Topsports International Holdings Limited (6110) Earnings Call Transcript & Summary

Welcome to Topsports International 2024 and 2025 Fiscal Year Annual Results Announcement. I'm Rebecca Zhang, Head of the Capital Markets. Please allow me to introduce the company's management team present today. They are Chairman, Chief Executive Officer and Executive Director, Mr. Yu Wu; Senior VP, Mr. Zhang Qiang; Vice President, Ms. Zhang Huijing; Vice President, Mr. Xiaoji Chai. For today's presentation, Mr. Yu will first provide a brief overview of the past fiscal year, and then the management team will report on financial performance and business development, followed by a Q&A session. As usual, I'd like to welcome Mr. Yu to address the floor first, please.

Good morning, all investors and analysts. Welcome to Topsports annual results announcement. Looking back to the past fiscal year, the weak macroeconomic consumer environment and the softer off-line foot traffic has put significant pressure on the retail industry. Our overall performance has been largely consistent with what we have communicated to you last October. Despite facing continued challenge and numerous difficulties at the macro level, we have never relaxed our efforts. We remain committed in establishing long-term value, exploring new models, enriching new formats and scenarios and constantly seeking breakthroughs and transformation. Responding to changes and pursue certainty have been the key focus of our business operations and development. Connection and integration are the key concepts as we look inward to deepen our omnichannel connectivity in the new environment. Breakthrough limitations and innovation represent our active outward exploration, breaking away from the traditional thinking to seek for long-term development opportunities. Facing this very complex and challenging situation, we must acknowledge the difficulties and challenges. We are maintaining confidence in our long-term development. As you can see from our performance data, we have maintained healthy cash flow generation even in adversity, which will support our sustainable development in the near future. At the same time, the past fiscal year also marks the 25th anniversary that Topsports has journeyed along with Chinese sporting retail industry. Through years of dedication and cultivation, we have established deep connections with more than 5,000 off-line stores, more than 2,300 mini-program stores and more than 500 TikTok and WeChat mini-programs. We have forged deep bond with 80 million sports fans, and we continue to further extend our customer base. By continuing to deepen partnership with the brands, we will be able to provide customers with high-quality products and service across multiple categories and domains. We have already become the exclusive operational partners for several brands in the Chinese market. We leverage our one-stop operational capabilities to enter into specialized scenarios, meeting consumer personalized needs while exploring incremental business value. At the same time, since our IPO, we have maintained very healthy business-driven cash flow, achieving a cumulative dividend payout of RMB 12.96 billion with cumulative payout ratio of 104.2%, constantly leading the industry. Additionally, our achievements in sustainable development have received high recognition from authoritative global institutions with our ESG rating leading the whole industry. For over 25 years, we have grown alongside the industry, journeyed with our upstream and downstream partners, resonated with the consumers and thrived with our employees. We continue to deliver healthy and sustainable returns to our shareholders. We continue to evolve as the one-stop omnichannel operational partners for more collaborators across diversified sporting segments in Chinese market. Looking ahead to the new year, when changes has become the new normal, we maintain a cautious optimistic outlook on the market development. The caution is by no means passive conservation, but with a commitment to maintain clear judgment and flexible response strategy. We are actively adapting to the new changes and the challenges brought by the evolving landscape, proactively seeking for changes, boldly advancing and executing with agility. We continue to strengthen our business foundation and explore new value for Topsports in new industrial environment. Now I will hand over the time to Rebecca to help to review our annual financial performance, please. Thank you.

