www.xtep.com.hk 4 XTEP INTERNATIONAL HOLDINGS LIMITED FIVE-YEAR FINANCIAL SUMMARY CONTENTS 2 Annual Results at a Glance 4 Five-year Financial Summary 5 Corporate Information 6 Chairman’s Statement 10 Management Discussion and Analysis 37 Investor Relations Report 42 Directors and Senior Management 46 Corporate Governance Report 62 Report of the Directors 74 Independent Auditor’s Report 80 Consolidated Income Statement 81 Consolidated Statement of Comprehensive Income 82 Consolidated Statement of Financial Position 83 Consolidated Statement of Changes In Equity 84 Consolidated Statement of Cash Flows 86 Notes to Financial Statements 158 Glossary ABOUT THE GROUP Xtep International Holdings Limited (SEHK stock code: 1368) is a leading multi-brand sportswear company listed on the Main Board of the Hong Kong Stock Exchange on 3 June 2008. The Group engages mainly in the design, development, manufacturing, sales, marketing and brand management of sports products, including footwear, apparel and accessories. Established since 2001, its own signature brand “Xtep” is a leading professional sports brand with an extensive distribution network of over 6,300 stores covering 31 provinces, autonomous regions and municipalities across the PRC and overseas. In 2019, the Group has further diversified its brand portfolio which now includes four internationally acclaimed brands, namely K-Swiss, Palladium, Saucony and Merrell. ANNUAL REPORT 2019 5 FIVE-YEAR FINANCIAL SUMMARY 2 XTEP INTERNATIONAL HOLDINGS LIMITED ANNUAL RESULTS AT A GLANCE 2019 FINANCIAL HIGHLIGHTS Revenue RMB 8,183 m 28 % Operating profit RMB 1,234 m 18 % Profit attributable to ordinary equity holders RMB 728 m 11% Net cash inflow from operating activities RMB 778 m (2018: RMB 154 m) Net cash and cash equivalents RMB 2,132 m (2018: RMB 2,438 m) Full year dividend per Share HK 20.0 cents1 (Payout ratio: 60.0%) 1 included an interim dividend of HK12.5 cents per Share and a proposed final dividend of HK7.5 cents per Share. The proposed final dividend per Share will be subject to the approval of shareholders at the forthcoming annual general meeting ANNUAL REPORT 2019 3 Retail sell-throughAnnual growth Resultsof core Xtep at brand a Glance 20% + Xtep branded stores in Mainland China and overseas as at 31 December 2019 6,379 149 in 2019 Under three markets Multi-brand strategy Mass Professional Athleisure 2019 OPERATIONAL HIGHLIGHTS 4 XTEP INTERNATIONAL HOLDINGS LIMITED FIVE-YEAR FINANCIAL SUMMARY For the year ended 31 December 2019 2018 2017 2016 2015 Profitability data (RMB million) Revenue 8,182.7 6,383.2 5,113.4 5,396.6 5,295.1 Gross profit 3,550.4 2,828.3 2,244.5 2,331.3 2,236.7 Operating profit 1,234.0 1,044.3 724.5 917.0 921.0 Profit attributable to ordinary equity holders 727.7 656.5 408.1 527.9 622.6 Basic earnings per Share (RMB cents) (Note 1) 30.72 30.19 18.81 23.89 28.97 Profitability ratios (%) Gross profit margin 43.4 44.3 43.9 43.2 42.2 Operating profit margin 15.1 16.4 14.2 17.0 17.4 Net profit margin 8.9 10.3 8.0 9.8 11.8 Effective tax rate 34.8 31.4 33.5 33.8 28.7 Return on average shareholders’ equity (Note 2) 11.9 12.4 8.0 10.8 13.0 Operating ratios (as a percentage of revenue) (%) Advertising and promotional costs 14.4 15.2 12.9 11.8 14.7 Staff costs 11.0 11.6 12.1 10.5 9.0 R&D costs 2.4 2.6 2.8 2.6 2.3 As at 31 December 2019 2018 2017 2016 2015 Assets and liabilities data (RMB million) Non-current assets 3,056.7 1,139.0 1,051.9 956.9 1,063.2 Current assets 9,265.9 8,059.6 7,881.8 7,217.0 7,050.8 Current liabilities 3,671.1 3,277.8 2,488.8 3,029.4 2,966.4 Non-current liabilities 1,691.2 589.8 1,116.3 121.7 275.9 Non-controlling interests 69.8 4.7 107.7 69.3 19.8 Shareholders’ equity 6,890.5 5,326.3 5,220.9 4,953.5 4,851.9 Asset and working capital data Current asset ratio 2.5 2.5 3.2 2.4 2.4 Gearing ratio (%) (Note 3) 19.1 21.1 20.7 18.4 19.8 Net asset value per Share (RMB) (Note 4) 2.77 2.38 2.4 2.26 2.22 Average inventory turnover days (days) (Note 5) 77 80 75 51 58 Average trade receivables turnover days (days) (Note 6) 96 105 130 119 98 Average trade payables turnover days (days) (Note 7) 88 98 122 107 96 Overall working capital days (days) 85 87 83 63 60 NOTES: 1 The calculation of basic earnings per Share is based on the profit attributable to ordinary equity holders of the Company divided by the weighted average number of ordinary shares in issue during the relevant year. 2 Return on average shareholders’ equity is equal to the profit attributable to ordinary equity holders of the Company for the year divided by the average of opening and closing shareholders’ equity. 