,007 1,093 1,193 brands in China, and has over 7,000 stores in its Depreciation and amortisation (57) (59) (59) (59) (59) network. It operates an asset-light wholesale model Operating profit 776 818 949 1,035 1,134 that relies on franchisees to exclusively distribute its Net interest (28) (51) (53) (47) (45) branded goods at retail outlets. Pre-tax profit 893 866 994 1,086 1,187 Taxation (257) (293) (283) (310) (338) Minority interests (14) (45) (45) (45) (45) Recurring net profit 623 528 666 732 804

Cash flow (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital 163 (510) (43) (52) (64) Cash flow from operations 669 299 681 731 791

Capex (59) (94) (150) (150) (150) Cash flow from investing activities 397 (567) (160) (160) (160) Proceeds from issue of shares 36 62 0 0 0 Dividends paid (317) (394) (399) (439) (482) Cash flow from financing activities (720) (542) (445) (484) (527) Cash at beginning of period 3,247 3,671 3,447 3,569 3,708 Net change in cash 346 (811) 77 87 103 Ending balance cash 3,600 2,863 3,523 3,656 3,811

Balance sheet (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 4,377 4,245 4,368 4,507 4,663 Tangible fixed assets 863 855 956 1,058 1,159 Intangible assets (8) (12) (18) (23) (29) Total investments 197 97 97 97 97 Total other assets 11 17 23 28 34 Total assets 8,114 8,174 8,488 8,839 9,233 Short-term debt 1,489 1,502 1,502 1,502 1,502 Total long-term debt 121 0 0 0 0 Other liabilities 2 0 0 0 0 Total liabilities 3,242 3,151 3,198 3,258 3,330 Shareholders' equity 4,852 4,953 5,220 5,512 5,834 Minority interests 20 69 69 69 69 Total equity 4,872 5,023 5,289 5,582 5,903 Net debt (2,766) (2,744) (2,866) (3,005) (3,162) Total liabilities & equity 8,114 8,174 8,488 8,839 9,233

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) 10.8 1.9 3.6 4.3 5.0 Recurrent EPS growth (%) 32.0 (17.6) 26.1 9.9 9.9 Gross margin (%) 42.2 43.2 43.5 43.7 44.0 Operating EBITDA margin (%) 15.7 16.3 18.0 18.7 19.5 Net profit margin (%) 11.8 9.8 11.9 12.5 13.1 Dividend payout ratio (%) 59.9 60.5 60.0 60.0 60.0 Capex/sales (%) 1.1 1.7 2.7 2.6 2.4 Interest cover (x) 27.9 15.9 17.8 22.0 25.0

