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Craftsmanship is all about perfecting a product over time through continual refinement.
That’s certainly been the case for homegrown Chinese sports brands, which are rapidly catching or even surpassing their global peers both in terms of brand recognition and market share. Homegrown giants Anta (OTCPK:ANPDY, 2020.HK) and Li Ning (OTCPK:LNNGF, 2331.HK) are leading the charge, overtaking global giant Adidas in revenue terms in their home China market.
The smaller Xtep International Holdings Ltd. (OTCPK:XTEPY, 1368.HK) is aiming to join their ranks by focusing on what it does best: running shoes. Last week, the company announced a new step in that direction by saying it would pay $61 million to buy out its China joint venture with Wolverine World Wide (WWW), maker of Saucony and Merrell brand running shoes. Xtep also agreed to buy 40% of Saucony Asia, owner and manager of intellectual property rights in the area where the joint venture operates, with the right to acquire a further 35% or 60% interest in Saucony Asia in the future.
Realizing Saucony’s potential
Xtep and Wolverine set up their joint venture in 2019 to sell apparel, footwear and accessories under the Saucony and Merrell brands on the Chinese Mainland, and in Hong Kong and Macao. The two brands have performed well since then, especially Saucony, which became the first of several recently acquired Xtep brands to turn profitable in the first half of this year. Saucony has become a major player in the market since the venture’s formation, with 80 outlets as of June this year. Merrell is much smaller, with just five Chinese outlets so far.
Xtep noted that the acquisition will provide the company with a unified intellectual property structure, which can, in turn, fully support Saucony’s ongoing China expansion. At the same time, the deal will also consolidate the company’s position as a multi-brand operator and enhance its portfolio diversification and penetration in the Chinese market.
Despite its progress, Xtep is still well behind Anta and Li Ning in many ways. In revenue terms, Anta was the market leader with 29.7 billion yuan ($4.16 billion) in the first half of this year, while Li Ning was second at 14 billion yuan. By comparison, Xtep’s revenue for the period was just 6.52 billion yuan. Both Anta and Li Ning are also ahead in terms of brand awareness, with the former also boasting rights to the Fila brand, while the latter takes its name from a legendary Olympic gold medal gymnast who is a source of national pride in China. Xtep is a relative newcomer compared to that pair. Its founder Ding Shuibo established his Sanxing Group in 1987 making products for other brands. He launched the Xtep brand in 2001, and listed the company in Hong Kong in 2008.
Running shoe leader
Xtep may realize it’s behind due to its later arrival to the China sportswear scene, which is why the company is looking to make its mark in the more focused area of running shoes. The company has pumped big resources into the space, investing heavily in technology related to power, cushioning and aerodynamics for such shoes. A case in point is its cushioning technology, which provides cushioning resilience and energy feedback to runners, and has been widely acclaimed.
As a company founded more than 100 years ago, Saucony will further bolster Xtep’s running shoe credentials, providing additional technology and other experience to provide Xtep with more firepower to compete against Anta and Li Ning.
Technology aside, Xtep has also become quite aggressive in its promotional efforts, sponsoring 10 major races in China last year alone. The company also cultivates athletes, such as Sheila Kiprotich, who wore the Xtep 160X 2.0 when she won this year’s Paris Marathon. What’s more, six out of the top seven Chinese male marathoners in China wore shoes from the same Xtep 160X series in their competitions in the first half of this year.
Xtep has also aggressively courted other foreign brands besides Saucony. Around the same time, it set up the Wolverine joint venture in 2019, Xtep also acquired the K-Swiss and Palladium brands to boost its name recognition.
All those efforts have helped to boost Xtep’s performance. The company’s revenue rose 14% in the first half of this year to 6.52 billion yuan, while its profit rose 12.7% to 670 million yuan. Its gross margin also rose by 0.9 percentage points to 49%. Its most recently announced third-quarter update didn’t disclose specific revenue or profit figures, but said the company continued to post strong growth with retail sales up by a high double-digit percentage amount year-on-year.
Investor caution
Despite strong results from Xtep and its peers, sportswear stocks in general have come under pressure lately due to concerns about China’s economic slowdown and resulting consumer caution. Xtep’s shares are down more than 60% from their high at the start of the year, and fell another 2% the day of the joint venture buyout announcement.
As its stock comes under pressure, Xtep shares now trade at a forward price-to-earnings (P/E) ratio of just 9.8 times. Li Ning trades higher at 11.5 times, while Anta’s 18.7 times makes in the investor favorite due to its market-leading position.
China’s sports shoe market was worth 224.1 billion yuan this year, and recorded compound annual growth of about 8.1% from 2018 to 2023, according to Euromonitor. The growth is expected to slow slightly to about 7.8% over the next five years, reaching 325.8 billion yuan by 2028. CICC believes that Xtep’s Saucony brand will be able to help the company keep posting strong growth, and thus maintain an “outperform” rating on the company. But it also noted the recent weak sentiment towards the broader sportswear sector, prompting it to lower its price target by 28% to HK$5.69.
The current investor caution means Xtep may need to wait a while longer to get recognized for its recent efforts. But such recognition should eventually come if it can maintain its sports shoe focus and continue executing on its potent strategy of making brand acquisitions, leading in technology and engaging in strong promotional activity.
Disclosure: None.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