Thanks, Mr. Yu. Coming next, I will update everyone on our financial performance for the fiscal year. The overall performance aligns with what we previously communicated to the market based upon our principle of openness, transparency and timeliness. There are a few points. First of all, at the profit and loss level, the Y-o-Y decline in revenue and the net profit was primarily affected by the weak macroeconomic demand and softer off-line foot traffic. Although our direct-to-consumer online business continued to grow and provide some support, the relatively high fixed cost structure of the off-line operation led to significant negative operational leverage as off-line revenue declined. This had a magnified negative impact on profit compared to the revenue performance. The second point, due to the overall external environment and the sales decline, as has been discussed with all of you, the inventory management is going to be the key focus during the fiscal year. Looking at the results, through the coordinated efforts of both online and off-line channel, we have achieved expected outcome. By the fiscal year-end, inventory decreased by 4.5% on a Y-o-Y basis and down by 1.9% compared with end of August 2024. Inventory turnover days stood at 134.9 days, down by 1.2 days on a Y-o-Y basis and 30.4 days decline compared with the interim. The total inventory volume has been effectively controlled on a Q-on-Q basis. The overall age structure of inventory remained stable compared with last year. There are still some room for further adjustment. With the clearance of the old commodities and gradual improvement in the new inventory intake, we expect the inventory age structure will continue to be improved. The third point, thanks to the effective inventory management, we still maintain a very robust and efficient working capital management during the period, driving excellent cash generation performance. Despite a 43.5% Y-o-Y decline in profit before tax, our net operating cash flow increased by 20% on a Y-o-Y basis to RMB 3.76 billion. Free cash flow was 2.6x of the net profit for the same period. If you take a look at our track record, such a ratio is higher than our observed 5-year average. Based on that, the Board recommended a final dividend of RMB 0.02 per share and a special dividend of RMB 0.12 per share. Combined with the interim dividend, the total annual dividend was RMB 0.28 per share with a total payout ratio of 135%. This maintains our industry-leading position, exceeds our previous fiscal year's payout ratio of 100.9%. We remain firmly committed to developing sustainable return to shareholders through robust cash generation. Coming next, I will elaborate on different criteria in the financial performance. Overall revenue declined by 6.6% to RMB 27.01 billion. H2 saw a Y-o-Y decline of 5.4%, narrower than the 7.9% drop in H1 of this year. This improvement was particularly evident in retail business performance between the 2 halves. The retail business declined by 8.9% in H1 and 4.8% in H2. This improvement was primarily due to our intensified online sales initiative in H2, which had positive effects on both revenue and inventory performance, while also impacting the discount level and certain expense items. By brand category, sales revenue for our key brands declined by 6.1% on a Y-o-Y basis to RMB 23.31 billion, while revenue from other brands declined by 9.9% to RMB 3.5 billion. The performance in the other brands category was mainly affected by casual sports brands. This is indeed in line with observation of the market, where specialized professional sports brands continue to outperform the comprehensive sports and casual sports category Y-o-Y. At the gross profit margin level, the fiscal year saw an overall Y-o-Y decrease of 3.4 percentage points to 38.4%, which was slightly narrowed down compared with 3.6 percentage point decline in H1. There are a few reasons. First of all, if you take a look at the left side green bracket, this actually shows the ever-deepening discount rate. This factor have a greater negative impact on gross margin in H2 of the fiscal year compared with the full year. This is also indeed in line with what has been discussed with all of you. This was primarily because we strengthened inventory reduction efforts in H2 and mainly through online channels as our primary strategy since the absolute value of the online discount rate is lower than the off-line discount rate, with the difference being around 20% points. The increased proportion of the online sales also had a negative impact on overall discount rate. This impact was greater in second half, as I mentioned, being further intensified while, at the same time, we also started to see the impact from the inventory provisions and other factors. The company's inventory provision adjustment for the full year was CNY 47 million. While the amount increased Y-o-Y, it narrowed significantly compared with CNY 90 million inventory provision adjustment in H1 of the fiscal year, which also is reflecting the effectiveness of our inventory management. The third point, the negative impact from the changes in sales proportional between the direct-to-consumer and wholesale channels. Looking at the full fiscal year, the impact has already been narrowed down compared with H1 of this year. This may also directly relate to the faster growth of the direct online sales in H2 of the year. Coming next, the next slide will help to walk you through our overall expenses ratio. During the fiscal year, the revenue declined by 6.6%. The total expenses decreased by 5.6%, resulting in a slight 0.3% point compared with expenses ratio of 33.1%. In this challenging environment, we mitigated off-line operating expense pressures through our omnichannel layout and continued to refine cost efficiency management. The key expenses component include 3 parts: rent, labor and other expenses. Let's take a look at the rental expenses. The overall estimated rental expenses decreased by 50.7%; the rental expense ratio, down by 1.3 percentage points, providing biggest contribution to controlling the overall expenses ratio due to a few reasons. First of all, for off-line network, we made the further optimization, as you can see from the store number changes throughout the full year while, at the same time, we also continue to talk to the property management company of getting more preferred terms. We are working for flexible rental structures. For that reason, I have already shared with you, by continuing to optimize our off-line network with flexible rental structure, the total sales area decreased by 12.4% on a Y-o-Y basis. There is another contributing factor for the ever-decreasing rental expenses. That is the ratio change for online and off-line. I have already mentioned it to you. Online channel sales continue to go up in this fiscal year. Generally speaking, for online channel, it has a lower expense ratio, where, from the expense composition perspective, the online has a higher proportion of variable cost where off-line has higher fixed cost. So improving the sales from the online channel will actually help to benefit the overall control of the expenses ratio. Secondly, on the staffing front, we maintained personnel configurations along with our omnichannel needs, building an agile and efficient talent supply while securing cost efficiency advantage. Overall head count decreased by 7.4% on a Y-o-Y basis, total employee cost down by 6.3%, expense ratio increased slightly by 0.1 percentage points to reach 10.2%, remaining essentially stable on a Y-o-Y basis. Despite external environmental fluctuations during the period, our overall average employee productivity remained consistent. We also would like to provide long-term development support to quality talent with average employee cost to remain relatively flat. Other expenses also showed an upward trend throughout the fiscal year. I'm going to provide you the breakdown one by one. Other expenses increased by 10.2% on a Y-o-Y basis, with H2 showing a faster rate of increase. The full year other expenses ratio increased by 1.5 percentage points. Those expenses primarily include property cost, depreciation of plant and equipment, e-commerce platform services and logistics services. During the fiscal year, as I mentioned, the rapid growth in online platform sales, including private domain live streaming, which lead to a corresponding increase in platform operation and logistics cost. We have kept an eye on the ever-increasing cost for those expenses. It's consistent with the sales growth of the direct online channel during the fiscal year. So from the overall expenses ratio perspective, the above analysis breakdown expenses by nature. However, from a business development perspective, the key negative factor is still the impact of the off-line operating negative leverage, which was partially offset by the increased proportion of the online retail business. Looking at the off-line expenses alone, the expenses ratio across all major categories increased to varying degrees. Let's also move to the profit or the net profit changes. From the left side, you can see -- the net profit trend chart on the left, we see that the main factor affecting the net profit were the decrease in gross profit and the slight impact from other income. While remaining items, including total expense and net financing costs and tax expenses all provide positive support. Looking at the Y-o-Y changes in factors affecting the net profit margin, the Y-o-Y decrease in GP margin and the slight increase in expenses ratio was negative factors. Other income remained basically flat. Net financing costs and tax expenses provided positive support. Yesterday, many of the investors have been asking about the income tax. So actually, income tax is indeed a factor. Income tax decreased by 50% on a Y-o-Y basis, slightly more than the change in profit before tax, contributing 0.9 percentage points positively to net profit, mainly due to the preferential tax rate policies we secured in certain regions in China. Coming next, let me just walk you through the working capital efficiency. During the fiscal year, inventory management was our key focus. We adhere to the principle of maximizing product efficiency, implementing efficient inventory circulation and precise management with one inventory across all channel approach. We promote precise investment ecosystem synergy across multiple disciplines. The year-on-year improvement in effective utilization of the online inventory channel has been secured. Such measures can help us to expand the sales volume and deepen operational efficiency. We have also reached a joint [ coping ] strategies along with our brand partners. Through the implemented measures, we can actually ease and steadily improve inventory pressures in the terminal market. Inventory value decreased by 4.5%. Inventory turnover days decreased by 1.2 days, reaching 134.9 days. Looking at the sales and inventory, that is inventory to sales ratio, it still remained within 4 to 5 months, basically consistent with the year-on-year, with the same improvement compared to Q2 and Q3 end. Regarding the age structure, due to the clearance of the old product and brand conscious approach for new product shipments. New inventory maintained a level of 70% to 80%, though slightly decreased Y-o-Y. So as we mentioned, inventory structure remained relatively controllable, but still have room for further optimization. Trade receivables decreased by 43.4%, with turnover days decreasing by 1 day to 40.1 days. Trade payables decreased by 11.3%. The turnover days decreased 7 days to 8 days, mainly related to the revenue decline and the differentiated comparable basis between the 2 periods. Due to the above factors, the cash conversion cycle increased by 4.8 days, reaching 141 days. During the fiscal year, we reduced working capital by RMB 850 million through excellent fund management. The changes in inventory, trade payables and trade receivables resulted in a working capital reduction of RMB 770 million, which was a great contribution. We'll still be able to maintain very high good efficiencies for that. Well, let's also move to the cash generation capacities. The key points are, for example, the largest positive contribution and the largest negative factor. The largest contribution comes from operating cash flow performance. Despite the impact of the profit decline, net cash flow from operating activities was RMB 3.76 billion, a 20% Y-o-Y increase, with working capital change providing a positive contribution of RMB 850 million. You can also see on the right side, this is a negative factor, which came from our dividends. We have constantly provided high and stable dividends to shareholders, with the total dividends accounting for 108% of the beginning cash. The beginning cash is being used for dividends, where the ending cash represents the cash generated from our business operations during the period. Ending cash was RMB 2.59 billion, up by 32%. We still maintain a very solid cash generation capacity. Coming next, I'm going to walk you through our dividends. From the capital allocation philosophy, on the right side of this diagram, you will be able to see the 3 key components. First of all, we're still using dividend to support organic business growth. And secondly, we're going to invest in business expansion opportunities. And thirdly, we will also continue to consider excellent shareholder cash returns. This is the philosophy we maintained for many years. Looking at the actual cash for the fiscal year, after meeting the funding needs of the first 2 items, we still have substantial cash reserve to support future business growth. During the period, our free cash flow was RMB 3.38 billion, with free cash per share RMB 0.5448, both increased by 24.1%. Free cash flow was 2.6x of the net profit for the same period, providing a very solid foundation for our dividend. Therefore, the Board recommends a final dividend of RMB 0.02 per share and a special dividend of RMB 0.12 per share for this fiscal year. Combined with the interim dividend, the total annual dividend was RMB 0.28 per share with a total payout ratio of 135%. This maintained our industrial-leading position and exceeds our previous fiscal year payout ratio. Due to yesterday's Hong Kong dollar to RMB exchange rate and the closing price, the dividend yield is approximately around 9%. During the period, despite business operational challenges, our overall cash performance remained strong. Based on that, we hope to continue to create sustained shareholder return value in a volatile market environment. Of course, we make comprehensive considerations, including our confidence in our long-term cash capacity, future development funding requirement and commitment to long-term sustainable return to our shareholders. So since the company has been listed in 2019, we have achieved cumulative dividend return to shareholders for approximately RMB 12.96 billion with total dividends accounted for 1.04x of the total net profit. Our consistent thinking and action has already been reflected in our great performance. That concludes the review of our financial performance. I will invite Mr. Zhang to lead us through the business review. Thank you.

