Xtep International Holdings Limited (1368) Earnings Call Transcript & Summary

To investors and friends of the media, good afternoon. Welcome to Xtep International Holdings Limited interim results announcement online. I am Sophia, representing Investor Relations and Corporate Communications. We also have with us our Chairman and CEO, Mr. Ding Shui Po; our CFO, Mr. Yeung Lo Bun Ricky. We are going to conduct this proceeding in Mandarin with English simultaneous interpretation. After we hear from the management, we will proceed to Q&A session. If you have any questions, please use our Q&A portal to input your questions. I will hand over the time to Mr. Ding Shui Po, our Chairman and CEO. Mr. Ding, please.

Dear friend of the media and investors. Good afternoon. Thank you for attending our online broadcast of interim sales announcement for Xtep. I'm Ding Shui Po, the Chairman. I will talk about some highlights for interim performance for the company in 2021 and also our development targets in the next 5 years. I will then pass to our CFO, Mr. Yeung, to go into more detailed explanation. In the first half of the year, economic activities have been affected around the globe by COVID-19. With effective control, things have been alleviated in Mainland China. GDP and performance of retail consumption has returned to normal levels. Our brands have performed very strongly, with a growth of 40% for retail flow business. Total revenue, 12.4%, reaching CNY 4.1 billion. Net profit increased by 72% to CNY 430 million. Our main brand net profit in the first half increased by 56.2% to CNY 490 million. Interim dividend per share, HKD 0.115, year-on-year increase of 76.9%, maintaining our 60% dividend payout rate. After we completed strategic transformation in 2017, we have solidified our foundation. In 2019, we successfully launched our multi-brand strategy. We've set up our JVs and we have also expanded further the domestic market for a number of brands, including Saucony and Merrell. We have also acquired K-Swiss and Palladium. We have announced this national fitness program in August this year by the Chinese government. So we're really confident about our future development, and we have set up our next 5-year plan for our major brands, except it is still the greatest engine of growth in the future years. By 2025, our revenue will reach CNY 20 billion with a CAGR growth of 23%. Our new brands will bring forth long-term sustainable development for the group. By 2025, our target is to reach CNY 4 billion revenue. In terms of our strategies, for our mass market, we are going to invest more heavily into innovation and R&D. And we'll launch more breakthrough products such as 160X series so that we can solidify our leading position in the running market. We will also make use of the China [indiscernible] momentum to launch Shaolin Series and XDNA, our new brand, to satisfy the demands of youngsters who pursued something very trendy. We'll also collaborate with major celebrities to enhance our brand image. Thirdly, we will move forward with digitalization and omnichannel business to enhance our shop's image and efficiency. Secondly, when it comes to professional sports, Saucony and Merrell will focus on enhancing awareness for our brands, continue to deepen our footprint in first- and second-tier cities and enhance efficiency of our stores. We will focus on speeding up domestic design and product development and enrich our product mix. Athleisure Group, that is K-Swiss and Palladium, we will collaborate with high-end collaborators so that we can inject more resources and experience development into our global business. We will reshape K-Swiss in China. First, self-operated shop will be commissioned in the beginning of 2022, enhancing our overall shop opening momentum and launch new products. For Palladium, we will focus on optimizing our retail network, and we will speed up store opening speed beginning from next year. So we are looking at more details of our 5-year plan, and we are going to run an Investors Day on the 1st of September to share more details with you. Today, we will focus on this year's performance and also our outlook for the next year. This is actually our 20th anniversary, which is a very important milestone for the group. With our effort made in the past, we have completed a very solid foundation. And in the next 5 years, we will deepen our market share and continue to build our foundation to be a truly leading sports product operator in China. Mr. Yeung, over to you for our financial highlights.

