Why We Remain Optimistic about TopSports, Three Performance Highlights Boost Market Confidence

TopSports's 1QFY23 revenue was at the high end of a 20-30% YoY decline, better than Pou Sheng's 34% decline. Among them, direct retail revenue fell by about 25% (compared to 23% in 2HFY22), which is expected to be in line with the revenue performance of Nike's wholesale business. The company's online revenue increased by 20-30% year-on-year, much better than Nike Digital's performance. Passenger flow in 1QFY23 fell by 30-40% YoY but began to improve significantly in the second half of May, and the decline in passenger flow narrowed to single digits in June, and some brands' revenue has turned positive.

TopSports's retail discounts deepened YoY in 1QFY23, but the depth was similar to 2HFY22. The good news is that despite the company's high inventory levels at the end of May, the company maintained a more disciplined retail discount in June.

According to management, retail discounts for both new and used products improved year on year in June, but overall retail discounts were flat year-on-year due to the relative shortage of new products. Therefore, SPDB International has greater confidence in the company's gross profit margin for the full year of FY23.

The major cooperative brands started to support the company in June, including 1) subsidies for discounts, 2) returns and futures adjustments, 3) inventory recovery, and 4) better billing periods.

SPDB International believes that the brand’s subsidy for discounts can partially offset the impact of deepening retail discounts on gross profit margins, while returns, futures adjustments, inventory recovery, and account period support will help ease the pressure on TopSports’s working capital. Guarantee its healthy operating cash flow.

SPDB International raised the target price of TopSports to HK$8.5 (based on 15x CY23 P/E), and maintained the “buy” rating of TopSports and the industry's first recommendation. Why should we remain optimistic about TopSports now? SPDB International gives the following four reasons:

(1) If the performance of international brands can continue to improve after June, combined with the help of the low base of the year, it is expected to drive the revenue of Topsports in the remaining three-quarters of FY23 to achieve relatively considerable growth.

(2) The company's self-disciplined retail discounts and brand partners' support for discounts will make the market more optimistic about the gross profit margin of Topsports.

(3) Potential rent relief and the company's flexible fee adjustment ability will also offset some of the impacts of negative leverage.