20180626-东英亚洲证券-特步国际-01368.HK-2Q18E_operations_preview_6页_1mb

Equity Research Summary: Xstep International Holdings Ltd. (1368 HK)

Core Information

• Company: Xstep International Holdings Ltd.
• Industry: Sportswear
• Stock Code: 1368 HK
• Research Date: 25 June 2018
• Researcher: Dallas Cai
• Rating: BUY
• Target Price: HK$6.40 (+21% upside from current close price of HK$5.30)
• Market Cap: HK$2,239.75 million
• Issue Share: 5.61 million
• 3M Avg Daily Vol: 2.49 million
• Major Shareholder: Ding Shuibo (60.06%)
• Close Price: HK$5.30

Key Financial Highlights (FY16 to FY20E)

2Q18E Operations Preview

• SSSG (Sales, Share, and Gross margin): Expected to maintain low-teens growth with a slight increase in retail discounts to ~25% due to the 618 shopping festival.
• Inventory Level: Expected to remain healthy at 4.0-4.5x.
• Management Shareholding: Management increased shareholding, with Chairman Ding purchasing 1 million shares in May 2018.
• Southbound Capital Inflow: Xtep has the lowest southbound holding ratio (less than 1%) among its domestic peers, suggesting potential for capital inflow.
• Price Correction: Recent price drop of up to 11.4% is viewed as an attractive entry point for investors to capitalize on 2018E results.

Key Risks

1. Deep discounts on e-commerce platforms due to intense competition.
2. Slower-than-expected retail growth.
3. Deflated consumer confidence due to slowing macroeconomic conditions.

Exhibit 3: 618 Shopping Festival Sales Ranking

Exhibit 4: Southbound Shareholding as % of Free Float

• Xtep has the lowest ratio of southbound holdings, indicating less pressure from institutional selling and potential for support.

Exhibit 5: Peer Group Comparison (Selected)

Recent Reports and Recommendations

• Recent Reports: Highlighting various companies in the Chinese market, including Xtep, with a focus on financial performance, strategic moves, and market dynamics.
• Recommendations: Xtep is reiterated as a BUY with an unchanged target price of HK$6.40, indicating confidence in its 2018E results and potential for growth.

Summary of Key Points

• Growth Outlook: Xtep is expected to maintain strong growth momentum in 2Q18E and throughout 2018, with a focus on retail and e-commerce performance.
• Valuation: Current P/E is at 14.7x for FY18E, which is below historical levels, suggesting potential for upside.
• Management Actions: Increased shareholding by management and potential for southbound capital inflow are viewed as positive catalysts.
• Competitive Position: Xtep ranked 6th on JD.com and 6th on T Mall during the 618 shopping festival, indicating a strong but competitive position in the sportswear market.
• Financial Health: Xtep maintains a healthy balance sheet with a net cash position and a low debt-to-equity ratio, supporting its financial flexibility.

Conclusion

Xstep International Holdings Ltd. is a promising player in the sportswear sector with a strong business outlook, management support, and potential for capital inflow. The recent price correction is seen as an opportunity for investors to enter the stock with a target price of HK$6.40, offering a 21% upside. Despite risks such as intense competition and macroeconomic conditions, the company's financial performance and strategic moves suggest a BUY rating for the short term.