Thank you, Mr. Ding. Welcome to our interim reserve announcement. Looking back at the first half, the global economy has been hard hit by COVID-19. Compared to other countries, China has exercised very good control. We do have some isolated cases here and there, but very quickly, the overall pandemic has been controlled. With China [indiscernible] and Xinjiang cotton factors, we have performed very well with a growth of 40-odd percent. Such growth is also reflected in our Q4 orders and also Q1 orders to be -- that was held in July for 2020. In the second half, we will be able to reflect such positive momentum, and I will offer more details in a minute when we talk about the outlook. In the past half year, we have attracted many new investors, have fully understand our commercial model. Sometimes they don't understand the retail flow of business and also how that relates to our sales revenue. So I would like to offer some explanation here. Other e-commerce and new brands, we do wholesale business. So there are 4 rounds of ordering. For example, by the end of March, that is Q4 ordering, and the products will be delivered to our customers between September and November. When they are delivered, we will confirm the receipt of income. So we have seen a growth of 40-odd percent for the first half. They are made up with 3 parts, the sales from the first half of delivered products, the sales of previous inventory, and thirdly, enhanced sales due to discount. For example, 10% will turn into 23% off, and then there will be 10% increase for the flow of retail business. Hopefully, we can explain to you how our revenue may be slightly different from the flow of retail business. Now the first half of the year, our performance -- our revenue increased by 12.4% to CNY 4.135 billion. Profit attributable to ordinary equity holders, CNY 427 million, up by 72%. We have a very healthy balance sheet. And we have a very strong cash flow of CNY 2.58 billion. If they recommended to issue HKD 0.115 per share as our dividend, an increase of 76.9%, by the end of June, we have 6,015 shops. For the inventory, it is standing at 4 months, very healthy level. Page 4, our consolidated income statement. Revenue grew by 12.4%, mainly due to our professional segment. We have Xtep major brand sales growing to CNY 3.6 billion, up 12.4%, taking total sales of 87%. The Athleisure segment growth of 0.7% to CNY 462 million. Professional segment, increase of 2.9x to CNY 76 million. Gross profit increased to CNY 1.73 billion, up by 16.1%. Gross margin up by 1.3%, reaching 41.8%. We have seen an increase of gross margin for all 3 segments. For our major brand, it's an increase of 1.1%, reaching 41.5%, mainly driven by the inventory write-back. Athleisure segment increased by 3% to 43.5%, mainly because of e-commerce. Direct sales has gone up in proportion. Professional segment, up by 6.7%, reaching 45.4%, mainly driven by economies of scale. SG&A increased by 4.9%, which is less than the 12.4% growth in sales. It is mainly driven by promotional activities and advertisement increasing by 10.2% to CNY 436 million, which takes up 10.6% of sales. Operating profit, with the reduction of SG&A and 16% growth of our gross figure, the year-on-year growth is 36.5%, reaching CNY 684 million. Attributable profit with reduction in our finance cost, and after deducting non-holding interest, it reaches CNY 427 million, 72% growth. Net profit rate up by 3.6 points to 10.3%. Our balance sheet is very healthy overall. Current asset ratio at 2.7x, very healthy. And our debt ratio dropped by 1.8 points to 15.4%. We have net cash at CNY 2.58 billion. Next page, working capital analysis. The turnover days reduced by 10 days to 77 days. Receivable turnaround, less by 8 days. And inventory days increased by 5 days. Payables increased by 7 days. Because of improved operations, we have certain write-back of bad debt beginning from the second half last year. So for the first half of this year, we're talking about CNY 19.5 million. Our major core brand, we are talking about revenue increase to CNY 3.6 billion. The major sales will come from Q1 order for 2021 and Q2 orders. For Q1 and Q2 orders for 2021, the meetings happened in June and September, while the pandemic was still quite serious. So there was a year-on-year drop in terms of level of order. But our terminals performed very well, and we have additional orders together with very good performance online. We recorded a growth of 12.4% at the end. Because of the order level for Q4 and Q1 for 2022 are very positive, we expect that the sales momentum will grow very quickly, and there will be a growth target of 30-odd percent. So for the whole year, the growth can reach beyond 20%. Gross margin increased by 1% to 41.5%, mainly because of the inventory buyback last year and we have optimized our product mix. In the past, the level is lower in the second half. But this time, we believe it will not be below 41% for the core brand. SG&A slight increase of 0.8%, mainly because of a lot of savings activities during the pandemic. I will explain further later because of growth in our sales and also growth in gross margin and less expenses. Net profit increased by 56.2% to CNY 485 million. The ratio is 13.5%. In the second half, normally, there will be more promotional and advertisement expenses by 23%. So for the whole year figure, for net profit ratio is 11% to 12%. Next, let's look at Page 9, and we will look at revenue and gross profit analysis. On the left-hand side, you can see our core brands have done some reshuffling, and we have maintained double-digit growth in our sales. Because of the pandemic, there was a slight decrease of 4.6%. This year, we have returned to a growing path. Our target for the second half is to maintain growth of more than 30%, for the whole year more than 20%. For apparel sales, it's been on the rise. For the first half this year, because of strong performance of e-commerce, the ratio dropped slightly. 