Topsports (6110.HK) has shown resilience in the face of macroeconomic uncertainties and industry challenges, with its sales growth accelerating and profitability expected to improve due to increased operational efficiency. Despite weak industry conditions and a downturn in consumer sentiment, the company's performance in the third quarter (ending November 2023) was in line with expectations, with retail sales growth slightly below CMBI estimates at 15%. However, this was considered strong given the broader economic context, with notable improvements across various metrics such as robust recovery from previous quarters, balanced growth across brands, outperformance compared to peers, resilient e-commerce sales, and high store productivity.
For the fourth quarter ending December 2023, despite concerns over declining purchasing power, subdued consumer sentiment, and increased inventory clearance, Topsports is seen to have a healthy inventory position and strong brand assets that allow it to optimize timing and drive sales growth through promotions. The company is forecasted to maintain a growth trajectory, with estimated retail sales growth of 8% for the fourth quarter of 2024 and a 9% and 12% growth for the second half and full year 2025, respectively, based on CMBI estimates.
The stock price is valued at $9.23 per share, which is based on a trailing P/E ratio of 18 times for the fiscal years 2022 to 2025. This valuation reflects a forward-looking multiple, considering the company's average P/E ratio over the four-year period of 13 times and a three-year NP (Net Profit) compound annual growth rate (CAGR) of 21%.
Topsports' earnings summary highlights revenue growth across all periods, with an increase from RMB 31,877 million in FY2022 to RMB 36,249 million in FY2025. Gross profit margins have also shown slight improvement, rising from 42.1% in FY2022 to 42.8% in FY2025. The company's return on equity (ROE) has been consistently high, ranging from 24.1% in FY2022 to 27.5% in FY2025.
The company's inventory levels are reported to be healthy and improving, with inventory volume declining by double digits in the third quarter compared to the previous quarter and being below a 4-month sales-to-inventory ratio, which is considered healthy and better than industry peers like Anta Sports and Xtep.
In terms of financial performance, Topsports has demonstrated resilience, with potential for improved profitability due to operational efficiencies. Its inventory management appears robust, with a focus on optimizing timing and enhancing sales growth through promotional activities. This outlook supports the positive assessment of the company's future prospects, with a "Buy" rating maintained and a target price of $9.23 per share, based on a trailing P/E ratio of 18 times and considering the company's average P/E ratio over the four-year period of 13 times and a three-year NP CAGR of 21%.
