XTEP'S Operation Strategy Boosts Strong Orders In The Fourth Quarter

May 9th dispatch fourth quarter 2011

Operational data for the first quarter of 2011.

In the first quarter of 2011, the company recorded a growth in the same store sales with high unit figures (same store sales figures covering about 60% retail outlets / about 4000 retail outlets).

The same store sales grew more than 10% during the May 1 holiday.

In addition, the company has fully executed orders from the beginning of this year and received 1-2% replenishment orders.

Retail channel inventory level / sales ratio is 4-4.5 months, at a healthy level.

The actual average discount of retail channels is about 15-20%, which is also robust.

XTEP currently has more than 7200 retail outlets.

Management is still optimistic about the industry outlook.

Management expects the industry growth in 2011 and 2012 to be 15-18%, higher than expected low double-digit growth expectations of Lining (14.88,0.68,4.79%, real time quotes).

In addition, management expects that orders for the first quarter of 2012 will increase by 20-22%.

The progress of Taiwan Depositary Receipts (TDR).

Management believes XTEP has a low share price, so it is not necessary to launch the TDR issue at the moment.

Before the Taiwan stock exchange, the TDR approval period was valid until the end of June 2011.

If the share price is still below the management expectation, the management plan to extend the time limit for issuing the TDR at the end of June.

XTEP will benefit from the government's policy of accelerating the development of urbanization and increasing the income of the middle and low income groups.

We prefer XTEP because XTEP's brand strategy is different from other mass market sports brands.

XTEP's market positioning in the mass market should benefit from the good policies of the central government, such as (1) raise the minimum wage standard to no less than 13% every year during the "12th Five-Year plan" and increase the urbanization ratio from 47.5% to 51.5%; and (2) the reform of individual income tax scheme is expected to be implemented in the second half of 2011 to reduce the tax burden of consumers, especially the low and middle income groups.

Maintain "buy" rating and target price of HK $6.7.

We have raised FY11F/FY12F's earnings per share by +0.9%/+1.5%. The reasons are: (1) in our forecast, we have reflected the replenishment orders from the beginning to the present; and (2) increased the annual order growth of XTEP brand FY12 from 17.5% to 18.5% (the relative management expects that the first quarter of 2012 will increase the growth of 20-22%, and our forecast is conservative). We also join the forecast of FY13F.

Operating profit growth dropped from 18.6% of FY12F to 17% of FY13F, while earnings per share increased from 16.7% of FY12F to 5.7% of FY13F. The reason is that we assume that the actual tax rate will rise from 26% of FY12F to 26% of FY13F (we assume that XTEP's main subsidiary XTEP (China) can postpone its hi-tech Certificate (at 15% tax rate) to FY12, but not FY13).

Maintaining the target price of HK $6.7 is equivalent to 13 times the FY11F P / E ratio.

At present, the valuation is equivalent to FY11F7.7 times the net earnings after deducting net cash, and the valuation is attractive.