Thanks, Rebecca. We have challenges and opportunities. From our observation of the retail industry, we can understand from the micro data that demand is relatively weak, with total retail sales of consumer goods growing by 3.5%, lower than the economic growth during the same period. Meanwhile, omnichannel integration experience upgrades and technology are accelerating the evolution of the overall retail industry against the backdrop of continued pressure for store foot traffic. The gradual move to the integrated online/off-line operation has become the new normal. Social e-commerce and live streaming channel continue to expand, making omnichannel inventory a must for any companies. Artificial intelligence provides a more possibility to upgrade consumer shopping experience and optimizing business operational efficiency. For consumer behavior, rational decision-making has become dominant. Consumer demand show globalization. On one side, mass market become price sensitive. On the other side, self-indulged experience has become the mainstream. Consumers' demand of a diversified experience and specialized sporting lifestyle continue to expand, which develop the niche markets such as traveling, running, skiing and tennis. At the same time, consumers also show great ability to go for brands with sustainable concept. In summary, we observed the following characteristics in the retail market of sports. Consumer demand is still being quite cautious, off-line foot traffic being pressured. Due to all those factors, there are some pressures for the industrial inventory turnover. With multiple challenges, we confidently focus on our strategic execution, responding to market changes. Overcoming difficulties, we remain engaged. During the fiscal year, we continued to advance the integration of our omnichannel retail network platform, trending towards more comprehensive, systematic and flexible directions, always along with the consumer while, at the same time, we also make sure we have efficient circulation of goods among all channels, leveraging refined things to well manage different grades of the product. The execution of the above 2 actions lay a very solid foundation for our stable cash flow during the year. And more importantly, it provides solid support for our sustainable development in the long run. Simultaneously, we broke through limitation with innovation, continuing to engage in the market, driving consumer experience upgrades in all channels. We explore diversified cooperation model. Within the period, we joined hands with more brands, continuing to become their exclusive operational partners in Chinese market to deepen our ties with them. It actually helped to diversify our business, also inject new vitalities into business development. We leverage technological innovation, our key driver, leverage the power of technology to support scaling effect of the business expansion and efficiency upgrades. In omnichannel retail, we position product management, user service and digital intelligence platform as 3 key support. Continuing to work for online and off-line channel with a more comprehensive and systematic and robust operation, we will be able to have a full coverage and the deep integration of online and off-line scenario. Against the backdrop of accelerated off-line development, the perception, experimental and touch points become more important. Retail store provide young people with space to connect with and foster empathy. We continue with experience synergy efficiency priority. And by improving the store structure, scenario integration operates and local ecosystem activations to improve consumer experience. For online, we focus on enriching scenario and inventory turnover. We actively expand our online channel layout, covering consumer multidimensional needs through multiple scenarios, creating a diversified scenario metrics. At the same time, targeting the inventory optimization during the full year, we accelerate turnover by leveraging characteristics of online scenario. For this year, facing the double-digit pressure for the decline of off-line foot traffic, we adopted an efficiency-oriented approach in providing lean and focused off-line network. We remain cautious with new openings and renovation, and we also continue to eliminate inefficient stores. We continue to have a select optimized principle, having one brand, one strategy, a differentiated operation. By combining the differentiated brand characteristics, consumer profile and product attributes, we create a specialized store with diversified store metrics. We strengthened the sports retail experience upgrades, making store the intersection point for omnichannel traffic and the different sporting lifestyle. Overall speaking, our off-line network is evolving towards a few [ number ], more diversified role and more complete experience and high priority and efficiency. For this fiscal year, following the above approach, we continue to advance store structure optimization. Total number of direct operated stores decreased to 5,020, decreased by 8.3%, and the store closures being further accelerated in H2. This is also in line with what we talked to the market. Regarding store openings and renovation, we are more stringent in selecting the right stores for the right square footage and store efficiency per square meter. During the period, our new store opening mainly focused on flagship stores and the principal brands and the new layout of the professional vertical category brands, emphasizing on overall retail service capacity through the store. Store renovation was centered on improving future store efficiency. During the year, 258 new stores are being established, fewer than the average for the past 3 years, reflecting our cautious attitude for new store opening. For store closure strategy, we combined market condition with brand strategies to marginally accelerate eliminations of the inefficient stores and mitigating negative impact from the sluggish foot traffic from the off-line stores. 1,382 stores are being closed higher than historical average for the past 3 years. Total sales area decreased by 12.4%. Single store sales grew by 7.2%, consistent with same period of last year, but slightly lower than the previous years. This also reflects our one brand, one strategy approach. We deeply recognize the essential foundational role of the physical store in the sports industry, upgrading stores with development potentials while refining experimental value. Based on that, we managed store areas seeking ideal matching and balance between experimental value presentations and store performance. Off-line network has become an integration point of omnichannel traffic coverage. No longer only we rely on traditional off-line ways to engage consumers, with ever-evolving roles, we continue to promote sports retail experience upgrades and break down the boundaries between online and off-line that accelerate our development according to young people's preference, meeting their needs of functionality plus social interactions. And for new store openings, we focus on flagship store with principal brands, representing a deep range of the multi-category of products to meet consumer diversified selection needs. We concentrated on opening new stores for vertical category brands to fulfill the in-depth needs of the consumer focused on those sentiments. For example, we have sports and recreation runner ecosystem expansion, urban pioneer sports and trend culture aggregation, working with our brand partners to jointly explore new-generation store formats. Within the fiscal year, we innovatively actually launched Adidas HALO concept store, FUTURE OF STYLE concept store, JORDAN WORLD OF FLIGHT stores, HOKA brand retail stores focusing on runner services, and KAILAS mountain climbing concept stores, making our store inflection points for urban culture and sporting lifestyles. At the same time, we also integrated more sustainability concepts into the off-line experience, including collaborating with brands on use of the clothing collection through our proprietary charitable IP GREENBOX. Our adidas HALO concept store also received the Leadership in Energy and Environmental Design, LEED, Gold certification, comprehensively implementing environmental community in building material, energy saving system and the construction process, creating a quality shopping environment for consumers. We are also convinced with the value of sustainable development and the positive healthy sporting lifestyle. For this fiscal year, our overall online business continued to grow rapidly. There are a few reasons. Combined with online channel characteristics and consumers' high price sensitivity to assist the omnichannel inventory turnover, now we captured the core business opportunity through broader online channel layout in response to the shift in consumer shopping preference towards omnichannel, which partially offset the off-line foot traffic pressure. Through the 2 tactical breakthroughs, our most important core achievements in online segment was refining and optimizing our overall metrics approach to online operations based on the characteristics of each online domain. We constructed comprehensive online metrics, including the platform e-commerce and content e-commerce private domain operation. In platform e-commerce, we emphasized on [ multi-product ] layout, focusing on store cluster metrics, deepening our approach through product upgrades and multi-brand advantage. In content e-commerce, we focus on comp metrics, driving interest in trends and accelerating audience penetration. Where in private domain, we focus on user relationship, establishing deep connection with users through community operation and preferred service, extending the depth and breadth of our omnichannel system. From the result, direct-to-consumer online business achieved a double-digit growth. Direct online accounted for mid-range to 30% to 40% of the overall direct sales. Overall speaking, we further broke down the boundaries between various domains and in all platform traffic about the core of the user preference. For online front, we continue to strengthen our e-commerce platform and also actively building the live streaming metrics, integrating content and social elements across Douyin, WeChat channel and Xiaohongshu to develop content e-commerce. By the end of the fiscal year, we have 500 live streaming accounts ranking #1 in Douyin sports and outdoor leaderboard. In private domain operation sector, we established a complete user ecosystem, stimulating user engagement through online communities, for example, like WeChat Work in the online community. We complete transactions with mini-program. To date, we have developed more than 2,300 mini-program stores and established more than 100,000 WeChat work groups. Our private domain mini-program consistently maintained the top position in Tencent official ranking of the popular WeChat mini-programs in sports and outdoor category. We leveraged our online traffic advantage to empower physical stores, driving foot traffic through local live service industry, commercial district collaboration and private domain community. And to a great extent, it can also help to offset the decline for the off-line foot traffic. Off-line store continue to play a crucial role, at top center, with stronger social attributes. Through our optimized and streamlined store network, we provide consumers with a more refined experience. Overall speaking, in response to fluctuation and customer preference, we have conducted more in-depth explorations and mature iterations of both online and off-line channel integration with more well matured and systematic iterations being made. That's all for me. Coming next, I'm going to welcome Ms. Zhang Huijing to review our initiatives and achievements for user operation and digital intelligence.

