National Fitness Boom And Saucony's DTC Strategy Will Strengthen Future Market Position

Key Takeaways

• Focus on national fitness and running sports, alongside rapid growth in high-end brands, positions Xtep for sustained revenue increases and margin enhancement.
  
• Strategic DTC operations and e-commerce investments aim to boost revenue, improve margins, and optimize profitability through better distribution control and operational efficiency.
  
• Economic uncertainty and competition may pressure Xtep's earnings, while high DTC strategy costs and financial risks challenge margins and cash flow.

Catalysts

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

• Xtep's focus on the growing national fitness boom and running sports, including leading marathon participation rates, positions it for sustained revenue growth in the professional and mass-market sports segments.
  
• The rapid growth of Saucony, a high-end brand with a CAGR of over 100% in the past five years, is expected to continue, with anticipated revenue growth of 30-40% in 2025, contributing significantly to overall group earnings and margin enhancement.
  
• The strategic emphasis on Direct-to-Consumer (DTC) operations, particularly for Saucony and Xtep core brand, is expected to drive revenue growth, improve gross margins, and enhance profitability through better control over distribution and customer engagement.
  
• Xtep's investment in e-commerce, which saw a 20% year-on-year growth, particularly on new platforms like Douyin and WeChat, is expected to continue increasing revenue and market reach, supporting higher revenue figures and potential margin improvements due to scale efficiencies.
  
• Operational efficiency enhancements, such as streamlined inventory management and reduced turnover days, along with strategic management changes, are expected to optimize net margins and drive sustainable profit growth.

Xtep International Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xtep International Holdings's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 10.1% in 3 years time.
• Analysts expect earnings to reach CN¥1.7 billion (and earnings per share of CN¥0.61) by about March 2028, up from CN¥1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥1.8 billion in earnings, and the most bearish expecting CN¥1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from 9.9x 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 8.89%, as per the Simply Wall St company report.

Xtep International Holdings Future Earnings Per Share Growth

Risks

• The macroeconomic environment remains uncertain, which could impact consumer spending and affect Xtep's future revenues and profits.
  
• The company’s significant investments in advertising, promotion, and e-commerce are increasing SG&A expenses, potentially putting pressure on net margins.
  
• Xtep's aggressive DTC (Direct-to-Consumer) strategy and store expansions require high capital expenditure, which could strain cash flows and profitability if not managed effectively.
  
• The company faces competition from international and domestic brands in the sports apparel industry, which could impact its market share and earnings.
  
• The one-time dividend tax and repatriation costs related to moving funds from China to Hong Kong highlight financial risks that could affect net profits if such situations recur.

Valuation

• The analysts have a consensus price target of HK$7.114 for Xtep International Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$12.03, and the most bearish reporting a price target of just HK$5.39.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥16.5 billion, earnings will come to CN¥1.7 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of HK$5.19, the analyst price target of HK$7.11 is 27.0% 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.