“National Tide Alternative” Xtep, after Hillhouse invested 1 billion, what’s worse for it to rush to the front line?

Xtep, whose market value has taken off, is worse than Li Ning and Anta?

Today, Jinjiang is known as the shoe capital of China.

Unlike Wenzhou, which is mostly mechanical shoes, Jinjiang shoes are mainly handmade. In the early days, most of the shoe factories here were small workshops and imperfect, but with the development of technology, they gradually grew into the shoe industry capital of large factories.

From villages and towns to the shoe capital, Jinjiang has born including Anta, Xtep , 361 degrees, noble birds, and Hongxing Erke, which has almost surpassed the Olympic Games recently. Even the capital market has formed a unique “Jinjiang plate.” The protagonist of our article today is Xtep, which is heavily supported by Hillhouse Capital.

In 1987, Ding Shuibo, who was only 17 years old, and his two brothers raised 1,500 yuan to establish Fujian Samsung Sporting Goods Company, and the predecessor of Xtep was born.

We have accumulated a wealth of experience in shoemaking through the early OEM (ie foundry) to expand the brand, and then further evolved from the OEM to start our own brand. In 2001, the Xtep brand was officially announced. In the following thirty years, Xtep moved from a small town to the whole country and went abroad. Xtep is now an international sports goods group engaged in the design, development, manufacturing and marketing of sports goods (including shoes, clothing and accessories).

On the eve of 6.18 this year, Xtep received a huge investment of HK$1 billion from Hillhouse Group. This is the capital’s optimistic view of the sportswear brand track and the biggest reason why Xtep’s share price has doubled this year, far surpassing its peers. However, after hitting a new high, as of the close of the market on July 27, Xtep’s stock price was fixed at HK$10.08 per share, a drop of nearly 30%. But even so, Xtep’s share price increase in 2021 is still close to 200%, with a total market value of 26.6 billion Hong Kong dollars.

Driven by the national tide and supported by capital, can Xtep get out of the “unusual feeling”? Node Finance will analyze Xtep’s products, history, and capital development and changes from several levels.

01 Starting from OEM to create brand dreams

Recently, Xtep issued a 21H1 operation announcement. The increase in brand power and the catalysis of the “cotton” incident prompted a rapid growth of 40-45% in Xtep’s H1 turnover and a rapid increase of 65% in net profit attributable to the parent company. From a strategic point of view, Xtep strengthens its main brand, which is a strong position in the running field, on the one hand, and on the other hand, it continues to exert its strength in new high-end brands. At present, Xtep has formed a matrix product line for different groups of people. Xtep is no longer the Xtep that “wears on blind dates and can’t be on the table”. Whether it is running shoes, fashion trends or high-end brand lines, Xtep has already had a layout.

To achieve this goal, Xtep has gone through more than 30 years.

2000 was the first milestone for Xtep. Chinese athletes made great achievements in the Sydney Olympics and successfully applied for the Olympics a year later. This year, Xtep switched from OEM to self-built brand. Prior to this, Xtep started with “travel shoes” and was the “king of export sales” in the industry at that time. With the budding of the domestic sports market, Xtep embarked on the road of exporting to domestic sales in the first five years of its establishment, focusing on the mass demand of the domestic market from outside to inside .

If you want to build a brand, you need not only excellent products, but also strong brand capabilities.

At that time, Xtep groundbreakingly invited Hong Kong singer Nicholas Tse to serve as the brand image spokesperson, and launched a well-known advertising slogan: “Xtep, an extraordinary feeling.” Nicholas Tse’s endorsement not only gave the Xtep brand entertainment attributes, but also achieved unexpected results. Victory, Nicholas Tse’s “Windfire Generation” sports shoes sold 1.2 million pairs, creating a single pair of sports shoes sales record, no one has broken so far. Thus special steps to open the sporting goods business entertainment Camp era pins, then signed TWINS, Pan, Jolin Tsai, Kwai Lun Mei, Han and other popular artists as brand endorsement.

