Xtep’s 1H25 NP was up 21.5% YoY to RMB913.6m, thanks to (i) steady performance of Xtep core brand; (ii) improving profitability of Saucony, and (iii) discontinuation of loss making operations of K-Swiss and Palladium. While we expect the sportswear market in 2H25 would remain highly competitive, Xtep should still achieve some growth thanks to its differentiated strategy, such as affordable carbon-plated running shoes and shoes that help children grow taller. We also expect investors’ confidence on the Company’s execution to grow new brands would improve after this set of earnings, which could also help improve valuation. Maintain BUY.
　　Key Factors for Rating
　　1H25 earnings slight beat thanks to cost control despite widening discounts. On a comparable basis, Xtep’s 1H25 revenue was up 7% YoY to RMB6,838m, while NP was up 21.5% YoY to RMB913.6m. This is mostly supported by the discontinuation of the operations of K-Swiss and Palladium brand, which recorded RMB106m operating losses in 1H24. However, Xtep also demonstrated good cost control in a rather tough 1H25, as GPM declined by 0.1ppt YoY to 45.0% under a more promotional environment but OPM improved 0.4ppt YoY, reflecting strong cost control for Xtep core brand and also encouraging progress of Saucony turning more profitable. n Manageable trade-offs of margins through differentiated products.
　　Another reason for Xtep’s lower GPM is the change of product mix. For Xtep core brand, its juvenile segment X Young has been growing faster than the adult segment and it dedicated more resources on products helping children grow taller. We see this is a niche but likely effective approach to differentiate itself from other domestic peers which are also ramping up juvenile business. In the meantime, Saucony is also launching more lifestyle products and apparel products. These product launches would dilute the group GPM slightly as evidenced in 1H25, but we see this manageable, and also more critical for Saucony to achieve better profits in the longer run with a larger scale.
　　Saucony’s success ensures a smooth transition towards the next stage. We believe investors could turn more positive on Xtep’s overall execution after this set of results, particularly related to two aspects: (i) self-operated retail, and (ii) ramping up new brands. Saucony’s 1H25 improving profitability suggests Xtep’s own self-operated business model is mature enough for allowing more franchising stores to expand the brand’s presence. This too makes Xtep more confident to ramp up its outdoor brand Merrell in 2026. Besides, we see this as a powerful evidence that Xtep core brand would also be ready for a gradual transition to direct-to-consumer (DTC) model, where Xtep will take over 100-200/300-400 stores in FY25/26 respectively.
　　Full-year guidance reiterated, which could be a positive signal. Mgmt. reiterated the following FY25 guidance: (i) group revenue to achieve positive growth; (ii) Saucony revenue to be up 30-40% YoY), and (iii) NP to be up >10% YoY. While there is no surprise to this guidance, we believe this is already a positive signal that Xtep would see the upcoming 4Q25 season, especially Double-11 Event manageable. We see such confidence could stem from positive recent developments, such as improving MoM sales in July 2025, more Chinese marathon runners wearing Xtep shoes in races, and also favourable reception of 160X 7.0 PRO running shoes launched in Aug 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 slightly revise our EPS forecast for FY25-27 by -1% to +3% to mainly reflect: (i) better performance of Saucony, and (ii) lower GPM due to product mix changes.
　　Our TP of HK$7.1 is based on 12.5x 2025 P/E (unchanged) after the earnings revision.
　　Maintain BUY as we see Xtep is defending its moat of running segment well after 1H25 earnings, and