Craftsmanship is the process of perfecting a product over time through continued refinement.
This has certainly been the case for local Chinese sports brands, which are quickly catching up with, or even surpassing, their global peers, both in terms of brand recognition and market share. Local giants Anta (OTCPK: ANPDY2020.HK) and Trim (OTCPK:LNNGF2331.HK) are leading the charge, overtaking global giant Adidas in terms of revenue in their Chinese market.
The smallest Xtep International Holdings Ltd. (OTCPK: XTEPY, 1368.HK) wants to join their ranks by focusing on what it does best: running shoes. Last week, the company announcement a new step in this direction by announcing that it would pay 61 million dollars to buy back its Chinese joint venture with Wolverine around the world (WWW), manufacturer of Saucony and Merrell running shoes. Xtep has also agreed to purchase 40% of Saucony Asia, owner and manager of intellectual property rights in the area where the joint venture operates, with the right to acquire an additional 35% or 60% stake in Saucony Asia in the future.
Realizing Saucony’s potential
Xtep and Wolverine established their joint venture in 2019 to sell apparel, footwear and accessories under the Saucony and Merrell brands on the Chinese mainland, as well as Hong Kong and Macau. Both brands have performed well since then, particularly Saucony, which became the first of several recently acquired Xtep brands to become profitable in the first half of this year. Saucony has become a major player in the market since the company’s inception, with 80 outlets as of June this year. Merrell is much smaller, with only five Chinese outlets to date.
Xtep noted that the acquisition will provide the company with a unified intellectual property structure, which can, in turn, fully support Saucony’s ongoing expansion in China. At the same time, the agreement will also consolidate the company’s position as a multi-brand operator and improve its portfolio diversification and penetration in the Chinese market.
Despite its progress, Xtep is still far behind Anta and Li Ning in many aspects. In terms of revenue, Anta was the market leader with 29.7 billion yuan ($4.16 billion) in the first half of this year, while Li Ning was second with 14 billion yuan. For comparison, Xtep’s revenue for this period was only 6.52 billion yuan. Anta and Li Ning are also ahead in terms of their brand awareness, with the former also enjoying the rights to the Fila brand, while the latter takes its name from a legendary Olympic gold medal gymnast who is a source of pride national in China. Xtep is a relative newcomer to this pair. Its founder, Ding Shuibo, established his Sanxing Group in 1987, manufacturing products for other brands. He launched the Xtep brand in 2001 and listed the company in Hong Kong in 2008.
Leader in running shoes
Xtep may find that it is late due to its late arrival in China’s sportswear scene, which is why the company is looking to stand out in the more focused area of running shoes. The company has poured enormous resources into the space, investing heavily in technology related to the power, cushioning and aerodynamics of these shoes. A typical example is its cushioning technology, which provides cushioning resilience and energy return to runners, and has been widely acclaimed.
As a company founded over 100 years ago, Saucony will further strengthen Xtep’s running shoe credentials, providing additional technology and other experiences to provide Xtep with more firepower to compete with Anta and Lining.
Aside from technology, Xtep has also become very aggressive in its promotional efforts, sponsoring 10 major races in China last year alone. The company also trains athletes, like Sheila Kiprotich, who wore the Xtep 160X 2.0 when she won the Paris marathon this year. In addition, six of the top seven Chinese marathon runners in China wore shoes of the same Xtep 160X series during their competitions in the first half of this year.
Xtep has also aggressively courted other foreign brands besides Saucony. Around the same time it created the Wolverine joint venture in 2019, Xtep also acquired the K-Swiss and Palladium brands to boost its profile.
All these efforts have helped improve Xtep’s performance. The company’s revenue rose 14 percent in the first half of this year to 6.52 billion yuan, while its profit rose 12.7 percent to 670 million yuan. Its gross margin also increased by 0.9 percentage points to 49%. The most recent update announced for the third quarter did not disclose specific revenue or profit figures, but said the company continued to show strong growth with retail sales up a high double-digit percentage year over year.
Despite strong results from Xtep and its peers, sportswear stocks in general have been under pressure lately due to concerns about China’s economic slowdown and resulting consumer caution. Xtep shares are down more than 60% from their high earlier this year, and fell another 2% on the day the joint venture buyout was announced.
With its stock under pressure, Xtep shares now trade at a forward price-to-earnings (P/E) ratio of just 9.8 times. Li Ning is trading higher at 11.5 times, while Anta’s at 18.7 times makes it a favorite among investors due to its leading position in the market.
China’s sports footwear market was worth 224.1 billion yuan this year and recorded a compound annual growth of around 8.1% between 2018 and 2023, according to Euromonitor. Growth is expected to slow slightly to around 7.8% over the next five years, reaching 325.8 billion yuan by 2028. CICC believes that Xtep’s Saucony brand will be able to help the company continue to show strong growth and thus maintain an “outperformance” rating. on the company. But it also noted the recent lack of confidence in the broader sportswear sector, prompting it to lower its price target by 28% to HK$5.69.
Current investor caution means that Xtep may have to wait a little longer to be recognized for its recent efforts. But such recognition should eventually come if the company can maintain its focus on athletic footwear and continue its powerful strategy of making brand acquisitions, leading in technology and engaging in strong promotional activity.
Editor’s Note: The summary bullet points in this article were chosen by the Seeking Alpha editors.
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