If it is said that blessing the entertainment attribute is Xtep’s strategy of broadcasting, then returning to sports is Xtep’s choice of focused play. In the industry, there are already giants such as Anta and Li Ning . Xtep chooses to play sideways, from the differentiated marketing of “sports and entertainment”, the brand layout of running as the core to the strategy of “return to sports”.

During the years of the Beijing Olympics from 2005 to 2008, Xtep seized the opportunity to grow into a leading company. The restructuring was implemented internally, the traces of the original family management were continuously diluted, and the listing was completed. In 2005, Xtep’s revenue was 297 million yuan, and in 2008 it climbed to 2.867 billion yuan, and revenue more than nine times in three years.

However, since the Beijing Olympics, China’s sports goods industry has entered a downward cycle. Due to mispredicting market demand, brands such as Anta and Li Ning have experienced a general phenomenon of inventory backlog. Xtep is no exception, the domestic sports shoes and apparel exposure to low demand after the Beijing Olympics boom, special steps are also facing relatively large library deposit pressure. You know, the tragic situation in the industry at that time was far beyond imagination. It is said that in 2009, Hongxing Erke sold 800 million goods, Xtep 2 billion, and Anta around 3 billion. At that time, there was a saying: Jinjiang produces shoes in one year, enough to sell for three years nationwide!

During this period, Kinglake, Northface , Del benefits …… Jinjiang nearly 60 brands, have trouble devastated.

Fortunately, Xtep did not, like Li Ning, chose to increase product prices during this period and pursue an international route. Xtep chose to focus on the current situation, carry out refined processing, increase product discounts to destock, improve supply chain efficiency, optimize supply channels, and withstand the pressure of declining business performance to survive the industry downturn.

From 2009 to 2014, Xtep’s revenue was 3.545 billion, 4.457 billion, 5.540 billion, 5.550 billion, 4.343 billion, and 4.778 billion. There was no large-scale regression and remained in a relatively stable state.

"National Tide Alternative" Xtep, after Hillhouse invested 1 billion, what's worse for it to rush to the front line?

At that time, some people in the industry said bluntly that the quality of products produced in Jinjiang was no problem, and the companies that fell in Jinjiang were in front of their brand dreams.

Realizing the importance of the brand, Xtep began to enter the next stage.

02 Three years of transformation to create a diversified product matrix

Beginning in 2005, with the listing of Hongxing Erke in Singapore, the launch of the listing of local brands was announced. Since then, Anta and Li Ning have landed on the Hong Kong Stock Exchange. Brands such as Xtep, Peak, and 361° have followed this pace and knocked on the door of the secondary market. 

However, after the glorious summit, the local sports brand was hit hard after the 2008 Olympic Games. Six years after Hongxing Erke was listed, it was suspended on the Singapore Stock Exchange due to suspected financial fraud.

The shoe company’s dilemma began. In the following years, Xidelong and Delhui fell. Although Xtep gradually released the pressure in this wave of backlogs. However, they are also faced with the difficulties of “wild, fake, cheap, and unbranded”.

In 2015, Ding Shuibo drastically launched Xtep’s three-year transformation, which became Xtep’s second milestone event.

Xtep proposed a “3+” strategy centered on consumers, namely “product+”, “sports+”, and “Internet+”.

“Product+” means that while preserving the fashion of the product, it further strengthens its professionalism and begins to focus on running shoes;

“Sports+” refers to the shift from pure sports sponsorship to comprehensive services, strengthening the construction of a sports ecosystem;

 “Internet+” refers to the closed loop of retail and online and offline activities based on the big data of runners and consumers, through innovative technologies to establish a new retail system that combines user experience and community construction, and customize products and services based on different runners’ data.

After several years of planning and layout, Xtep started a multi-brand and international road. In terms of the brand matrix, Xtep formed through the acquisition of K-Swiss and Palladium and the establishment of a joint venture with Wolverine to be responsible for the development, marketing and distribution of shoes, clothing and accessories under the Soconni and Mellor brands A new pattern of mass sports, fashion sports, and professional sports has been established.

