On Tuesday, HSBC revised its stock price target for Topsports International Holdings (6110:HK), a prominent sportswear retailer, to HK$5.50 from the previous HK$6.60. The firm has decided to maintain a Hold rating on the stock. This adjustment in the price target reflects a 16.7% reduction and is based on several financial recalculations made by the firm.
The reduction is primarily due to a downward revision of the company's earnings projections by 9-17%. Moreover, HSBC increased the weighted average cost of capital (WACC) for Topsports International from 8.1% to 9.0%.
This change in the WACC is attributed to an adjustment in the company-specific beta from 1.20 to 1.40. HSBC has made these revisions to account for the overall devaluation in the sportswear sector, which has seen a substantial decrease in the sector's price-to-earnings ratio by 37% since January 2023.
HSBC's rationale for the new stock price target also includes the impact of slower growth within the sportswear industry. Despite these challenges, the firm has rolled its discounted cash flow (DCF) model forward, which partially offsets the impact of the revised earnings and increased WACC.
The analyst from HSBC further clarified their position, stating that despite the lower price target, the terminal growth rate assumption for Topsports International remains unchanged at 1.0%. This indicates that while short-term headwinds have led to a more cautious valuation, the long-term growth expectations for the company have not been altered.
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