Source: Company data, RHB

See important disclosures at the end of this report 2

Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

FY16 Results Review Net profit missed our estimates by 19% in FY16 (2H16: 45%) due to: i. Slower sales from the reduction of trade fair deliveries in 2H16; ii. Greater-than-expected AR provisions relating to Xtep Kids; iii. Its high interest expense. FY16 sales growth slowed to 2% YoY to CNY5,397m, as Xtep’s apparel segment declined due to the negative effects of erratic weather patterns and its decision to sell less fashion and lifestyle products. 2H16 sales reversed into a decline of 1.5% YoY, after Xtep once again cut distributor trade fair orders in order to control its store inventory. This explains why trade fair orders grew by the high SDs for both the 3Q16 and 4Q16 collections – thereby deviating from its reported sales decline. As we originally expected sales to grow 4.9%, its actual 2H sales missed our estimates by 6%. GP margin expanded 1ppt to 43.2% (2H16: +0.5ppt to 43.1%) due to a product mix upgrade. Meanwhile, having a bigger proportion of functional apparel in its product mix boosted the segment’s margin by c.2ppts. Sales & distribution (S&D) expenses decreased 13% YoY to CNY851m (2H16: -9% YoY to CNY530m) after the company actively reduced its advertising and promotions (A&P) budget by discontinuing the sponsorship of celebrities and lifestyle shows and focused instead on sporting events. A&P as a percentage of sales declined 2.9ppts to 11.8%. Administrative expense increased 39% to CNY662m (2H16: +39% YoY to CNY420m) from net provisions for doubtful debts rising to CNY222m (2H16: 158m). Its AR provisions exceeded our original 2H16 forecast of CNY50m. Management explained that 90% of these provisions stemmed from restructuring (including closure of stores) relating to its Xtep Kids business. The remaining 10% comes from the AR provisions incurred from extending credit days to support distributors. We also note Xtep did not declare any inventory provisions for FY16. Dividends maintained. It maintained a full-year dividend payout ratio of 60%, which implies a 4.4% dividend yield for FY16. Store network contracted by 200 to 6,800 stores for Xtep (Adult). Xtep Kids, due to its restructuring, closed 250 stores by end-FY16, from 600 stores in FY15. Inventory days (average) dropped by seven days to 51 days in FY16, primarily due to a high inventory balance on 1 Jan 2015. If based on the end-of-period method, its inventory days increased by seven days to 55 days due to a higher balance sheet inventory (CNY460m, vs CNY398m in FY15). We believe retail store closures and an effort to keep channel inventory healthy may have led to Xtep holding more inventory in its wholesale warehouses. AR days increased by 21 days to 119 days in FY16 (from FY15) as the company provided temporary support for Tier-1 distributors in acquiring operations of Tier-2, -3 and -4 retailers, as part of its initiative to streamline the structure of its distributor network. Key takeaways 3Q17 trade fair and 4Q16 stores performance was as expected. Xtep just announced trade fair orders for its 3Q17 collection grew in the low SDs, as it maintained its policy to increase replenishment orders. SSSG was in the mid-SDs, with retail discounts improving (from 1H16) to 25% and channel inventory being at 4-5 months. We note that its SSSG and channel inventory are indicative of a healthy situation, although this was achieved by truncating trade order deliveries and done during a period of store network reductions. Subdued earnings guidance. The company believes sales growth for FY17 would be in the mid-SDs, as they believe their apparel segment has bottomed out in terms of sales. GP margins would continue to expand on product mix upgrade on functional apparel, while A&P budget would be set at 11-13% of sales. However, it did not discount that it may have to make some more provisions in FY17, as 10% of its current AR (10% x CNY1,916m = CNY192m) relates to Xtep Kids distributors. CFO Mr Terry Ho suggested Xtep would revert back to growth in FY18, with earnings growing by the mid-teens as achievable.

See important disclosures at the end of this report 3

Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Xtep Kids’ restructuring. Historically, Xtep Kids was more of a fashion brand, with items like casual jeans and t-shirts being sold. As competition in the casual fashion segment became crowded, Xtep decided to turn Xtep Kids into a functional sportswear brand and aligned its positioning with that of Xtep (Adults). As such, both brands share the same sources for materials and production.

Figure 1: Actual vs estimated numbers

Source: RHB

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Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Figure 2: Key changes to our estimates

New Estimates Old Estimates Difference FYE Dec (CNYm) 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F Sales 5,591 5,830 6,123 5,906 6,560 0 -5.3% -11.1% COGS -3,160 -3,280 -3,427 -3,314 -3,660 0 Gross Profit 2,430 2,551 2,696 2,592 2,900 0 -6.3% -12.0% Selling & Distribution -922 -962 -1,010 -1,004 -1,115 0 -8.1% -13.7% General & Admin -559 -554 -551 -561 -623 0 -0.4% -11.1% Other income 99 99 99 90 90 0 9.6% 9.6% EBIT 1,047 1,133 1,233 1,117 1,251 0 -6.2% -9.4% Net finance costs -53 -47 -45 -14 -12 0 PBT 994 1,086 1,187 1,103 1,239 0 Tax -283 -310 -338 -314 -353 0 Profit for the Year 711 777 849 789 886 0 -9.9% -12.3% Minority Interest 45 45 45 60 60 0 NP to Equity 666 732 804 729 826 0 -8.7% -11.4% One-offs Adj 0 0 0 0 0 0 Recurring NP (Equity) 666 732 804 729 826 0 -8.7% -11.4%

EPS (Basic, CNY) 0.301 0.331 0.364 0.331 0.375 0.000 -8.9% -11.7% DPS (CNY) 0.18 0.20 0.22 0.20 0.22 0.00 -8.8% -11.6%

As % of Sales GP Margin 43.5% 43.7% 44.0% 43.9% 44.2% 0.0% -0.4ppt -0.5ppt SG&A expenses 26.5% 26.0% 25.5% 26.5% 26.5% 0.0% 0.0ppt -0.5ppt EBIT Margin 18.7% 19.4% 20.1% 18.9% 19.1% 0.0% -0.2ppt 0.4ppt Tax Rate 28.5% 28.5% 28.5% 28.5% 28.5% 0.0% 0.0ppt 0.0ppt Recurring NP(Equity) 11.9% 12.5% 13.1% 12.3% 12.6% 0.0% -0.4ppt 0.0ppt

