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Hunting to Invest in the Potential “Nike of China”

Had much fun over the past weeks exchanging investment thoughts and getting to know some of you from the EngineerInvest community. Hope you guys were entertained by some of my silly stories as much as I enjoyed hearing yours. Quite surprised that most students are Engineers by profession and not only that, some young professionals even came with a 6-figure portfolio!


“Dual circulation” is the recent buzzword in news portals and one that Chinese President Xi Jinping has often mentioned. One of the pillars of this new economic strategy is expanding domestic demand [1]. It seeks to realise the advantage of China’s super large market, the world’s largest population of 1.42 billion [2]. Naturally, there are hurdles to cross but there is much potential there. Consumption accounted for 38.8% of China’s GDP in 2019 as compared to 66% of US’s [3]. Hopefully, this will bolster the previous report of China being the world’s fastest growing consumer market where the consumption gap between China and US is closing to $280 billion [4].


A decent sector to capture on this growth is the apparel industry. In particular, the sportswear industry. Comparatively, in 2016, the sportswear segment in China enjoyed a higher growth rate of 11% as compared to a 5% growth in total apparel sales [5]. The sportswear industry could further benefit from a hype of hosting the 2022 Winter Olympic Games.



To further support this indication, China’s sports-related industry is just 0.7% of its GDP while this industry contributed 3% of US’s GDP [5], more than 4 times the share in China. I believe that there is room for growth in terms of percentage contribution to China’s GDP. More figures from Statista:



To get a bite of this pie, I bought a small position in this China sportswear brand.


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My Story “From N-Level, Dropout to Masters, From $20k at 19 to over $1m at 33” (Also shared by Dr Wealth / theFinance.sg / NextInsight, etc.)


Notably not the best “Draw My Life” video out there but hope that my story would inspire students, parents, salaryman, or anyone out there who are still trying their best that there is always hope 🙂.



Part 1: “From N-Level to Masters, From $20k at 19 to over $1m at 33”

Part 2: “How I Made My First Million (not clickbait)”

View >> My Portfolio



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The China Sportswear brand I bought

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Not really a small cap but I’ve chunked this purchase under my list of multiple small caps asset allocation. This is not part of my main core holdings. As mentioned in my early April article where I’ve mass purchased stocks during April lows, there won’t be many big purchases moving forward as most stocks (especially tech stocks) had already run up quite a bit. Nobody will keep doing big purchases every month. If I do buy stocks, it will be small positions or probably just selling of puts. Future big purchases are only during subsequent “golden opportunities”. Whenever there is a big crisis, cash is king. Hence, always set aside some funds for these “golden opportunities”.


Business / Story:

International sportswear brands still very much dominate the market share in China. However, there has been a broader shift in consumer sentiment towards domestic brands [9]. Reiterated in a recent survey, "Sixty-six percent of Chinese consumers say they’ll be shopping for domestic brands over foreign labels during the shopping event, which is held on Nov. 11 each year.” [10] Apart from patriotism playing a role, it is due to a genuine improvement of Chinese companies, having more sophistication in marketing [10]. Another reference where Chinese brands are gaining traction, Shein, a Chinese fast fashion e-tailer, has more app downloads to date than H&M and Zara combined. Shein recorded 229.4 million downloads, versus that of H&M’s 123.5 million downloads and Zara’s 90.6 million downloads. Shein did this without any domestic presence in China [11].



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Xtep’s market share was stagnating and even fell in 2018. However, in 2018, things did seem to start turning bright for them. Product sales grew by more than 20% in 2018 and 2019 after experiencing a fall of 5.2% in 2017. This could be due to a shift towards a new branding as 90% of Xtep stores were redesigned and renovated by 2019 [29]. Also, Xtep seems to have an edge in the runners’ scene, consistently taking the spot of the top domestic footwear brand worn by participants who finished a full marathon in 3 hours [29].


Could 2018 be the turning point for Xtep? Many users on China’s popular social media, “Little Red Book” (focused on fashion and beauty), only realized the change in image of the brand recently.




Did my best at the translation 😁




Management

The Founder, Chairman and Chief Executive Officer (CEO) of Xtep, Mr Ding Shui Po has numerous awards such as “2nd China Footwear Industry Ceremony - Annual Leading Figure of 2015”, “Quanzhou Top Talent” and “Most Innovative Entrepreneur of Quanzhou City” [18]. Mr Ding and his family is also the largest shareholders of Xtep, owning 54% of the company. This is also something I like about the company where the management has a stake in the game. To note, there has been recent insider purchase by Mr Ding where he bought HK$860k worth of the stock at HK$2.73 per share and HK$4.84 per share in a HK$9.7m purchase [19].


In addition, as CEO of a company with market capitalization of HK$6.4 billion, Mr Ding takes a noticeably lower remuneration of CNY1.7 million. For reference, the median CEO compensation is CNY3.6 million in a range of companies with market caps ranging from CNY2.9 billion to CNY11 billion [20].


Lastly, the company has notable shareholders like Templeton and Vanguard [21].



Financials

Xtep’s revenue has been growing since 2018 and cash flows from operating activities was positive for the last 4 years. It also has a consistent dividend history and with special dividends for a few years.



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Nike is an international player with considerably larger market share. However, its revenue and net income did not have much growth as compared to Xtep’s. Furthermore, it has a much higher Total Debt to Equity. That being said, it might be because Nike is a renowned brand hence investors have a higher valuation towards Nike.







Back in around 2010, Li Ning’s share price suffered a massive pullback prior to making new highs recently. Back then, Li Ning faced challenges which came in many forms such as differentiation of consumer demand and dominance from established international brands [24]. Besides closing their only store in Hong Kong in 2012 [24], they’ve also closed their regional headquarters in Singapore [25].