The differentiated positioning of these brands has achieved a high degree of complementarity with the combination of Xtep’s main brand for different target consumer groups. The revenue for the whole year of 2020 will reach 8.172 billion yuan, and the income of mass sports, fashion sports and professional sports will be 7.1 billion yuan, 1 billion yuan and 71.7 million yuan respectively.

Currently, special steps of the main brands focus on serving the mass market, providing trends and cost-effective yet body sports goods; fashion sports, launched the “XDNA”, “special step x Shaolin” series; in professional sports brand, has become Xtep main brands Product portfolio subsidies are mainly targeted at middle-class and high-end customer groups with high spending power, targeting first-tier major cities. These new brands will help the Group penetrate into different target groups in order to further expand its business development.

Xtep Group revealed to Node Finance that most of the retail stores of Xtep’s main brand will be opened in second- and third-tier cities.

“First-tier cities store opening program will mainly focus on four new brands, and Suokang Ni Mai Music head before a second-tier cities has more than 40 stores. Paladin also has stores in first-tier cities. K-Swiss in early 2022 first-tier cities in China Open the first store.”

03 The market value has soared in three months, what is Xtep worse than Li Ning and Anta?

How does Xtep view itself?

Xtep answer is: “Special steps are the second and third tier cities leading sports one brand of goods.”

It is precisely under this positioning that Xtep transformed its previous brand positioning of “fashion sports” into “sports fashion” in 2015, and clarified the brand’s positioning with professional running as its primary development direction. If Xtep did something right, it has to do with its unique play style that is different from other sports brands.

First, positioning the mass market.

Adhering to the mass market is a direction that Xtep has always adhered to in its strategy. Without rash advancement, Xtep embarked on a road of differentiated competition. “The Group will continue to launch cost-effective products, and the price range is positioned at the consumption power of second- and third-tier cities.” Xtep told Node Finance.

As a second-tier brand, Xtep is usually priced lower than competitors such as Anta and Li Ning, and is mainly targeted at consumer groups in the second-tier and lower-tier markets.

The Everbright Securities Research Report pointed out that the current low-tier cities in the industry are estimated to still occupy about 20% of the market share. Xtep’s main product pricing is similar to that of the other brands, matching the leading brands in product performance. By launching low-priced and high-quality sports shoes and apparel products, In the future, we can take advantage of brand advantages, cost-effective advantages and differentiated competition between mid- and high-end brands to seize the miscellaneous brand market.

Second, Shigekura professional running shoes.

In addition to its positioning in the mass market and second- and third-tier cities, Xtep has heavily stocked professional running shoes in terms of product types. In fact, Xtep has been a frequent visitor at international competitions in recent years.

In the past ten years, Xtep has accumulated a certain depth in product development and design. The 160X series created for professional athletes has achieved excellent results in many marathons.

According to the report “Marathon Sports Industry Development Plan”, the compound growth rate of China’s marathon will reach 67% from 2011 to 2020. In 2019, the number of national marathon events (above 800 people)/the number of events certified by the Chinese Athletics Association has reached 1471/357 respectively.

Driven by the marathon movement, running shoes have entered the incremental market space.

After the success of Xtep’s 160X series, the 160X2.0 and 160XPro launched in 2021 have also been highly recognized by the market.

According to data from Soochow Securities , the wearing rate of Xtep running shoes on the Xiamen Marathon track in 2019 was only 4.2%, which was much lower than Nike’s 70.4%. In the Xiamen Marathon two years later, the number of participants wearing Xtep 160X running shoes accounted for as high as 51.03. %, it can be seen that the Xtep wearing rate of the majority of runners has achieved a leaping increase.

Third, multi-brand growth.

As mentioned above, at present, Xtep has created a product line with different levels of consumption for people with different consumption power. Whether it is the continuous efforts of its own main brand, or brands such as Soconni, Mele, Paladin, etc., they are all helping Xtep penetrated into different target markets to further expand its business development.

"National Tide Alternative" Xtep, after Hillhouse invested 1 billion, what's worse for it to rush to the front line?

