Guotai Haitong has issued a research report stating that it estimates Topsports (06110) will record attributable net profits of RMB 950 million, RMB 780 million, and RMB 800 million for FY2027/28/29, respectively. Taking into account that the impact of Nike terminating its online distribution rights will be fully reflected in FY2028, the report assigns an FY2028 PE of 8X, which, based on a conversion rate of HK$1 = RMB 0.86, corresponds to a target price of HK$1.16 per share, maintaining an "Outperform" rating.
The main views of Guotai Haitong are as follows: Revenue came under pressure in the first half of the fiscal year, with consistent trends in Q1 and Q2. In FY27H1 (March 2026 to August 2026), the company recorded revenue of RMB 10.91 billion, down 11.3% year-on-year. By channel, direct-operated stores (-8.8%) outperformed franchised stores (-27.5%). By brand, other brands (-8.5%) outperformed core brands (-11.6%). In Q2, the company's retail sales fell in the low range of 10-20% year-on-year, consistent with Q1 performance. At period-end, the number of offline direct-operated stores stood at 3,872, down 17.4% year-on-year, with total selling space down 12.9% year-on-year and average store size up 5.5% year-on-year. A net of 488 stores were closed in the first half of the fiscal year, a larger magnitude of closures compared with approximately 300 stores in each of FY26H1 and FY26H2.
Deeper discounts weighed on gross margin, while expense control remained strict. FY27H1 gross margin was 40.1%, down 0.9 percentage points year-on-year, mainly due to deeper discounts. The company strictly controlled expenses, with selling and administrative expense ratios both flat year-on-year during the period. Breaking down selling expenses, the employee expense ratio remained stable year-on-year, while the rental expense ratio declined 0.9 percentage points year-on-year, offset by a 0.9 percentage point year-on-year increase in other expense ratios. Government subsidies during the period amounted to RMB 80 million, up 105.4% year-on-year. Ultimately, attributable net profit was RMB 660 million, down 16.0% year-on-year, with attributable net margin at 6.1%, down 0.3 percentage points year-on-year.
Cash flow remained abundant, with a high dividend payout ratio maintained. Operating cash flow during the period was RMB 1.84 billion, up 36.1% year-on-year, 2.8 times the net profit for the same period, reflecting abundant cash flow. Inventory at period-end was RMB 4.92 billion, down 16% year-on-year. An interim dividend of RMB 0.11 per share was declared, representing a payout ratio of 103% and an interim dividend yield of 13%.
Steady operations to address changes, with deep cultivation of professional brands in niche segments. Starting January 1, 2027, Topsports will completely terminate the sale of Nike products on online platforms. The report expects the company is currently maintaining communication with Nike, cooperating to complete online inventory clearance, and will continue to maintain close cooperation on offline sales in the future. The company is increasing its layout in niche segments such as running and outdoor. During the period, it steadily advanced full-chain operations for exclusive partner brands including Ciele, norda, Norrøna, and Soar. Its running collective store ektos opened a new store in Aranya, Qinhuangdao during the period. It newly signed an exclusive operating rights agreement for the Chinese market for the U.S. outdoor brand Sierra Designs, with its first store expected to open in November at West Bund Dream Center in Shanghai.
Risk warning: Deterioration in the retail environment, intensifying industry competition, and short-term negative impacts from partner brands reclaiming distribution rights.
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