70% to 80% on e-commerce is selling shoes and footwear. Offline is half-half. So the overall ratio will maintain at 6 to 4, and footwear launched many new products, generation 2, 160X, 300X, so the gross margin increased by 2.4%. Apparel, full year figure should be 40% to 41%. Next, please turn to SG&A on Page 10. It grew by 0.8% to CNY 944 million, ticking up 26.2% of sales, a drop of 3.1 points. We've talked about a lot of saving efforts during the pandemic. But when it comes to brand and on the investment, it will not be reduced much. So we increased by CNY 28 million for promotional activities, and R&D level is more or less the same as last year. In the second half, all these will go up. And for the whole year SG&A expenses, we're talking about 11% to 12% of sales. R&D will be about 2.5% to 3%. Staff expenses have increased and that is because we have newly issued 75 million shares. Total cost, CNY 300 million. They are spreading across 6 years and 9 months. After completing the KPI, they can get the first batch of stock towards the end of March in 2023. So we will focus on amortization at the beginning and less towards the end without any cash impact. So the amortization this year would be about CNY 50 million. Next, let's look at core brand performance. By the end of June, we have set up 6,015 shops in China and abroad. 428 of them have been remodeled into 9th generation shops. We have added 4 run clubs. And we have more than 1 million members for our 13 run clubs. We have set up the biggest running life ecology cycle. Our club to offer free training, locker and shower services. We will also help them to sign up for our sponsored marathons. We will use KOLs to promote our products so as to enhance the love of loyalty. We've also used some ecological circles to solidify our leading position, and this has become a very supportive initiative. In the first half, we have launched the new 160 series with very good response, sold out within 1 week. For 160 series, we have performed very well. We have supported 3 full marathon runners to complete their races in 2 hours and 8 minutes, which is a new record in China. As for Xiamen Marathon, 51% of the runners completed within 3 hours. We're in our 160 series. Towards the right-hand side, you can see that we define runners industry levels advanced, 160, 300X, 160X Pro. They can use these footwear to complete marathons and then intermediate runners, dynamic foam, reactive coil. They can be used for running the distance of 5 to 10 kilometers or for gym or walking. Beginning runners, we have Comfy Cubes and X-Flow, so they can be used for relaxed running for 2 to 3 kilometers or for just walking. So with all these new products, we are able to enhance our average ASP. Page 13, lifestyle products. With the new China seek momentum and also generation X patriotism. On 15th of May on Tmall, we went to Shaolin Temple to run this major fashion show, launching our XDNA. We're maintaining the X factor combining different China [indiscernible] (00:21:59) DNA from Chinese culture. XDNA is towards the higher end. So they are about 50% more costly compared to other leisure style products. On the day of launch, at our flagship store, we have reached the highest record on Tmall platform. We ranked #2 on that day. And between 15th and 17th of May, we ran some branding activities. Online business exceeded CNY 60 million, #1 for 3 consecutive days on Tmall. We rely heavily on social responsibility in our corporation and we will continue to develop sustainable options, we'll focus on design, R&D, manufacturing sales, operations and brand management. Because people are becoming more concerned with environmental protection, we also have similar direction of development. We have set up the screen tech platform. And we now use polylactic acid in our products, which is biodegradable. PLA will be decomposed within 1 year in natural surroundings. We use PLA to replace plastic fiber to reduce the harm caused to our environment. We have set up new standards to encourage our staff to be more green and meet our ESG demands. Let's turn to Page 14. Advertising and promotion. We have a number of marathon activities those who got approval. Well, of course, the scale has been reduced. We sponsored 6 of such activities and also we've sponsored professional athletes in various areas. And we have also obtained very good results at the Tokyo Olympic celebrity spokespersons. They are very important in enhancing our brand awareness. In August, we signed a new contract with one of the most popular actresses, Dilraba, to be our latest spokesperson. Page 16, outlook and strategies. Our core brand is taking up 87% of our total sales. It will continue to be the greatest engine of growth in the next 5 years. We will continue to focus on innovation and technological enhancement to solidify our position, and we will continue to expand our runners cycle and runner clubs. With a Chinese [indiscernible] we're going to ride on it to integrate Chinese aesthetics into Sportswear products. And in the past, we focused mainly on third to fourth tier cities. We are moving upward to first to third tier cities. We'll launch more shops in shopping malls. We will optimize our channels and launch the 9th generation stores