Why is the valuation of XTEP INT'L (01368) still not rising despite the main brand maintaining growth, the second growth brand continuing to grow rapidly, and profit levels constantly climbing?
According to Zhitong Finance APP, XTEP INT'L's Q1 2025 shows that in mainland China, the main brand's retail sales (including online and offline channels) achieved a mid-single-digit year-on-year growth, while the second growth brand Saucony's retail sales achieved over 40% year-on-year growth. The main brand and Saucony jointly drive stable performance growth, with a compound annual growth rate of revenue and net profit attributable to shareholders over the past five years of 13.53% and 24.64%, respectively.
In addition, the company maintains a long-standing dividend policy, with the dividend amount for 2024 hitting a record high, proposing a final dividend of HKD 0.095 per share, bringing the total annual dividend to HKD 0.156, with a payout ratio of 50%. Additionally, a special dividend of HKD 0.447 per share will be distributed within the year, resulting in a year-on-year increase of 221.7% in total annual dividends, with the payout ratio more than doubling to 138.2%.
However, investors seem unconvinced, as the company's stock price showed no significant fluctuations after the earnings release, and the long-term trend remains downward. The company's market value has declined for three consecutive quarters, shrinking nearly 70% from its peak since 2022. So, why is XTEP INT'L not favored, and is there an investment opportunity?
<h2>Steady Performance, Nearly Doubling ROE in the Past Five Years</h2>
Zhitong Finance APP learned that over the past five years (2020-2024), XTEP INT'L's performance indicators have maintained double-digit synchronized growth, with profitability continuously improving. The gross profit margin increased from 38.9% to 43.2%, and the net profit margin rose from 7.2% to 9.1%, an increase of 4.3 percentage points and 1.9 percentage points, respectively. Additionally, the average return on equity during this period increased from 7.3% to 14.1%, nearly doubling.
The company's overall expense ratio has not changed much. Although brand sponsorship and promotion expenses have been rising each year, this has been offset by optimization in employee costs. In 2024, the combined advertising and promotion expense ratio, employee expense ratio, and R&amp;D expense ratio was 26.3%, an increase of about 0.7 percentage points compared to 2020. Operational efficiency also remains stable, with inventory turnover days optimized, accounts receivable turnover days showing significant fluctuations but offset by accounts payable cycles, resulting in an overall operational capital turnover period of 87 days in 2024, an increase of just 4 days year-on-year, unchanged compared to 2020.
 <img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250421/1745206968200907.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="图片 1.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250421/1745206968200907.png"/>
Image source: Company financial report
With robust operations and continuously improving profitability, XTEP INT'L has strong cash flow, with an average net cash flow from operating activities exceeding 1.2 billion yuan over the past two years, meeting operational and investment needs without requiring additional financing. As of December 2024, cash equivalents amounted to 2.98 billion yuan, a year-on-year decrease, mainly due to the purchase of 1.033 billion yuan of KP convertible bonds during the period, with an annual interest rate of 3.5%, equivalent to earning 36 million yuan in interest over one year. The company has 1.161 billion yuan in short-term interest-bearing debt and 867 million yuan in long-term interest-bearing debt, and its cash capacity can cover these obligations
Although the company's performance is stable, it is still not impressive compared to its peers. On one hand, its profitability is lower than that of its competitors, and on the other hand, there may be hidden risks. For example, the proportion of accounts receivable to revenue has always been very high for this company, reaching 33.9% in 2024, while it is low among peers, such as Anta at 6.3% and Li Ning at 3.5%. In terms of operating cash flow and cash holding capacity, it is also far below its peers. For instance, Li Ning has cash of 7.5 billion yuan, plus time deposits of 15.76 billion yuan, accounting for 44.1% of total assets, while this company has less than 20%.
XTEP INT'L lacks highlights in horizontal comparison, but it is indeed continuously optimizing vertically, creating a dual-brand growth curve, with profitability gradually catching up to industry levels, and shareholder returns (ROE) continuously improving.
<h2>High Dividend Ratio, Waiting for the Right Timing</h2>
Specifically, XTEP INT'L has a mass-market brand (main brand XTEP) and a high-end professional sports brand (Saucony and Merrell), with the main sales models being offline retail stores and e-commerce.
