Nike And Adidas Moves Will Erode Third Party Margins

Key Takeaways

• Dependency on third-party global brands and slow digital adaptation exposes the company to declining margins, market share, and topline growth.
  
• Demographic headwinds and rising competition from local brands increase inventory risk and further erode profitability and pricing power.
  
• Strong cash flows, diversified brand expansion, digital innovation, improved store productivity, and rising customer loyalty collectively support resilient earnings and long-term shareholder value.

Catalysts

An investment holding company, engages in the trading of sportswear products in the People’s Republic of China.

• Topsports' heavy reliance on third-party relationships with global brands like Nike and Adidas leaves the company exposed to the accelerating shift of these brands toward direct-to-consumer models, which will likely bypass intermediary retailers and lead to a significant decline in long-term revenues and gross margins.
  
• The rapid expansion of digital channels controlled by major brands and technology giants is expected to continue eroding brick-and-mortar traffic and bargaining power, diminishing store productivity and likely resulting in ongoing declines in same-store sales, directly impacting topline growth.
  
• As e-commerce penetration rises and consumer preference for online shopping grows, Topsports' relatively slow digital transformation and reliance on fixed-cost physical infrastructure will lead to persistent negative operational leverage and compressed net margins.
  
• With the sportswear market facing headwinds from demographic stagnation and an aging population in China, long-term demand growth for athletic apparel is likely to slow further, placing structural pressure on revenue growth and amplifying inventory risk.
  
• Intensifying competition from vertically integrated domestic brands and shifting industry dynamics toward channel consolidation are expected to further squeeze Topsports' market share and profitability, driving ongoing erosion of both earnings and pricing power over the next decade.

Topsports International Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Topsports International Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Topsports International Holdings's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 5.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.6 billion (and earnings per share of CN¥0.26) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 13.6x today. This future PE is greater than the current PE for the HK Specialty Retail industry at 11.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Topsports International Holdings Future Earnings Per Share Growth

Risks

• Topsports has maintained robust free cash flow and an industry-leading dividend payout ratio, consistently exceeding 100 percent in recent years, which could support sustained high shareholder returns and limit downside risk to total shareholder returns, even if near-term earnings are volatile.
  
• The company has deepened exclusive relationships with leading global sports brands and is continuously expanding its brand portfolio into high-growth verticals like outdoor and running, which could diversify revenue streams and drive future topline and gross profit improvement.
  
• Strategic investments in omnichannel digitalization, including AI-driven customer targeting, live streaming, and a strong presence across private domain and social e-commerce platforms, are strengthening customer engagement and operational efficiency, supporting higher net margins and revenue resilience.
  
• Single store sales productivity rose by over 7 percent year-over-year and store closures have focused on efficiency, meaning brick-and-mortar operations are being right-sized and may recover profitability if offline traffic trends stabilize, supporting future net profit growth.
  
• The company's customer base approached 86 million, with high-value member penetration and strong repeat purchase metrics, indicating growing customer loyalty and lifetime value that can support revenue stability and earnings power over the long term.

Valuation

• The assumed bearish price target for Topsports International Holdings is HK$2.82, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Topsports International Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$6.95, and the most bearish reporting a price target of just HK$2.82.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥27.3 billion, earnings will come to CN¥1.6 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of HK$3.09, the bearish analyst price target of HK$2.82 is 9.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.