361 Degrees International Ltd. (1361 HK) Equity Research Summary
Core Content
361 Degrees International Ltd. is a company involved in the design, development, manufacturing, marketing, and distribution of sportswear products, including athletic footwear, apparel, and accessories. The company has faced a short-sell report from GMT Research, which criticized its performance and raised concerns about potential fraud due to its location in Fujian. However, the report's claims are deemed unfounded by the research team, who maintain a BUY rating with an unchanged target price of HK$4.50, based on a 14x FY19E PE ratio.
Key Data
- Close Price (14/06/2018): HK$2.54
- Target Price: HK$4.50 (+77%)
- 12 Months High: HK$2.54
- 12 Months Low: HK$4.34
- 3M Avg Daily Vol (mn): 2.35
- Issue Share (mn): 3.78
- Market Cap (HK$mn): 2,067.60
- Fiscal Year: 12/2017
- Major Shareholder: Director Ding Wuhao (16.46%)
Main Allegations from GMT Research
- Previous frauds in the Chinese sportswear sector are attributed to Fujian-based companies.
- Domestic brands have experienced revenue growth while losing market share to international giants like Nike and Adidas.
- Domestic brands have higher OPM than foreign brands.
- Domestic brands have low inventory levels.
- Low debt/sales ratio indicates a high risk of fraud.
Counterpoints and Analysis
- Hasty Generalization: The research team argues that GMT's claims are based on old news and do not reflect the current state of the market.
- China's Sportswear Development: The growth of the sportswear sector in China is compared to the US in the 1970s, driven by rising middle-class consumers and high CP ratio products.
- Foreign Brands' Performance: Adidas and Nike have higher OPM in the Greater China market than domestic brands.
- Inventory Management: The domestic brands' inventory issue was due to channel stuffing in the past, and now they have ERP systems in place to manage it.
- Debt and Risk: 361 Degrees has the highest debt/sales ratio among peers, which indicates lower fraud risk, supporting the low PE valuation.
Financial Summary
| Metric |
FY16 (RMB mn) |
FY17 (RMB mn) |
FY18E (RMB mn) |
FY19E (RMB mn) |
FY20E (RMB mn) |
| Revenue |
5,022.7 |
5,158.2 |
5,569.5 |
5,958.3 |
6,316.7 |
| Net Profit |
402.7 |
456.7 |
511.1 |
548.0 |
578.5 |
| Diluted EPS (HK$) |
0.243 |
0.265 |
0.297 |
0.318 |
0.336 |
| Net Margin (%) |
8.0 |
8.9 |
9.2 |
9.2 |
9.2 |
| P/E (x) |
10.6 |
9.7 |
8.7 |
8.1 |
7.7 |
| Yield (%) |
4.3 |
4.1 |
4.6 |
5.0 |
5.2 |
| DPS (HK$) |
0.110 |
0.106 |
0.119 |
0.127 |
0.134 |
Debt Composition
| Company |
Ticker |
Year |
ST Debt/Debt (%) |
Debt/Sales (%) |
| Anta |
2020 HK |
12/2017 |
100 |
1 |
| 361 Degrees |
1361 HK |
12/2017 |
0 |
50 |
| Xstep |
1368 HK |
12/2017 |
45 |
36 |
| Li Ning |
2331 HK |
12/2017 |
46 |
1 |
Peer Group Comparison
| Company |
Ticker |
Price (HK$) |
Mkt Cap (US$m) |
P/E (x) |
P/B (x) |
EV/EBITDA (x) |
Net Margin (%) |
ROE (%) |
Dividend Yield (%) |
Payout Ratio (%) |
| 361 Degrees |
1361 HK |
2.54 |
669 |
9.7 |
0.78 |
1.8 |
8.0 |
8.3 |
4.1 |
45.2 |
| Anta Sports Prod |
2020 HK |
9.18 |
2,556 |
34.9 |
3.2 |
17.1 |
5.8 |
11.4 |
N/A |
74.7 |
| Li Ning Co Ltd |
2331 HK |
1.46 |
994 |
15.7 |
1.0 |
7.2 |
2.1 |
6.3 |
1.4 |
33.7 |
| Xstep Intl |
1368 HK |
45.15 |
15,445 |
31.5 |
7.2 |
21.3 |
20.0 |
35.5 |
2.2 |
0.0 |
| Global Peers |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Risks
- Sales Growth Pullback: Due to channel optimization efforts.
- Execution Risk: In the implementation of the eSports strategy.
- Lower-than-Expected Sales: From trade fairs and retail growth.
Recent Reports
| Date |
Company / Sector |
Stock Code |
Title |
Rating |
Analyst |
| 14/06/2018 |
361 Degrees International |
1361 |
Convincing BUY with TP HK$4.50 unchanged |
BUY |
Yuji Fung/Dallas Cai |
| 16/05/2018 |
361 Degrees International |
1361 |
1Q18 operating data on track |
BUY |
Yuji Fung/Dallas Cai |
| 29/05/2018 |
China Sportswear Sector |
- |
Raising efficiency, reaching for the stars |
BUY |
Dallas Cai |
Summary
361 Degrees International Ltd. (1361 HK) is a sportswear company that has been impacted by a short-sell report from GMT Research, which questioned its performance and raised concerns about fraud. The report's claims are viewed as unfounded and not reflective of the broader sportswear sector in China, which is growing due to the rising middle class and the shift to lower-tier cities. The company maintains a BUY rating with an unchanged target price of HK$4.50, based on its attractive valuation, decent dividend yield, and rising brand awareness in the eSports segment. Financial metrics indicate consistent growth and a healthy margin profile, with the company showing a strong financial position. The research team emphasizes the importance of not drawing hasty conclusions and highlights the company's potential in the evolving Chinese sportswear market.
