The retail sell-through of Xtep core brand recorded a LSD YoY growth during 3Q25, which was mostly in-line with expectations. However, the quarterly performance reflected some headwinds, such as weaker performance in September, and sales of Saucony’s e-commerce still declined YoY as adjustments were still in place. While mgmt. expected sales could pick up in 4Q25 when the weather turns more favourable, we believe investors would remain cautious in the near term given a rather weak retail environment. Nonetheless, mgmt. reiterated its guidance, including the target of achieving >10% YoY NP growth, which may allow some room for investors to accumulate in our view.
　　Maintain BUY as we expect the current valuation to remain reasonable.
　　Key Factors for Rating
　　3Q25 mostly within expectations. For the Xtep core brand, retail sell- through grew by LSD YoY while operating metrics such as channel inventory level (at 4-4.5 months) and retail discount level (25-30% off) remained largely stable and healthy. In the meantime, Saucony also achieved a >20% YoY retail sell-through growth. These performance basically extended the trend of 2Q25, where running-related products supported the volume growth. However, mgmt. commented that the performance during July-Aug was better, and Sept performance was affected by the warmer-than-expected weather, which weighed on its sales of apparel.
　　Channel adjustment ongoing as Saucony e-commerce took longer to adjust. While sales of Saucony as a whole was still decent in 3Q25, this was mostly driven by a strong offline performance (+>30% YoY) as 16 stores were opened, a rather rapid expansion when there were only 155 stores in June 2025.
　　This also implied weaker online sales of Saucony that declined YoY, and mgmt. attributed this to the longer-than-expected adjustment of e-commerce positioning. Mgmt. expected after the adjustments, both Xtep and Saucony brand would be ready to face the upcoming Double-11 sales campaign. In the meantime, Xtep core brand is also ramping up its presence in outlets, which could be a counter measure to its competitors opening up more value-oriented retail formats. While we expect there could be some ASP measure, we believe this would still support volume growth and defend Xtep’s market share.
　　Guidance of >10% NP growth reiterated. Despite the recent headwinds faced by the Company, mgmt. reiterated the full-year guidance in the conference call where: (1) Xtep core brand would achieve sales growth; (2) Saucony would achieve >30% sales growth, and (3) NP to have >10% YoY growth. We expect this could provide some comfort to investors, especially given that Xtep still focuses on fast-growing categories such as running while there will be no big investment to be incurred is considered.
　　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
　　Our TP of HK$7.1 is based on 12.5x 2025 P/E, which is also equivalent to 11.5x 2026 P/E.