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

Welcome to FY 2025, 2026 Annual Results Presentation of Topsports International Holdings Limited. I'm Rebecca, Head of the Capital Markets of the company. Please allow me to introduce you the management team with us here today. They are Mr. Yu Wu, Chairman, Chief Executive Officer and Executive Director; Mr. Zhang Qiang, Senior Vice President; Ms. Zhang Huijing, Vice President; Mr. Ding Chao, Vice President; [indiscernible], Vice President. For today's session, Mr. Yu will first provide opening remarks for a brief recap of the past financial year. Then the management team will walk you through the financial performance and the business progress, followed by a Q&A session. Ladies and gentlemen, please allow me to welcome Mr. Yu for his opening remarks.

Good morning, dear investors and analysts. Very happy to meet all of you. Welcome to [indiscernible] Topsports results presentation. Over the past year, the market environment remained under pressure. The industry is going through a phase of structural adjustment. Consumer demand has become more rational and cautious. The channel formats are evolving rapidly and the competition has intensified. The whole industry is now facing [indiscernible]. However, we have always believed these challenges often opened up windows of opportunities to [indiscernible] value and build the capacity. The fact that thoughtful has been able to weather the pressure and maintain steady operation is a testimony of our clear and consistent strategic direction, the pragmatic execution of the entire team and continued [indiscernible]. This year, we stayed focused on our core business with emphasis on increasing quality and efficiency. On one hand, we optimized our offline through network, sharpened our focus on single-store operational quality and deepened the integration of online and offline channels into refined operations while exploring incremental growth opportunity. On the other hand, we deepened user value through professional services, scenario-based experience and community engagement, solidifying our core customer base. At the same time, we kept pace with the new wave of false consumption trends and quickly secure strategic positioning in key niche segments such as running and [indiscernible] outdoor anchored by our one-stop operational capacity, we are now building competitive moat for the future. Looking into the long-term capacity building, we have continued to advance the application of digitalization and artificial intelligence across the entire business line to drive efficiency, laying a solid foundation for sustainable development. On the operational side, we have remained firmly committed to our responsibility to the shareholders, [indiscernible] long-term and stable returns through solid cash flow and consistent dividend payout. I would like to sincerely thank for all the investors and analysts for your continued attention, trust and discipline. Next, our management team will walk you through the full-year financials and operational progress across our robust business in detail. Thank you and we welcome Rebecca.