Nike has come a long way (share price chart below). Hope that some of the Chinese sportswear brands will become mainstream in time to come.



Verdict:

What I like about Xtep:

  • Almost historical low share price recently

  • Xtep’s market share has been falling in the previous years. However, in 2018, things did seem to start turning bright for them. Product sales grew by more than 20% in 2018 and 2019 after experiencing a fall of 5.2% in 2017.

  • PE ratio of 11+ is a lot lower than Li Ning at 60+, Nike 70+

  • Though not the lowest gearing (debt to equity) but still considered acceptable

  • Growing Revenue

  • Fairly strong moat for its industry

  • Decent management

What I dislike about Xtep:

  • No definite assurance that this brand would come out on top

  • Net profit growth for past 5 years seemed quite flat

  • Offline sales are still the major contributor of revenue where e-commerce only accounts for about 20% of revenue. This is on the low side considering e-commerce seems to be the future trend and COVID-19 had sped up the adoption of online buying. Although retail is here to stay as well [29].



Lately, Xtep had a single day 16% spike in its share price due to placing 5 million new shares of the company to the brand spokesperson Nicholas Tse (谢霆锋) [27].



I had shared a bit on Xtep in my Telegram and Facebook Page few months back. As always, it isn’t a huge purchase and is a small punting position under my multiple small caps allocation mentioned earlier on.


Do note that my portfolio allocation and investment objective might be different from yours. There’s always risk in the stock market. What is suitable for me might not be suitable for you, cheap can go cheaper. Not encouraging any trades & my positions might change without notice. Just sharing the stock idea for reference, learning purposes only. Do not follow trade, practise due diligence and do check out our full disclaimer.


Updates from Telegram / Instagram / Facebook page:

Here are some of the selected posts (screenshots) from my Telegram, Instagram & Facebook page. If I did any trades, sometimes I will also share it there. Do join us to check out our previous and future sharing!!




To add on, while most are disappointed at Ant's suspended IPO, Ping An's fintech arm Lufax Holding had IPOed successfully on NYSE. Yesterday (6th Nov 20), it had a good 18% run. Was lucky to catch it at $14+ before the jump (pure luck). Again, just a small position under my punting allocation. Recently, I've explained to students on some of the advantages Lufax has over Ant Group.


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Not encouraging any trades & my positions might change without notice. Just sharing the stock idea for reference, learning purposes only. Do not follow trade, practise due diligence and do check out our full disclaimer.


Cheers & Great Weekend!!


Disclaimer: Just sharing from experience as I have put my own money into the stock market over the period of 17 years. I am not a Chartered Financial Analyst (CFA) Charterholder and do not have any finance-related qualifications. Please also check out our full disclaimer.


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Join us on Telegram / Facebook / Instagram for more regular insights!

Reach out to me at engineerinvest.biz@gmail.com


Reference Links:

1.http://www.xinhuanet.com/english/2020-10/31/c_139479636.htm

2.https://www.pewresearch.org/fact-tank/2018/07/11/world-population-day/

3.https://www.straitstimes.com/asia/east-asia/chinas-new-economic-development-pattern-of-dual-circulation-5-things-to-know-about-it

4.http://www.chinadaily.com.cn/a/201912/20/WS5dfc3e4aa310cf3e3557f845.html

5.https://brandongaille.com/19-china-sportswear-industry-statistics-trends-analysis/

6.Xtep 2019 Annual Report

7.https://xtep.aliexpress.com/store/1243696

8.https://www.xtep.com.hk/en/about/milestones.php?cat=spokespersons

9.https://www.bloomberg.com/news/articles/2019-09-19/apple-is-suffering-an-identity-crisis-with-consumers-in-china

10.https://www.cnbc.com/2020/10/28/alibabas-singles-day-2020-chinese-to-shun-us-brands-alixpartners.html

11.https://www.scmp.com/lifestyle/fashion-beauty/article/3107086/chinese-fast-fashion-e-tailer-shein-takes-zara-and-hm-and?fbclid=IwAR0oxhQPcTnbqx7RTFo2pZtyaSM2sDFnic2Z1ZeFDRIo8Iwj_s9UPLqE65I

12.https://www.scmp.com/business/companies/article/3015556/jinjiang-gets-map-chinas-sports-shoe-capital-anta-xtep-and-361

13.https://www.gartner.com/en/marketing/insights/daily-insights/adidas-gets-fashion-forward-in-china

14.http://xhslink.com/5EfJM

15.http://xhslink.com/U6lJM

16.http://xhslink.com/B0iJM

17.http://xhslink.com/li9IM

18.https://www.xtep.com.hk/en/about/dingshuipo.php

19.https://simplywall.st/stocks/hk/consumer-durables/hkg-1368/xtep-international-holdings-shares/news/founder-shui-ding-just-bought-a-handful-of-shares-in-xtep-international-holdings-limited-hkg1368/

20.https://simplywall.st/news/is-xtep-international-holdings-limiteds-hkg1368-ceo-pay-fair-2/

21.https://www.marketscreener.com/quote/stock/XTEP-INTERNATIONAL-HOLDIN-6170900/company/

22.https://www.investing.com/

23.http://aastocks.com/en/stocks/analysis/company-fundamental/dividend-history?symbol=01368

24.http://www.chinadaily.com.cn/china/2012-09/12/content_15753896.htm

25.https://www.chinadaily.com.cn/world/2012-12/20/content_16036053.htm

26.Google Finance

27.http://www.aastocks.com/en/stocks/analysis/stock-aafn-con/01368/RUM.201012_102446/all

28.Xtep 2019 Annual Results Presentation

29.https://www.mingtiandi.com/real-estate/china-retail-real-estate-news/capitaland-china-retail-reit-recaptures-2019-traffic/


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