TOPSPORTS(6110.HK)：IMPROVED IN 2H25E MORE CATALYSTS IN FY26E-格隆汇

机构：招银国际
研究员：Walter WOO

　　Supported by our channel checks and comments by management of various brands (Adidas, Pou Sheng, 361 Degrees), we believe the sportswear sector has turned around in YTD 2025 vs 4Q24 (decent retail sales growth during CNY, retail discounts may be high but are likely to bottom out after CNY as inventory has finally normalized). We see further upside for Topsports in FY26E, thanks to: 1) a better macro environment, 2) more new product launches, 3) better inventory level and discounts, 4) more support from principal brands, and 5) rapid outdoor brand growth. We upgrade to BUY and revise up TP to HK$ 4.51.
We have turned more positive on FY26E, because of the macro environment, lowered inventory and discount risks and better momentum from the principal brands (more new product launches and margin support).
　　Industry-wise, we believe the trend is improving, because: 1) the central government, in our view, has become more supportive on the consumer sectors, for which it has released more subsidies and adjusted the numbers of holidays, etc. and 2) the risks of industry-level inventory pileup is much lower, as the trade fair orders growth (for most of the brands) has normalized (adjusted to a level that is conservative enough, to likely be matched by the actual retail sales growth).
　　Company-wise, we do expect Topsports can turn around in FY26E (estimating a 4% sales growth and 18% net profit growth), thanks to multiple catalysts: 1) a decent start in FY26E, as recent data from Adidas (10%+ sales growth in YTD 2025) and peers like Pou Sheng (LSD retail sales growth during CNY and early Mar 2025) are all rather positive; even though Pou Sheng’s guidance of flattish sales growth in FY26E is quite conservative, given the seasonality between CNY data and FY data, we think any growth between 0% to 10% are reasonable. 2) More new product launches, where Adidas has a decent pipeline of lifestyle shoes (ramp up of Campus and SL72, releases of Climacool) and function shoes (expansion of Adizero, release of Supernova series and new boost material-based shoes) and Nike’s pace of releases may turn faster, as many plans were delayed in FY25E due to the changes in management. 3) Likely reduction in retail discounts and a higher sales mix from in-season products (thanks to Adidas’s strong brand momentum and the end of de-stocking cycle for Nike (management do have a target to normalize by May 2025). We can also see the inventory days of Pou Sheng have already improved to 148 days in Dec 2024 (from 152 days in Sep 2024), therefore this should be helpful in terms of GP margin. 4) Likely to secure more support from the Nike brand, possibly in the form of higher rebates and reduction in whole discounts (these are all positive for the GP margin), because Nike is undergoing a transition which is aiming to rebuild their relationship with the major distributors and spend more on A&P to rebuild its branding. 5) Rapid growth from the outdoor brands like HOKA and KAILAS, may likely sustain.
　　We believe Topsport’s 2H25E performance has improved and is better than guidance. Based on our channel check, we are now expecting a LSD retail sales drop for Topsports in 4Q25E (Dec 2024 to Feb 2025), after a MSD decline in 3Q25. Therefore, we are now forecasting a -5% sales growth in FY25E (ahead of the company’s guidance of HSD drop). This improving trend, in our view, was driven by: 1) a better-than-expect macro environment (positive consumption sentiment created by gov. subsidies, increases in the number of holidays, stabilization of housing prices in some cities, etc.), 2) better-than-expected performance from Adidas and other outdoor brands (such as HOKA and KAILAS) and 3) better-than-expected e-commerce sales (early promotion, better O2O inventory management, etc.). In terms of margin, we do expect GP margin in 2H25E to fall slightly, due to increased retail discounts for de-stocking (discounts were still falling YoY during 2025 CNY, but mainly for Nike, where that for Adidas should have been improved YoY) and expect OP margin to drop more, because of the operating deleverage and the increased sales mix from e-commerce. All in all, we are estimating a 5% sales and 31% net profit drop in FY25E (implying a 2% sales and 26% net profit drop in 2H25E).
　　Raise to BUY with TP of HK$ 4.51, based on 14x FY2/26E P/E (rolled over from 12x FY2/25E P/E). We have revised up FY25E/ 26E/ 27E net profit forecast by 16%/ 18%/ 13%, in order to factor in: 1) better-than-expected sales growth and 2) improvement in retail discounts and support from the principal brands. We are much more confident now (vs late 2024) about Topsports’ multi-year turnaround, thanks to a better macro environment and new product line-up; hence we will now upgrade Topsports to BUY. The stock is trading at 11x FY2/26E P/E, vs 5-year average of 14x, not too demanding in our view. And the downside is likely protected given its 9% FY2/26E yield.