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

Thank you. Welcome to the Xtep International Holdings Limited interim results conference. I'm Sophia, the Director for Sustainable Development, and we have today the Chairman and the CEO, Mr. Ding Shui Po. Mr. Tian Zhong, the core Xtep brand Chief Executive Officer; and the CFO, Mr. Ricky Yeung. Today, our conference will be hybrid, both online and offline. Apart from on-site, we also have webcast and also telephone conference. The management would be sharing with you the interim results for 2023, and then we'll have a Q&A session. First, Mr. Ding Shui Po, Chairman and CEO Mr. Ding will address us. Thank you.

Thank you, Sophia. Ladies and gentlemen, members of the investment and media community. Good afternoon to you, and welcome to the Xtep International Holdings Limited 2023 Interim Results Presentation. I'm Ding Shui Po, I would like to highlight some of the performance in the first half for you. In 2023, with the epidemic behind us in China, and people have been going back to normalcy in their everyday livelihood. The first quarter of 2023 in terms of China's retail and consumer market, there had been continuous recovery. And compared to the same period, it was a 5.8% increase. And at the same time, our company in terms of our core brands, the retail sell-through had been recovering. In the first quarter, it had increased 20% compared to the same period of last year. And the second quarter had also registered high double-digit growth better than the industry. In the first half of the year, our revenue was RMB 652 million (sic) [ RMB 6,522 million ] which is an increase of 14.8% compared to last year. And our core brands revenue increased 10.9% to RMB 543 million (sic) [ RMB 5,430 million ] compared to same period of last year. Our net profit increased 12.7% to RMB 670 million and our core brands, net profit had increased 12.7% to RMB 870 million. And interim dividend is HKD 0.137 per share, which is a payout rate of 50%. This is our 15th year since listing. And since 2008, our revenue had increased times, and we have been rewarding our investors very well. All through these years, we have been higher than our average than the industry's average in terms of dividend payout. And our market cap is over [ HKD 20 billion ]. Since 2019, with our core brand strategy, we have been able to show excellent operation and management capabilities and the core brands of Xtep had also been enhanced and growing steadily and significantly. Of the 4 main brands. We will continue to grow in the next 2 years. And in 2025 since Saucony, there had been rapid growth in this brand. And this is the first brand that had recorded profit, the first new brand that had done so. I'm very happy about that, and we'll continue to nurture new brands and continue -- we continue over the years to raise public health and the culture of exercise, and this is in keeping with the country's strategy and policy for development. And at the same time, we are nurturing our R&D for, in particular, the running segment, and we are strengthening our cooperation with professional marathon athletes as well as other running athletes to build a very strong ecosystem for running. And this is a fastest-growing athlete sector or spot sector. And in the second half of the year, we will continue to develop this sector and also to reach new heights as we continue with our development, even though there may be certain challenges from consumption or the economy, but we will -- we are confident that we will be leading the sector. And next, we will have Mr. Yeung and Mr. Tian to talk to us about the financials and the business.