YoY Change Sales 3.6% 4.3% 5.0% 5.8% 11.1% 0.0% Gross Profit 4.2% 5.0% 5.7% 6.7% 11.9% 0.0% SG&A -2.1% 2.3% 3.0% 3.8% 11.1% 0.0% EBIT 14.2% 8.2% 8.8% 10.4% 12.0% 0.0% Recurring NP (Equity) 26.1% 9.9% 9.9% 12.2% 13.3% 0.0%

Source: RHB

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Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Figure 3: Full-year P&L FYE Dec (CNYm) 2014 2015 2016 2017F 2018F 2019F Sales 4,778 5,295 5,397 5,591 5,830 6,123 COGS -2,831 -3,058 -3,065 -3,160 -3,280 -3,427 Gross Profit 1,947 2,237 2,331 2,430 2,551 2,696 Selling & Distribution -799 -983 -851 -922 -962 -1,010 General & Admin -488 -478 -662 -559 -554 -551 Other income 149 145 99 99 99 99 EBIT 809 921 917 1,047 1,133 1,233 Net finance costs -38 -28 -51 -53 -47 -45 PBT 770 893 866 994 1,086 1,187 Tax -284 -257 -293 -283 -310 -338 Profit for the Year 486 637 573 711 777 849 Minority Interest 8 14 45 45 45 45 NP to Equity 478 623 528 666 732 804 One-offs Adj 0 0 0 0 0 0 Recurring NP (Equity) 478 623 528 666 732 804

EPS (Basic, CNY) 0.220 0.290 0.239 0.301 0.331 0.364 DPS (CNY) 0.13 0.17 0.14 0.18 0.20 0.22

As % of Sales GP Margin 40.8% 42.2% 43.2% 43.5% 43.7% 44.0% SG&A expenses 26.9% 27.6% 28.0% 26.5% 26.0% 25.5% EBIT Margin 16.9% 17.4% 17.0% 18.7% 19.4% 20.1% Tax Rate 36.9% 28.7% 33.8% 28.5% 28.5% 28.5% Recurring NP(Equity) 10.0% 11.8% 9.8% 11.9% 12.5% 13.1%

YoY Change Sales 10.0% 10.8% 1.9% 3.6% 4.3% 5.0% Gross Profit 11.4% 14.9% 4.2% 4.2% 5.0% 5.7% SG&A 27.4% 13.5% 3.6% -2.1% 2.3% 3.0% EBIT -9.7% 13.9% -0.4% 14.2% 8.2% 8.8% Recurring NP (Equity) -21.1% 30.3% -15.2% 26.1% 9.9% 9.9% Source: RHB

Figure 4: Segmental sales Figure 5: Segmental GP margins FYE Dec (CNYm) 2014 2015 2016 2017F 2018F 2019F FYE Dec 2014 2015 2016 2017F 2018F 2019F Sales GP margins by segment Footwear 3,043 3,258 3,525 3,702 3,924 4,198 Footwear 42.1% 43.8% 44.0% 44.2% 44.5% 44.7% Apparel 1,688 1,927 1,765 1,782 1,800 1,818 Apparel 38.5% 39.7% 41.7% 42.0% 42.2% 42.5% Accessories 47 110 106 106 106 106 Accessories 36.9% 39.7% 41.0% 41.2% 41.5% 41.7% Total 4,778 5,295 5,397 5,591 5,830 6,123 Total 40.8% 42.2% 43.2% 43.5% 43.7% 44.0%

YoY growth Footwear 35.4% 7.1% 8.2% 5.0% 6.0% 7.0% Apparel -16.1% 14.2% -8.4% 1.0% 1.0% 1.0% Accessories -44.0% 133.9% -3.6% 0.0% 0.0% 0.0% Total 10.0% 10.8% 1.9% 3.6% 4.3% 5.0% Source: RHB Source: RHB Figure 6: Store network according to brand 2014 2015 2016 2017F 2018F 2019F Store Network Xtep 7110 7000 6800 6750 6800 6850 Xtep Kids 500 600 250 200 250 300 Total Stores 7610 7600 7050 6950 7050 7150 YoY Change -0.7% -0.1% -7.2% -1.4% 1.4% 1.4% Source: RHB

