In 1Q25, core Xtep brand reported a mid-single digit YoY growth in retail sell-through, which is in line with market expectations. The premium brand Saucony remained strong as it achieved >40% YoY growth, reflecting good progress of its brand development in high-tier cities. While we expect the ongoing trade tension between China and the US could weigh on sportswear sales as consumers could become more cautious, we view the actual impact on Xtep’s business model is limited, as the operation of Saucony brand in China is essentially separated from the US entity. Reiterate BUY as we see Xtep as a relatively safe play in sportswear sector with undemanding valuation.
　　Key Factors for Rating
　　1Q25 in line while Saucony remained strong. For retail sell-through during 1Q25, core Xtep brand/Saucony recorded MSD/>40% YoY growth respectively, in line with expectations. The operating metrics of core Xtep brand such as retail discount level (25-30% off) and channel inventory turnover (c.4 months) remained stable QoQ and YoY, reflecting good execution of its product strategy under which running shoes achieved >10% sales growth, implying continuous market share gain in the segment.
　　Limited impact of tariff wars on Saucony operations. Despite Saucony being an US brand, mgmt. confirmed the operations of the brand in China are essentially separated from the US brand owner Wolverine Worldwide (WWW US, NR). The supply chain is mainly in China and Southeast Asia, while there is no sales exposure to the US at this moment. We believe the impact of US tariff tensions would be more likely to be indirect on sales in 2H25 as consumer sentiment will be affected amid higher macro uncertainties.
　　Preparing for DTC transformation but near-term impact limited. Xtep reiterated that it plans to convert 400-500 franchised stores to directly operated stores on track, and around 100 stores will be converted in 2H25. We believe this move will have limited impact on financials, given the store involved will be less than 2% of total store count in 2025.
　　Key Risks for Rating
　　Downside risks: (1) unsuccessful multi-brand strategy; (2) deteriorated retail sell-through for core brand, especially under DTC; (3) unexpected spike in advertising spending; and (4) higher costs related to new brand expansions.
　　Valuation
　　We cut our FY25-27E EPS forecasts by 6-12% to factor in the impact of trade tensions on sportswear consumption.
　　Our TP is lowered to HK$7.1, based on 12.5x 2025 P/E (unchanged).