Company Reports

Narrow-moat Topsports’ second-half fiscal 2024 (ending February) earnings were in line with our estimates. However, management's guidance for fiscal 2025 was somewhat ambiguous, indicating a wide range of positive revenue growth. We made minor updates to our model but kept our fair value estimate unchanged at HKD 7.50 per share. We expect a five-year revenue compound annual growth rate of 7% for Topsports. We think shares are undervalued currently, trading at a modest 13 times fiscal 2025 earnings, 7% dividend yield, and 25% discount to our valuation.

We lowered Topsports’ fair value estimate to HKD 7.50 per share from HKD 7.70, reflecting a cautious sales forecast. With the macroeconomic climate prompting consumers to opt for less expensive alternatives, we anticipate slower growth from Nike and Adidas, two of Topsports' key brands. Despite this adjustment, we still view Topsports' shares as undervalued, trading at a modest 12 times forward earnings and offering a mid-single-digit dividend yield.

Topsports receives more than 80% of its revenue from selling Nike and Adidas products in China. The company operates more than 6,500 stores across China, providing more selection and convenience than any other sportswear retailers. Topsports is Nike and Adidas' largest retail partner in China, helping them reach consumers across hundreds of Chinese cities.

We maintain TopSports' fair value estimate following its report of in-line fiscal third-quarter sales (ending Nov. 30). Although management refrained from issuing specific numerical forecasts, it still expects the company's sales growth to align with the overall trend of the sportswear industry for the fiscal year. We fine-tune our near-term forecasts and continue to view TopSports shares as undervalued, trading at a 20% discount to our fair value estimate of HKD 7.70.

Topsports receives more than 80% of its revenue from selling Nike and Adidas products in China. The company operates more than 6,500 stores across China, providing more selection and convenience than any other sportswear retailers. Topsports is Nike and Adidas' largest retail partner in China, helping them reach consumers across hundreds of Chinese cities.

We initiate coverage of Topsports, the largest distributor for Nike and Adidas in China, with a narrow moat rating, Exemplary Morningstar Capital Allocation Rating, HKD 7.70 fair value estimate, and 4-star rating. Our fair value estimate implies a price/earnings ratio of 19 times, a free cash flow yield of 7%, and dividend yield of 6.6% for fiscal 2024 (ending February).