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Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Figure 7: Peer comparison I – sportswear companies Company Ticker Price Mkt cap 3-mth P/E P/E P/E EPS FY1 EPS FY2 3-Yr EPS PEG Div yld PB/V PB/V (USDm) avg t/o Hist FY1 FY2 YoY% YoY% Cagr (%) (x) Hist (%) Hist FY1 (USDm) (x) (x) (x) (x) (x)

HSI 24,310 13.5 12.2 11.2 10.2 9.3 10.3 1.1 3.4 1.3 1.2 CSI300 3,446 15.4 13.1 11.5 18.0 13.9 N/A 2.0 1.9 1.6 Sector avg 24.5 18.5 15.4 5.1 18.1 5.6 1.1 4.5 2.2 2.0 Domestic Sportswear - H-share Anta Sports Prod 2020 HK 23.95 7,723 12.3 22.8 18.8 15.4 21.2 22.2 18.6 1.0 3.1 5.6 5.0 Xtep Intl 1368 HK 3.72 1,064 1.6 13.9 11.0 10.0 26.1 9.9 4.5 2.4 4.4 1.5 1.3 Li Ning Co Ltd 2331 HK 5.30 1,485 6.1 NM 29.3 21.9 NM NM NM 0.1 0.0 2.7 2.7 China Dongxiang 3818 HK 1.57 1,120 1.7 9.6 9.0 12.8 6.5 (29.7) (10.3) N/A 7.6 0.8 0.8 361 Degrees 1361 HK 2.80 746 2.0 12.8 8.7 7.8 46.7 11.2 23.8 0.4 6.4 1.0 0.9 Pou Sheng Intl 3813 HK 1.97 1,355 3.6 21.0 12.7 10.2 65.3 25.0 35.3 0.4 1.0 N/A 1.5 Average (ex-Li Ning) 16.0 12.0 11.2 33.2 7.7 14.4 1.0 4.5 2.2 1.9

International Sportswear Nike Inc -Cl B NKE US 57.80 95,629 498.9 26.2 24.7 21.9 6.0 12.8 11.2 2.2 1.2 7.8 7.8 Adidas Ag ADS GR 182.98 41,137 94.5 36.0 30.5 25.5 18.0 19.7 18.4 1.7 0.9 5.7 5.3 Puma Se PUM GR 293.40 4,755 1.4 70.4 43.0 31.5 63.6 36.6 40.1 1.1 0.2 2.5 2.5 Under Armo-C UA US 18.08 8,190 97.3 N/A 43.8 36.7 N/A 19.4 N/A N/A N/A N/A 3.5 Lululemon Ath LULU US 64.04 8,779 94.0 33.7 29.7 25.0 13.6 18.9 15.1 2.0 N/A 7.3 6.8 Asics Corp 7936 JP 1,895.00 3,364 16.1 23.1 24.5 20.5 (5.7) 19.5 8.4 2.9 1.2 1.8 1.7 Mizuno Corp 8022 JP 610.00 720 0.8 36.9 43.6 26.4 (15.4) 64.9 16.1 2.7 1.6 0.9 0.9 Average 37.7 34.2 26.8 13.3 27.4 18.2 2.1 1.0 4.3 4.1

Sportswear OEM Yue Yuen Ind 551 HK 28.95 6,151 7.2 15.7 12.7 12.1 23.6 5.5 12.3 1.0 4.1 N/A 1.3 Win Hanverky 3322 HK 1.14 189 0.2 5.9 12.8 8.1 (53.6) 57.3 (10.0) N/A 10.1 0.6 0.6 Pegasus Intl Hld 676 HK 1.23 116 0.0 88.0 N/A N/A N/A N/A N/A N/A 1.6 1.3 N/A Kingmaker Foot 1170 HK 2.12 191 0.1 12.2 14.1 10.1 (13.7) 40.0 9.8 1.4 8.1 1.3 1.2 Average 30.5 13.2 10.1 (14.6) 34.3 4.0 1.2 6.0 1.1 1.1

