Here’s why investors should pay attention to Topsports International Holdings Limited (SEHK: 6110). –
Thanks to the recent promotion of internal consumption by the Chinese government, stocks in China’s retail sectors have benefitted significantly from this narrative.
Despite this, Topsports International Holdings Limited (SEHK: 6110), one of the largest sportswear retailers in China, has had a rather muted share price performance (up 8%) since the beginning of the year.
In this article, I’ll take a look at the reasons why Topsports is worth your attention.
Strong growth potential
Topsports is one of the largest sportswear retailers in China and is the major distributor and retail partner of Nike Inc (NYSE: NKE) and Adidas AG (XTRA: ADS) in China.
In addition to these principal brands, it also distributes other popular international brands in China, such as Puma, Reebok, and Onitsuka Tiger, among others.
Nike and Adidas are by far the two most popular sportswear brands in China, which capture a total 40% of the Chinese sportswear market.
Riding on the popularity of these sports brands it partners with, Topsports has also had significant growth.
From 2016-2019, its revenue grew by 16% per annum (p.a.), and its net profit had a similar growth of 20% p.a.
In 2019, the company operated more than 8,000 stores in nearly 300 cities all over China. Its number of stores had a net increase of over 50% year-on-year.
The company is on the trajectory of continued growth and is not slowing down.
Solid business fundamentals
Compared to another domestic sportswear owner and operator in China, Li Ning Company Limited (SEHK: 2331), which most investors are familiar with, Topsports actually showed both similar revenue growth and profitability margin.
From 2016-2019, Li Ning had a revenue growth rate of 20% p.a., which is slightly higher than that of Topsports.
During the same period, Li Ning had an average net profit margin of 6%, which is the same as that of Topsports.
Pou Sheng International Holdings (SEHK: 3813) is another smaller distributor of the brands, Nike and Adidas, in China and, therefore, a major competitor to Topsports.
But its profitability margin was much lower at only 3% from 2016-2019.
Topsports is currently trading at around 10x EV/EBITDA, while Li Ning and Pou Sheng are trading at 28x and 5x EV/EBITDA, respectively.
As Topsports outperformed Pou Sheng significantly in terms of profitability, it does make sense for it to be trading at a much richer valuation level than Pou Sheng.
However, as compared to Li Ning, although Topsports had a similar growth profile and profit margin, their share price performance and valuation levels differed substantially.
Since the beginning of the year, Li Ning’s share price has grown by more than 50%.
On an EV/EBITDA multiple basis, Li Ning is trading at almost double the level of Topsports.
The Chinese sportswear market is expected to deliver an annual growth rate of around 10% in the coming years.
This is thanks to factors such as rising disposable income and government initiatives like “Healthy China.
Given this, it’s difficult not to expect that those more popular sportswear brands should benefit better from the sector growth.
In my opinion, it doesn’t make sense for Topsports, which is a major partner of the two most popular sports brands in China (Nike and Adidas) and with a similar growth profile and profitability margin to Li Ning, to be trading at such a hefty discount.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn’t own shares of any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020