Thank you, Mr. Yu. Let me start with a brief overview of our financial performance for the full year. Overall, we delivered in line with our plan and expectation. First of all, affected by sluggish consumption demand and fluctuating offline foot traffic, revenue declined by 4.7%, reaching RMB [ 2.574 billion ]. Second, the gross profit margin declined by 0.4 p.p., reaching 38%. The negative factor was the deepening of the discount rate driven by the change in revenue mix. Let's take a look at the story behind the same, has been discussed with you during the interim results, we do see a change in the revenue mix, specifically higher online contribution led to deeper retail discount rate. [indiscernible] we have more sales from the online channel, which will impact our discount rate, while at the same time, on the positive side, the lower inventory corrosion Y-o-Y together with the revenue mix [indiscernible]. I was talking about the wholesale and the retail business, meaning a lower wholesale contribution and a higher retail contribution, while retail carrying a higher GP margin than the wholesale partly offset the negative drag. So the net gross margin being declined 0.4 p.p. Y-o-Y to 38%. However, we have the two positives being able to [indiscernible]. The third point, our overall selling, distribution, general and administrative expenses continue to decrease by 6.7%. The flexibility and efficiency of our omnichannel layout, together with prudent expense control helped to drive the SG&A expense ratio down 0.7%, reaching 32.4%. Other income declined by 49% during the period, mainly related to the government incentives, and trends largely consistent with the broader industry observation. Excluding other income, the core operating profit up 0.1% on Y-o-Y basis, driving the [indiscernible] core operating profit margin up to 0.3 p.p. reaching 5.6%. The profit attributable to equity shareholders decreased 0.1% -- 1.5%, reaching [indiscernible] was 4.9% up by 0.1 p.p. In addition the Board has recommended a final dividend of [indiscernible] and a special dividend of 12% together the interim dividend, the total annual dividend amounted to [ 28%]. The dividend payout ratio was 137.1% that was completed to maintain high quality dividend payout to reward shareholders and [indiscernible] to the shareholders. [indiscernible] please allow me to work you through revenue [indiscernible]. If we take a look at the revenues, H1 and H2, H2 revenue declined by 3.7%, gradually from 5.8% in H1. Secondly, by channel, the retail revenue was down by 2.7%. Wholesale revenue was down by 16.6%. This trend was largely consistent across both H1 and H2 of the year. Thirdly, by brand, the sales of the key brands declined by 4.2%, reaching RMB 22.3 billion. The sales of other brands decreased by 7.4%, reaching RMB 3.2 billion with the other brand performance primarily affected by the leisure sports brands. Overall speaking, the performance sports category continues to clearly outperform the recreational sports and leisure sports on Y-on-Y basis. Such trend has been continued as [indiscernible] and we also noticed that the trend is very much consistent with what is [indiscernible]. Coming next, let's take a look at the expense ratio. During the period, the revenue declined by 4.7%, but the total expense was also down by 6.7%. The expense ratio was down by 0.7 p.p. reaching 32.4%. Against a challenging backdrop, our omnichannel layout across online [indiscernible] together with refined cost efficiency management helped to mitigate the operating expense pressures on the offline side. The total extension of the rental expense declined by 12.5%. The rental expense ratio was down by 1 p.p., the largest contributor to the overall expense ratio improvement. There are several factors behind the same. First of all, on the offline channel side, we continue to streamline our network with control and efficiency enhancement. The efficiency of new opening and renovation also improved on a Y-o-Y basis. Mr. Zhang Qiang is going to provide detailed remarks on that. The channel mix shift with online contributing a higher share of the total revenue. On staff cost, we kept stressing [indiscernible] with our omnichannel layout building an agile and efficient talent supply that strengthened our cost efficiency edge. The total number of employees down by 18%. The total staff cost decreased by 0.3%. The staff cost ratio declined by 0.2 p.p. reaching 10%. This trend, as you can see, was more pronounced in H2 of the [indiscernible] year, which is also consistent with what we shared with you at our interim results in last October, mainly the cost efficiency benefit from the organizational effect [indiscernible] in first half of this year would gradually flow through over time. So in other words, in H2 of this year, we see a more pronounced improvement where other expenses decreased by 0.6%, including the depreciation of the properties, plant and equipment services from the e-commerce platform and logistics. The ratio of other expenses rose by 0.5 p.p., primarily due to the fast growth of online channel sales during the year, which resulted in higher related platform operating costs. From an overall business perspective, the [indiscernible] was operating deleverage from the fluctuating offline foot traffic. However, this impact was offset by the continued optimization of our offline network and the rising contribution of the retail online business. Now let's turn to our net profit Y-o-Y change analysis. Look at the net profit waterfall on the left, the negative contributor to the net profit was declined in the gross margin on the right side. You see there are few factors that has negative impact over the net profit was the decline of the gross profit and the decline in other income, but both in largely offset by the lower total expenses and reduced net-net financial costs and income tax expenses. Looking at the Y-o-Y changes in the net profit margin drivers, the decline in the gross margin and the decline in other income were the negative factors where the lower total expense ratio and reduced net finance cost as well as income tax contributor provide a positive impact. Despite a 4.7% revenue decline, the net profit decreased only by 1.5% Y-o-Y. The net profit margin improved by 0.1 p.p. reaching 4.9%. Now let's move to our operating working capital efficiency, during the year, inventory management was still the top priority for the company guided by the principle of maximizing inventory efficiency, we managed and [ efficient ] inventory of course the 2 omni-channel network. Inventory decreased by 8.6% Y-o-Y. The inventory turnover days decreased by 3.5 days reaching 131.4 days. If you take a look at our track record, 131.4 days and the turnover is already the lowest level in the past full financial year. The trade receivable increased by 78%, turnover days up by 0.7 days, reaching 14.8 days. The increase in the trade receivables was mainly due to the timing mismatch of the Chinese New Year between 2026 and 2025. Chinese New Year 2026 fell later in February, while the Chinese New Year 2025 fell in January, which leads to a relatively large Y-o-Y increase in trade receivables. As of end February 2026, due to the mismatch of the Chinese New Year timing, the trade payable increased by 17.4%, the turnover days up slightly, which is consistent with what we saw last year, 8.5 days. In terms of the operating working capital efficiency, despite the Y-o-Y revenue decline, our average operating working capital as a percentage to the revenues remained flat Y-o-Y, indicating we have largely maintained efficient working capital management. Ladies and gentlemen, now let's turn to our cash generation capacity. The net cash generated from operating activity was RMB 2.73 billion, down by 27%. There is 1% we can actually turn to you because we released the report last night and so this morning I received many inquiries from investors regarding the reason of the net cash generated from operating activities down by 27%. The trend was that primarily driven by the primary difference of the Chinese New Year between the 2 years, which led to Y-o-Y increase in trade receivables and a corresponding impact on operating cash flow. In the same period of last year, the Chinese New Year timing difference has infact been a positive contributor. So, as a result, the main factor between the 2 years had an 1.16 period impact from the operating cash flow at the year end. Well, if you take a look at the actual Y-o-Y increase in the net cash from operating activities during the period, it was RMB 1.03 billion, so comparing rates RMB 1.16 billion against RMB 1.03 billion, you can see the Chinese New Year trade receivables hardly different between two few years, was the most important factor, including the operating cash flow performance [indiscernible]. We are a retail company, there will be some impacted from the timing mismatch with the Chinese New Year. If you take a look at our track record, similar pattern also appeared in fiscal year 2024 and 2021. Again, driven by Chinese New Year timing mismatch and resulting in receivables. So what was happening in the past fiscal year has also been done from the [indiscernible]. Free cash flow was RMB 2.44 billion during the period that dividend payouts were RMB 1.67 billion, representing 55% at the beginning of the period cash. Period end cash was RMB 1.77 billion. Bank balance and cash was RMB 2.44 billion and net cash was RMB 1.17 billion. During the year, we continued to maintain solid cash generation capacity. While in the final part of the financials, please allow me to walk you [indiscernible] let me just walk you through the underlying logic of the capital allocation. Underpinned by our cash generation capacity, our capital allocation framework consists of three priorities. First of all, supporting organic business growth. Secondly, investing in expansion opportunities. And thirdly, delivering strong cash returns to the shareholders. We have constantly followed this framework as you can see from our dividend payout performance. Looking at the actual cash position during the year after meeting the funding needs of these first two priorities, we still retain ample cash returns to support the future business growth. On the right side of the slide, you can see our free cash flow was RMB 2.44 billion, representing 1.9x the net profit of the same period. The solid foundation for our dividend payout, accordingly for the financial year, the Board has recommended a final dividend of [indiscernible] this year and special dividend of 12% [indiscernible] together the interim dividend would be [indiscernible]. The annual dividend payout rate would 137.1%, which is slightly higher than last year. Last year, the number was 135% for dividend ratio. Compared with the whole industry was still having a high dividend payout ratio. Best upon yesterday the Hong Kong [indiscernible] and the closing share price, our dividend yield is around 12%. We aim to continue driving healthy cash flow through efficient operations, creating sustainable value returns to the shareholders. This concludes the financial review. Now I'd like to hand over to Mr. Zhang for the business review.