Thank you. Through continued accumulation and development, Topsports user base approached 86 million. During the fiscal year, fluctuations in the external environment increased the difficulty of understanding consumer psychologies and enhancing user stickiness, facing ongoing bottleneck in traffic and rising consumer acquisition cost. We built a diversified user value system from the consumer perspective, determining users' value and form a deep bond with them. Leveraging our omnichannel scenario consumer engagement, we continue to expand our user base. Based on tiered operational strategies, we effectively maximize user lifetime value. We have built an integrated closed-loop user operation system, building product, content and membership costs as entry points to continue to enrich and refine user value. Whether the user are in-store or after leaving, we provide an omnichannel operational mindset, closely matching the characteristics of each stage of user life cycle to implement precise targeting and efficient conversion. For community activities, with creating a good sporting life as our key concept, we continue to enhance user experience values through systematic community operation strategies, including focus in creating a sense of community belonging, emphasizing brand value creation, meeting personalized needs, achieving the guidance and support of the user experience to commercial value. We conducted regular membership activities like May Day card collection, September member month and the new month shopping festival. We're also working with well-known brands like IP, like [indiscernible] and Teletubbies. But at the same time, we have our running IP, TOP Run Free, Sports Club IP, [ Ignite Your Sports Life ] and the charitable IP, GREENBOX. As our future IP, we partnered with brand partners to host NBA star and fan interaction event at Topsports stores, using innovative and diversified marketing approach to achieve high-frequency interactions with young consumers, enriching sports products diversified combinations and enriching brand reputation. At the same time, through diversified marketing and off-line community experience activity, with deeply optimized user experience, stabilized user scale and enhanced user loyalty, the results show that we have achieved solid repeat consumer performance and effective maintenance of high-value users. First of all, high membership consumption contribution. Member contributed to 93.2% of the in-store retail sales, including constantly maintain high and stable sales contribution. Repeat member accounted for 70% of overall member consumption with very stable performance, highlighting the effectiveness of the high-value members. Our cultivation of the high-value members has yielded positive feedback. The high-value members represent only a mid-single-digit percentage of the total consuming power, but they contribute to nearly 40% of the sales from the total consuming members. The average transaction value is also significantly higher than overall membership, with consumption potential and loyalty standing out compared with ordinary members. During the fiscal year, with the flourishing development of technology and widespread adoption of artificial intelligence, it also supported our retail development. We promoted digital intelligence on precision plus efficiency, starting from people, products to places, with omnichannel retail business moving towards user connectivity and efficiency and cross-border integration. Through the omnichannel user touch points, combined with practical needs of the core business, we drove platform capacity upgrades through technology empowerment to achieve sales expansion and cost reduction with efficiency improvement. At the value level, we promote the interconnections of the cross-platform member data. We successfully achieved a nearly [indiscernible] of Y-o-Y growth incremental member on new platforms, expanding user base. At the same time, through precise user matching, including expanding diversified sales channels like gift cards and paid vouchers, we achieved 50% Y-o-Y increase in per capita consumption during New Year Shopping Festival. At the product level, the GMV generated on the intelligent recommendation system was 4x higher than accurate recommendation. Product information [ editing ] efficiency also being greatly improved after product mid-platform upgrades. With 50% of expansion in database of products of quantity lay a very solid foundation for [ agile ] product distribution across multiple scenarios. Last, but not least [indiscernible], we actively explored new business scenarios like Taobao-Tmall ecosystem and made one-stop shopping, upgrade online scenario. The upgraded mini program mall achieved a 70% increase for purchase conversion rate and a 20% increase for average user visit duration. Additionally, we also conducted more application and exploration of artificial intelligence tools in omnichannel retail ecosystem, achieving preliminary results. Our [ self-device ] Dolphin AI has partially implemented integrated applications of our full scenario workflow. After the product intelligent recommendation functions went online, it drove nearly RMB 100 million sales, accounting for 10% of the private domain more total sales. Intelligent content generation covered 40% of the private domain market copy creation, improving content production efficiency. Automation transformation of the back-end process result in the time consumption down by 50%, with release resources being reallocated to value segments that create more value. That concludes our user operation and technology empowerment. Coming next, I will welcome Mr. [indiscernible] to share with us long-term layout and future strategy.