Thank you. Next, I will be talking about the financials with you. First of all, I would like to review the first half of the year as the global economy has been unstable. China in the beginning of the year had gradually recovered from the epidemic and have been growing significantly. And our main core brands in terms of flow-through retail had been improving. In particular, for March and April, there had been 40% growth. But since May, there had been significant lowering. However, there had been high double-digit growth for our core brands, which is better than the industry and leading the China retail market as a whole. In July and August, August is better than July significantly and our retail flow-through had kept up with double-digit growth. Let's look at the first half performance. Let's look at Page 2. For the group's revenue, the total is RMB 6,522 million, that is an increase of 14.8%. And our core brands revenue was RMB 5,430 million, up 10.9%, and it is 83.2% of total. Profit attributable to ordinary equity holders of the company was RMB 665 million, up 12.7% and the brand's net profit was RMB 871 million, up 12.7%. Interim dividend is HKD 0.137, which is a payout ratio of 50%, which is stable. And we're very happy that MSCI ESG rating had raised our BB rating upgraded to BBB, which is highest in the industry. We continue to balance, ESG and governance as well as environmental protection. In end of June 2023, we have 8,031 core Xtep branded stores and mostly in the mainland of China. Now let's look at Page 4, the consolidated income state. During this period, the revenue was RMB 6,522 million, up 14.8%, gross profit RMB 2,797 million, up 17.2% and the sales revenue growth had been fast because gross profit margin is 42.9%, up 0.9%, and we'll be talking about that a little bit more later. SG&A up 26.1%, RMB 2,147 million. Operating profit was up 7%, RMB 987 million. Profit attributed to shareholders was up 12.7% and net profit margin is 10.2%. Next page. We continue in the following segments: Mass Market, Athleisure and Professional Sports. First of all, in our core brands, the sales revenue had increased 10.9% to RMB 543 million (sic) [ RMB 5,430 million ], of which child had been a growth of 15%, that's RMB 820 million. And gross profit margin had raised 0.9% and gross profit growth had been 13.1% to 23 -- RMB 233.8 million (sic) [ RMB 2,338 million ]. And the operating profit has slightly dropped by 0.2%, and the main reason is because of our sponsorship for major marathon sports and also the university student sports. And therefore, our promotion and sponsorship expenses had increased by 50%, and we continue to optimize our organization structure, lowering our staff costs and offsetting some of this increase. And our profit -- net profit growth has been 12.7%, and our net profit margin is 16%, slightly higher than last year's 15.8%. This benefits from our very good tax planning. And further, for K-Swiss and Palladium, the Athleisure, our sales had increased 18.9%, mostly from China. And China sales compared to same period of last year was a RMB 57 million increase, which is -- from last year, which is RMB 173 million this year, which is 200% growth. And further, for China, it is 204% and overseas had been 0.5%. Gross profit margin compared to last year had improved to 42%, mainly because of DTC. And our operating loss have been RMB 66 million, which is increase of RMB 12 million. This is mainly because of expansion in our domestic markets. Saucony and Merell, the sales growth has been close to 120%. Gross profit is more or less the same as last year at 57.2%. Saucony profit is RMB 21 million and Merell there's a slight loss of RMB 2 million. Saucony is the first core brand to realize profit. Next page, Page 6, we are looking at our consolidated balance sheet. You can see that our bank borrowings is slight and it's come down 1.1%. We are in a net cash position, and this supports a very healthy growth. And our current asset ratio is also very healthy. And our net cash position is at RMB 117.7 million (sic) [ RMB 1,177 million ]. You may be -- next page, you may be concerned about our inventory days. It is 14 days more than last year's inventory turnover days. It is 5% more. And -- but if you look at the absolute amount, it is just more by [ RMB 120 million ], which is 5%. And compared to last year same period, it is only 3.9% increase. So if you look at the same price sale, you would know that after calculation, the number of days have been increased for inventory turnover, but the absolute dollar cent is you have to calculate that. And also, the inventory in terms of the inventory turnover days, it is mainly because of new brands inventory. And this is because for new brands inventory, we need to build up a little bit more inventory so that there can be fast growth in the domestic market because the new brands are mainly in the DTC market. And our sales for new products or new brands have been very satisfactory. In August, in particular, in the second half, we continue to digest some of the first half inventory. So whether it is our channel inventory, our own inventory, we are very confident that we will be attaining an even more healthy level. Next page, SG&A. For SG&A, it had increased 24.1% to RMB 156.8 million (sic) [ RMB 1,568 million ] and it is 28.9% of sales, which is 3.1% increase. The rise is mainly because of the 50.5% increase in A&P and advertising, which is 13% of the whole. There are a few reasons because of this. Last year's base number was low. Normal A&P should be the 11% to 13% of sales. But because of epidemic last year, it was only 10%. And this year, there is normal sponsorship of Marathon activities. And also what could -- should have been organized in 2021, and that is university students sports meat had been delayed to this year. So some of the 2021 expenses have been already expanded. But actually, the event had been delayed to this year. And also the first half A&P as a proportion of sales had been 13.7%, but the second half sales is usually higher than the first half. And so after this consideration, it should stand at about 13%. R&D expenses had increased by RMB 69 million, which is 3.2% of sales. Whole year, it should stand at 2.5% to 3%. And at the same time, we have restructured our organization. With this optimization, we have cut staff and staff costs had come down 16.5% to RMB 243 million, and this is 5.9% last year of sales lowering to 4.5% this year. Mr. Tian next.

