20150618-工银国际-VIEWPOINTS_EXPRESS_12页_529kb_529kb

Market Report Summary - 18 June 2015

Xtep International (1368.HK)

Core Content

• Rating: BUY
• Target Price (HK$): 4.00
• Upside: 25.0%
• Market Cap (HK$bn): 6.97
• Total Issued Shares (mn): 2.18
• Avg. 3mths Turnover (HK$mn): 17.88

Key Takeaways from 1Q16 Trade Fair

• The 1Q16 trade fair reinforced the positive view on the company's fundamentals.
• The trade fair is expected to have 3,000 distributors over 6 days.
• The company emphasized the functionality of running and football products, with upgraded technologies such as Dynamic Foam, X-Helix, and Air Mega for shoes.
• New textile materials were introduced for apparels.
• Management expects performance products to account for 35-40% of footwear revenue (compared to ~25% in 2014) and 40% of apparel revenue in 2015 (compared to 20-30% in 2014).
• The company maintains a wholesale discount of 38%.
• The trade fair growth is expected to continue an upward trend, with low single-digit growth in 4Q15.

User-Oriented Transformation

• The company defined 2015 as the year of transformation across three aspects:
  1. Products +: Focus on providing more comfortable and protective products, especially in running and football categories. Increased R&D on wearable equipment such as intelligent shoes.
  2. Sports Services +: Better leverage sponsorship resources and offer value-added services like teaching, training, medical care, and rehabilitation.
  3. Internet +: Use ~7,100 offline stores to provide online-to-offline services and collect and analyze customer data to enhance user experience.
• These transformations are in their early stages, and the report does not expect a significant increase in expenses for FY15E.

Financial Forecast

• Revenue growth is expected to be at a CAGR of 6.8% during FY14-17E, driven by improving per store efficiency.
• Net profit forecast for FY15E-17E: Rmb570mn-Rmb698mn, implying a net margin of 11.2%-12.0%.

Valuation

• The stock trades at 9.0x 12 months forward PE, which is a 6% discount to historical average PE.
• It has outperformed HSCEI by 11% in the past month.
• Valuation is based on blended DCF and PE methods.
• Key risks include rising competition in the sports-lifestyle market and further deterioration of the apparel segment.
• Key catalysts include better-than-expected footwear sales growth, more contribution from e-commerce, and higher provision reversal.

Valuation Statistics

• 2013A:
  • Turnover: Rmb4,343.1mn
  • Net profit: Rmb606.0mn
  • EPS: Rmb0.30
  • Net margin: 14.0%
• 2014A:
  • Turnover: Rmb4,777.6mn
  • Net profit: Rmb478.0mn
  • EPS: Rmb0.22
  • Net margin: 10.0%
• 2015E:
  • Turnover: Rmb5,063.8mn
  • Net profit: Rmb569.7mn
  • EPS: Rmb0.26
  • Net margin: 11.2%
• 2016E:
  • Turnover: Rmb5,468.5mn
  • Net profit: Rmb648.8mn
  • EPS: Rmb0.30
  • Net margin: 11.9%
• 2017E:
  • Turnover: Rmb5,813.6mn
  • Net profit: Rmb698.1mn
  • EPS: Rmb0.32
  • Net margin: 12.0%

Ratio Analysis

• Gross margin: 40.2%-40.8%
• Operating margin: 18.3%-17.3%
• EBITDA margin: 19.4%-18.6%
• Net margin: 14.0%-12.0%
• ROA: 8.8%-8.8%
• ROE: 13.8%-11.8%
• ROCE: 9.8%-10.4%
• Liabilities to assets ratio: 38.3%-24.5%
• Net gearings: -61.1%- -50.1%

Cash Flow

• Profit before tax: Rmb863mn (FY13), Rmb770mn (FY14), Rmb863mn (FY15E), Rmb969mn (FY16E), Rmb1,027mn (FY17E)
• Cash flow from operations: Rmb984mn (FY13), Rmb455mn (FY14), Rmb994mn (FY15E), Rmb921mn (FY16E), Rmb993mn (FY17E)
• Net change in cash: Rmb442mn (FY13), Rmb-426mn (FY14), Rmb-205mn (FY15E), Rmb-188mn (FY16E), Rmb345mn (FY17E)

TMT Sector Highlights

Key Developments

• Alibaba's Logistics Arm: Launched refrigerated distribution centers for fresh groceries in Beijing, Shanghai, and Guangzhou, aiming to compete with JD.com.
• Cheetah Mobile: Launched a major global ad platform to reach and engage with global consumer audiences.
• CNIT: Launched the proprietary Cloud Nest Operating System (NOS), version 1.0, for the new media industry.
• Coursera: China became its second-largest market with one million registered users, operating through Netease.
• Uber: Introduced a mobile game to improve navigation and recruit drivers.

Stock Market Performance

• Hang Seng Index (HSI):
  • Price: 26,754
  • % change: 0.7%
  • Spot mth fut.: 26,539 (Prem.: -215)
• H-share Index:
  • Price: 13,415
  • % change: 1.2%
  • Spot mth fut.: 13,193 (Prem.: -222)
• CSI 300 Index: Price 5,139, % change 1.5%
• Shanghai Composite Index: Price 17,406, % change 1.9%
• Shenzhen Composite Index: Price 3,021, % change 2.0%
• Nikkei 225: Price 20,219, % change -0.2%
• Korea KOSPI: Price 2,035, % change 0.3%
• Taiwan TWSE: Price 9,190, % change -0.2%
• India Sensex 30: Price 26,833, % change 0.5%
• DJIA: Price 17,936, % change 0.2%
• S&P 500: Price 2,100, % change 0.2%
• NASDAQ: Price 5,065, % change 0.2%
• UK FTSE 100: Price 6,681, % change -0.4%
• Germany DAX: Price 10,978, % change -0.6%
• France CAC40: Price 4,791, % change -1.0%

Other Indicators

• WTI oil: $59.90, % change -0.1%
• Gold: $1,176.40, % change -0.4%
• Copper futures: $5,745.00, % change -0.1%
• Aluminum futures: $1,704.50, % change -0.1%
• Reuters/Jefferies CRB futures: 223.50, % change -0.1%
• Baltic Dry Index: 725.00, % change 6.5%
• UST yield 3m: 0.00%, % change -0.01%
• UST yield 10y: 2.32%, % change +0.007%
• HIBOR 3m: 0.39%, % change -0.002%
• USD LIBOR 3m: 0.29%, % change +0.000%

Key Risks and Catalysts

• Risks: Rising competition in the sports-lifestyle market, further deterioration of the apparel segment.
• Catalysts: Better-than-expected footwear sales growth, more contribution from e-commerce, and higher provision reversal.

Price Performance

• 1368.HK: 1m: -8.5%, 3m: 39.2%, 6m: 3.2%
• HSI: 1m: -3.0%, 3m: 10.9%, 6m: 17.2%

Next Year Forward PER

• 2015E: 9.7x
• 2016E: 8.4x
• 2017E: 7.7x

Working Capital

• Average inventory days: 78.7 (2013A), 69.7 (2015E), 67.7 (2017E)
• Average account receivable days: 91.9 (2013A), 103.7 (2015E), 89.6 (2017E)
• Average account payable days: 76.2 (2013A), 89.5 (2015E), 79.7 (2017E)