Thank you. With microeconomic environment and the international situation, the consumer industry started to have more opportunities where generation Z and the new middle class deeply find sports consumption with self realization, leverage our multi-category layout. We continue to expand our product metrics, including the comprehensive sports, casual sports, professional sports and agriculture. We're committed of becoming the omnichannel one-stop operational partners or more collaborators across diversified sporting segments in Chinese market. Through deeper retail operating capacity, broader scenario coverage and the diversified integration and more comprehensive user base. By the end of the fiscal year, we established deep cooperation with more than 20 brands, jointly explore market opportunities. Within the fiscal year, through exclusive market operations and planning, and we continue to further expand our coverage and be able to cover a broad category space. We precisely matched user consumption needs, explore robust cooperation model, enriching our operational trends and achieve comprehensive coverage of differentiated consumer group. In running market, with expansion of the group size and upgraded professional needs, modern runners also needing high requirements for high performance, personalized and athletic design with value satisfaction in equipment. We can capture the development opportunity, introducing high-end running brands sold running to Chinese market as an exclusive operational partners in China, taking full responsibility for its development in China market. So running with pioneering design and the innovative technology material, as [indiscernible] highlights, provide professional sports equipment and then combine functional design with special athletics in global runners. Moving forward, it will help to meet Chinese consumer needs. Additionally, our cooperation with medium [indiscernible] running brands, [ Norrona ] can actually continue to deepen. And now it already have a flagship in Zhangzhou and also moved into a macro city, including Shanghai and Beijing, fully capturing development opportunities in [indiscernible] segment. In outdoor verticals, and we now started to reach cooperation with Norrona as essentially primary outdoor brands from Nordic regions as exclusive operational partners in China market will work with Norrona exploring the potential of the auto market. Moving forward, we're going to have omnichannel operation plus precise project team, open flagship stores online and build private domains, leveraging the brand activities to influence more consumers. We will also show the latest progress with investors in the near future. In 2025, with a strong promotion of the national strategy to expand the domestic demand and promote consumption, the consumer market is very likely to welcome multiple policy. However, the trend has been accelerated. The fragmentation of the consumption scenario significantly show shortened product cycle, which challenge retail companies a lot. Facing the challenges, we never underestimate difficulties. We know our strengths. We will continue to refine our competitiveness with forward-looking strategies and continue to create long-lasting value to consumer, shareholders, partners and society. Looking into the next fiscal year, our business was still focused on the following core points: focusing on omnichannel retail user innovative business models and service for long-term growth. Continue to focus on consolidating efficiency following the fundamental resilience of the retail business. Third, optimize and improve precise, but efficient digital environment. Fourthly, actively practice ESG concept, building sustainable paths for ecological core construction and value win-win. We have already shared with you what has been achieved within this fiscal year. Then I will ask Rebecca to help to share our ESG initiative. Thanks.

