1H26 (ending Aug 2025) results were slightly better than expected, thanks to resilient GP margin. Even though we are cautious about sales growth ahead in 2H26E, margin expansion is still likely given the strong support from principal brands and closure of many under-performing stores. Thanks to various positive signs out of Nike, we start to have more confidence on its turnaround (even it may take quite some time). Due to the 8% FY27E yield, we maintain BUY.
Retail sales trend QTD in 3Q26E (ending Nov 2025) was similar to last quarter. Retail sales dropped by HSD YoY in 2Q26 (Jun-Aug 2025), widened vs MSD drop back in 1Q26 (Mar-May 2025). According to management, the trend is kind of similar in Sep-Oct 2025, for both online and offline channels. Inventory level was still healthy (inventory days was at 150 days in 1H26 vs 148 days in 1H25, or dropped by 5% YoY on RMB terms in 1H26). But the retail discounts were still widening YoY in 2Q26 (even though the magnitude of increase has kind of narrowed QoQ).
No change on the FY26E guidance, which we do find achievable. Despite the profit drop in 1H26, management has reiterated the FY26E guidance of flattish net profit (vs FY25) and increase in NP margin (vs FY25). They are also confident on paying out around 100% of net profit as dividends. We believe sales could be still falling fast in 2H26E, given that: 1) sportswear industry demand is still subdued because of the macro uncertainty, 2) both the traffic and conversion rate are still under great pressure, 3) online marketplace is still highly competitive and promotional (which is bad for both Nike and Topsports as they prioritize margin over sales growth at the moment), and 4) store count has dropped a lot and it is still falling. But we are relatively confident about net profit as well as profitability, because: 1) GP margin could still be expanding, thanks to meaningful and continual support from the principal brands, as well as the low base for retail discounts (many promotions were done back in Oct 2024 for inventory clearance), 2) OP margin is likely to improve, since quite a few of the under-performing stores have already been closed in the past 12 to 18 months, 3) average sales per store have started to grow positively in 1H26 (including the new retail sales contribution) and therefore the operating deleverage have stabilized.
Maintain BUY but fine-tune TP to HK$ 3.77, based on 15x FY27E P/E (rolled over from 16x FY26E P/E). We have revised down FY26E/ 27E/ 28E net profit by 1%/ 8%/ 10%, in order to factor in: 1) weaker offline sales, 2) higher store closures, but 3) a better GP margin. On one hand, we are highly cautious on the sportswear sector in near term (due to potentially unfavorable weather, weak consumer sentiment, rising competition and a worsening landscape). On the other hand, there are already some positive signs about Nike’s turnaround. Plus the healthy cash flow and generous payout ratio, and its FY26E/ 27E yield is still high at 7%/ 8%, we thus believe Topsports share price could still be resilient going forward.
We have seen some positive signs out of Nike, but the reform is still on-going and could take more time. We are encouraged to see Nike’s new products getting better traction: 1) running shoes like Vomero Plus launched in Aug 2025 are very hot-selling, and the sell-through rate was as high as 60%, and 2) apparels like Milano Jacket and basketball shoes like the Kobe series are also very hot-selling. Noted that the running segment sales have already returned to positive in Jan-Sep 2025. Going forward, Nike is going to invest more in the outdoor segment and revamp many of its stores in China, which is all beneficial for Topsports (4 out of the 5 ACG stores in China were opened by Topsports and the store format will be re-designed to become more relevant to the consumers nowadays with a much lower Capex per store). Moreover, management also pointed out the trade fair orders growth (presumably Winter 2026 and Spring 2027) for Nike was only mildly negative, which is certainly an indication of improvement, in our view, given the large number of store closures. But since many of these reforms are at the very early stage, we tend to be cautious and would not expect a meaningful turnaround in the near future.
1H26 (ending Aug 2025) results were slightly better than expected. For 1H26, Topsports’ sales declined by 6% YoY to RMB 12.3bn, 2% higher than BBG est./ inline with CMBI est., while net profit dropped by 10% YoY to RMB 788mn, beating BBG est./ CMBI est. by 28%/ 10%, due to: 1) better-than-expected GP margin (at 41% vs BBG/ CMBI est. of 38%/ 40.5%) and 2) meaningful cost savings from more closures of the under-performing stores, even though there are quite some one-off impairment losses). Dividend payout ratio remained high at 102%. By channel, sales growth for direct-retail / wholesale was at -3%/ -20%. By segment, sales growth for principal brands/ other brands/ concessionaire fees was at -5%/ -12%/ -21%. By product type, running outperformed with a positive growth, basketball remained under pressure, while smaller segments like outdoor and tennis continued to grow rapidly.