20180314-东英亚洲证券-361度-01361.HK-Runner-up_deserves_a_medal_31页_1mb

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

Core Content

361 Degrees International Ltd. (1361 HK) is a sportswear company that designs, develops, manufactures, markets, and distributes athletic footwear, apparel, and accessories. The research report highlights the company's growth potential in the Chinese sportswear market, particularly in the footwear and kids' wear segments, and recommends a "BUY" rating with a target price of HK$4.50, representing a 65% upside from the current closing price of HK$2.73.

Key Growth Drivers

• Footwear Segment:

  • The Chinese running population is expected to grow significantly, with the market for sports footwear projected to expand at a CAGR of 7.2% from RMB48bn in 2016 to RMB69bn in 2021E.
  • 361 Degrees holds a 3.9% market share in the 2016 sports footwear market and is expected to increase its market share to 3.8% in 2021E.
  • The company's professional running shoes are well-regarded for their value-for-money proposition and have received international recognition, such as being selected as "Best Buy" by Runner's World in 2015.
  • The rise in marathon participation, driven by a healthier lifestyle and economic growth, is expected to boost demand for professional running shoes.

• Kids Segment:

  • The children's sportswear market in China is growing rapidly, with a 5-year CAGR of 6.5% for apparel and 7.2% for footwear.
  • 361 Kids, a separate brand under 361 Degrees, has outperformed the industry with a CAGR of 24.9% from FY11 to FY17.
  • The company is expected to maintain strong growth in this segment, contributing 15.4% of total revenue in 2021E.
  • Market consolidation is anticipated as the market matures, which will benefit leading players like 361 Kids.

Financial Highlights

• Revenue Growth:

  • Revenue is expected to grow at a CAGR of 6.9% from FY16 to FY21E, reaching RMB3.1bn in 2021E.
  • Revenue contribution from footwear is expected to rise to 46% of overall turnover by FY21E.
  • Apparel is projected to contribute 37.5% of revenue in FY18E and 36.8% in FY19E.

• Profitability:

  • Net profit is forecasted to grow steadily, with a CAGR of 6.0% from FY16 to FY20E.
  • Gross Margin (GPM) for kids' wear is 41%, with potential for continued double-digit growth.

• Valuation:

  • The company trades at an 8.6x FY18E PE, which is 1sd below the 5-year average and approximately 50% discount to its peers.
  • The target price of HK$4.50 is based on a 15x FY18E PE, indicating a 12% discount to peers and 65% potential upside.

Investment Rationale

• Attractive Valuation: Despite the market's over-reaction to the major shareholder's sell-down in 2017, the current valuation is seen as undervalued compared to peers.
• Steady Revenue Growth: The company has shown consistent revenue growth, with a 8.0% CAGR in FY16-18E.
• High Dividend Yield: The company has maintained a stable dividend payout ratio of over 40% for the past 4 years, with above-average dividend yields.
• Strong Brand Recognition: The brand has gained international recognition and is well-positioned to expand its presence in overseas markets.

Risks

• Economic Slowdown: A decelerating Chinese economy and declining disposable income may affect growth.
• Retail Demand Weakness: Weaker retail end demand could impact sales.
• Quality Control Failures: Any failure in quality control could damage brand reputation.
• GPM Deterioration: Potential for a decline in gross margins due to increased competition or cost pressures.

Conclusion

The report concludes that 361 Degrees is a "2nd Runner-up" with steady growth, a high dividend yield, and an attractive valuation, making it a compelling investment opportunity. The BUY recommendation is based on the company's strong position in both the professional running shoes and kids' wear markets, supported by demographic and policy-driven growth factors.

Key Financial Metrics (FY16-FY20E)

Appendix Highlights

• Appendix I - Shareholding Structure: Director Ding Wuhao holds 16.46% of shares.
• Appendix II - Management Profiles: Not detailed in the summary.
• Appendix III - Industry Background: The Chinese sportswear market is growing, with increasing demand for professional and kids' wear.
• Financial Summary: The company is expected to maintain a strong financial performance with steady revenue and profit growth, and a solid dividend yield.