Guosen Securities issued a research report expressing optimism about TOPSPORTS' (06110) operational resilience and long-term cash returns. Despite a challenging retail environment marked by weak offline consumption and intense online promotions, the company demonstrated narrowing revenue declines in H1, stabilized gross margins, and maintained robust cash flow with a high dividend payout ratio of 102%. The brokerage expects sustained efficient cash generation and high dividend distributions in the medium-to-long term. It reaffirmed a fair valuation range of HK$3.8-4, corresponding to 17–18x FY2026 P/E, and retained an "Outperform" rating.

**Key Highlights from Guosen Securities:** 1. **Narrowing Revenue Decline, Outperforming Retail & Core Brands** FY2026 H1 revenue fell 5.8% YoY to RMB12.3 billion amid macroeconomic headwinds. - By channel: Retail revenue dropped 3.0% to RMB10.6 billion; wholesale revenue declined 20.3% to RMB1.62 billion. - By brand: Core brands (Nike, Adidas) revenue slid 4.8% to RMB10.81 billion; other brands fell 12.2% to RMB1.41 billion. Net profit attributable to shareholders decreased 9.8% YoY to RMB790 million. Gross margin dipped slightly by 0.1 ppt to 41.0%, attributed to a higher mix of lower-margin online sales, partially offset by retail expansion and brand partner support. Expense ratio edged up 0.1 ppt to 33.2%, reflecting prudent cost control. Net margin declined 0.3 ppt to 6.4%, mainly due to a 49.5% YoY drop in other income (primarily government subsidies) to RMB39 million.

2. **Cash Flow & Inventory Metrics** Operating cash flow netted RMB1.35 billion, down 48.2% YoY, with a net cash conversion ratio of 1.7x. Inventory days rose 1.7 days YoY but remained stable, while receivables/payables days improved by 3.5/6.5 days, influenced by Lunar New Year timing. The interim dividend payout ratio stood at 102.2%, with a per-share dividend of 13.0 HK cents.

3. **Store Optimization & Membership Growth** As of August 2025, directly operated stores decreased by 1,125 to 4,688 (-19.4% YoY), with total sales area down 14.1% YoY but average store sales area up 6.5%. Cumulative users reached 89.1 million (+10.0% YoY), with members contributing 92.9% of sales. Repeat customers drove 60% of spending, while high-value members (mid-single-digit % of total) accounted for nearly 35% of sales.

4. **Digital & Omnichannel Strength** Online retail sales grew double-digits YoY, led by content e-commerce (e.g., Douyin and WeChat Video with 800+ accounts; Douyin GMV ranked #1 in sports/outdoor category). Private domain operations accelerated, with 3,600+ mini-program stores (top-ranked in WeChat’s sports/outdoor segment). Instant retail expanded to 3,700+ stores.

5. **Strategic Focus: Running & Outdoor Segments** TOPSPORTS entered exclusive partnerships with premium brands (Norda, Soar, Ciele, Norway’s Norrna) and launched its first running multi-brand store *ektos*, enhancing its "professional + trendy" product matrix to transition from distributor to brand operator.

6. **Q2 Performance & Outlook** Q2 (June–August 2025) total sales declined high-single-digits YoY (Q1: mid-single-digit drop). Direct store area reductions widened to 3.3% QoQ and 14.1% YoY (Q1: -1.3%/-12.3%), though management expects stabilization in H2. FY2026 guidance maintains flat net profit with margin improvement.

**Risks:** Weaker-than-expected consumer demand; delays in channel optimization; brand reputation risks.