Is Topsports (6110.HK) Reaching a Bottom in a Tough Retail Cycle?

The retail sector in China remains under pressure, with shifting consumer preferences, economic headwinds, and the lingering effects of the pandemic reshaping the landscape. Topsports International (6110.HK), a key player in the distribution of global sportswear brands like Nike and Adidas, has faced a challenging 2025/26 fiscal year. Yet, amid these headwinds, the company's strategic pivot toward digital innovation and brand diversification, coupled with Nike's tentative turnaround in China, raises the question: Is Topsports nearing a bottom in this tough retail cycle?

A Challenging Quarter, but Structural Resilience

Topsports reported a high-single-digit year-on-year decline in total sales for Q3 FY2025/26, with its directly operated store footprint shrinking by 13.4% year-on-year. This reflects broader retail sector struggles, including declining foot traffic and a shift toward online consumption. However, the company's gross margin of 41% and a net cash position of RMB1.27 billion suggest operational discipline. Topsports has also reduced total expenses by 5.5% and is optimizing its physical store network, focusing on high-performing locations and themed flagship stores.

The company's reliance on Nike and Adidas remains stark: these two brands accounted for 88% of sales in 1HFY26. Yet, this dependency is not without upside. Nike's recent insider buying activity-led-by figures like Apple CEO Tim Cook and board members-signals confidence in its "Win Now" strategy for China. Nike's Q2 FY26 results, which exceeded Wall Street expectations despite a 17% decline in Greater China revenue, highlight a stabilization in its core markets.

If Nike's localized innovations and partnerships with distributors like Topsports gain traction, Topsports could benefit from a rebound in its largest revenue stream.

Digital and Brand Diversification: A Path to Long-Term Resilience

Topsports' long-term value hinges on its ability to reduce reliance on Nike and Adidas while adapting to China's evolving retail ecosystem. The company has made strides in this direction. Its digital initiatives, including 3,600 mini-program storefronts and 3,700 real-time e-commerce channels, drove double-digit online GMV growth in 1HFY26. This digital pivot aligns with Nike's own shift toward leveraging WeChat and Tmall for localized campaigns, suggesting a symbiotic evolution.

Moreover, Topsports has expanded its brand portfolio, securing exclusive China licenses for Norda, Ciele, and Soar, while developing its own lifestyle brand, ektos. These moves aim to diversify revenue streams and capture emerging consumer trends. However, the transition is not without risks. The company's 5.8% year-on-year revenue decline in 1HFY26 and 9.7% drop in net profit underscore the challenges of balancing short-term profitability with long-term reinvention.

Valuation and Analyst Sentiment: A Mixed Picture

Topsports' trailing P/E ratio of 14.21 and forward P/E of 12.49 place it above both the peer average of 9.1x and the Hong Kong Specialty Retail industry average of 11.4x. A PEG ratio of 6.57 further suggests the stock may be overvalued relative to its growth prospects. Yet, analyst price targets for 2025 range from HK$3.01 to HK$6.50, with an average of HK$4.10. This dispersion reflects uncertainty about the pace of Nike's turnaround and Topsports' ability to execute its digital and brand strategies.

Nike's own valuation offers a cautionary tale. Despite insider confidence and improved Q2 results, the company's shares remain down 24.2% year-to-date. If Nike's China strategy falters, Topsports' recovery could be delayed. Conversely, a successful Nike turnaround could catalyze a rebound in Topsports' fortunes, particularly if the company's digital infrastructure and community-driven retail model gain traction.

Conclusion: A Calculated Bet on Retail's Future

Topsports' current valuation appears stretched given its short-term performance, but its strategic initiatives-digital expansion, brand diversification, and operational efficiency-position it to weather the retail sector's challenges. The company's fate is inextricably linked to Nike's success in China, where the sportswear giant's "Win Now" strategy is still in its early stages. For investors, the key question is whether Topsports can leverage its existing strengths to capitalize on Nike's potential rebound while reducing its exposure to sector-wide risks.

In a market where consumer behavior is rapidly evolving, Topsports' ability to adapt may determine whether it reaches a bottom-or continues to sink. For now, the stock offers a high-risk, high-reward proposition, with its long-term value hinging on the success of both its own reinvention and its most critical partner's revival.