In the sustainable development, with the vision of becoming a promoter and a leader of green consumption through a sustainable ecosystem of co-construction and value win-win. We actively fulfill our responsibility. During the fiscal year, in response to the United Nations sustainable development goals and the new carbon strategy of China, we have moderated our 10-year carbon reduction target, conducted our first greenhouse Scope 3 inventories. Additionally, top sports stores maintains that leadership in energy and environmental design gold certification for the first time, making another advancement in green retail. We have created charitable IP, green box in offline retail stores and now they're also coming sustainable development value and a positive healthy sporting lifestyle to consumers. In terms of the governance and responsibility, we achieved an employee training coverage ratio more than 95% and 100% value rate with the suppliers integrated agreement. All those achievements reflected our continued progress to new heights in sustainable development. So based upon our strategy and multiple actions being taken during the fiscal year, our MSCI ESG rating jumped 2 levels to reach AA, leading consumer goods industry in China. Key areas includes privacy, data security, commercial safety and corporate governance all made significant progress reaching industry-leading levels. This achievement marks the high recognition from authoritative institutions for our continued investment in ESG. In the future, we will continue to promote green coordination and integration across omnichannel retail in [indiscernible], guided by our own environmental strategy, driving upstream and downstream to practice ESG, working with stakeholders to build a sustainable development ecosystem. This concludes our prepared remarks. Coming next, we will move into the Q&A session. We welcome our investors to raise your questions and talk with the management team. [Operator Instructions]

[Operator Instructions] We have Xiaopo from Citibank, please.

I have three questions. My first question is regarding brands, especially on Slide 28. I see the number of the brands you are working with. I actually have to compare the descriptions you have over the brand's partners since IPO. You can see that you do have many vertical brand partners besides [indiscernible] and you also have [indiscernible]. Those are indeed the very much vertical category brands, which can only be purchased in overseas countries in the past. Mr. [indiscernible] also mentioned that you have some strategic considerations for that. I'd like to ask you, you used to have 1 to 2 key brands as your brand matrix, but now you have a very complicated brand matrix. Then what would be your mid- and long-term strategy? Do you have any implications on the financials by having such a diversified brand matrix? My second question was to your 2 key brands. In September and October last year, the company has been quite forward-looking in the inventory yourself. In other words, you become less passive for market macros. Particularly looking at the 2 key brands in China, the demand is still uncertain due to tariff reason. But from the supply perspective, I believe the industrial inventory was on the down trend. So there will be less negative factor from the supply side. While for the 2 key brands, I do see there are many uncertainties for demand. I'd like to ask you, after talking with the 2 key brands recently, how those brands are you going to comment on their practice in China market? Even the launch in the next few months or how they're going to continue to build their brands in China and how they're going to support the retailers of their brands' product. My third question is regarding the dividend payout ratio. I'm not going to ask too much on financials. I think you made a very clear narrative of the financials. Your dividend payout ratio is reaching 135%. But due to the uncertainties of the future, can I take 135% dividend payout ratio as a base to forecast what the future dividend payout ratio might be?

Thanks for Mr. Wei. Let me help to answer the first question regarding new brand development. Three points to help me to further respond to that. You see that once we will be IPO-ed, I have already shared with you we are representing the sportswear consumption market in China. If you take a look at the product matrix, just like the investment portfolio, all of you are building, what we do is to trying to showcase the change in demand of the Chinese market. We always keep an eye on the changes to the Chinese market and ever-changing consumption needs in China. As I have already mentioned, no matter for the outdoor or the running, both verticals are performing very well in Chinese market. So that's reason we will be very proactive in engaging more brands to take care of the consumption needs. Where from the consumer perspective, how we're going to further integrate the relationship between us and the consumers? No matter we need to serve our consumers or even forge a demand with the consumer, what we have to do is to have a deep connection with our consumers. For our brand matrix, for consumers themselves, no matter for their age groups or the market changes, the consumer needs continue to be differentiated, and we also continue to see the ever-changing landscape of the market, also be able to capture the ever-changing consumer needs. You can take a metaphor. For the educational institution, we used to be a middle school. But in the near future, we hope it could be a K-12 school covering from kindergarten to university so that we can travel with our consumers to every stage of their lives. And more recently, we introduced many brands, especially starting from an order, we continue to explore new business ways. Starting from traditional distributors to the regional exclusive partners. So in other words, we are taking more responsibilities on the value chain with more roles being commissioned and with more tasks being performed, which were also -- continue to have a profound impact on our GP margin and our profile. This is one breakthrough we made from the business perspective.

Okay. Xiaopo, let me help to answer your second question. After talking with the key brands, we truly feel the position of the Chinese market and all the key brands remain committed to the Chinese market for further investment. China is still indeed one of the most important market globally speaking. So with such commitments, we also see ever-changing product landscape. But this one thing you have to be alerted. The fundamental change of the product really takes time and pass through -- go through the circle. Until now supportive initiative from brands to distributors are pretty stable.

Thank you, Mr. Wei, your question regarding dividend payout ratio. On Slide 13, we have already provided the philosophy of dividend payout ratio. First of all, we're going to use the dividend payout to help to further support our sustained business growth. For this fiscal year, even if the profit is being pressured, but our overall cash performance is being quite strong, especially the free cash flow to net profit was 2.6x. It used to be 1.2x last year. And also for the past 5 years, the average -- I mean, excluding the 2024 to 2025 fiscal year, the free cash flow to net profit ratio used to be 2. But for this year, it's already 2.6x. The reason is because, indeed, the company registered a very solid performance for cash. We also hope that we will be able to leverage the payout ratio or cash dividends as a way to pay back the shareholders with sustainable returns. The company attach great importance to the return to the shareholders. Well, of course, according to what was happening for the past 5 years, you can also clearly see the 5-year average dividend payout ratio in history was 105%, which is indeed stay ahead of the industrial average. The company has been quite committed for the shareholder returns. It is always above the industry average.

We hope you can further improve the dividend payout ratio. No more questions from me.

Coming next, let's welcome Lucy Yu from Bank of America.

I'm Lucy from Bank of America. I have 3 questions. My first question, indeed, in a very challenging fiscal year, the company rolled out many actions and initiatives. Can you provide us the guidelines for 2026? I do notice retail industry is hard to be predicted. But at least the growth of e-commerce or the margin, do you have any overarching guidelines to the market? My second question, e-commerce accounted for more than 10% of your overall rate revenue. Can you help us to work through the e-commerce, including its rental fees and also logistics? From the operating profit or from the net profit perspective, what's the different between online and offline business? My final question, that is effective tax rate. Just now, Rebecca has already explained why in 2025 the effective tax rate was very low. Is it a onetime thing? Or is it going to happen after this year?

