1.3 billion funds quietly lurking, Xtep (01368) strategic focus gains market recognition.

China's number one running brand, XTEP INT'L (01368), has once again entered the "bullpen" of investors. Data shows that as of September 5th, in the past nearly 60 trading days, funds have bought a net amount of 125 million Hong Kong dollars worth of XTEP stocks. In addition, as of September 4th, Southbound funds held 443 million yuan worth of XTEP shares, accounting for a shareholding ratio of 16.73%. With the influx of funds, XTEP's stock price has seen multiple surges since July, rising 52% as of the closing on September 5th compared to the year's low of 2.927 Hong Kong dollars. With solid performance growth, the market actively seeks out "expectation gaps" The market's significant purchase of XTEP shares at this time is largely a recognition of the company's past performance. XTEP's 2024 mid-year financial report shows that in the first half of the year, the company achieved revenues of 7.203 billion yuan, a year-on-year increase of 10.4%; comprehensive gross profit margin increased by 3.1 percentage points to 46%. Operating profit increased by 10.9% to 1.094 billion yuan; net profit attributable to ordinary shareholders increased by 13% to 752 million yuan. In the view, XTEP's solid performance growth is attributed to its main brand positioning in the mass sports market, offering high-quality products at competitive prices, making it highly attractive in price-sensitive third and fourth-tier cities. At the channel end, XTEP's main brand has strengthened its channel penetration in third and fourth-tier cities by expanding store areas and optimizing retail spaces. At the same time, XTEP has also increased the proportion of shopping center stores to adapt to the trend of consumer upgrade. On the other hand, "brand success depends on product depth support" is also a fundamental logic for XTEP to build brand influence. In the running track, XTEP, based on solid product functionality, continuously optimizes product development and design according to changing consumer trends to provide the market with products that have a strong sense of value. It is reported that XTEP's innovation center building in Xiamen will be put into use at the end of September, with departments ranging from planning, research and development to design all moving in, injecting new technological strength into the group's future product development. The emphasis on product technology is evident in the upgrade of the flagship product 160X series. The latest 160X6 series uses injection-molded midsole technology, overcoming industry challenges to give running shoes longer lifespan, more even force distribution, better rebound, lighter weight, and improved runner experience. Based on outcome-oriented view, XTEP's main brand has formed a solid foundation. In addition, after long-term cultivation, XTEP's international brands have become the company's "second growth curve," and the leading brand in professional sports, Saucony, is a new "growth pole" in the XTEP brand matrix. It is understood that XTEP and Saucony brands, with a focus on the running track, have already achieved a market share of 40%, helping XTEP consolidate its leading position as China's top running stock in the capital market. There is a simple stock selection method in investment, which is to evaluate whether the alternative target is the best company in the industry category. Given XTEP's achievements in the running field, the company's high-quality products are the top choice for many running enthusiasts. Combining XTEP's solid leadership position in the running market, investors should have a clear judgment on who is the "best in category". The so-called "investment is in the future." In addition to statically examining the company's operating results, dynamically assessing the company's development prospects is equally important. Because predicting that the company will grow bigger and stronger in the future, investors will then consider it as the best investment choice at the current time point. Therefore, XTEP's recent continuous influx of funds can be seen as investors actively seeking out the "expectation gap" hidden in the sports goods market and the fundamental of XTEP, in order to achieve excess returns in the future. Strategic divestment of KSWISS still remains promising In the view, the "expectation gap" of XTEP lies in the company's bold and transformative changes. In 2015, XTEP launched a three-year strategic transformation, proposing a "3+" strategy with consumers at the core. Through this transformation, XTEP optimized product design and development, supply chain, store management, etc., and thus created China's number one running brand. Global marketing strategist Jack Trout, in his classic work "Positioning: The Battle for Your Mind," states that for market leaders, the best defense is to attack themselves. Today, this viewpoint is equally applicable to XTEP. In May 2024, XTEP announced the proposed strategic divestment of KSWISS and Palladium, with the group continuing to focus on running. The XTEP main brand targets the mass market; Saucony serves the high-end and mature customer base; Mile focuses on trail running and outdoor activities, and the synergy between the brands will be