Thank you. Thanks for the data. If we look the data of 2025, consumer confidence index remained at a low level, total retail sales of the consumer goods were at low and volatile pace. The recovery of the consumption remains relatively slow. Consumer become more cautious in their purchasing decision. This created a direct market pressure on sports industry, a common challenge faced by all. That said, challenges comes with opportunities against the backdrop of industry-wide pressure, each segment such as performance sports show, already emerging trend driving sports continue to demonstrate a strong growth momentum. With said issues, consumer demand is operating towards more segmented process and more experience and advertise of segment performance. Ektos outperformed the transformation as they contained the channel operations. Traffic operations has been shifted from 5-year growth-based standard placement onward to a 5-year aided operations that combined the placement and leads to the private real estate, a multi-scenario in-depth deployment. Precise reaching target consumer and improved ROI has become core priorities. Consumer fulfillment has also become more diversified. The revenue rise of the emerging omni-channel has aided a highly diverse channel structure, driving proposed transaction fulfillment as evolving to a simple transition model is to diversify at-home thing to an on-site model. The overall fulfillment will need some work and in plan and a decentralized model. Channel diversification, advising market complexities, updating product demand through the operating markets is requiring us to actively adopt, reflect and reform. Only by proactively embracing industrial change, we strengthen the corporate active fulfillment and ready ourselves in the competitive environment to reduce the simple strategies. Turning to strategies from the structured industrial change. Topsports continues to strengthen our core operating capacity, lay a solid foundation for long-term strategy development. During the year, we reforged our operational resilience, give us confidence to navigate market volatility. We have constantly created efficient inventory management and solid cash generation capacity at our direct stores, ensuring a steady operation in complex environment. We have enhanced our omnichannel store network, leveraging more than 4,000 directly operated stores. Comparing them with online channel and private online operation, we have built an extensive consumer reach network. Those stores are not only direct store terminals, they are also brand experience avenues, community asset in part and core end user. On the user side, we have a cumulative user base of more than 90 million with solid repurchase foundation among purchasing users, which is our most valuable core asset. We continue to deepen our private domain operation, strengthen emotional connection with the user. At the same time, we have deepened our brand strategic cooperation, building a portfolio of more than 20 brand partners across diverse sports scenario, by partnering in strategic lines in brand partners through diversified models, including wholesale distribution, joint operation and investment. We have continued to strengthen our digital and AI capacity to optimize operational process and enhance decision-making efficiency. Through the above strategic purpose, Topsports aim to become a trusted one-stop omni operational partner under variety sports format, achieving mutually beneficial outcomes with our partners. Now let's talk about omnichannel retail layout. We continue to solidify and implement omnichannel retail framework. Our core objectives and core traditional stores act as a foundation, fully covering the three major consumption areas, at-home, in-store and on-site while connecting with online channel including content, e-commerce, private domain operation, localized setting and decentralized retail to help the traditional stores to complete their omnichannel capacity upgrade. We have built a 1xN store and many online stores building operating model. They now serve as hub for public domain traffic acquisition, private domain user acquisition and content creation opening national benefit, eventual separation and has a deep online value, which can also help to cushion and the pressure from the external micro environment. More importantly, we have built a testable solution and stable omnichannel operating capacity. In terms of the early store layout, we tightened resource equipment with new business approach. We are leveraging on single store profitability and strengthened omnichannel signature across stores. We maintained a prudent and disciplined pace of store expansion, are going live and strictly controlled new store quality. We're assigning differentiated, different operating and renovation of the existing stores with operational efficiency at our existing stores. We gathered our adjustments to each brand positioning, causing a significant growth and product features, applying one brand, one strategy to continue to optimize overload to success. At the end of February 2026, we operated 4,360 directly operated stores. Total stores account down by 13.1%. During the year, we opened 201 new stores, fewer than 258 in the prior year period. However, the newly opened stores and the renovated stores outperformed same period as last year. We closed 861 stores, significantly lower than 1,382 in the prior year season. The loss reduction from the closure was much better than last year. The selling area per store grew by 3.9%. A low when compared than 7.2% in the prior year. Focusing on our resource allocation and proficiency, resulting in more streamlined resources allocation, the capital expenditure decreased by 24% on a Y-o-Y basis. With [indiscernible] the core value of a typical store is pushed by retail investors. During the period, we are optimizing and operating traditional online stores. We have five differentiating strategies to expand the omnichannel operating capacity, at a pace with evolving consumption trends and for new growth opportunities. We ramp our content ecommerce doing account management and interest agreement consumption, leverage a hit product combination to reach more customers, which will improve the model as itself. At the period end, we operated more than 700 accounts on Douyin and WeChat video channels. Different private domain operations offer is not only self-driving, but also a core awareness of the customer exhibiting value. We have 3,700 mini-program stores where we have built a service call close through community operation and ramp data-driven insights for prices recommendation, enhanced the user stickiness and conversion. At retail, we strengthened our [indiscernible] capacity to lead the consumer needs to ready to pay at any time here at hand in delivery. We have 3,800 stores now connected to instant retail. We have also partnered with localized service platforms using online brochure of value retention models to drive traffic to stores and while easing the traffic pressure. Given the omnichannel operations [indiscernible] continued resolution of retail capacity, given the appeal, we are focused on upgrading in-store management and upgrading our operations with physical and online stores to increase the omnichannel retail capacity. On the product side, we continue to expand the product share situation between online and omnichannel scenarios, upgrading our omnichannel product operation model followed by digital inventory management will achieve an agile and inventory allocation. In doing those product growth, it can now end up like higher inventory efficiency with fully efficient operations of the entire omnichannel system. We will talk about in-store digital tool, that is panoramic compass dedicated to the stores. Let me interpret the four key actions. Smart SOP, single-operational model management, diagnostics and AI knowledge base. Precisely addressing the core practical needs in daily store operations, including asset retail management, business overview, optimization and [indiscernible]. The store management no longer requires many data storing. In fact, data is proactively delivered and decisions are intelligently taken. We have also made the complexities of omnichannel retail management to standardize the daily workflows. The AI knowledge hub mainly starts to assess operations and to spend active investor base, but also can go to potential and comprehensively elevate the independent operating capacity of the store personnel. To sum up, in a complex market environment, our active exploration and omnichannel retail footprint help to cushion the revenue decline. On top of that, the omnichannel inventory management and accelerated proactive channel optimization adjustments along with prudent expense control helped to ease operating leverage pressure. Average workforce productivity increased. The staff cost ratio for the year decreased by 0.2 percentage points to 10%. At the year-end, inventory decreased by 8.6% and inventory turnover days decreased by 3.5 days with improved inventory turnover efficiency. The estimated rental expense ratio, including rental from operating lease and depreciation and right to use assets decreased by 1 percentage point, reaching 11.2%. Clearly, the profitability and risk revenue and steady cash flow, provide enhancing quality and efficiency through omnichannel operation, all lay a solid foundation for the company's long-term sustainable development. That concludes my part. I will hand over to Ms. Zhang Huijing who will walk you through our initiatives and progress in user operations and digital intelligences'.

