XTEP'S Fourth Season Order Will Be Ideal.

　　特步國際(1368.HK)2010年第四季訂貨會(huì)成績理想。

Rating: buy to current price: HK$6.0 target price: HK$7.69 potential potential upside: 28.2%

In the second half of 2009, the base number was high, and the order in the fourth quarter of 2010 increased by 25%.

In the fourth quarter of 2010, the performance of the order was better than we expected, because the supplement was 13% in the second half of 2009.

The number of shoe orders and the average selling price increased by double digits and unit figures respectively, which led to an increase of 23% in shoe orders.

Among them, this year's main product - running shoes - orders increased by 43%.

In addition, clothing orders increased by 26%: not only did the number of orders increase, but the average price also increased.

The average selling price will increase and the gross profit margin expected by management will be improved.

As the company has locked production costs and the average selling price has increased, the gross profit margin is expected to improve.

We expect that the gross profit margin of XTEP brand footwear products will increase by 1.5 percentage points, because (1) the ex factory price discounts in 2010 decreased from 09 to 62% in 60%; (2) sales of running shoes increased by 43% over the same period last year. We believe that the gross profit rate of running shoes is higher than the average gross profit rate of footwear products; (3) about 50% products are produced by their own factories and are easier to control the production cost.

In terms of clothing products, management said the increase in average selling price was only slightly higher than offset cost.

We expect gross margin to rise by 0.4 percentage points.

Latest developments and retail level performance.

In April 2010, the operational data at the retail level were further improved.

(1) the growth of same store sales increased from the median of unit figures in the first quarter of 10 to 7%-8%; (2) the average discount offered decreased from 20% in the first quarter of 10 to 12% in April 2010; (3) the inventory sales ratio has remained at a stable level for 4 months.

XTEP and Taobao have formed strategic cooperation to develop Internet sales.

In terms of the "XTEP Bermingham" brand, Bermingham arranged for promotional activities in China in July, and the joint brand product will be launched in the first quarter of 11.

The target price is up to HK $7.69, valuations are still attracting.

We raised FY10F/FY11F's earnings per share by 3% and 4% respectively, reflecting the better performance of the order in the 10 quarter and the sales contribution of Taobao.

The annual average annual growth rate of FY09 - FY11F's earnings per share rose from 21.7% previously predicted to the current 24.1%.

At present, XTEP's FY10FPEG is only 0.58 times, and it is still the lowest among all sportswear brands. We think XTEP valuation should be raised.

Therefore, we raise the target price to HK $7.69, which is equivalent to FY10F18 times earnings ratio (the previous target price is equivalent to FY10F17 times earnings ratio).

XTEP's valuation is still low due to: (1) when FY10F's price to earnings ratio is 24.1% compared to FY09F FY11F earnings per share, the average annual compound growth rate is 24.1%; (2) if the estimated net cash at FY10F end is 2 billion 400 million yuan, the price earnings ratio of FY10F is only 11.4 times; (3) according to Bloomberg, compared with Lining (2331.HK), Anta sports (2020.HK) and China trend (3818.HK) 0.84 times to 1.20 times PEG, XTEP 0.58 times of the PEG is the lowest among all sports apparel brands.