Topsports International
　　Dividend surprises but is buying space with time
　　Topsports’ FY25 results were slightly below our expectations as net profit was down 42% YoY to RMB1,286m, reflecting struggles from physical stores and Nike’s weakness. However, it announced final and special dividends at a total of RMB0.14 per share, making the full year payout ratio to be 135%, a rather strong positive surprise. We believe this signals the Company’s commitment to returning cash within reasonable limits, and if its business stabilises, then it could indeed offer attractive dividend yield to investors. However, given that offline retail is still under stress, we see ex-dividend share price could be volatile. We reiterate HOLD rating, as we see this higher dividend return now reasonably priced-in after the recent rebound, and long-term sustainability would depend on its execution of brand diversification.
　　Key Factors for Rating
　　FY25 NP down 42% YoY, reaching the lower end of guidance. Although revenue declined 6.6% YoY to RMB26,816m, Topsports’ NP was down 42% YoY to RMB1,286m, below our expectations and reaching its lower end of the guidance (FY25 NP to down 35-45% YoY). The results have shown that it suffered from: (i) decline in offline traffics; (ii) drag from Nike as Nike’s product pipelines had been weak and it proactively reduced new product delivery; (iii) weaker GPM due to higher like-for-like retail discounts and channel shift towards online, and (iv) strong negative operating leverage due to the fixed rent portion.
　　Strong operating cash flow to support 135% dividend payout ratio. Despite the weak results, Topsports generated RMB3,755m operating cash flow in FY25, a 20% YoY increase despite the profit decline. We view this favourably, reflecting Topsports’ strong grip on working capital, especially accounts receivable. Hence, Topsports’ cash on hand grew 32% YoY to RMB2,587m, and its board proposed to distribute final and special dividends at a total of RMB0.14 per share. Combining with RMB0.14 interim DPS, this makes the payout ratio to be 135%, a rather strong surprise, as this indicates a div. yield of 9.4% based on the closing price of HK$3.2 on 21 May 2025.
　　Still cautious on FY26 as challenges remain. In FY26, Topsports targeted to achieve flattish NP while NPM improving. This suggests the rather weak trend of sales in 4QFY25 may continue, while we also expect its gross profit would continue to be under pressure due to higher sales from e-commerce. While we are convinced that Topsports could continue to lower overheads, this is also achieved by likely more store closures, and we see downside risks on impairments. Topsports is also taking more initiatives to introduce more brands, such as Norrona, but we believe it takes more time to contribute, and unlikely offset the weakness from Nike in the near term.
　　Key Risks for Rating
　　Downside risks: rising competition from other distributors; cannibalisation from brands’ DTC efforts in China; deteriorated store productivity; significant share placement by major shareholders, and lower margins due to channel shift.
　　Upside risks: strong performance of non-Nike brands, strong sales recovery of Nike products, less intense competition from peers and better-than-expected cost control.
　　Valuation
　　We lower our EPS of FY26 and FY27 by 13%/15% after FY25 results were slightly below our expectations, and we are more cautious on FY26-27 after its latest guidance. We now expect Topsports will still suffer from the weakness of offline traffic, and also from Nike as it reduces the SKUs available to Chinese retailers before its product reform completed.
　　We reiterate HOLD rating. While the dividend yield of >9% is indeed attractive and rare among China consumer sector, we see this higher dividend return now reasonably priced-in after the recent rebound. We expect share price could also be under pressure after ex-dividend dates if its fundamentals remained challenged in the near term. After all, we see the potential to re-rate and resume decent earnings growth in the long term would depend on its execution of brand diversification.
　　Our TP is raised to HK$3.2, based on 14x FY2026E P/E (previous: 10x) and a HKDCNY rate of 0.93. We assign a higher target multiple for Topsports due to: (i) the Company’s strong capability and willingness to offer decent dividends despite downturn, and (ii) a likely sequential improvement in FY26, particularly in 2HFY26.