Interest Rate Rises, Sales Network Construction Opens Orderly, XTEP Is "Not Ordinary".

XTEP International (01368) grew 174.3% to 1 billion 408 million yuan in the first half of the year, and the gross profit margin increased 4.6 percentage point to 36.8%.

Equity holders should account for an increase of 214.1% to 255 million yuan in profits.

XTEP brand retail store sales increased 45.4%, the company's basic earnings per share increased by 190% to 0.16 yuan.

The company declared an interim dividend of HK $5 per share.

The company's revenue increased sharply.

During the period, it benefited from the expansion of the company's brand promotion and retail network, and the income of footwear and clothing products recorded a rapid growth. The income from footwear and clothing increased by 86.3% and 414% respectively over the same period last year.

With the increase in revenue, the gross profit margin of the company's products increased from 32.2% in the same period last year to 36.8%. This is mainly due to the company's efforts to develop a brand strategy with gross margin being higher than that of its original equipment manufacturers.

Gross profit margin steadily rising

During the period, the retail price of the company's products increased, of which the average selling price of footwear products increased by 6.1 yuan or 8.9%, while the brand growth of clothing products was the most significant, increasing by 6.2 yuan or 16.1%.

In addition, with the expansion of sales, the bargaining power of the company has been enhanced, thereby achieving better scale economic benefits and reducing the cost of raw materials.

The cost of footwear and clothing products increased by only 7.2% and 13.3% respectively during the period.

The increase in revenue and scale effect resulted in a 36.1% increase in gross margin of footwear products compared to 30.9% last year, mainly due to the increase in sales of XTEP brand shoes.

With the Disney movement of higher gross margin and the growth of Colin brand sales, the gross profit margin of clothing products increased from 32.2% in the same period last year to 36.8%.

Orderly sales network construction

In terms of the sales network expansion plan, the company plans to open 1100 retail stores in 08 years and expand the total floor area by about 100000 square meters, so as to enhance the average sales area and overall profitability of retail outlets.

The company will identify strategic and prime locations as flagship stores and sell its XTEP brand products.

At present, there are three flagship stores located in Changsha (shop area of about 3000 square meters), Wuhan (shop area of 2000 square meters) and Hefei (shop area of 2000 square meters).

The company's current plan is to identify some 10 strategic locations for flagship stores in 2008. We believe that the opening of flagship stores in the golden section is expected to further enhance the brand image of the company.

Retail channels are developing steadily.

During the period, the three retail outlets of XTEP, Disney and Colin totaled 5115, with a net increase of 468 or 10.1%, of which 4733 of Anta's brand stores increased by 353 or 8.1%.

At present, the XTEP, Disney movement and the Colin brand retail network run by the company distributors and the three party retailers all over the 31 provinces, autonomous regions and municipalities directly under the central government.

Buy rating for company

We expect the company's revenue and net profit to increase by 96% and 114% to 2 billion 676 million yuan and 475 million yuan respectively in the past 08 years, and the current share price of the company is equal to 08 times the expected price earnings ratio of 08 times.

We give the company a buy rating and a target price of HK $2.6 in the next 6 months, equivalent to 12 times the expected price earnings ratio in 08.