20180823-中国银河国际证券-特步国际-01368.HK-Strong_Performance_from_Reforms_Seen_in_2018._Reiterate_BUY._6页_880kb

Xtep International [1368.HK] Summary

Core Content

Xtep International, listed on the Hong Kong Stock Exchange (ticker: 1368.HK), has shown strong performance and positive outlook in 2018. The firm's three-year reforms have led to a successful turnaround, with improved financial results and a reiteration of the BUY rating. Analysts expect continued growth and a solid earnings recovery potential, with a projected CAGR of 29.3% for EPS from 2017 to 2020.

Key Financial Highlights

Main Points

• Strong 1H18 Performance: Xtep reported a 18.1% YoY revenue increase to RMB2,729 million and a 20.9% YoY net profit increase to RMB375.2 million, demonstrating the effectiveness of its three-year reforms.
• Improved Working Capital Management: Working capital turnover days fell to 83 in 1H18, a 20-day decrease from 1H17, and trade receivable turnover days dropped to 113 from 164 in 1H17, indicating better liquidity and efficiency.
• Inventory Trends: Inventory reached a historical high of RMB1 billion as of June 30, 2018, driven by strong replenishment orders. However, the Company expects this demand to wane in 2019, but the growth momentum is expected to continue.
• Earnings Forecasts: The analyst has revised up the 2018E/19E/20E EPS estimates by 19%/9%/14% to RMB0.30/0.35/0.41, with a 2017-2020E EPS CAGR of 29.3%. This growth is attributed to the Company's strong base in 2017 and its strategic focus on the mass market.
• Valuation: The current price-to-earnings (P/E) ratio for 2019E is 11.6x, which is considered reasonable given the expected earnings growth. The target price remains at HK$6.30, unchanged from the previous estimate.
• Strategic Initiatives: Xtep is expanding into the athleisure segment, exemplified by its sponsorship of The Rap of China Season 2. The Company is also exploring M&A opportunities but is not raising funds from the market.
• Peer Comparison: Compared to peers like Anta, Li Ning, and international brands such as Nike and Adidas, Xtep's valuation and growth prospects are seen as competitive, with a lower P/E and higher EPS growth.

Key Information

• Market Cap: US$1,305 million
• Shares Outstanding: 2,221.4 million
• Auditor: EY
• Free Float: 39.5%
• 52-Week Range: HK$2.395 - HK$6.140
• 3-Month Average Daily T/O: US$3.23 million
• Major Shareholder: Chairman Ding Shui Po with 60.06%
• Analyst: Tony Li, CFA (Analyst) and Wong Chi Man, CFA (Head of Research)

Analyst's View

• Investment Rating: BUY
• Price Target: HK$6.30 (up 37.9% from closing price of HK$4.57 on August 22, 2018)
• Earnings Recovery Potential: The Company is expected to continue its strong performance, with EPS growth anticipated to be driven by cost control, better inventory management, and expansion into new product segments.

Conclusion

Xtep International is demonstrating a strong recovery, with improved financial performance and a clear strategy to expand into the athleisure market. The Company's management is optimistic, and the analyst's revised forecasts indicate a positive outlook for the coming years. Despite a one-time surge in inventory demand, the long-term growth trajectory remains favorable, and the stock is considered undervalued relative to its earnings potential.