TOPSPORTS INTERNATIONAL(6110.HK)：RETAIL LANDSCAPE STILL UNDER STRESS DESPITE SEQUENTIAL IMPROVEMENT-格隆汇

机构：中银国际
研究员：Tony LI/Penny PENG

　　Topsports’ 3QFY25 operating figures reflected a tough operating environment for the sportswear retailer, as sales were down by mid- single-digit YoY during Sept-Nov 2024. Despite some sequential improvement in numbers, there are certain weakness behind, such as steepening discount and further shrinkage of retail network. We reiterate our view that it is facing a double whammy, and a recovery would require improvement of both industry dynamics and Nike’s appeal to consumers. Mgmt. also reiterated its guidance: FY25 revenue to be down high-single-digit YoY, and NP to be down 35-45% YoY. We believe it is too early to say the worst is over, but its FY25E dividend yield is again not too bad at 8%. Reiterate HOLD.
　　Key Factors for Rating
　　Some improvement in 3QFY25 top-line but unlikely to be exciting. Topsports’ 3QFY25 (Sept-Nov 2024) sales were down mid S.D. YoY, which is an improvement over 2Q (-ve low teens). However, the figures implied underperformance against the apparel industry under the official social retail sales figures, which were -0.4%/+8.0%/-4.5%. We believe this mainly reflects: (i) scaling down of retail network, as the GFA of its directly-operated stores declined by 4.4% YoY, and (ii) its principal brand Nike is still under transition after unsatisfactory performance in 2024. By segment, thanks to longer Double- 11 campaign, its e-commerce is relatively better, as the segment recorded double-digit YoY growth, and now accounts for c.40% of total sales.
　　We expect similar performance in 4QFY25. Although Topsports is positive on the recent reforms initiated by Nike (NKE US, NR), we believe it could take quarters for both parties to see a meaningful lift in the retail sales number amid escalating macroeconomic pressure and keener competition. Although Topsports has seen further improvement in retail performance in Dec 2024 so far, we view this could be partly attributed to seasonality effect, i.e. earlier Chinese New Year in 2025 versus 2024, and also earlier start of Double-12 campaign, a similar phenomenon as Double-11 campaign. Topsports reiterated it would prioritise lowering inventory level to a healthier level in FY25, which reflects the challenges of the sportswear retail industry.
　　Reiterating guidance of 35-45% YoY decline of net profit. Mgmt. reiterate the guidance given in Oct: revenue to be down high S.D. YoY, while NP to be down 35-45% YoY. We believe the current earnings visibility is still low, even though topline figures have shown some QoQ improvement. A key moving part would be its retail discount, as it is YoY worsening in 3QFY25 due to: (i) steeper discount for its offline stores, and (ii) higher contribution from online sales. We expect discount level could be a rather significant risk that could affect its earnings, especially given its reliance on Nike.
　　Key Risks for Rating
　　Downside risks: rising competition from other distributors; cannibalisation from brands’ DTC efforts in China; deteriorated store productivity; significant share placement by major shareholders, and lower margins due to channel shift.
　　Upside risks: strong performance of non-Nike brands, strong sales recovery of Nike products, less intense competition from peers and better-than-expected cost control.
　　Valuation
　　We revise our FY25-27 EPS by +1-2% after the release of 3QFY25 data as we are less conservative on its FY25 topline.
　　Our TP is unchanged at HK$2.7, based on 10x FY2026 P/E and a HKDCNY rate of 0.93 (previous: 0.91). Reiterate HOLD for its rather stable and high dividend yield despite recent weakness in fundamentals.