20180827-信达国际控股-特步国际-01368.HK-Earnings_recovery_on_track_5页_583kb

Xtep Summary: 1H18 Performance and Outlook

Core Content

Xtep, a leading PRC-based fashion sportswear brand enterprise, reported its 1H18 results, showing a slight beat compared to full-year estimates. Revenue and net profit increased by 18.1% and 20.9% YoY, reaching RMB 2,729 million and RMB 375.2 million, respectively. The company is currently trading at HK$4.71, with a target price of HK$5.45, representing a 15.8% upside.

Main Points

• Revenue and Profit Growth:
  • Xtep's 1H18 revenue and net profit exceeded expectations, with revenue at 50% of full-year estimates and net profit at 63% of FY18E estimates.
• Gross Margin (GM):
  • Apparel GM slightly decreased to 42.0% due to higher replenishment orders and increased manufacturing costs.
  • Footwear GM improved by 50 bps YoY to 44.8%, while overall GM remained relatively flat at 43.7% (vs. 43.9% in 1H17 and 44.4% CIRL FY18E).
• SSSG Growth:
  • SSSG (Same-Store Sales Growth) continued to accelerate, reaching mid-double-digit growth for the third successive quarter.
  • Retail channel inventory was at ~4 months, below the industry average of 4-6 months.
• Distributor Performance:
  • Distributors showed improved profitability and cash flow, which is expected to continue driving sales in FY18E.
• Store Expansion:
  • Xtep aims to add 200-300 stores (net) in FY18E, mainly in shopping malls.
  • Over 60% of total stores are managed by exclusive distributors, with upgraded '6s' generation stores contributing to a 10% increase in retail sales/sqm.
• Working Capital Improvement:
  • The cash conversion cycle improved to 83 days (vs. 103 days in 1H17).
  • Net operating cash flow turned positive in 1H18, reaching RMB 224.9 million (vs. ~RMB84 million net outflow in 1H17).
  • Receivables turnover days decreased to 116 days (vs. 130 days in FY17), and management targets a 120-day turnover in FY18E.
• Inventory Turnover:
  • Inventory turnover days rose to 104 days in 1H18 due to high replenishment orders, leading to an increase in finished goods inventory to RMB768 million (up 52.4% YoY).
  • These orders are expected to translate to ~RMB470 million sales in 2H18.

Key Financial Forecasts

Earnings Recovery and Valuation

• Xtep's earnings recovery is on track, with revised FY18E-FY19E EPS and a new FY20E forecast introduced.
• The company's current FY19E 12.3x PE is trading at ~35% discount to ANTA, with a FY19E yield of 5.1%.
• The new target price is HK$5.79, based on a 14.1x FY19E PE (1 s.d. above average since listing and ~25% discount to ANTA).
• The BUY rating is maintained due to the positive outlook on sales recovery and GM expansion.

Risk Factors

• Over-reliance on distributors.
• Excess inventory in distribution channels.
• Additional AR provision.
• Longer than expected product mix transition.
• Rising production costs.
• Increasing competition from international and PRC peers.

Trading Data

• 52-Week Range (HK$): 6.14 / 2.49
• 3-Month Average Daily Volume (m): 4.80
• Number of Shares (m): 2,242.4
• Market Cap (HK$m): 10,561.6
• Major Shareholders (%): Group Success (60.0%)
• Auditors: Ernst & Young
• Result Due FY18: Mar 2019

Analysts

• Hayman Chiu: Research Director, (852) 2235 7677, hayman.chiu@cinda.com.hk
• Lewis Pang: Associate Director, (852) 2235 7847, lewis.pang@cinda.com.hk
• Kenneth Li: Senior Research Analyst, (852) 2235 7619, kenneth.li@cinda.com.hk
• Chloe Chan: Research Analyst, (852) 2235 7170, chloe.chan@cinda.com.hk
• Edith Li: Research Analyst, (852) 2235 7515, edith.li@cinda.com.hk

Rating Policy

Conclusion

Xtep's performance in 1H18 reflects a positive trend, with revenue and profit growth slightly exceeding expectations. The company's SSSG continues to accelerate, and working capital improvements indicate better financial management. Despite a slight decline in apparel GM, the overall financial health and potential for growth in FY18E and beyond support the BUY rating. The target price of HK$5.45 is maintained, with the new TP of HK$5.79 based on revised earnings and valuation assumptions.