Ladies and gentlemen, good afternoon to you. Next, I will be talking about our main core businesses performance and also our future strategy. We have always been focused on running. We have been excavating the value for that. And for the runners in China, this has been their first choice, and we have had some breakthroughs in R&D. On the 18th of August, the -- Great Wall. We had launched a new products for our running shoes. Actually, right here, we have these new running shoes right here. And these new running shoes are using the X technology that we employ. So in terms of a number of aspects, including lightness and performance and the breathability, they are better than the previous products. And there is an increase of 18.8% and the weight had been lowered by 9.7 grams. So this is an even better equipment and footwear for our runners to raise their performance. 660 has always been attracting a lot of attention from the market. In the first half of the year, Xtep in the 100 top runners, it had increased to 42% of utilization, which leads all the brands, that is the 10 top runners, 7 of them use our -- wearing our shoes. And also for the major Marathon sports events, we have very good performance. Out of the 60 runners, 29 of them had received major awards, which is a breakthrough for the spot. And also 2023 first half, we have assisted our runners in the Beijing and Wuhan Marathon. And they have won these competitions, and we have been, therefore, able to keep the 15-year record. Apart from 160x carbon fiber plate running shoe series. We continue to come up with professional shoes for runners in the matrix and also winning the confidence of the mass market so that there are new runners who will try out our products. In May, they had a global star and also super models and sports stars, they have been on Douyin to invite all over the world, the runners to put on the fluorescent 160X collection, so that there was this over Douyin night run challenge, which was organized in May 2023. And at the same time, we have the 2,000 kilometers running shoe, and this has been given explosive reception online. And as well, for the Shanghai blacktoes series, it had been very well received as well. And there had been some Retro collections as well. This is recalling the University Day, student days of the runners, so that they continue to strive for the best. Apart from running, we have continued to develop in other areas in the first half of 2023. For basketball, we have launched a number of activities, including signing Malik Beasley and Zhang Zhenlin to become Xtep basketball new generation of ambassadors. And in 5 cities of China with Jeremy Lin and the fans, there had been very close signing tours and interaction, and we continue to launch this SKY01 basketball shoe. This is in keeping with the country's policy and 76% of our carbon footprint label, PLA T-shirt and Recycled Fibers T-shirt. As mentioned, this is in keeping with the two carbon targets of the country. And this is in the sustainability area. And we continue to live up to our targets of ESG. We have some announcements for the next 4 years, we will be donating RMB 100 million to help with the young people for their development in the those that live in the rural areas. And also, we are the FISU World University Games, official sponsor, and we provide the sports equipment and clothing for the university students in the games. For our ninth generation stores together with the consumers' interaction, we have bigger store area and better experience for the shoppers. For the young shoppers and consumers, it has been very successful. As of the first half of 2023, domestically in China and overseas, they are over 50% of the 6,440 stores. And there is a new positioning of our stores. And in particular, for the young people, we provide even better equipment for them. And in particular, for the professional and also for the younger people, we want to solidify our leadership in running and also, in particular, for the Chinese children and the young people. We want our brand to become the closest brand and the most popular brand and accompanying them in their experience of sports. And through this, we want to be able to develop products for sports that are more suitable for our Chinese children. And there is a strategic cooperation with the aerospace. And we have come up with new products in running for this particular product. And we will be launching some new products in this area, together with aerospace, so as to accompany our children and also to sponsor some of the effects. CHUC in 2023, the national team, that will be strategic cooperation. In 20 