As of 2024, the company has a total of 6,382 stores in mainland China and overseas, a year-on-year decrease of 189 stores. In recent years, it has been optimizing store operations, improving operational efficiency, and achieving steady growth in same-store revenue, while e-commerce channels maintain double-digit growth, especially on emerging platforms like Douyin, WeChat Video, and Xiaohongshu, with overall share continuously increasing, exceeding 30% of XTEP's main brand revenue in 2024.
Currently, the company's core revenue still comes from the mass-market brand (main brand), contributing over 90% of revenue. However, thanks to Saucony's strong performance, the revenue share of the professional sports brand continues to rise. From 2020 to 2024, the compound annual growth rate (CAGR) of revenue for the mass-market brand is 14.72%, while the CAGR for the professional sports brand is 104.3%, with its revenue share increasing from 1% to 9.2%, of which Saucony's revenue contribution has risen to over 7%.
It is worth mentioning that the gross profit margin of the professional sports brand is very high, with a significant increase in 2024, reaching 57.2%, up 17.2 percentage points year-on-year, and gross profit contribution rising to 12.2%. In comparison, the main brand's gross profit margin remains stable at around 42%, and the company's overall gross profit margin continues to show an upward trend. This is mainly due to the company's strategic transformation focused on driving growth and optimizing operations, with all three brands, including the main brand XTEP, Saucony, and Merrell, remaining profitable, each possessing unique attributes and consolidating their leadership position in the running market.
Among them, Saucony is leading in both growth and profitability. Since 2020, Saucony has primarily expanded its retail network in China through the DTC model, achieving breakeven in 2023 and maintaining a high growth trend, with sales growth exceeding 60% in 2024, and continuing to exceed 40% in the first quarter of 2025, expected to maintain a high gross profit level. Saucony has become the company's second growth curve and has quickly emerged as a new favorite in the industry.
With steady performance growth and continuously improving profitability levels, XTEP INT'L actively returns to shareholders, maintaining a high dividend payout ratio of no less than 50% over the past five years, and in 2024, it also conducted its first special dividend. According to Dongfang Choice data, from 2005 to the present, the company has distributed dividends 42 times, totaling 9.416 billion yuan, with a cumulative dividend payout ratio of 69.02%
The company stated that it will focus on returning profits to shareholders while balancing reinvestment for future growth.
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250421/1745207042195395.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="图片 2.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250421/1745207042195395.png"/>
Image source: Company financial report
Investment banks generally have a positive outlook on the company's development, with target prices mostly above the current price. Among them, Citic Securities' report stated that XTEP's guidance indicates positive growth in group sales, with a sales growth forecast of 30-40% in the professional sports sector, and the target price has been raised from HKD 5.7 to HKD 5.9; Deutsche Bank's report expressed a cautious view on XTEP's main brand but is more optimistic about Saucony, raising the target price from HKD 6.4 to HKD 7, with a rating of &#34;Buy.&#34;
Overall, the reasons for the lack of optimism about XTEP International mainly include three points: first, although growth and profitability have maintained steady improvement, they are below industry levels, especially suppressed by industry leaders; second, the footwear and apparel sector lacks capital attention, with only the leaders showing independent trends while other targets maintain a downward trend; third, its current valuation is at the industry average level, and without special dividends, the dividend yield is not attractive to value investors.
However, XTEP International still has opportunities. With the dual-brand drive of &#34;XTEP + Saucony,&#34; steady profit growth, a commitment to high dividend payouts, and the positive outlook from major investment banks, the company's valuation has limited downside potential, and it needs to wait for the right-side layout opportunity to arrive in the long term

01368

XTEP INT'L showed growth in both its main brand and second growth brand in Q1 2025, with profit levels continuing to improve. The compound annual growth rates for revenue and net profit over five years were 13.53% and 24.64%, respectively. Despite the company maintaining a high dividend policy, with dividends reaching a record high in 2024, the stock price has not shown significant fluctuations, and the market value has declined for three consecutive quarters, with investors holding a cautious attitude towards its future performance

Steady performance growth, why is XTEP INT'L's valuation still declining?