One of China's first sports apparel makers to use Hong Kong entertainment celebs. From left: Jolin Tsai, Nicolas Tse, Wilber Pan, the Twins in Xtep ad.

XTEP INTERNATIONAL Holdings Ltd is lacing up for continued strong performance in China’s fashion sportswear segment due to aggressive outlet expansion, a strong cash position and a clear sense of its target market.

The Chinese firm, which listed in Hong Kong (HK 1368) in June of last year, boosted its leading Xtep brand outlets in China last year to 5,056, up 15% yoy, to help meet growing demand for its products.

It also had a banner year last year, boosting its revenue by 110% to 2.86 bln yuan, and hiking its net profit by 129% to 508 mln, allowing it to make a dividend payout ratio of 68%, or 8.0 cents HK per share.

And because in some senses it doesn’t compete head-on-head with some of the well known heavyweights in China’s traditional sportswear sector like Li Ning and China Dongxiang, it to some extent enjoys something resembling “under the radar” growth.

Pop stars, rather than athletes have more impact on Xtep's target customer, according to its CFO, Terry Ho. NextInsight photo by Dan Tam.

“For athletic footwear, Anta would be our closest competitor, as we target the same demographics and markets.

"For example, our average sneaker prices are 200-250 yuan, which is similar to them for the second- and third-tier markets in China.

"And for fashion sportswear apparel and accessories, our closest competitor in China is probably Kappa,” said Mr. Terry Ho, CFO of Xtep International Holdings Ltd.

Xtep’s distribution network has a presence in 31 provinces, autonomous regions and municipalities across China, and its enviable cash position enables the firm to seriously consider any viable and worthwhile M&A opportunities that might present themselves, which potentially enhance its clearly enunciated multi-brand strategy.

Mr. Ho said consumers between 18 and 25 are its core demographic.

“We are often preferred, especially by the younger consumers, for our versatility as many of our footwear and apparel is considered more suitable for everyday use, like getting back and forth to class while still looking active and feeling comfortable.

“We’ve done our market research and the fact is that this demographic spends far more time shopping, surfing the Web and heading to movies than it does sweating it up on the basketball court.”

He added that this is why Xtep strives to sign on celebrities to stand up for its products in our various marketing campaigns rather than hire high-profile athletes.

Vis-à-vis its domestic peers, including Li Ning, China Dongxiang and Anta Sports, Xtep has one of the lowest P/E ratios, making its shares all the more desirable at this time.

The company manufactures, designs, develops and markets fashion sportswear including footwear, apparel and accessories.

Xtep’s three lines recorded surging turnover in 2008, with the flagship Xtep brand accounting for 91% of the total, leaping 117% yoy to 2.606 bln yuan, thanks to footwear and apparel volume growth of 76% and 145%, respectively.

Its Disney and Koling brands, which were launched in late 2007, accounted for 8% of total revenue that was up a robust 302% yoy to 241 mln yuan.

The company consists of 28 Xtep, 31 Disney Sport and 30 Koling branded distributors plus over 5,500 retail outlets.

The CFO markets Xtep to investors.
The company was making significant progress in sales expansion for both its footwear and apparel divisions, thanks to aggressive marketing and brand awareness campaigns.

In 2007, it sold 849 mln yuan worth of footwear, comprising 62.2% of total revenue, while also selling 498 mln yuan of apparel, or 36.5% of the total.

Following acquisitions and promotions, apparel sales in 2008 jumped to 1.35 bln yuan, or 47.1% of the total, while footwear sales also grew strongly to 1.46 bln yuan, but its share of the total fell to 50.7%.

Not content resting on its laurels, the company’s advertising/promotion and R&D budgets last year rose by 243% and 172%, respectively, to 260 mln yuan and 45.2 mln yuan.

The company’s future potential is being pulled by Chinas’ growing enthusiasm for physical fitness and sports, and also the gap in retail sales of sportswear between China and other countries.

Additionally, approaching international sporting events in China will stimulate sales of sportswear.

With its substantial retail network across China and brand growth strategy, Xtep’s 2009 earnings are expected to rise by some 22%.

The company plans to spend 150 mln hkd this year and 220 mln next to bolster its distribution network and flagship stores.

It is also budgeting 250 mln hkd this year and 100 mln next for production facilities and an operation center, proving to investors that it is not willing to ride the pine anytime soon in the Chinese fashion sportswear and apparel market.

Related story:

XTEP INTERNATIONAL: Riding on youth sportswear trend in PRC

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