cities, there will be the FISU so that there will be more young people to provide a bigger stage for them to excel and to perform. And together with kids, there will be -- for the kids, there will be programs for training in Xiamen, Changsha, Guangzhou and 19 cities, there are over 30 events covering over 10,000 kids and young people. So as to nurture a sports culture among them and to raise their fatigue. As of the first half 2023, Xtep Kids, we have 1,588 kids branded stores in the Mainland of China. For our strategy in the future since the 2022 period and also the 2023 strategy and period, we have been able to show our capabilities, and we continue to focus on mass market as well as running and to raise the products to a new level and also to service the ecosystem a lot better and to continue to grow our market share, and we will continue to in terms of channel to enhance it and to come up with shops and stores, which are immersive in nature and a lot more attractive and to create unique experience and to raise store performance and in particular, among the young people to raise their awareness and acceptability of our brand. And next, there will be an introduction of the new strategy. Now let us look at Page 16. Page 16 is cases K-Swiss and Palladium from 70% of last year, it is 56%. This is wholesale as a major part of our sales channel. And you can see that DTC retail proportion had increased to 29% from 15% last year, and DTC is mainly in China, Hong Kong and Taiwan. And it is through the DTC where we raised the consumers' understanding and awareness of our brand. For overseas wholesale business, we focus on footwear and the DTC retail contribution continues to increase. And we can see that for apparel and accessories contribution has increased to 19% from 6% last year. For K-Swiss shops and stores, they are 80%. Compared to last year, it is 8 more, and Palladium is 60 stores, which is an increase of 4 stores from last year. Page 17, K-Swiss and Palladium, even though the stores in the mainland of China are not that many. However, the performance has been very good. For the first half K-Swiss store area is about 200 square meter without a lot of advertising, the performance is actually over RMB 300,000 already average per store. As for Palladium, with a period of restructuring of the channel, the performance is a lot better. And the average size, even though it is only 140 square meters, but the monthly store sales and performance is over RMB 200,000. K-Swiss will be focusing on the sponsorship of Tennis and also to bring on the awareness of our tennis products. It will be high-end trendy and spotty. This is K-Swiss positioning, and we will be focusing on 29 to 39 successful consumer sector. Palladium is urban outdoors focusing on 19 to 29 years of age in terms of consumers. In the second half, we will be restructuring our shareholding structure. And our K-Swiss and Palladium may be seeking independent listing, and we continue to hold 50% share. Page 18 for Saucony and Merell, the contribution is more or less the same as last year without major changes in the number of stores, Saucony has 11 more stores compared to the end of last year and Merell has on less. And the growth of sales is 120%. So we continue to increase the store performance and e-commerce sales. Saucony square meter per store is 100 and average store performance is RMB 300,000 individual stores is RMB 600,000. Saucony will continue to have more franchise stores, 10 now. And in the second half, there will be another 10 or a dozen or so. We think that for the second half for total new stores, there will be a direct stores of 16, franchise 17 and joined cooperative led stores increase as well. Page 19, Saucony is the first core brand to have turned profitable. As for Merell, we continue to grasp outdoor market recovery. And we will be bringing in more talent into the company. And as Saucony moves to Shanghai, we should be in an even better position to do so. Page 21. China and the world economy is recovering gradually, but there are still a lot of uncertainties. As for the consumers, they are choosing value for money from the mass market. And this is exactly where we excel. For running for this particular sector, its rapid increase and popularity is a source of confidence for us. Even though short term, there may be certain fluctuations. But mid- to long term, we are very optimistic about the sports and apparel and footwear industry, especially in China. And in the Beginning of the year, we have had a guidance of 15% to 20% rise in sales. We are still very confident about this. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]