Thanks, Lucy. Let me help to respond to the 2 questions you raised before. The first question that is around e-commerce, specifically, operating profit, GP margin and profitability difference for online, offline. So let me just take the previous fiscal year as the case to share with you. But as I have already mentioned in the prepared remarks, in H2 of last year, we do take some de-inventory actions for online channel. So what we do is an adjust approach based upon inventories and market trends. You won't be able to take what was happening in 2025 as a guideline or baseline for future outlook. But go back to fiscal year 2024 to 2025, at least for the online and offline channel, operating profit still see growth for online channel. But for offline channel, as I was talking about the expense ratio, the operating negative leverage for offline channel is quite severe, especially we do see a double-digit decrease for the foot traffic for the offline channel. So for '25 fiscal year only, the online profit performance is better than what we see from the offline channel. But for sure, GP margin range a difference. Well, for GP margin, offline GP margin offset performance online GP margin. But for online expenses, it was less, especially fixed costs for online expansion. It's even lower than what we have for the online channel. In fiscal year 2025, the online channel operating profit is better than the offline channel. You also asked about the question on effective rate. As I already shared with you, we secured many tax incentives and preferential treatment in certain regions in China. Some of them would be sustained in the near future. But looking to the longer run, the preferential tax policy continued to change. From the '19 to now, there are some supportive policies being made, but sometimes the policy is been discontinued in certain region. Looking to the near future, I'm not going to suggest to you of using the effective tax rate of the current fiscal year as a benchmark for future assumptions. The existing effective rate is around 80%. Right before the previous interim performance, I have already shared with you in the next 2 to 3 years effective rate would be around 20%. Effective tax rate would be around low 20s. That would be taken as a reference. Thank you.

Thank you, Lucy. You still have more questions. Let me help to respond to the first question made by Lucy. That is the full year outlook. For the new fiscal year, we're still cautious and positive. In the new fiscal year, we're going to focus on efficiency and profit first. And we're not going to have the so-called increasing revenue, but decreasing the profit. That is not going to be our strategy. And the overall market environment is not positive yet. We have been quite cautious. We took multiple actions for cost initiatives to continue to improve our cash flow. Our target is that, we're going to have a flat growth of the net profit, and the net profit rate need to be improved.

Next question, let's welcome [ Pei Ying ] from Shenwan Hongyuan Securities.

I'm [indiscernible] from Shenwan Hongyuan Securities. I have a few questions. First question is regarding your inventory and the discount. As you have already mentioned about the inventory clearance action meet its expectations. So I'd like to ask about you what would be the discount trend and the performance of the retail industry. The second question for the brand partners, for example, Nike, did they provide additional support to you in the new fiscal year? What would be the implemented actions? For example, the support you received compared with COVID-19 period and [ Xinjiang Carton ] period, what about the existing support from those large brands? For my final question, you have contracted many new brands. What about the revenue and profit contribution now? And how are you going to make your operations and channel ready for those new brands?

You were asking about a few questions. For the latest updates, the consumption trend of the new year is almost the same as what we saw in Q4 of the fiscal year. We have 2 observations. The market, overall speaking, is performing good. I don't see the further deterioration in the market. Well, from the product perspective, some of the brand companies have been cautious in shipping new products. They will also be very cautious in placing the order. So for new products, supply, it was on decline on Y-o-Y and M-o-M basis, but the new product sales was performing very well. Well, for this year, our overall inventory could be well controlled. Conversion has been well maintained and the discount rate will still be pressured. First of all, we have less new product. So in our overall sales, we have less new product where for the online sales, the online sales also see nice improvement on a Y-o-Y basis. That's the performance update. Second question, support from Nike. Nike always provide us very stable support. And the same has been stated by the new CEO of Nike. Until now, I didn't see too much changes on the support from Nike.

Thanks for keeping an eye on the new brand. So question actually asked about a few new brands we were being contracted. These are the new brands just got into the Chinese market. They're still in the infancy stage. So they won't be able to contribute too much of the revenue or profit, but we're going to keep all the investors updated with the new sales contribution from the new brands. Secondly, you talk about the channel development. Majority of the new brands we engaged. From the business nature perspective, they are different from the brands we used to work with. We have become the exclusive partners for their Chinese business, starting from brand building to marketing strategies to content generation to retail and to consumer touch points. So in other words, we're going to use long-term practice to help to nurture the new brands, to help to nurture the consumers for those new brands, continue to further expand the condition -- foundation of the business. Where on the other side, we have flexible and agile tools and ways of engaging the market. So to be specific on the strategy and the future outlook, as I have already shared with you, we do have so-called one strategy -- one brand, one strategy. As we have already shared with you, we are actually working with a new brand, [ Narda ]. Its product line and brand readiness have been well established. We have already showed with the market it's going to have the stores ready, along with the flagship store online where for other brands, we are going to keep an eye on their existing progress and development and finding the right approach for them to further improve their channel presence. In short run, they may have a single store online/offline or they may have some online stores with the flagship stores in the offline channel or the market presence. But going back to what I mentioned before, for all those brands, we have been quite consolidated. We nurture the market and help to incubate those brands. I believe they're still going to have a very promising future. And we are also going to update the market on any of the new progress we made on the new brands.

Coming next, let's welcome Samuel Wang from UBS.

I'm Samuel Wang from UBS. My first question, I'd like to ask, if you have a normalized inventory and discount, then how you're going to comment on GP margin and net profit rate? Were it being restored to 2023 to 2024 level? Because from the structure perspective, probably the online growth is due to structural reasons. The GP margin won't be able to go back to the fiscal year '23 or '24 level. But going back to the profit level, I think the market now is in the deep discount for inventory clearance stage. But after the stage is gone, what's going to happen in the near future, whether the GP margin and net profit could be back to the same level as what we see in fiscal year '23 and '24? My second question, you are working with some new brands. Many of them are vertical category brands, including the running brands and the outdoor brands. Do you believe outdoor sports is going to be a sustained sector? And what kind of criteria did you use in order to make the conclusion? My third question, we are very much ready to see our operating cash flow accounted for 2.6x of the net profit. Can you help us to why we have such a strong operating cash flow? I didn't notice the elaboration from your financial report.