Footwear Belle Intl 1880 HK 5.42 5,890 11.6 9.1 11.3 12.1 (20.0) (6.4) (9.8) (1.2) 4.7 1.5 1.5 Stella Internati 1836 HK 11.48 1,175 0.8 14.4 13.0 11.3 10.7 14.9 9.4 1.4 7.4 1.2 1.2 Le Saunda 738 HK 1.71 156 0.1 8.1 10.1 11.4 (19.7) (11.8) N/A N/A 9.2 0.8 0.8 Daphne Internati 210 HK 0.77 164 0.2 N/A N/A N/A N/A N/A (144.3) N/A N/A 0.3 0.4 Average 10.5 11.5 11.6 (9.7) (1.1) (48.2) 0.1 7.1 1.0 1.0 Note: Data is as of 17 Mar 2017 Source: Bloomberg, RHB

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Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

Figure 8: Peer comparison II – sportswear companies Company Ticker Rev Rev NP Hist NP FY1 Net Net Beta Gross Net Net ROE ROE Sh px Sh px Hist FY1 (USDm) (USDm) gearing gearing margin margin margin Hist (%) FY1 (%) 1-mth 3-mth (USDm) (USDm) Hist (%) FY1 (%) Hist (%) Hist (%) FY1 (%) % %

HSI 9.4 9.8 0.7 11.9 CSI300 12.1 12.2 (0.7) 4.1 Sector avg 1.9 1.0 0.7 40.0 7.5 8.0 9.1 10.4 1.3 1.0 Domestic Sportswear - H-share Anta Sports Prod 2020 HK 1,933 2,277 359 409 0.0 0.0 0.5 48.4 17.9 17.7 26.3 27.8 (4.2) 6.4 Xtep Intl 1368 HK 782 857 79 96 0.0 0.0 0.5 43.2 9.8 11.9 10.8 14.5 6.0 11.4 Li Ning Co Ltd 2331 HK 1,027 1,168 61 70 0.0 0.0 0.8 45.0 0.2 5.3 4.9 10.6 3.3 12.8 China Dongxiang 3818 HK 213 235 116 123 0.0 N/A 0.7 55.5 54.7 52.3 10.5 8.6 5.4 9.8 361 Degrees 1361 HK 728 801 58 86 0.0 N/A 1.2 42.0 8.0 10.7 7.6 10.3 (8.8) (8.8) Pou Sheng Intl 3813 HK 2,300 2,377 64 109 3.1 0.0 0.6 33.3 2.8 4.6 N/A 12.6 2.1 (11.7) Average 1,164 1,286 123 149 0.5 0.0 0.7 44.6 15.6 17.1 12.0 14.1 0.6 3.3

International Sportswear Nike Inc -Cl B NKE US 32,376 34,590 3,760 3,936 0.0 0.0 1.1 46.2 11.6 11.4 30.2 31.1 1.9 13.7 Adidas Ag ADS GR 17,965 19,957 947 1,130 0.0 3.8 0.8 48.6 5.3 5.7 16.8 17.9 23.0 26.9 Puma Se PUM GR 3,377 3,673 58 96 0.0 0.0 0.5 45.7 1.7 2.6 3.7 6.1 (1.9) 19.6 Under Armo-C UA US 4,825 5,367 257 186 27.9 N/A N.A 46.4 5.3 3.5 10.7 8.7 (8.5) (28.7) Lululemon Ath LULU US 2,061 2,338 266 297 0.0 0.0 1.1 48.4 12.9 12.7 25.1 27.4 (4.0) (4.0) Asics Corp 7936 JP 3,542 3,680 138 134 0.0 0.0 1.4 44.2 3.9 3.6 7.8 7.5 (2.8) (22.7) Mizuno Corp 8022 JP 1,740 1,705 19 16 21.8 19.6 0.8 38.6 1.1 0.9 (0.1) 2.7 1.3 4.5 Average 9,412 10,187 778 828 7.1 3.9 0.9 45.5 6.0 5.8 13.5 14.5 1.3 1.3

Sportswear OEM Yue Yuen Ind 551 HK 8,435 8,509 390 492 0.0 0.0 0.1 23.4 4.6 5.8 N/A 10.6 7.6 0.0 Win Hanverky 3322 HK 495 514 31 15 0.0 N/A 0.9 30.2 6.3 3.0 8.9 5.0 (2.6) (8.8) Pegasus Intl Hld 676 HK 75 N/A 1 N/A 0.0 N/A 0.9 12.3 1.8 N/A 1.0 N/A (1.6) (8.2) Kingmaker Foot 1170 HK 302 258 15 14 0.0 N/A 0.2 16.4 5.1 5.3 11.5 9.0 0.5 (0.2) Average 2,327 3,094 110 174 0.0 0.0 0.5 20.6 4.5 4.7 7.1 8.2 1.0 (4.3)

