XTEP（1368.HK）：第四季度的精彩表现，前景一致

Xtep's 4Q24 results were slightly better than expected (retail sales growth was inline but the inventory level was better than expected). And we are delighted to hear that sales trend in Jan 2025 is decent and management outlook for FY25E has turned more positive. However, we will continue to stay prudent at the moment given the macro uncertainty. Maintain BUY but fine-tuned TP to HK$ 7.55, based on 13x FY25E P/E (unchanged).

For FY25E, we think the trend is constructive but our view remains conservative. For Xtep brand in FY25E, management has turned more optimistic, due to the recently better-than-expected sales trend and improved market conditions post government stimulus. They had mentioned many growth drivers such as: 1) opening more larger sized stores and closing more smaller sized ones (the average store size in 1H24 was at 160 sq.m) with better locations, 2) ramp-up of more 9th gen stores, 3) launch of a new store format (e.g. for running), 4) launch of more value for money products for the online channel and 5) further improvement in the kid business (by improving customer experience, living streaming capability and launch of more value for money products). Given the extremely healthy inventory level and its first class product innovation and price to quality, we are also positive about Xtep's outlook and will forecast HSD (unchanged) retail sales growth in FY25E. For Saucony brand in FY25E, we do concur with management's optimistic view (even better vs Xtep), thanks to different growth drivers, namely: 1) store expansion (40 new stores in FY25E, including more flagship stores and those in the tier 2 or below cities), 3) opening of more larger sized stores (used to be at 100 sq.m, but the new stores now are at 150 to 200 sq.m), 4) superior product quality (comparable to other overseas brands but the tag price is still at a discount of 30% to 50%), 5) category expansion (rolling out more SKUs, such as products for business use, retro or OG series, various apparel products (account for only 20% of the SKUs at the moment), etc., 6) decent sales per store growth (sales per store for the new store in Shenzhen had far exceeded RMB 500K per month while average sales per store was just at RMB 300K, and SSSG was as high as 45%+ in FY24), 7) greater wholesale sales (of the China product series and apparel products) to Saucony international, 8) further improvement in customer experience and operation of different running clubs. Noted that there is a major change lately, where the company will focus more on direct retail stores now (instead of franchising). In terms of profitability, we believe the net profit margin will not be realized soon in FY25E due to the need of more investments in marketing and R&D, even though that may ultimately be at 20%+ (likely to come gradually during FY26E-30E, according to management). All in all, we are now forecasting 32% sales growth and a net profit margin of 4% for Saucony in FY25E.

4Q24 retail sales growth was roughly inline. Xtep has reported HSD retail sales growth in 4Q24, improved from the MSD in 3Q24 and very close to our estimates of 10%. Given the challenging industry environment (esp. for the offline channel) and unfavourable weather, we are totally satisfied with such a growth rate. In terms of segment, retail sales growth for offline/ online channels/ Xtep kids was at LSD/ 20%+/ 10%+, which have all improved slightly vs those in 3Q24. We believe the growth drivers continued to be the running products (esp. the star products like 160x, 260x and 360x) and e-commerce (esp. the Douyin channel). Moreover, retail sales growth for Saucony was still very rapid at 50% in 4Q24, very similar to the 50%+ in 3Q24. Retail sales growth for Merrell was also very fast, at 40% in 4Q24. For FY24, Xtep/ Saucony's retail sales growth was at HSD/ about 60%, inline with/ ahead of management guidance of HSD/ 50%, but both were inline with market expectation, in our view. All in all, the management is highly confident on achieving net profit growth of higher than 20% in FY24E.

But the retail discounts and inventory were all the bright spots. Retail discount for Xtep was at 25% to 30% off in 4Q24, widened from the 25% in 3Q24, but did improve YoY from the 30% off in 4Q23. Such a trend had actually outperformed the industry average. Moreover, the inventory to sales ratio was at just 4 months in 4Q24, which did not change QoQ from 3Q24 and this was rather impressive, in our view, because this was supposed to increase YoY due to the early CNY in 2025.

A good start so far in 1Q25, but we are prudent. According to the management, retail sales growth trend for Xtep/ Sauncony in Jan 2025 was at 10%+/ very robust. We do appreciate such a growth rate, but we tend to be prudent as it has a low base due to the CNY seasonality in 2025.

Maintain BUY and fine-tuned the TP to HK$ 7.55, based on 13x FY25E P/E (unchanged). We have raised our FY24E/ 25E/ 26E net profit forecasts by 1%/ 1%/ 2%, to factor in faster-than-expected sales growth and better-than-expected margins for Saucony. The stock is now trading at 10x FY25E P/E, still attractive vs its 8-year average of 15x, plus its 5% FY25E P/E yield.