Xtep historical market value change source: Yiniu.com

Since its listing, Xtep’s market value has fluctuated, but it is hard to beat Anta and Li Ning. As of the close on July 27, Anta’s total market value was 418.2 billion Hong Kong dollars, Li Ning was 178.8 billion Hong Kong dollars, and Xtep was 26.604 billion Hong Kong dollars. In terms of overall scale, Xtep is still far behind the top two. Why?

The three domestic sports brands are different from the starting point. Taking Li Ning as an example, he was born with the label of a star athlete, which is both sentimental and professional. The rise of Anta is inseparable from its acquisition of FILA. FILA’s gross profit margin is as high as 69.3%, which is more profitable than Anta’s main brand, and it is a veritable hematopoietic machine.

Xtep has not reached the first-tier cities for many years starting from second- and third-tier cities. Until 2018, the brand matrix was made more complete through acquisitions. But can Gasway and Paladin replicate Anta’s FILA miracle? In the future, how to increase the gross profit margin of the new brand and cultivate the reputation of the main brand will not be accomplished in a day.

The capital market has not performed well for many years. This year, Xtep finally waited for a surge.

Xtep’s share price achieved a strong rise in the second quarter of this year, and its share price has repeatedly hit record highs. On March 31, 2021, Xtep International’s share price closed at HK$4.496 per share, and on July 23, it closed at HK$11.88 per share, nearly three times higher. The skyrocketing stock price stems from revenue growth, and the underlying internal factors are the sharp increase in replenishment orders from Xtep agents and the growth of e-commerce business.

In addition, the gross profit margin of Xtep’s main brand has also improved.

"National Tide Alternative" Xtep, after Hillhouse invested 1 billion, what's worse for it to rush to the front line?

Image source: Soochow Securities

According to Xtep’s financial report, after 2010, Xtep’s gross profit margin has basically remained around 40%. Since 2014, Xtep’s overall gross profit margin has continued to increase. Despite the impact of the epidemic in 2020, terminal discounts have been relatively large, but as its new high-end brands continue to generate revenue, there is still room for the group’s overall gross profit margin to increase.

However, over the past ten years, Xtep’s gross profit margin has generally lost to Anta and Li Ning. Xtep told Node Finance that the difference in gross profit margin between the group and its peers also comes from the difference in business models. The 6000 retail stores under the Xtep main brand are mainly operated in a distribution mode, so it is a wholesale gross margin. However, some of Anta and Li Ning’s stores adopt the form of directly facing customers (retail), so they are calculated based on the retail gross profit margin. Generally speaking, the retail gross profit margin is higher than the wholesale gross profit margin. Overall, Xtep’s operating conditions tend to be positive.

In addition to performance growth and gross profit and other indicators operating well, Xtep’s share price ushered in a major positive in the capital market there is another factor.

In June of this year, Hillhouse subscribed for Xtep International’s 500 million Hong Kong dollar convertible bonds, and at the same time subscribed for Xtep’s subsidiary Xtep Global Investments (with the operating rights and ownership rights of Gasway and Paladin) for 65 million U.S. dollars (about 506 million Hong Kong dollars) convertible bonds. And establish a strategic partnership. Hillhouse has invested approximately HK$1 billion in Xtep International and its subsidiaries.

Hillhouse Capital’s previous case of Belle has achieved excess returns. The market takes this as a target and also believes that under the blessing of Hillhouse, Xtep may become the next Anta.

For Xtep itself, the addition of Hillhouse Capital will not only supplement the company’s cash reserves, but also rely on Hillhouse Capital’s sports ecological resources to complement each other’s strengths, make up for shortcomings in channels and operations, and enhance its overall strength. With the support of “capital giants” like Hillhouse, can “national tide wind” help Xtep soar into the sky? Xtep’s performance in the second half of the year is crucial.

Node Finance Statement: The content of the article is for reference only. The information or opinions expressed in the article do not constitute any investment advice. Node Finance does not assume any responsibility for any actions taken due to the use of this article.

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