Footwear Belle Intl 1880 HK 5,909 5,901 765 681 0.0 0.0 1.1 56.3 7.2 10.6 9.7 13.4 7.3 24.0 Stella Internati 1836 HK 1,551 1,571 82 88 0.0 0.0 0.3 18.7 5.3 5.6 8.3 8.9 4.9 (13.2) Le Saunda 738 HK 256 207 19 15 0.0 N/A 0.5 66.0 7.5 7.2 8.5 7.9 0.6 6.9 Daphne Internati 210 HK 1,080 871 (49) (49) 0.0 N/A N.A 56.4 (4.5) (5.6) (11.8) (10.9) (3.8) (3.8) Average 2,199 2,137 204 184 0.0 0.0 0.7 49.3 3.9 4.4 3.7 4.8 2.3 3.5 Note: Data is as of 17 Mar 2017 Source: Bloomberg, RHB

Figure 9: Forward 3-year P/E band

Source: Bloomberg, RHB

See important disclosures at the end of this report 8

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20 March 2017 Consumer Cyclical | Sportswear

Figure 10: DCF valuation (CNYm) FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F Term Val. Valuation Date: 3/19/2017 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Time Period 1 2 3 4 5 6 7 8 9 10 Adj Time Period 0.76 1.76 2.76 3.77 4.77 5.77 6.77 7.77 8.77 9.77 EBIT 1,047 1,133 1,233 1,304 1,341 1,354 1,368 1,381 1,395 1,409 Multi-stage grow th rate 8.2% 8.8% 5.8% 2.8% 1.0% 1.0% 1.0% 1.0% 1.0% Tax Rate 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% Net Operating Profit After Tax (NOPAT) 749 810 882 933 959 968 978 988 998 1,008 Depreciation 59 59 64 67 69 70 71 71 72 73 ∆CapEx -150 -150 -70 -74 -76 -77 -78 -79 -79 -80 ∆Net w orking Capital 43 -52 -64 -67 -69 -70 -71 -71 -72 -73 Others 0 0 0 0 0 0 0 0 0 0 Free Cash Flow (FCF) 700 667 812 859 883 891 900 909 918 928 937 NPV* 638 537 579 542 493 441 394 352 314 281 2,366

DCF Valuation Terminal Value NPV of discrete forecasts 4,570 47.2% Terminal Grow th Rate 1.0% NPV of terminal value 2,366 24.4% WACC 13.0% Firm Value 6,935 71.6% Terminal Value FCF 937 Add: Net Cash/(Debt) 2,826 29.2% NPV of Terminal Value (End) 7,807 Less: Minority Interests -69 -0.7% NPV of Terminal Value (Today) 2,366 Equity Value (CNY) 9,692 100.0% CNYHKD 0.90 Equity Value (HKD) 10,769 Shares Outstanding 2,210 Value per Share (HKD) 4.90 Source: RHB

See important disclosures at the end of this report 9

Xtep International Holdings Ltd Hong Kong Results Review

20 March 2017 Consumer Cyclical | Sportswear

SWOT Analysis

 Known for running, functional and fashion sportswear  International products in China brands such as Nike and Adidas  Due to its beginnings, it has expertise as an original equipment manufacturer (OEM) for footwear may move into Tier-3 & 4 cities to win market share

 Its fashionable casual wear line faces increasing

 Football is a competition as segment with fast fashion high growth brands such as potential Zara and H&M  Xtep has increase their established a footprints in strong foothold China in sponsoring high school and college football leagues

 Weaker brand equity vs international names such as Nike and Adidas  Xtep’s research & development in sports functionality is relatively new, and its technology may be less convincing to the consumer compared to international brands

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-01-23 Buy 5.20 3.21 4.9

Recommendations & Target Price 2016-08-23 Buy 5.70 4.08

5.70 5.70 5.20 4.4 5.80 2016-07-11 Buy 5.80 3.98 2016-04-15 Not Rated na 4.28 3.9 Source: RHB, Bloomberg

3.4

2.9

2.4

1.9 Buy Neutral Sell Trading Buy Take Profit Not Rated Mar-12 Jun-13 Oct-14 Jan-16

Source: RHB, Bloomberg

See important disclosures at the end of this report 10

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Consumer Cyclical | Sportswear

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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