Topsports (6110 HK) reported a profit warning for the first half of 2025, expecting a 35% year-over-year (YoY) drop in net profits, primarily due to a significant decline in offline traffic leading to a meaningful same-store sales (SSS) drop and operational leverage, along with a decline in gross profit (GP) margin caused by increased retail discounts and higher sales contributions from the lower-margin e-commerce business.
The company's outlook remains cautious, with no signs of improvement expected in the coming quarters, considering the depressed macroeconomic environment and challenges faced by key brands such as Nike. The report forecasts a similar drop in retail sales and GP margin contraction in the second half of 2025, estimating a potential 30%+ net profit decline compared to the first half.
To mitigate operational challenges, Topsports plans to close more stores in fiscal year 2025, which might impact sales and net profit growth in future years. However, the management intends to maintain the dividend payout ratio around 100% rather than maintaining the absolute amount of dividend, suggesting a low probability of a share buyback.
Despite these concerns, the stock maintains a 'BUY' rating due to its attractive dividend yield of over 11% post-share price correction. The target price has been adjusted to HK$2.89 from HK$6.78, reflecting slower growth and industry de-rating.
Topsports faces a challenging environment with potential implications for foreign and domestic sportswear brands. For Nike, it suggests a weakening trend in China, affecting wholesale business growth, while domestic brands like Anta and Li Ning might experience more promotional activities, including higher retail discounts and price wars across all channels.
Analyst CMB International Global Markets forecasts a revenue drop for fiscal year 2025, with revenue estimated at HK$26,936 million, a decrease of 6.9% compared to the previous year. Gross profit margin is projected to fall by 2.2 percentage points, and net profit margin is expected to decline by 2.7 percentage points.
The earnings summary shows a significant downward revision in revenue, gross profit, EBIT, net profit, and diluted EPS for fiscal years 2025, 2026, and 2027, indicating a decline of approximately 13.3% to 17.0% in revenue and 28.3% to 42.0% in net profit.
CMB International Global Markets' estimates differ from consensus forecasts, with differences ranging from -6.1% to -16.9% for revenue, -10.5% to -10.9% for gross profit, -29.6% to -35.9% for EBIT, and -28.3% to -42.0% for net profit.
The results preview highlights a decline in revenue and profit margins in the first half of 2025 compared to the previous year, with COGS increasing, gross profit decreasing, and operating profit margins declining. The full-year results show a further decrease in revenue, with COGS and gross profit margins experiencing a significant drop.
In conclusion, Topsports faces a grim outlook for 2025, with operational challenges and a cautious market outlook. However, the company's attractive dividend yield and potential for recovery make it an attractive investment, warranting a 'BUY' rating.
