What's newChina Dongxiang’s 1QFY23 (April-June 2022) retail sales of the Kappa brand (excluding the Kappa kids’ apparel business) registered a mid-to-high-teens decline YoY, and same-store sales (SSS) saw a mid-to-low-teens decrease. As of end-June, the firm had 1,130 Kappa-branded stores (excluding the Kappa kids’ apparel business).CommentsCOVID-19 resurgence weighed on end-market sales in 1QFY23. Domestic COVID-19 resurgence in 2Q22 weighed on end-market sales. Retail sales of Kappa brand (excluding the Kappa kids’ apparel business) registered a mid-to-high-teens decline YoY. SSS of Kappa brand (excluding the Kappa kids’ apparel business) saw a mid-to-low-teens decrease in 1QFY23 as COVID-19 resurgence impacted offline customer traffic and consumer sentiment. Moreover, some Kappa-branded stores, especially those in shopping malls, suspended operation due to COVID-19. We note that the firm’s end-market sales had gradually recovered to the June 2021 level in June 2022 as the impact of COVID-19 resurgence eased. As of end-June, the firm had 1,130 Kappa-branded stores (excluding the Kappa kids’ apparel business), with a net closure of 53 stores vs. end-March.Online sales remain under pressure. Data from Mktindex.com shows that April-June sales of sports footwear and apparel of the Kappa brand in Taobao ecosystem (Taobao & Tmall) fell 9%, 42%, and 38% YoY. We think the firm’s online sales were under pressure. During the 618 (June 18) shopping festival, retail sales of the Kappa brand for the overall platform dropped about 30% YoY due to weak sales on Tmall. The firm also expanded its e-commerce business to Douyin and booked sound sales growth on the platform. Management plans to continue to optimize the firm’s stores on Tmall, develop new fashionable sports products, re-connect with consumers, and expand its customer base. Meanwhile, the firm plans to expand businesses on content-based e-commerce platforms such as Douyin and Xiaohongshu to launch blockbuster products.Product reforms continue. The firm focuses on the fashionable sportswear market, and launched a series of vintage fashion products which generated positive feedback in FY23. The firm also released co-branded products such as "Kappa X Chibi Maruko-chan" and "Kappa X Britto" to enhance the Kappa’s brand name and product competitiveness. Management indicated that it will continue to strengthen product quality and product culture to enhance the Kappa brand name.Financials and valuationWe maintain our FY23 and FY24 EPS forecasts at Rmb0.03 and Rmb0.08. The stock is trading at 11x and 5x FY23e and FY24e P/E. We maintain OUTPERFORM. We keep our valuation of 8x FY23e P/E for the apparel business unchanged, and grant a discount of 71% to the firm's multi-business model. Overall, we maintain our SOTP-based target price at HK$0.53, offering 30% upside.RisksProlonged COVID-19 pandemic; retail sales environment in the end-market and/or reforms disappoints; investment income fluctuates.