20180321-东英亚洲证券-361度-01361.HK-eSports_targets_young,_goes_global_9页_1mb

361 Degrees International Ltd. (1361 HK) Equity Research Summary

Core Content

361 Degrees International Ltd. is a sportswear company that designs, develops, manufactures, markets, and distributes athletic footwear, apparel, and accessories. The company has a strategic focus on the growing eSports market in China, which it sees as a key growth driver. On 14 March 2018, it announced a strategic cooperation with QG Club, one of China's leading eSports teams, to launch co-branded products. These products are expected to be available online in FY18E and in offline stores in FY19E.

The current share price is HK$2.56, and the target price is HK$4.50, representing a 76% potential upside. The company maintains a BUY rating, with the target price based on a 15x FY18E PE, which is 30% below the industry average. This valuation is supported by high visibility of order book value growth, stable dividend payouts, and a strong ex-cash PE.

Key Financials

• Revenue: Expected to grow steadily, with an 8% increase in FY18E and a 6% increase in FY19E.
• Net Profit: Projected to increase by 11.9% in FY18E and 7.2% in FY19E.
• EPS: Expected to rise from HK$0.243 in FY16 to HK$0.297 in FY18E, with a consistent growth rate of 0.3% in FY18E and FY19E.
• Net Margin: Increased from 8.0% in FY16 to 9.2% in FY18E.
• EBITDA: Projected to rise from RMB 983 million in FY16 to RMB 1,181 million in FY20E.
• EBITDA Margin: Maintained at around 19.2% in FY18E and is expected to slightly decline to 18.7% in FY20E.
• Operating Margin: Remains stable at around 17.5% in FY18E.
• Gross Margin: Slightly declined from 42.0% in FY16 to 41.4% in FY18E, but is expected to stabilize in the following years.
• ROE: Increased from 7.6% in FY16 to 8.9% in FY18E.
• P/E Ratio: Projected to decrease from 10.8x in FY16 to 8.3x in FY19E.
• P/B Ratio: Stabilized at 0.8x in FY16 and is expected to decline to 0.7x in FY19E.
• Yield: Increased from 4.0% in FY16 to 5.1% in FY20E.
• DPS (Dividends per Share): Projected to rise from HK$0.110 in FY16 to HK$0.134 in FY20E.
• Net Debt/Equity: Decreased from 42.8% in FY18E to 38.4% in FY20E.

Strategic Highlights

• eSports Strategy: Co-branding with QG Club, a top-tier team in LPL and King of Glory, is expected to enhance brand recognition and drive online sales.
• Market Penetration: eSports is gaining traction in China, with King of Glory achieving 64 million daily active users and a 21.8% mobile penetration rate.
• Target Demographics: The eSports audience and 361 Degrees' target consumers are similar, being primarily aged 15-35 and located in Tier 2 and below cities.

Risks

• Execution Risk: The success of the eSports strategy depends on effective implementation.
• Market Response: There could be a cold reception to the new eSports products.
• Retail Demand: Lower-than-expected retail demand could impact performance.

Peer Comparison

• Sector Average: The company's P/E and P/B are below the sector average, suggesting potential undervaluation.
• Competitors: Anta Sports, Li Ning, and others in the sportswear market are also key players, with varying financial metrics and growth rates.
• Global Peers: Companies like Nike, Under Armour, and Adidas have higher valuations and market caps, indicating a competitive landscape.

Summary

361 Degrees International Ltd. is a Chinese sportswear company that has identified the eSports market as a significant growth opportunity. By partnering with QG Club, it aims to enhance brand recognition and boost online sales through co-branded products. The company maintains a BUY rating with a target price of HK$4.50, based on a 15x FY18E PE. Financial performance has shown steady growth in revenue and net profit, with a consistent EPS growth rate. The company's financial metrics, including P/E and P/B, suggest it may be undervalued relative to its peers. Despite the potential, execution and market response remain key risks to consider.