3 The calculation of gearing ratio is based on the total borrowings divided by the total assets of the Group at the end of the year. 4 The calculation of net asset value per Share is based on the total number of Shares in issue at the end of the year. 5 Average inventory turnover days is equal to the average of opening and closing inventory divided by costs of sales and multiplied by 365 days (or 366 days in 2016). 6 Average trade receivables turnover days is equal to the average of opening and closing trade receivables divided by revenue and multiplied by 365 days (or 366 days in 2016). 7 Average trade payables turnover days is equal to the average of opening and closing trade payables divided by cost of sales and multiplied by 365 days (or 366 days in 2016). 8 When calculating the average inventory turnover days, trade receivables turnover days and trade payable turnover days for 2019, the opening balances of inventories, trade receivables and trade payables include the respective consolidated balances of K-Swiss Holdings, Inc. (previously known as E-Land Footwear USA Holdings Inc.) and its subsidiaries as if it had been part of the Group since 1 January 2019, and the revenue and cost of sales used for the calculations include the annualised consolidated revenue and cost of sales of K-Swiss Holdings, Inc. and its subsidiaries recorded since the Group’s acquisition on 1 August 2019. ANNUAL REPORT 2019 5 CORPORATE INFORMATION BOARD OF DIRECTORS PRINCIPAL PLACE OF Executive Directors BUSINESS IN HONG KONG Ding Shui Po (Chairman) Unit A, 27/F, Tower A Ding Mei Qing Billion Centre, 1 Wang Kwong Road Ding Ming Zhong Kowloon Bay, Kowloon, Hong Kong Independent Non-executive HEAD OFFICE IN THE PRC Directors Xiamen Xtep Tower, No. 89 Jiayi Road, Guanyinshan Tan Wee Seng Siming District, Xiamen, Fujian Province, PRC Gao Xian Feng Postal Code 361008 Bao Ming Xiao LEGAL ADVISER AS TO HONG BOARD COMMITTEES KONG LAWS Audit Committee Loeb & Loeb LLP Tan Wee Seng (Chairman) AUDITOR Gao Xian Feng Bao Ming Xiao Ernst & Young Remuneration Committee CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND Gao Xian Feng (Chairman) TRANSFER OFFICE Ding Mei Qing Bao Ming Xiao Butterfield Fund Services (Cayman) Limited Butterfield House, 68 Fort Street, P.O. Box 705 Nomination Committee Grand Cayman KY1-1107, Cayman Islands Ding Shui Po (Chairman) HONG KONG BRANCH SHARE Tan Wee Seng REGISTRAR AND TRANSFER Gao Xian Feng OFFICE COMPANY SECRETARY Computershare Hong Kong Investor Services Limited Shops 1712–1716, Yeung Lo Bun, FCPA 17/F, Hopewell Centre AUTHORIZED 183 Queen’s Road East REPRESENTATIVES Wanchai, Hong Kong Ding Shui Po PRINCIPAL BANKERS Yeung Lo Bun Bank of China REGISTERED OFFICE Bank of East Asia China Construction Bank Cricket Square, Hutchins Drive China Minsheng Bank P.O. Box 2681, Grand Cayman KY1-1111 Hang Seng Bank Cayman Islands HSBC Industrial Bank COMPANY WEBSITE www.xtep.com.hk 6 XTEP INTERNATIONAL HOLDINGS LIMITED CHAIRMAN’S STATEMENT Dear Shareholders, The year 2019 was an exciting year for the sportswear industry particularly in Mainland China. The local and international sportswear brands continued to grow significantly and outperformed the overall retail industry against the backdrop of a slowing economy and a more volatile global trading environment. The rapidly emerging middle-class, their pursuit of fitness due to increased awareness of health and wider participation in sports supported by the government have combined to create strong demand for fitness gear. These trends have also sparked the wider spread of athleisure that merged elements of fashion with sportswear, thus generating massive opportunities for the brands to capitalize on. The past year marked a milestone for Xtep as we transformed from a domestic brand to a global sportswear enterprise. Over the past few years, we have dedicated our efforts to restructuring the Company. The strategic transformation ranging from branding and products to the supply chain and the distribution of Xtep and Xtep Kids has positioned us better than ever to drive future development. Coupled with a stable and strong management team, we have well and truly entered our next stage of growth this year through a multi-brand business model, which began with a joint venture with Wolverine for Saucony and Merrell in March 2019, followed by the acquisition of K-Swiss and Palladium completed in August 2019.