strengthened. From a business perspective, XTEP's strategic divestiture of its fashion sports brands is a way for the company to consolidate its strategic resources and not consume too much energy on non-strategic points. Considering the changing demands of the industry, the consumption of sports shoes and apparel is showing a trend of consumer segmentation, scene subdivision, functional specialization, and personal expression. This means that behind the same sport are different groups of people, different scenarios, and different functional needs. As a sports brand, focusing on niche markets can lead to a multi-brand layout, which is also an important reason why XTEP can operate three running brands for different customer groups. According to data from the People's Data Research Institute, in 2020, the number of Chinese people who regularly engage in sports reached 440 million. The "2022 Research Report on Mass Fitness Behaviors and Consumption" released by the China Sporting Goods Federation shows that running is the most participated sport, accounting for 61%. Currently, XTEP is actively strengthening its running ecosystem. As of the first half of the year, XTEP's special running group had over 2.1 million members, showing great potential for further development among the billions of runners. In this context, XTEP's strategic divestment of KSWISS and Palladium offers many benefits. Through strategic focus, XTEP can concentrate its resources on managing more profitable brands, improving profitability and operating cash flow, and enhancing shareholder returns. It is worth noting that the strategic divestment of KSWISS and Palladium does not mean that XTEP is abandoning its multi-category business layout. On the contrary, if these two brands can achieve success in the future, they can further strengthen the overall competitiveness of the company.Transformation and growth, XTEP INT'L still has the right to convert bonds into shares of KP Global (parent company of KSWISS and Palladium), thus indirectly benefiting from its future success.In my opinion, the future development prospects of K-SWISS and Palladium are promising. Firstly, both brands have achieved significant development under the umbrella of Special Steps, and according to the latest performance data, they have shown strong momentum in the Chinese market. As of June 30, 2024, K-SWISS has 105 brand stores in the Asia-Pacific region (including mainland China); Palladium has 114 brand stores in the Asia-Pacific region, indicating that the brands have laid a solid foundation in the Asia-Pacific market. On the other hand, the current trend of fashionable sports is booming, and K-SWISS and Palladium are expected to benefit from this trend and usher in a strong growth period. It is understood that 2024 is a year of great harvest for tennis in China. Zheng Qianwen, Zhang Zhizhen/Wang Xinyu won the women's singles and mixed doubles silver medals at the Olympics respectively; Zhang Shuai and her partner won the women's doubles silver medal at the US Open. The excellent results achieved by Chinese tennis players have significantly increased the popularity of tennis, promoting the popularization and development of tennis in China. As the pioneer of the world's first all-leather tennis shoes, K-SWISS will also benefit greatly from the "tennis fever". In fact, as early as 2023, K-SWISS signed a forward-looking agreement with China's "tennis ace" Zhang Zhizhen, who became the first Chinese mainland male player to enter the top 50 in the world rankings. With Zhang Zhizhen's outstanding performance at the 2024 Olympics, his commercial influence is bound to soar. It can be said that Zhang Zhizhen is to K-SWISS what Zheng Qianwen is to Nike. On August 20, 2024, K-SWISS officially signed a contract with ATP world No. 6 tennis player Andrey Rublev, further enhancing the brand's visibility. In addition, K-SWISS's continuous optimization in product and channel layout is also ongoing. In March 2024, K-SWISS held a "RE-BORN" global new product launch event. The event showcased the professional tennis sport "COURT" series, helping K-SWISS redefine itself as a high-end fashion sports brand. In June 2024, K-SWISS opened its first tennis concept store in Shanghai, showcasing a classic flagship product line inspired by tennis. This concept store reinforces K-SWISS's brand image as a tennis fashion sports brand. In terms of performance, in the first half of 2024, K-SWISS's driving Special Steps fashion sports division achieved a revenue of 822 million yuan, a year-on-year increase of 9.7%. Among them, revenue from mainland China grew rapidly by 85.7%, accounting for 39.2% of the division's revenue. In conclusion, in the fiercely competitive sporting goods market, Special Steps does not follow blindly but focuses on doing its own thing. Special Steps attaches great importance to market segmentation, finding its own relatively advantageous track in market segmentation, upgrading product advantages in the identified track, establishing correct market marketing, and striving to be the first in the segmented market. This is the reason why Special Steps occupies a leading position in the Chinese sporting goods market, creating its own "golden age" and the essence of creating greater returns for investors.