Thank you very much. Ladies and gentlemen. Regarding the user operation, Topsports has continued to build diversified operating system that requires continued potential and healthy engagement for user relations. During the year, we focused on two main pillars, user acquisition and activation plus deepening member value, driving user base growth and member value operation through segmented operation and innovative privilege while compensating our omnichannel user growth loop. We refreshed our membership tier system, upgrading from the prior year sports, including [indiscernible] to Legends. The new membership resonates with the mandate for sports consumers, optimized tier structures extending the proportion of the leap year to December, making the overall member structure more balanced and healthy. We also rolled out innovative offerings, like online school group cards and brand co-branded cards, upgrading advanced system for payments and end use softer payment methods, effectively retain high-value consumer cohorts. We have implemented refined member segment. Designing and differentiated privilege of matrix and algorithm strategy for users and different gears, more differentiated needs. We focus on five core mandates, the first-day customer, the end true customers, brand loyal customer and set plan consumers, enabling the scenario-based precession operation, which is going to get member involvement. We deploy innovative measures such as transaction from production and treasure code to drive upgrade purchase. Well, for the offline invested operations and at-home channel life may [indiscernible] strengthened omnichannel with all these investments. Through all those initiatives, our total customer base reached 90 million. Contribution of the repurchasing maintained at 70%. Our high-value loyal customer base also grew steadily. For that, we also continued into the quality of our operations. In terms of the Future with Intelligence, we added digital and AI capacity building as a core strategic priority with the aim of moving from experience-driven to intelligence-driven, building a hard-to-replicate move and providing technological underpins for the company's long-term development. We firmly believe that Topsports' compact operating scenario, including multi-brand, multi-SKU and multichannel together with our extensive user base, providing ideal arena for AI to leverage its scale and precision efficiency advantage. Digital and AI capabilities have already become integral part of our core competitiveness. Our digital and AI strategy is built around five core value chains, including merchandise operations and supply chain, omnichannel retail operation, user operation and marketing, operational and management decision-making and general management efficiency, guided by the principle of practicality, dual-channel efficiency and measurable and actionable outcomes. We apply AI technology from a business standpoint to do a full spectrum digital intelligence capacity from frontline execution to management decision-making. We are focusing on advancing the five core applications and know-how to deliver the full efficiency gain and results realization, ensuring that digital and AI capacity turns the business growth and embedded in every operational business. In merchandise operation and supply chain, supported by an AI-powered intelligence management, we will be able to fully optimize process of production selection, ordering and pricing, facilitate refined inventory management, improving inventory efficiency, driving intelligent upgrade of the merchandise operation. In omnichannel retail operation, we have built a smart store panoramic compass, successfully optimizing the match efficiencies of people, products and place, achieving efficient user outreach and conversion. In user operation and marketing, we have built AIGC content factories and precision-marketing system through AI-powered content and production at scale. We have connected omnichannel membership privilege with some multiple scenario voucher operation workflows to drive user lifetime value and drive sales conversion. In operational and management decision-making, we have established an unified data platform and an intelligent decision-making process, consolidating full business data and completing system upgrades, significantly improving operational efficiency and accuracy in business analysis. In general management, we have rolled out the knowledge platform and function-specific AI applications, improve assets and empowering organizational efficiency. We developed the proprietary AI tools across different scenarios, steadily building scenario-driven data connected AI-enabled ecosystem that can help to build our new build based upon AI. Now I will pass on the floor to Mr. Ding, who will share with us the breakthroughs and progress in innovative strategic position. Thank you.

