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361 Degrees (1361 HK) Equity Research Summary

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 report highlights the company's strategic moves and outlook for the future, particularly in the context of China's growing sports industry and the increasing adoption of smart technology.

Key Points

Company Overview

• Close Price: HK$2.66 (as of 23/07/2015)
• Major Shareholder: Ding family (62.1%)
• Market Cap: HK$5,499.82 million
• Issue Shares: 2,067.60 million
• 3M Avg Daily Vol.: 2.78 million

Strategic Partnerships and Innovations

• Baidu Collaboration: 361D is the first company to launch children's smart shoes in partnership with Baidu, featuring GPS tracking, anti-lost alerts, and health monitoring.
• LeTV Sports Partnership: Signed in May 2015, this alliance aims to develop smart sports equipment and digital applications. LeTV Sports is backed by Dalian Wanda Group and Jack Ma's Yunfeng Capital.
• SmartMozo Joint Venture: Formed in May 2015 to enhance cross-border e-commerce. The headquarters is located in the Xiamen Free Trade Zone, which offers tax and logistics advantages.

New Product Launches

• Smart Shoes: Launched in 3Q15, these are expected to provide a first-mover advantage and contribute to sales growth.
• Football Boots Series: Set to launch in September 2015, this new line is anticipated to drive sales and improve margins, especially with the government's push to promote football in China.

Market Outlook

• Growth Expectations: Management guided for double-digit growth in both top and bottom lines for FY15, with 361 Kids expected to grow faster (over 20%) than 361 Adults (over 10%).
• Catalysts for FY16: The 2016 Olympics and European Football Cup are expected to boost sales and brand visibility.
• Valuation: 361D trades at a 7.9x FY16 PE, lower than the peer average of 10.8x, and has the third-highest yield at 3.8% in FY15.

Government Policies and Sports Development

• The Chinese government has been actively promoting sports development, with key policies including increasing sports participation, improving sports infrastructure, and boosting the sports industry's contribution to GDP.
• The State Council aims for the sports industry to contribute 5 trillion RMB to GDP by 2025, which implies a CAGR of 22%.
• The government has also set targets for increasing the number of people exercising regularly to 0.5 billion and achieving 100% coverage of sports facilities in neighborhoods.

Business Performance

• Operational Trends: Indicators such as SSSG, trade fair sales, and same-store sales are showing positive trends, indicating recovery.
• Sales Network: The company has a significant presence in all regions of China, with Northern China contributing the largest share (around 39% in FY14).
• Sales Per Store: Improved slightly over the years, showing a positive trend in sales performance.

Risks

• Slow Sales Growth: Trade fair and same-store sales may not meet expectations.
• Receivable Turnover: Deterioration in this area could affect cash flow.
• New Partnerships: The success of new product launches and partnerships depends on execution and market acceptance.

Key Financial Highlights

Revenue and Profit Growth

• Revenue: RMB 4,951 million (FY12A), RMB 3,583 million (FY13A), RMB 3,906 million (FY14A)
• Net Profit: RMB 715 million (FY12A), RMB 215 million (FY13A), RMB 405 million (FY14A)
• EPS Growth: 88.2% in FY14A

Valuation Metrics

• P/E Ratio: 5.2x (FY12A), 15.7x (FY13A), 8.7x (FY14A)
• P/B Ratio: 0.8x (FY12A), 0.7x (FY13A), 0.7x (FY14A)
• Yield: 7.8% (FY12A), 6.9% (FY13A), 4.8% (FY14A)

Conclusion

361D is positioned to benefit from the growth of the sports industry in China, driven by favorable government policies and rising consumer participation. The company's strategic collaborations with Baidu, LeTV Sports, and SmartMozo are expected to enhance its market position and drive innovation. However, the success of these initiatives depends on effective execution and market response. The company is also poised to benefit from the upcoming 2016 Olympics and European Football Cup, which are likely to boost demand for its products. Despite the potential, there are risks related to sales performance, receivable management, and the effectiveness of new product launches.