Thanks for Samuel. Let me just respond to the questions regarding the financial report. First of all, on the slide, we have a dedicated section for cash flow in our -- that is on Slide 12. On the cash flow chart, we have already provided the breakdown of the operating cash, along with the changes in the history. So you can see operating cash flow grew by 20%, reaching RMB 3.76 billion. There are 2 great contributors for the ever-improving operating cash. The first one is RMB 3.25 billion before the operating cash changes. In the same period, operating cash change was around RMB 850 million. So the operating cash change still be very positive contributor to our ever-improving operating cash position. Going back to the question -- I mean, the second question. You asked about the reference number. Let me say the market has been changing all the time. You may have deep lessons from that. First of all, the macro environment is changing, and the retail demand continued to change. Consumer consumption also being changed. Many of the consumers, they don't simply just go for online channels. Many of the consumers, they still would like to dive deep into the value. So for Topsports, no matter for online and offline, as Mr. [indiscernible] has already elaborated those initiatives with all of you. Overall speaking, we believe consumer behavior also started to see the corresponding changes as the market change. But it is not 100%, but the same as online business change. We do see the macroeconomic changes, consumer behavior change and also inventory change. For the past fiscal year, the discount impact is even larger than what we used to see in the previous fiscal years. But in H2 of the fiscal year, we continue to step up our effort for inventory clearance. We also leverage the channel features to continue to de-inventory the business. For online channel, by then, it's probably the best option for us to inventory in the fastest approach. So in other words, for Topsports, we always keep an eye on market environment, consumer changes and inventories. And then we take opportunities to make sure we stay healthy. While at the same time, we will also keep an eye on the overall operational efficiency and the cash flow as a key criteria to support our future business. So it's a dynamic process. We hope that we will be able to continue to grab the good opportunities along the journey so that we will be able to further drive the business growth and continue to improve the performance of the cash flows and continue to deliver good returns to the shareholders. Thank you.

You also asked the question regarding the vertical category brands. A few points I can share with you. First of all, with the overall industrial landscape, we do notice the vertical category brands are going to have a very good growth. There are 2 reasons. First of all, the consumer behavior or consumer preference started to go for more niche market and be more professional. While at the same time, between different verticals, there might be some rotational trends. For sure, we are still very positive for the long-term growth of outdoor sports. And I'm not going to elaborate it here, and we can talk in the near future. But you also mentioned about the trend. No matter how the sporting trends may change, but the foundation has already been well established. On the other side, for outdoor sports, you rather want to know whether there's any bubble there and where does this bubble might be. What are those consumers or what are those brands? Are products are actually making money out of the outdoor sports or what are those brands that are the noncore brands in outdoor sports segment? According to the secondary market, it actually reversed, but reverse me was going to down to the average, but also be bounced above the average. So in other words, for outdoor sports, we are still very positive on that. You asked about whether there's going to be any bubbles or any [indiscernible] changes. Maybe there will be, but it won't change the demand growth for outdoor sports segment.

We'd like to welcome Ding Shijie from Guosen Securities, please.

I'm Ding Shijie from Guosen Securities. I have 3 questions to the company. My first question, according to your latest performance or the business updates, I do notice your online platform has been performing very well, especially you have many incremental growth from TikTok or Douyin. So I'd like to ask the management team, is there any advantage for you to operate your business on Douyin? What about the profitability from the Douyin platform? My second question, we have already observed there are some media coverage said Nike is going to increase price for certain products, whether that's going to impact or hurt your operation? My third question, the management team has already mentioned the net profit go up. What are those drivers? For example, the discount or offline business or your online sales contribution or other structural factors, why the net profit will go up. Is there any brand who's going to provide supportive measures to ever improve the profit you can make?

Thank you. Let me help to answer your questions. First of all, our operation on Douyin, on Douyin, we do have our featured operation. We're just leveraging the live streaming account as a metrics for operation. We do have our headquarter live streaming account and the live streaming room to sell the product. We also have the featured product that is our offline store. For example, for Shanghai, IFC Jordan store, besides just having the physical store, we also have a live streaming store within the physical store. And people can actually watch the Oriental pay from our live streaming room. So we have a very good hybrid of the online plus the offline store, which can boost the consumer confidence. For the online channel, people may just worried whether I bought the authentic product or whether the store is going to be dismissed after a few months. But actually, the live streaming in physical store can boost the consumer confidence for that. And this can help to further improve the sales of our physical stores. So 2 features. We have the live streaming account metrics. But at the same time, we also have the live streaming in the physical store. Those are the 2 approach that can help us to register good performance on Douyin. The second question was regarding the price up by certain brands. I think you must have heard about this news when the tariff intentions be in peak. But let me just tell you, the tariff disputes even not yet being 100% resolved, but still in a relatively final stage. I have to say for Topsports, all of our business are within China. And we are working with Nike China for transactions and for operations. Majority of the China products are actually being produced in China or in Southeast Asia countries. So the product is immune from the tariff dispute. So even until now, we don't see any price up for Nike products. So overall speaking, our business is within China. I have to tell you for tariff, it was actually impacting product made in other countries. And so to U.S., it will generate tariffs. In our existing product portfolio, we don't have any made in U.S. Nike product.

Thank you. Let me help to respond to the question regarding driver for profit rate improvement. A few points from me. I think you have already asked about this. From the GP margin perspective, as Rebecca was talking about economic trend, we find out the industry is still in big promotion. So we will be quite cautious in placing orders. And for some of the brand partners, they control the shipment of the new product, which will, for sure, impact the inventory age because less for the new product. Inventory structure has been very stable, but still can be improved in the near future. With the order of the new products continue to be well adjusted, there will be some positive signs. According to our existing observation, I see the online business growth is still good. That is at least from what we observed from the market. So for GP margin factor, the key is still on the discount. But for the company, we still reserve positive -- remain conservative for the GP margin. And another contributing factor coming from expenses rate. For the company, we have a very tight expenses control, especially given the previous fiscal year, we take more cost initiatives. And in that way, we also continue to optimize the channel structure. I have already mentioned expenses ratio for online is lower than offline channel. And the fixed cost for online channel is much lower than the offline channel. Those are going to be the 2 key drivers to improve the GP margin. So the company, overall speaking, we're quite conservative on GP margin, but expenses rate would be the key contributor to further improve the overall margin of the company.

Okay. Thanks for all the investors to stayed online for the prepared remarks and the Q&A. Thanks for keeping an eye on Topsports. In the near future, our IR team and our management will be happy to share our insights with you in the road shows and the broker summit. Thank you very much. Thanks for joining us here today. We come to the end of the... [Statements in English on this transcript were spoken by an interpreter present on the live call.]