Thanks for Madam Zhang. Currently, we are discussing our core business. We are also actively expanding our core business boundaries with focus layout in professional core segment, advancing brand strategy, establishment and operational capacity upgrades to seek for mid and long-term growth opportunities. Today, consumers grew cautious, have shifted from a basic functionality to a full pursuit of performance plus emotional value. Niche market like running and prime outdoor have sustained strong momentum, become the key growth driver of the whole industry, which also represents a clear opportunity for us to expand our brands there. We focus on two core segments, running and prime outdoor, and systematically building our professional operational capacity through brand strategy, content communication, omnichannel operation and community contribution, potentially anchoring to the minds of the consumers. In prime outdoor, Norrona is a niche, foundation building brand in China, leveraging our existing outdoor business operation. We are focused on strengthening prime outdoor professional operational capacity. During the year, we launched the boutique store at Beijing SKP and Ektos pop-up Shanghai City Center successfully validated the store mode, operating workflow and service standard for prime outdoor brands. In terms of the running segment, Norda, is a flagship brand building. We continue to engage core runners to outfly events, pop-up stores and to runner-based marketing where we went full strategic way with professional running communities to events that continue [indiscernible] partnering with [indiscernible] which can also help validate market potential of Norda brand to the [indiscernible]. During the full year, we also launched full but also limited star product as the localized signature base, expanding running among the professional runners. We also tested sports that can go beyond the grounding tasks, building experience for future category expansion using running as a foundation to reach a broader consumer base. In our running segment layout, for niche establishment, we planned to cultivate local running culture by funding dedicated scenarios and communities that have connections, which deepened our bond with core runners and reinforced the use of Topsports in professional sports. To date, we have incubated actual child running culture brand located in China. We opened our first multi-brand store in Shanghai. It's a hub for core runners not only for running cultural events and has helped incubation stage for professional brands. In the fiscal year, Ektos made [indiscernible] opened a new running product store, readily host a running brand and community activities, building reputation and growing into an influential running lifestyle platform. And then as a platform for brands in niche, early stage, Ektos served as a venue for showcase, trial and user data for flagship brands such as Norda, Soar and Ciele. As flagship cases gain more market visibility, I think we can have this event actively to reach the user base, helping Ektos reach a broader running community. Through Ektos, we have now found an aggravated marketing room for professional brands, but also stimulated valuable capacities in community operation and outflies in order creation, laying a solid user and brand partnership foundation for long-term development in the running segment. Going forward, we are committed to becoming a one-stop running operational platform for prime brands entering the China market, providing both mass and niche segment consumers with diversified product choice and high-quality sports experience, but continue to bring momentum to the development of the Chinese sports industry. Today, driven by the combined factors of product support, technological upgrade and rising consumption demand, the sports consumption industry landscape continues to evolve. Competition is becoming more intensifying, bringing both opportunities and strategies. In a compact market environment, we adopt our operational strategies, proactively addressing various challenges, continue to strengthen our core competitive gains through forward risking position and efficient execution. On one side, we deliver comprehensive high-quality service to the consumer. On the other side, we drive basic requirement with our brand partners, constantly creating long-term and stable investment return for the shareholders. Looking to the future, there are going to be direct four directions we will go for. First of all, prioritize operational efficiency with sustain steadiness of core business foundations. Secondly, pursue systematic positioning and optimize professional segment matrix and upgrade core capacities. Thirdly, empower development via digital intelligence to deepen omnichannel digital transformation and AI implementation. Fourthly, pursue win-win collaboration and follow an ESG development path with distinctive corporate culture. I will now hand over to Rebecca to show our initiatives on sustainable environmental development.

