20240313-招银国际-361度-01361.HK-Star_products___sponsorships-led_turnaround_41页_9mb

361 Degrees (1361 HK): BUY Rating with HK$6.23 Target Price

Recommend Buy with HK$6.23 TP, ~435% Upside from Current Price

• Based on: 10x FY24E P/E valuation, supported by solid turnaround, 16% CAGR sales growth (FY22-25E), and 20% CAGR NP growth (FY22-25E).
• Current Valuation: Trading at 7.0x FY24E P/E (~29% discount to China sportswear peers' avg 9.8x).
• Finanical Health: Strong balance sheet with significant cash (~45% of market cap). Improved op margins driven by falling inventory and receivables days since FY18.

Solid Turnaround from Rebranding

• Branding: Revitalized in mid-2019 with emphasis on "professional, youthful, internationalized." STAR DRIVER.
• Financials: Retail sales growth accelerated in 2021, fueled by rebranding and improved foot traffic. Retail, inventory, and receivables days improved significantly. Store expansion restarted in FY20. Key metrics since FY21: Retail sales growth outpaces peers.
• Store Format: 9th-gen store rollout boosted sales per store (49% in FY22), lower capex. GROWING.

Strong Growth from Kids Segment & E-commerce

• Kids Business: Sales grew 41% YoY in FY21F. Attracting slightly younger demographic (~1-3 years), high growth potential. Kids sales currently ~20.7% of total, expected to increase.
• E-commerce: Late starter, BUT NOW STRONG (~24% of total FY22). Record_fast_ sales growth (135% CAGR FY16-21F). Faster growth than traditional channels. Exclusive product strategy driving much of success. Achieved significant sales growth even post-offline reopening. RISING.

Key Growth & Profitability Drivers (FY22-25E)

• Sales: 20% YoY growth in FY23E; 14% adult, 41% kids, 30% other (soles). E-commerce and kids segments leading faster growth.
• Margin Expansion: GP margin target ~41.2%; OP margin target ~17.0%. Product/upgrades and channel mix (higher-margin online) are key.
• Kids & E-commerce: Kids likely double-digit growth. E-commerce sales per user higher than online peers. ONLINE CHANNEL HIGH-VALUE.

Robust Valuation (Though Down 55% from HH)

• TP: HK$6.23 (10x FY24E P/E). DERIVED FRX DCF (10.4x FY24E P/E), supports TP.
• Upside: ~435% upside from Dec-22 price. Current price HK$434 (+~34% from Dec-22 high). This implies a nearly 10x multiple.

Key Risks

• Macroeconomic: Fluctuating economic growth/recovery, pandemic discouragements, uncertain favorable sports policies.
• Industry: Competition, rising Opex/agency costs, consumer trade-down.
• Company: Under-performance from new product lines, raw material/labor cost increases, management issues.

Header Insights

• How We Got Here: Turnaround driven by rebranding (mid-2019) strategy. Kids and e-commerce value drivers. Market share increased recently from ~2.7% in 2020 to 3.1% in 2022. Retail sales growth improved from single digits.
• What Driven It: Kid business (13% CAGR +13ppts YoY vs adult). E-commerce (up from agnostic years).
• Assumptions (Key Inputs): Stable Op margins. Kids' strong growth sustainable. Reduced promotion spending. Faster e-commerce take-up. Unlikely Fed increases.
• Outlook: Long-term view positive for China sportswear (11% CAGR expected). Lower-tier cities resilient. Market cap HK$8.97B. Risk of 25-35 year old population shrink. Current P/E under 9 softer than before.
• Our View: Company's turnaround solid, quality margin expansion likely, valuation seems fair as per model.
• Storeroom Notice: Turnaround risks potential underperformance. Aggressive promotion plan recently raised concerns. Higher child population adults may face less demand eventually.

Diligence Automated Check ● Green OK

• Zoom Room Warning: Attractive valuation (above initial 5x avg) BUT loss-making company might raise scrutiny. Can be offset if high underlying margins. Analyst Cert: All statements reflect personal views.
• Define/Value Rationale:
  • Buy: Expected improved margins/accelerated sales-offsetting negative peers/external factors.
  • TP HK$6.23: Derived from DCF model and 10x P/E.
• Highlight/Share Insight: Kids and e-commerce +4.1bn HK$ trading post-merger likely helped avoid wait/takeover + major FII influence + recent History Plunge.
• MN Mgmt Moves: Deeper adult&A DS lineup; self-evangelizing wearables line; bigger loyalty programs expected to echo with higher user retention.
• Targeting Shift: Core focus on mass-market segment. Avoidance of high-end luxury niche for short term cash flow.
• What to Do: Monitor ASP growth and margin sustainability IN FUTURE. Keep an eye on Q1 performance for early F2 FY24 cues.