XTEP International Is Good In The Four Quarter, But There May Be A Brief Drag In The First Quarter Of Fiscal Year 20.

The Bank of Hong Kong issued a research report on XTEP international in February 5th.

The target price has been lowered to HK $4.47, but because of the low valuation, it has maintained the buy rating, based on the 12 times 20 fiscal year earnings ratio (13 times lower due to the weakening of investor confidence), and lowered 20/21 earnings per share by about 5% in the fiscal year. As XTEP business is more concentrated in Central China (Hubei and Hunan), we believe that the company will be affected by pneumonia.

19 retail sales growth has improved in the fourth quarter of fiscal year. XTEP achieved a retail sales growth of more than 20% in the fourth quarter of fiscal year 19, higher than the high double-digit forecast of the Bank of China International Securities, and faster than the 20% growth in the three quarter of 2019. Same store sales also saw low double-digit growth (compared to 10% in the three quarter of 2019), and retail discount improved to 75-80 (compared to 75-78 in the three quarter of 2019), while pipeline stocks stabilized at four months (unchanged from the three quarter of 2019).

The current focus is on the impact of the epidemic. In view of the high base in the fourth quarter of 18 fiscal year and the warm winter of 2019, the company's data in the fourth quarter of the 19 fiscal year are ideal. However, we think investors are more concerned about the negative effects of recent pneumonia in Wuhan.

Brands are less affected than dealers, but they will still drag on future growth. We believe that brand businesses, such as XTEP and other well-known brands, are of a wholesale nature and are less affected by the epidemic. On the contrary, sales of distributors (such as Tao Bo or Baosheng) are directly impacted. We believe that during the outbreak period (including the Spring Festival of 2020), the number of shops decreased. Although some owners took the initiative to reduce rent, the loss of sales and the loss of fixed costs (basic wages plus depreciation amortization) still seriously hurt the net profit of dealers. We believe that these economic losses are mainly borne by the dealers. The negative impact of the epidemic on brands will strike orders in the 20 quarter of fiscal year and the order meeting in the first quarter of fiscal year 21, thus dragging down the financial figures for the 20/21 financial year.

In rough estimation, we believe that retail sales growth in the first quarter of fiscal year 20 has dropped by about 15%, which is not surprising (originally expected to grow by about 15%). If we assume that retail sales growth in fiscal year 20 will fall by 50% in the first half of the month (from late January to March, the Spring Festival is also included), the total retail sales in the first quarter of fiscal 20 will fall by about 15%, which will lead to 8% growth in orders for the fourth quarter of fiscal year 20 and the first quarter of the 21 fiscal year, even though consumers may shift their demand to the electricity supplier.

The buy rating was maintained, but the target price was reduced to HK $4.47. We downgraded 20/21 earnings per share 4.8%/5.5% in the year of fiscal year 20 to reflect the reduction in orders for future orders (due to the weakening of investor confidence, the projected price earnings ratio in fiscal year 13 to 12 times). The company currently has a forecast price earnings ratio of 9 times in the 20 fiscal year, less than 12 times its 5 year average. It is important to note that XTEP's stock price has been callback 23% from its January 2020 high (more than Lining / Anta's 19%/15%).