Thank you. Thanks Mr. Ding. Within this financial year, we continue to defend our sustainable development and actively promote green consumption as well as the development of the circular economy, our efforts around environment, social and governance dimensions working hand in hand with our brand partners to explore new approaches to low carbon value chain. First of all, on procurement and collaboration, we have continued to drive low carbon operations. During the prior financial year, our Scope 1 and Scope 2 GHG absolute emissions decreased by 20% as a quantitative amount. However, during the past year, we made steady progress, our Scope 1 and 2 GHG absolute emissions down by 16%. We also conducted our first climate based analysis. But at the same time, in consumption and lifestyle through public welfare activities such as Greenbox, we promoted green consumption and circular economy. Altogether, we collected close to 3 tons of the user clothing and an accumulated basis equivalent to reducing 10 tons of carbon emissions. Simultaneously, in our TOP governance and responsibility, we have continued to advance initiatives in diversity, inclusion, employee empowerment and supplier integrity and compliance, strengthening our internal foundation for sustainable development. In addition, our ESG performance has been recognized by external institutions. Our S&P ESG rating still is maintained at AA extending our leadership position in the industry. This concludes today's results presentation, ladies and gentlemen. [Operator Instructions]

My name is Wei, Xiaopo, from Citi. I have three questions. The first question, in April and May, people started to feel uncertain about the overall consumption trend. Is it possible for you to share with us the operational progress for April and May? 618 Shopping Festival is ready to be started. Is there any strategies for discount rate you can share with investors for the 618 Shopping event? The second question, a key brand you are working with on the U.S.-based brand. Mainland China sales was down by 20% from March to May of this year. We would like to ask you, do you have any new observation or insight within that company for China operation? How long does this aggressive destocking initiative of that brand is going to last? The third question regarding the dividend payout. The company has escalated the dividend through the free cash flow. So free cash flow is actually 129% of the actual proceeds. And as said out, your absolute EPS in [indiscernible] and dividend payout ratio was 137%. In the near future, whether the company is going to prioritize dividend payout ratio or absolute dividend?

Thank you, Mr. Wei. Let me respond to the question one by one. First question, right after the spring festival of China, the demand from the whole industry has been slowed down compared with January and February. I have to admit the sales has been pressured compared with H2 of the fiscal year. Our retail assortment outperformed wholesale. You asked about impact of 618 Shopping festival. 618 Shopping festival is being started from very early on. We see many of the merchants are in payment proceeds. So the discount rate would be consistent with what you saw last year. The second question, you asked about key brands while working ways. At least according to our observation, that brands is already adjusting its performance in Greater China region aggressively. Being localized would be a key strategy for them. That brand has already initiated a strategy named China by design. They also adjusted organizational structure. I think that brand, they really want to build a localized capacity connecting product design, sales and marketing. However, regarding the product, they have two initiatives, local creation and the local merchandising namely and operation. For local recreation, the local first response team and product R&D team has been upgraded into a localized innovation and R&D center with corresponding staff changes. I think that brand is trying to build a more localized merchandise faster response organization. And also they're trying to build a localized product that can readily respond to the local market needs. But having such a presence, the brand will be able to improve, they'll advance through the China market and also be able to well manage the China market. While at the same time, regarding the local operation, the brand also made some adjustments over the period. But anyway the Greater China region is known and well, the two big reasons. In that way, the strategy is, of course, to serve to the user needs. That will also showcase how they attach their brands to the other channels and improve the store performance. That's my answer to your two questions.

