Xtep’s 1H25 results were stronger than expected, mainly due to other income and Saucony. Going into 2H25E, even though the macro backdrop is still quite worrying, Xtep should still be able to achieve its rather prudent FY25E guidance, in our view. Therefore, with its fairly undemanding valuation of 11x FY25E P/E, we maintained BUY and lift TP to HK$ 7.39.
　　Retail sales growth has trended better in 3Q25 QTD. According to
　　management, retail sales growth in Jul 2025 is faster than that in Jun 2025, for both core Xtep brand and Saucony brand.
FY25E guidance maintained. Despite the results beat in 1H25, management has kept the FY25E guidance unchanged (positive group- level sales growth, 30%-40% Saucony sales growth, as well as 10%+ group-level net profit growth).
　　Even with a more challenging macro backdrop (bad weather, weak demand and deepening discounts), we are still confident on Xtep to
　　achieve its FY25E guidance, because of: 1) a series of new product launches, such as the newer versions of 160X (the 7.0, 7.0 PRO and 7.0 Monster) and a new collection named QING YUN, echoing the busy marathon seasons in 2H25E; 2) recent ramp-up of kids wear. Xtep has partnered with many major institutions (like the National Health Commission, Peking University Third Hospital, Tsinghua University and others) in order to provide a more all-round solution for the kids to grow better, faster and stronger. It also rebranded its kids wear line into “Xtep Youth”, hence the growth should be boosted in the near future.
　　We believe both the short-term and long-term growth outlook for Saucony is highly intact, despite some prudence in margin expansion.We are even more confident for Saucony to achieve its FY25E target (even though the margin assumption is quite conservative). Saucony’s retail sales growth did slow down slightly to just 20%+ in 2Q25 (partly due to the shift in e-commerce business strategy, where some lower-priced product offerings were removed and less discounts were given), but we still believe it can re- accelerate in 2H25E, thanks to: 1) the launch of new flagship product Triumph 23, 2) sustainable product category expansion (more items for OG series and apparel will be introduced), 3) likely store expansion acceleration (CMBI est. 40, up from 30 in FY25E). Management has reiterated once again their ambitions to double Saucony’s sales in 3 years’ time. Saucony’s OP margin expansion in 1H25 was impressive, but we are slightly more prudent for 2H25E (CMBI est. 7% for FY25E), as it is expected to do more marketing around all the product launches, crossovers and openings of new stores (some of those are flagship stores).　　
Maintain BUY and lift TP slightly to HK$ 7.39, based on 14x FY25E P/E(unchanged). We have fine-tuned our FY25E/ 26E/ 27E net profit forecasts by +3%/ 0%/ -3%, in order to factor in the earnings beat in 1H25, the weaker-than- expected GP margin, but the better-than-expected OP margin for Saucony. The stock is trading at 11x FY25E P/E, still highly attractive vs its 8-year average of 15x or its 13% 3-year net profit CAGR. n DTC transformation is still on track. The Company will repurchase 100 to 200 stores in 4Q25E (unchanged) and 300 to 400 stores (previously mentioned 200 to 400) in FY26E. The capex needed for this repurchase is about RMB 400mn and will all be funded by internal cash flow, according to the Company. According to our estimates, this act may drag sales/ net profit by 2-3%/ 4-5% in FY25E/ 26E, however, this negative shall be largely priced in.
　　1H25 results were better than expected. Xtep’s sales increased by 7% YoY to
　　RMB 6.8bn, inline with CMBI est., and the net profit surged by 21% YoY to RMB 913mn, 28% higher than CMBI est. We believe this stronger-than-expected results were due to: 1) absence of K-Swiss and Palladium’s losses, 2) more-than-expected other income, and 3) greater-than-expected operating leverage for Saucony (OP margin jumped to 10% in 1H25 vs 4% in 1H24). Working capital was fairly strong and healthy as well, inventory level increased only by 3% YoY and receivables grew by only 10% YoY in 1H25.