Frequent pandemic outbreaks and global supply chain disruption, sales dropped by 12%

For the financial year ended 28 February 2022, Topsports recorded revenue of RMB31,876.5mn (2021: RMB36,009.0mn), a decrease of 11.5% YoY, below our estimates of RMB4,104mn. operating profit of RMB3,430.1mn, a decrease of 14.0% YoY. The profit attributable to the shareholders during the year amounted to RMB2,446.5mn, a decrease of 11.7%, also below consensus. Final dividend for the FY2022 of RMB7.00 cents per ordinary share and a special dividend of RMB23.00 cents per ordinary share, full year dividend of $0.43, equivalent to a payout ratio of 109% (2021: 143%).

The decline of revenue was mainly due to the impact of frequent pandemic outbreaks and global supply chain disruption, since late July and the second half of the financial year respectively. When broken down by brand categories, revenue from the Principal brands (including Nike and Adidas) was RMB27,569.3mn, down 12.3% YoY, and represents 86.5% of total revenue. Other brands (including Puma, Converse, VF Corporation's brands: i.e. VANS, The North Face and Timberland, ASICS, Onitsuka Tiger, Skechers and LI-NING) generated revenue of RMB4,005.2mn, down 6.1% YoY, and accounted for 12.6% of total revenue. Revenue from e-Sports income was RMB66.0mn, down 19.0% YoY and accounted for 0.2% of total revenue. When broken down by sales channel, retail operations decreased by 14.2% to RMB26,354.3mn, while Wholesales operations increased by 5.4% to RMB5,202.2mn and Concessionaire fee income decreased by 1.7% to RMB236.0mn.

Gross profit margin hit a record high

The gross profit margin was 43.4%, increased by 2.6ppt. Increase in gross profit margin primarily resulted in disciplined markdown control of retail operations, improved wholesales discount YoY, as well as more integrated cooperation with the brand partners. Selling and distribution expenses accounting for 29.6% of the total revenue (2021: 26.8%). Increase in a percentage of revenue was mainly due to the adverse impact of the pandemic and global supply chain disruption on sales which increased operating leverage, decrease in the rent concessions. General and administrative expenses accounting for 4.1% of the total revenue (2021: 3.5%). The increase primarily due to decrease in the government policy of provisional reduction and exemption of social insurance premium as the impact of the pandemic during the year.

Continued Optimization of Directly-Operated Retail Network remains the core focus. Consistently rolled out large format stores in joint efforts with our strategic brand partners in major commercial areas with high potentials, revamped and upgraded high potential stores and closed the low-productivity and loss-making stores to mitigate the long-tail impact imposed by low efficient ones within our store network. As of 28 February 2022, Topsports operated a network of 7695 directly-operated stores. As compared with 28 February 2021, a net decrease of 311 stores was registered with gross selling area increasing by 5.4% YoY. Large format stores over 300sq.m accounted for 12.9%, representing an increase by 3.5ppt. For those stores equipped with WeChat mini programs, private domain contributed to mid-teens of the total direct retail sales (before VAT) of these stores.

To compensate the impact from fluctuating offline traffic as a result of recurrent pandemic outbreaks were offset by member acquisition from online and offline. As a comprehensive membership management and service platform that integrates content marketing, online shopping, membership services and other functions, the TOPSPORTS app garnered over 4.1 million cumulative users, cumulative number of enrolled members reached 55.5 million. During the latest quarter as of 28 February 2022, the total in-store retail sales (inclusive of VAT) contributed by members was maintained at a high level of 96.4%.

Company valuation

With reference to Nike, one of Topsports 's major customers, reported 4Q results for the period ending May 2022, with the Greater China region experiencing a nearly 20% decline in sales (excluding the impact of exchange rates) due to the impact of the outbreak prevention and control policy, recording only US1.56bn, below market expectations. Meanwhile, Nike management said that company would take a cautious approach to the Greater China region due to the uncertainty brought by the pandemic. Topsports provide the operational update on the business for 1Q2023 (three months from 1 March 2022 to 31 May 2022), the total sales of retail and wholesale operations registered a high-twenties decline on a year-on-year basis. As at 31 May 2022, the gross selling area of directly-operated stores declined by 2.0% since the end of previous quarter, and increased by 2.8% on a YoY basis. In other words, Topsports in 1Q2023 is expected to have more negatively impacted. In addition, since March 2022, Shanghai and other first-tier cities have been temporarily closed due to pandemic. Although the prevention and control has been gradually relaxed, it is expected to affect consumer confidence and slow down the pace of recovery. In view of the above impact, we cut FY2023E-FY2024E EPS to RMB0.41 and RMB0.46 respectively, with new TP is HKD7.54, implies a FY2023E P/E of 15.9x and FY2023E yield of ~6%. Our investment rating is “Accumulate”.

Risk factors

1) The pandemic has worsened more than expected; 2) Intensified competition in the industry; and 3) the slowdown in international brand sales is worse than expected.

Financial

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