Sales drop of the principal brands narrowed in 2H25 (ending Feb 2025) vs 1H25. However, because of the weaker-than-expected GP margin and other brands’ sales, FY25 net profit was a miss; and FY26E guidance is conservative in our view. However, thanks to an impressive payout ratio of 135% and strong cash flow, we tend to believe that the dividend yield in FY26E could also be decent (CMBI est. 9%). Hence we maintain our BUY rating.
　　FY25 net profit missed but dividend was a beat. Topsports sales dropped by 7% YoY to RMB 27.0bn, inline with BBG/ CMBI est.. Net profit declined by 42% YoY to RMB 1.3bn, missing BBG/ CMBI est. by 7%/ 16% (but inline with Company’s previous guidance). The miss was mainly due to far weaker-than-expected GP margin and higher finance costs (even though S&D expenses and tax rate were better than expected). However, the dividend was a positive surprise, as the payout ratio was raised to 135%, way higher than CMBI est. of about 100%; hence the absolute amount of dividends was about 30% higher than BBG est. and inline with CMBI est.. We believe this is healthy because both cash/ cash flow increased by 32%/ 20% YoY. Inventory days were at 135 days, remaining healthy and steady vs 136 days in FY24.
　　Trend in 1Q26E is similar to that in 4Q25, and we believe it is still inline with the Company’s FY26E target. Management has highlighted that the retail sales trend in 1Q26E is similar to that in 4Q25 (MSD drop). Based on our channel check, we believe the numbers during the 5-1 golden week holidays were still on track with the Company’s FY26E target. In terms of channel, e-commerce sales growth continued to outperform the offline sales growth. Even though the inventory level remains healthy, retail discounts are still under certain pressure, given the rather promotional industry environment.
　　Prudent FY26E guidance. The Company is now targeting a flattish net profit in FY26E (vs FY25), as well as an improvement in NP margin (implying a group-level sales decline), as it will prioritize profit over sales and put more efforts on efficiency gains. Management also expects GP margin to remain under pressure, due to: 1) rather slow new product launches, 2) an unfavourable channel mix (more online, less offline will drive down GP margin), 3) a rather promotional industry environment, and most importantly, 4) stable support from the principal brands (level of rebates or other benefits may not be as high as other regional distributors). However, we are still forecasting a small increase in GP margin factoring in our positive view on Adidas’s momentum in mainland China.
　　Our view on the guidance (a high payout ratio (100%+) is still possible and so is the FY26E yield (~9%)). There are certainly sales pressure in FY26E, due to: 1) massive store closures in 4Q25, and 2) sluggish turnaround of Nike (more time may be needed). However, Topsports could still be turning around as its net profit may bottom out in FY26E (even though this could be slower than expected). And margin improvement is still likely, as we believe: 1) channel could turn out to be positive (e-commerce sales OP margin is now higher vs offline sales), 2) SSS decline may stabilize (online sales growth to more than offset the drop in offline traffic, at the store level). Most importantly, thanks to Topsports’ shifted focus to generate more cash flow and its relatively rich net cash position, we believe it is not so difficult for the Company to maintain several years of 100%+ payout ratio; hence we are forecasting a 120% payout ratio in FY26E and current yield could be as high as 9%.
　　Maintain BUY but trim TP to HK$ 3.62, based on 16x FY26E P/E (up from 14x), slightly above the 5-year average of 14x. We have revised down FY26E/ 27E net profit by 27%/ 24%, in order to factor in: 1) lower-than-expected GP margin, 2) slower-than- expected turnaround of the principal brand. However, because of Adidas’s strong momentum, plus the higher-than-expected payout ratio, which we believe is somewhat sustainable (thanks to fairly strong cash flow) in FY26E, with the current yield still high at 9%, therefore we maintain our BUY rating. The stock is now trading at 14x FY26E P/E, at par with its 5-year average.