Keeping apace with the times. Photo: Mark Lee
KIM ENG Securities has initiated coverage of fashion sportswear heavyweight Xtep International Holdings Ltd (HK: 1368) with a “buy” call and a target price of 6.85 hkd, and called its 14.1x P/E "undemanding."
The brokerage noted the Chinese firm’s unique ability to get a foothold in a very fast-growing and lucrative market segment (Click here to see Bocom's identical initiation earlier this week).
”Xtep has managed to differentiate itself with a strong positioning in the mass and fashion‐oriented segment. Its ambassadors comprise young idols, enabling it to create a buzz among the young and trend‐focused crowd,” Kim Eng said.
Xtep was also seen benefiting from its strategy of targeting various inland provinces as well as seeking to expand its share of the second- and third-tier city markets.
“It has a dominating market share in Hunan, Shandong and Anhui and it intends focus on lower‐tier cities to capture emerging urban demand.”
Written in the Stars: Xtep relies on celebrities to promote its products. Photo: Mark Lee
The Fujian province-based fashion sportswear firm was also seen riding the coattails of a globally recognizable entertainment brand – Disney – especially given the US entertainment giant’s progressing plans to build a theme park in Shanghai.
“The company has an extensive expansion program for the Disney Sports stores in China and in 23 new overseas markets. It has an exclusive license agreement with Disney to distribute Disney sportswear. This segment, which accounts for 7.7% of total sales in H1/2009, is expected to grow to around 10% in FY10,” Kim Eng said.
Xtep will open a flagship store in Shanghai in 2010 in anticipation of the opening of the Shanghai Disney theme park there in 2014.
“We believe segment sales will undoubtedly rise alongside the increasing popularity of Disney in China. Xtep will further accelerate expansion of Disney Sports stores and it is planning an extensive expansion program in China and 23 new markets globally. It will be unveiling more plans for international markets in 2010.”
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| Xtep |
2008 |
2009(e) |
2010(e) |
2011(e) |
| Turnover (rmb) |
2.87 bln |
3.41 bln |
4.15 bln |
4.91 bln |
| Net profit |
508.2 mln |
610.4 mln |
761.1 mln |
918.5 mln |
| EPS (basic) |
0.268 |
0.281 |
0.350 |
0.423 |
| P/E ratio |
16.3x |
15.6x |
12.5x |
10.3x |
| PEG |
0.21 |
3.37 |
0.51 |
0.50 |
| Ex-net cash P/E |
13.2x |
12.6x |
10.0x |
8.0x |
| Yield |
3.6% |
2.8% |
3.5% |
4.3% |
| Price/book |
3.6x |
3.3x |
2.9x |
2.5x |
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Decidedly differentiated
Xtep, a relative newcomer to the industry, has managed in just a few short years to establish itself as China’s top fashion sportswear enterprise.
In the process, it has managed to differentiate itself from its domestic competitors, thus making a very recognizable name for itself – a feat worth its weight in gold in the hypercompetitive global industry.
“Xtep has distinctively differentiated itself vis‐à‐vis peers in the intensely competitive sportswear space which, we believe, will bring about attractive growth for the company. X‐step is positioned in the mass and fashion‐oriented segment and its ambassadors are young idols, which enables it to create a buzz among younger and fashion‐focused customers,” Kim Eng said.
Xtep also appealed to more budget but brand conscious young consumers in lower tier cities as Its average selling price (ASP) is around 10% lower than Anta’s and around 30% below that of Li Ning, both Xtep’s major domestic rivals.
Xtep's running shoes are among the world's lightest
The Hong Kong-listed firm was also expected to get a boost from the robust Chinese economy, which was expected to meet its original target of 8% GDP growth for last year.
“We are bullish on the PRC retail discretionary sector due to favorable operating conditions as the government continues to promote and stimulate domestic consumption. The sportswear space will remain a key sub‐sector for discretionary retail due to its decent growth profile, large market cap, and stable yield.”
Kim Eng added that it expects the industry to grow 15‐18% in the next three years with stronger names such as Xtep outperforming, led by market share gains.
As proof of revenue vibrancy, Xtep’s same‐store‐sales growth (SSS) at the retail level was 2%, 5%, 6% and 6% during Q1-4/09, respectively, reflecting the pick‐up in consumer sentiment in the PRC.
The company recorded “encouraging” sales at its trade fair this year, Kim Eng said, with its order book value growing 22% and 20% year-on-year in Q1/2010 and Q2/2010, respectively.
“In particular, Xtep launched a total of 360 new apparel and 260 footwear designs in the 2Q10 trade fair, encompassing new apparel series across sailing, soccer and tennis, as well as eight new footwear categories, classic, leisure, basketball, running, tennis, beach, air‐permeable and kids.”
It added that the newly launched products indicate Xtep’s R&D capabilities and its strong order book growth reflects the receptiveness of distributors and franchisees.
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Xtep had the third‐largest market share in the domestic sportswear market in 2008. It has a dominating market share in Hunan, Shandong and Anhui provinces. With 85% of its stores located in second‐ and third‐tier cities, Xtep is well‐positioned to capitalize on the growing purchasing power of consumers owing to rapid urbanization. |
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Off and running
Xtep intends to focus on the running shoes category to drive growth in its footwear segment and has put in relentless efforts to promote sales in this category, Kim Eng said.
“It produced marathon running shoes that weigh 187g, the lightest running shoes in the world. This indicates the company’s determination to excel in this space and illustrates its R&D capabilities. Revenue of the running shoes category grew at a remarkable 40% year-on-year in the Q2/2010 trade fair.”