Mr. Wei, please allow me to answer your third question regarding dividend payout. First of all, we'd like to thank for the trust the investors and all the friends of co-branding the high dividend payout to not negatively for shareholders. As we mentioned, the fundamental low yields of dividend payout [indiscernible]. At the same time, our cash flow [indiscernible]. The ratio of advances through payments made in certain years. You know that as we mentioned, we already a company who have the revenue [indiscernible]. There were some issues over the past several years. However, generally speaking, free cash flow through net profit is always advanced. The company already has as healthy cash flow as our foundation. Generally, as was equally prudent, and based on past performance, we are going to use this money and we were providing the [indiscernible]. And our public education was used in three parts. The first one, the organic growth of our business. The second one, the money will be used to identify some potential allies for breakthrough. And the third one will be the shareholder returns. For convenience, no matter how business grows or the new potential process, we will use cash to make it happen, but we'll still maintain strong balance and cash generation capacity, then we choose to provide more returns to the shareholders. So that's the reason for the dividend payout. I have already mentioned, according to the sourcing files last year and actually, our dividend made a first attempt so far about the same average [indiscernible] the upper limit of [indiscernible]. So we actually made a comprehensive yield of our performance. In the sports industry, our free cash flow as well as our dividend go beyond the industrial average. That is the core operational capacity that we have complementary to Topsports [indiscernible] cash generation capacity and then to consider what the dividend payout ratio might be. I hope I answered your question. Next question comes from Dustin Wei from Morgan Stanley.

I have three questions. First question. I would like to ask about the pricing discounts and advanced pay of the product. Majority of independent brands, they mentioned that they would like to equate the cost of the normal priced product, full priced product. What will be the trend now alongside the full price product [indiscernible] including the full price product itself, then the inventory needs to be slowed down. So from the management's perspective for the whole industry, for Topsports, when the inventory is going to be optimized. This is my first question. Second question is regarding outside channel for the store format. I think for the past few years, the company closed some large format stores. However, generally speaking, the DSA per store, there continues to be anywhere around 150 to 160 DSA per store, but now the DSA is more than 200 per meter per store. So it seems that you have some flaw design. I wanted to think about the 200 per meter as DSA [indiscernible] then what are the new store formats you are opening now and what do we think on that because many of the key brands, they also mentioned that they find new store formats [indiscernible]. I also have a question regarding the brand store. What will be rent we will pay here? Are you still going to be looking for low rental per square meter at existing stores or still it is the rent per square meter as we open new stores in the future? And I also have a question regarding the operating guidance of 2027?

Let me respond to your first question that is the full price product itself. As far as I can see for the whole industry, the inventory is still quite at satisfactory level and kept at a high level. In H2 of last year, we optimized our inventory, made it down by 8.6%. Our overall inventory is well controlled. So from the discount control perspective, alongside you need to consider our own inventory structure if you also take a look at the discount trending in the market. But I think at hindsight, we will be having on top our own inventory discount to be welcome. However, we also see more challenges from the external environment. Well, for Topsports, we are going to keep an eye on the competition landscape and discount trending for the season to adjust our performance accordingly. Full price product is always a priority for ourselves. We do have a principle, that is, giving priority to the seasonal products and full price products using a high full price of making sure we have to improve the sales of the full price product. That is the priority of Topsports. I don't know if you have a good streamline of sales, then you will be able to lay a solid foundation for the future discounted sales. Responding to your second question, you asked about the store planning of Topsports. Last year, we closed more than 600 stores. Well, in this year, we're going to narrow down the store closure. The reason is because every year, we need to take care of those underperforming stores or the stores who have not performed after years of incubation. Anyway at Topsports, we are quite cautious and prudent in opening new stores. We are also testing some new store format. For example, in Adidas Topsports and the Nike edition stores, we continue to identify new opportunities to grow our business. I think the whole market is also to marching towards professional stores and segmented stores. And we also started to build our own running multi-brand running stores. And open to embrace opportunities in market and capture the right opportunity if presented. Whereas for other store format, one has to take a look at the sales per square meter efficiency and then to have a periodic review to make the structure we can maintain a healthy store format. The third question is regarding the property rental fees. The higher property rental fees has everything to do with the output of our single store. From that perspective, we also proposed omnichannel operation for our flag stores in an attempt supporting the outfly stores with omnichannel operational capacity, providing mainly traffic as well as features from the online channel perhaps to overcome the fluctuation of the full traffic in the offline channel. For that, first of all, we're going to talk to the property owner against the existing backdrop of the market. We already have some supportive measures from the property owner. Some of that we will make it happen within this fiscal year. Some will be materialized in next fiscal year. That can actually help to improve our expense ratio to improve the profit of the existing stores. So for rental fees on one side, we need the property owner support, and we also need to leverage our own store performance to improve the sales. That is the answer.

