Expanding Middle-Class Income In China Will Drive Premium Athleisure

Key Takeaways

• Aggressive direct-to-consumer expansion and leading brand status in China's running market position Xtep for outperformance in sales, margins, and long-term growth.
  
• Strong ESG execution and international diversification are expected to drive greater market share, premium pricing, and earnings stability beyond domestic business cycles.
  
• Heavy reliance on China, rising expenses, and strong competition threaten profitability, while sustainability pressures may drive up costs and compress margins.

Catalysts

Designs, develops, manufactures, markets, and sells sports footwear, apparel, and accessories for adults and children in Mainland China.

• While analyst consensus expects Saucony's strong growth trajectory to continue, management guidance and execution suggest Saucony's revenue could sustain a compound annual growth rate exceeding 40%, not only in 2025 but through the rest of the decade, with accelerating margin expansion as scale and direct-to-consumer leverage drive profitability beyond current forecasts.
  
• Analysts broadly agree that Xtep's DTC expansion will support margins and revenue, but the ambitious plan to transition 400 to 500 stores to the DTC model by 2026, with large, high-tier city flagship stores and synergistic marketing, could rapidly amplify both gross margin and overall sales volumes at a pace well above consensus estimates.
  
• Xtep's positioning as China's undisputed #1 running brand – evidenced by dominating marathon wear rates and continuous innovation in its Champion running shoe series – puts it at the center of China's nationwide fitness boom, enabling exponential volume growth in both core and premium categories, driving top-line revenue far above current expectations.
  
• The company's industry-leading ESG strategy, recognized by an MSCI ESG A rating and a 10-year sustainability roadmap, is likely to attract increasing institutional and Millennial/Gen Z consumer preference, leading to faster market share gains and premium pricing power, boosting both sales and net margins in the medium-to-long term.
  
• With substantial growth in premium and co-branded product lines, ongoing investments in digital-native channels with over 80% e-commerce growth on new platforms, and further international expansion, Xtep is set to unlock new recurring revenue streams and diversify its earnings base well beyond current China-focused forecasts, materially lifting group earnings and reducing risk from domestic volatility.

Xtep International Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Xtep International Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Xtep International Holdings's revenue will grow by 9.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.6% today to 10.7% in 3 years time.
• The bullish analysts expect earnings to reach CN¥1.9 billion (and earnings per share of CN¥0.69) by about July 2028, up from CN¥1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 10.5x today. This future PE is greater than the current PE for the HK Luxury industry at 9.9x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.24%, as per the Simply Wall St company report.

Xtep International Holdings Future Earnings Per Share Growth

Risks

• Xtep remains heavily reliant on the domestic Chinese market for its core revenue streams, making the company vulnerable to economic slowdowns or unfavorable demographic shifts in China, which would directly limit revenue growth and long-term earnings potential.
  
• Increased focus on direct-to-consumer operations, while aiming to improve brand control and margins, also exposes Xtep to higher expenses in areas like store rental and staffing, placing additional pressure on net margins if sales growth does not keep up with the cost structure.
  
• The rapid increase in SG&A expenses, particularly rising advertising, promotion, and e-commerce platform costs, could weigh on profitability if aggressive marketing and sponsorship activities do not generate commensurate increases in revenue or brand value.
  
• Intensifying competition from both global powerhouses such as Nike and Adidas and innovative local brands may restrict Xtep's ability to raise prices or maintain market share, inhibiting revenue growth and reducing overall profitability as price wars become more frequent.
  
• Growing consumer demand for sustainability and heightened regulatory scrutiny of labor and environmental practices in the apparel sector could force Xtep to make costly operational adjustments, increasing compliance costs and further compressing gross and net margins if not effectively managed.

Valuation

• The assumed bullish price target for Xtep International Holdings is HK$9.84, which represents two standard deviations above the consensus price target of HK$7.1. This valuation is based on what can be assumed as the expectations of Xtep International Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$12.3, and the most bearish reporting a price target of just HK$5.62.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥18.0 billion, earnings will come to CN¥1.9 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 9.2%.
• Given the current share price of HK$5.63, the bullish analyst price target of HK$9.84 is 42.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.