Guotai Haitong: Maintains "Overweight" rating on Topsports (06110) with a target price of HK$1.16

Guotai Haitong released a research report stating that it expects Topsports' (06110) net profit attributable to shareholders for FY2027/28/29 to be RMB950 million/780 million/800 million, respectively. Considering that the impact of Nike terminating its online distribution rights will be fully reflected in FY2028, it assigns an 8X PE for FY2028, which, based on the conversion rate of HK$1 = RMB0.86, corresponds to a target price of HK$1.16 per share, maintaining the "Overweight" rating. Guotai Haitong's main views are as follows: Revenue under pressure in the first half of the fiscal year, with consistent Q1/Q2 retail sales trends In FY27H1 (March 2026-August 2026), the company's revenue was RMB10.91 billion, down 11.3% year-on-year. By channel, direct retail (-8.8%) performed better than franchising (-27.5%). By brand, other brands (-8.5%) performed better than the main brand (-11.6%). In Q2, the company's retail sales fell by the low range of 10-20% year-on-year, consistent with Q1 performance. At period-end, the number of offline direct retail stores was 3,872, down 17.4% year-on-year, of which total selling area decreased 12.9% year-on-year, while average store area increased 5.5% year-on-year. In the first half of the fiscal year, a net 488 stores were closed, a larger reduction compared with approximately 300 stores each in FY26H1/H2. Deeper discounts dragged on gross margin, strict expense control FY27H1 gross margin was 40.1%, down 0.9pct year-on-year, mainly due to deeper discounts. The company strictly controlled expenses, with selling/administrative expense ratios both flat year-on-year during the period. Breaking down selling expenses, the employee expense ratio remained stable year-on-year, while the rental expense ratio decreased 0.9pct year-on-year, offset by a 0.9pct year-on-year increase in other expense ratios. Government subsidies during the period were RMB80 million, up 105.4% year-on-year. Ultimately, net profit attributable to shareholders was RMB660 million, down 16.0% year-on-year, with a net margin attributable to shareholders of 6.1%, down 0.3pct year-on-year. Abundant cash flow, maintaining a high dividend payout ratio During the period, the company's operating cash flow was RMB1.84 billion, up 36.1% year-on-year, 2.8 times net profit for the same period, indicating abundant cash flow. At period-end, inventory was RMB4.92 billion, down 16% year-on-year. An interim dividend of RMB0.11 per share was declared, with a payout ratio of 103% and an interim dividend yield of 13%. Prudent operations to respond to changes, deepening cultivation of professional brands in niche tracks From January 1, 2027, TOPSPORTS will completely terminate the sale of Nike products on online platforms. The bank expects that the company is currently maintaining communication with Nike, cooperating to complete online inventory clearance, and will continue to maintain close cooperation on offline sales in the future. The company has increased its layout in niche tracks such as running and outdoor. During the period, it solidly advanced full-chain operations of exclusively partnered brands such as Ciele, norda, Norr?na, and Soar. The running multi-brand store ektos opened a new store in Aranya, Qinhuangdao during the period, and the company newly signed exclusive operating rights in the Chinese market for the U.S. outdoor brand Sierra Designs, with its first store expected to open in November at Dream Center on the West Bund in Shanghai. Risk warning: Deterioration of the retail environment, intensifying industry competition, and short-term negative impact from partner brands reclaiming distribution rights.