Thanks very much. Let me respond to your question regarding the year 2027 guidance. First of all, regarding our long-term guidance, the company still maintains constantly prudent for short run and optimistic for the long run regarding the guidance. We are talking about the [indiscernible]. We're going to need to prioritize produce and efficiency to take effect the micro environment. As Ms. Zhang was responding to other question, she has already mentioned in the opening remarks. What are we seeing right now is that the industrial environment is still fluctuating a lot. The promotion of the whole industry and the brand promotion are still at risk in the industry. So far our countermeasures were going to be prudent and to stick [indiscernible]. So regarding our overall revenue, actually the micro environment along with the whole adjustment from the brand partners, the revenue will be pressured on one hand. However, for Topsports, we are going to be successful on brand commitment and already well managed our performance. This includes our omnichannel efficiency optimization, with particular action by Topsports, to help and be able to have a stable line process and the micro environment is challenging, but we have to leverage our assets to maintain a constant environment and then to maintain our overall environment. This is indeed what the overall principles that we are going to have for fiscal year 2027. Thank you. [Operator Instructions]

My name is [indiscernible]. I have two questions to the company. First of all, you have two key brands you're working with. What will be the performance and operational in the year 2026, I mean the fiscal year 2026? And I noticed for the non-key brands, the rents last year have declined more aggressive compared with the key brands. As Rebecca mentioned, some major sports brands, the performance was pretty great. Are you going to still have some new adjustment measures for those brands? The second question is regarding the channel. In the fiscal year 2026, you closed more than 600 stores. So as you are adjusting the stores itself, from the cost per square meter, the whole operations Y-o-Y, any quantified data you can share with us? And I think the online performance 2026 will be much better than 2027? What would be the online channel performance revenue contribution and how the online channel be differentiated from one to another. Can you breakdown and if you can provide to us? And the final question regarding the new fiscal year guidelines, what are the guidelines for expense ratio and the GP margin?

Let me respond to your first question. Your first question for the two key brands working ways. Operational wise, I think you can read it through their financial release. We're not going to comment on that. Responding to your second question, indeed we have some recreational major sports brands. Their performance is absolutely fine. We are also adjusting that accordingly. But at the same time, we invest more for outdoor and online stores, opening new stores for both formats. So we will always be able to adjust our store according to the dynamics of the market, invest more for outperformance segments and brands and narrow down investment for underperforming brands and segments. The second question you were asking about the stores. This year, the store closure amount would be more than last year. I think your third question was asking about the online performance, right? Let me just share with you something on that. Online business was increasing to some extent so that traffic showed impact in the offline. Online business is divided into two parts. The first one is the public domain e-commerce. And the second one is the private domain e-commerce. And we see that our online performance is related to the stores are performing the best. You asked about more breakdown for the guidance we provided to the market. I think I have already mentioned some of that. We are facing the challenging environment and many complexities from the market. We have to factor in those to make dynamic adjustments. So it's not the best time for us to provide any absolute predictions now. However, we're going to leverage our own performance improvement to have help the business and to mitigate the pressure on the revenue. That's the principle for the product.

Sorry, I would like to respond to one more question. Regarding the sales per square meter and the profit of our stores. Let me see after the store structure optimization and adjustment, sales per square meter and profitability of the store are all including on a Y-o-Y basis. Ladies and gentlemen, we would like to accommodate one final question. Now let's welcome Ding, Shijie from Guosen Securities.

My name is Shijie Ding from Guosen Securities. I have two questions. I would like to ask first one. The first question. As we can see in the previous fiscal year, your sales and your sales expense going down, but GP is improving, whether this is going to be the trend for this fiscal year? My second question, it seems that the corporate income tax rate has been reducing. So I would like to ask you for the corporate income tax, what the rate might be for this fiscal year?

Thank you. Let me have to respond to the two questions. First of all, regarding the expense ratio, while the sales expense ratio the increase would be significant compared with expense reduction because the sales expense ratio is directly linked to our store format and structure adjustment along with the omnichannel deployment. While for administrative expenses, we have some organizational optimization work. It is going to be due into the expense ratio by [indiscernible]. But overall for fiscal year 2027, we will still have a comprehensive structural independent factors including the marked advancements to make for dynamic adjustments. Regarding the corporate income tax, I think I have already shared with many of you. In the mid and short term, the rate is going to be around 20%, basis also the number we have predicted around at the same time.

Ladies and gentlemen, we don't see any further questions from our online channel. So ladies and gentlemen, I would like to thank you again. Thanks for all the investors and analysts. Thanks for joining us for this results presentation. The management has already worked through our management as well as the business landscape in the presentation. In the follow-up roadshows, we're going to continue to talk to you, and please keep in touch with our IR team. Thanks for coming. [Statements in English on this transcript were spoken by an interpreter present on the live call.]