to boost customer experience and store productivity. We will also facilitate our omnichannel retailing, drive online sales and tighten collaboration with celebrities and KOLs on major social media platforms. We will also use tech platforms, big data and new retail to enhance efficiency of our retail business. We are very confident in double-digit growth in the next 5 years. Last year, we provided guidance for 2021 to '25, our target CAGR growth would be 15% per year. We are confident that we can surpass 15% in 2021. We can actually reach beyond 20%. Based on the current growth momentum, the growth in 2022 should be greater to 20% this year. So we are going to readjust our target between 2021 to '25, CAGR growth should be 23%. By 2025, our annual target of sales is CNY 20 billion. Next, let's look at Athleisure brands case with some Palladium, Page 18. Sales improved by 0.6 -- 0.7% to CNY 462 million, taking up 11.2% of our sales. The major operations will be U.S., Taiwan and Hong Kong, and Europe. Because of the pandemic, we have only reached a flat trend. Our gross margin increased by 3 points because we have increased our direct sales momentum in Europe and U.S.A. When we purchased these 2 brands, they focus on wholesale business. Direct retail and e-commerce very weak. So our future focus is going to reshuffle sales channels. 77% growth of e-commerce to CNY 58 million last year. We strengthened the 2 brands in terms of their e-commerce performance. In the past, the ratio was only 7.4%. It has been enhanced to 12.6% this year. And this ratio will continue to grow in the future. Losses reduced by 15% compared to last year. Because of the global pandemic and also some losses in newly opened shops in China, the losses will be more or less compared to the previous guidance, CNY 90 million to CNY 100 million. It will not exceed the level from last year. Page 19 other than e-commerce, we have also increased our direct sales stores to offer better experience to our consumers. By the end of June this year, we have 44 [indiscernible] and 60 Palladium self-operated shops. [indiscernible] ones are mainly located in Hong Kong and Taiwan. Palladium mainly in Mainland China and Taiwan and Hong Kong. By the end of June this year, we also think very positively. In these 2 brands [indiscernible] started strategic partnership with us, providing very good advice to us. And next, our focus will be Saucony and Merrell, the Professional segment. Sales increased by 29x, reaching CNY 76 million, gross margin up 6.7 points to 45.4%, mainly because of economies of scale. Total loss CNY 11 million at the JV level. In the second half, there will be more new shops opened and full year loss will be about CNY 40 million to CNY 50 million, which is comparable with our guidance. We have half of our sales from e-commerce, 40% through our self-operated shops in the small part, wholesale business in Hong Kong. Footwear is still the main product, 85%. With more and more apparel options being launched, the apparel proportion will be expanded. Page 22. By the end of June, Saucony self-operated shops, 36 of them and 6 for Merrell. In the second half, 10 more shops will be open in first and second-tier cities, mainly going to Saucony. The number is less than the originally planned because e-commerce performance was better than expected. Whole year sales target will be better than CNY 150 million. It will be adjusted to CNY 170 billion to CNY 180 million. Losses, between CNY 40 million and CNY 50 million. Finally, let's turn to Page 24, the outlook. China has done pretty well in terms of pandemic control and 90% of our business is in Mainland China. The Chinese government has offered a lot of support, and we have done very good positioning. So we're very confident in our future development. For the shorter term, our whole year target is we have very strong confidence that we can keep the target. In the second half, growth target is more than 30% for our core business. Whole year, more than 20%. Profit margin between 11% and 12%. [indiscernible] Palladium, target sales CNY 900 million to CNY 1 billion. Target loss will not exceed that of last year, between CNY 90 million and CNY 100 million. JV sales, CNY 170 million to CNY 180 million. Total loss, CNY 40 million to CNY 50 million. So we are confident that the second half profit level will be higher than the first half. Whole year growth of our profit will not be lower than that of the first half, which was 72%. For the longer term, looking at the next 5 years, we will continue to drive the major growth momentum from our core business. And between '21 and '25, we have this target of annual CAGR growth of 23%. By 2025, we can reach a revenue of CNY 20 billion, with higher level of our profit margin year-on-year. For our JV, our target is to reach CNY 1 billion scale by 2025. For case within Palladium, our target is to exceed USD 500 million by 2025. New brands will have smaller scale and less branding effect. So we need investment and there will be losses. But we will control the scale of loss, hoping to reach a leveled situation within 2, 3 years. If we can realize all these targets by 2025, our total revenue will exceed CNY 24 billion. After 2025, with established scale of our new brands, they will create new growth momentum for the group. At 5:30 p.m. on the 1st of September, we are going to organize an Investor Day. We will offer greater details to explain the 5-year plan covering 2021 to '25. Other than myself and Mr. Ding, other senior management will also participate. So please mark your diary. So that is my report. Thank you very much.