September 27, 2010 361°(1361 HK) HK$10.00 COMPANY INSIGHTS Target price Up/downside +39% Play the Asian Games Current price HK$7.18 Prestige sponsorship of the Asian Games and the launch of kids’ specialty shops to build brand equity and drive sales… 361° ad linking brand to the Asian Games and the Games Town Gymnasium Matthew Marsden Analyst We initiate coverage on 361° at BUY with at target price of HK$10.00. [email protected] +852 3411 3710 This stock has been on a tear, gaining 99% since listing in June 2009, but we see a series of positive catalysts that will drive the shares even higher: Summer Wang [email protected] Our research shows that the 361° brand is genuinely differentiated, +852 3411 3723 enabling the company to maintain growth in an increasingly competitive sports market. Prestige sponsorship of the Asian Games, to be held this Technical analysis contributed by: November in China for the first time in 20 years, should build brand Seung Min You and Sang Cheol Im [email protected] equity and drive sales. Samsung Securities Korea* 361°‘s launch of specialty kids‘ stores will provide a new leg of growth and gives upside risk to our forecasts; we view this as a ―free option.‖ SAMSUNG vs THE STREET We anticipate that the 1QFY11 (year ends June 30) trading update—to be Stock market fashion in released in late October—will continue to show healthy same-store-sales apparel stock‘s valuation? growth as retail consultant S1MONE helps 361° redesign stores to No. of Bloomberg estimates 5 enhance efficiency. Target price vs Bloomberg mean +24% We look for 23% YoY bottom line growth in the 1HFY11 results to be FY11 EPS vs Bloomberg mean +3% released in February 2011. FY12 EPS vs Bloomberg mean +5% Bloomberg rating Buy/Hold/Sell 5/0/0 We argue that the market‘s current valuation for some apparel stocks, relative We cannot help musing on the differential in to sportswear, smacks of irrationality. This will inevitably right itself in the valuation multiples that the market is currently longer-term, much to the benefit of 361° shareholders. apportioning to certain apparel stocks. The branded kids retailer Boshiwa has IPOed in We apply a P/E target of 14.9x to our calendarized 2011E EPS to reach our 12- HK this month at a P/E of 34.8x 2010. month target price of HK$10.00, representing 39% upside. Longer-term, we HK listed menswear retailers China Lilang and see a bright future for the stock given our forecasted EPS CAGR of 20% across Trinity trade on 2011 P/E multiples of 22.1x and 28.8 x, respectively, according to Bloomberg. FY11-13E. 361° is trading on a CY 2011E P/E of 10.7x. Figure 1: Summary financial data It occurs to us that there is a certain amount of Rmb m, (year ends Jun 30) FY08 FY09 FY10 FY11E FY12E FY13E stock market fashion in these valuations; Revenue (Rmb m) 1,317 3,447 4,331 5,429 6,560 7,846 Menswear and kidswear are “hot”, while YoY growth 252.8% 161.7% 25.7% 25.4% 20.8% 19.6% sportswear is simply not, irrespective of the fact Net profit (Rmb m) 179 632 917 1,100 1,332 1,595 that the majority of sportswear is, in fact, casual YoY growth 681.2% 253.2% 45.0% 19.9% 21.1% 19.7% men’s and kids’ attire (we estimate that around Net profit margin 13.6% 18.3% 21.2% 20.3% 20.3% 20.3% 65% of existing sales at 361° are to men and kids). Diluted EPS (Rmb) 0.12 0.42 0.44 0.53 0.64 0.77 P/E NA 15.0x 14.2x 11.8x 9.8x 8.1x Does all this smack of market irrationality that will Dividend yield NA 2.2% 2.1% 3.4% 4.6% 6.2% inevitably right itself in the long-term, much to the ROE (average) 80.5% 44.7% 30.9% 28.9% 28.3% 27.8% benefit of 361° shareholders? We think so. Note: P/E based on HK$7.18 as of market close Sep 24 Source: Company data, Samsung Securities estimates This report has been prepared by Samsung Securities (Asia) Limited. *Not licensed in Hong Kong nor carrying on any business in Hong Kong. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 35 361° THE PITCH RETURN FORECAST 361° is under-covered - only five analysts have forecasts on Bloomberg, compared to 29 for both Li Ning and Anta - and undiscovered - 361° trades on 11.8x FY11E P/E yet offers a FY11-13E earnings CAGR of 20%. Given the strength of the brand, excitement around the company’s sponsorship of the 2010 Asian Games and the 2011 University Games, entry into the kids’ marketplace and the prospects for sustained earnings growth, we think that 361° is fundamentally undervalued and should continue to rerate upwards. ★<15% ★★15-30% ★★★>30% Stars reflect absolute value of up/downside to target price Fundamentals ★★★ FUNDAMENTALS 361 has good brand differentiation, is entering into the kids’ marketplace and has decent prospects for The 361° brand is differentiated from the competition by embodying a pure sustained earnings growth. love of sport, more about participation than winning. Valuation ★★★ Our P/E based 12-month target price implies 39% O&M’s excellent creative work for two advertising campaigns has helped to upside, and we initiate with a Three-Star-BUY. set a new manifesto for 361° as an everyday brand. Technicals ★★★ We see continuing positive momentum. The company’s prestige sponsorship of the 2010 Asian Games and 2011 University Games increase brand presence and credibility. VALUATION Moreover, 361° is wholeheartedly entering into the kids’ market. 06-10A 06-11E 06-12E A new series of flagship 361° Town stores, over 1,000 sqm in size is being P/E 14.2x 11.8x 9.8x rolled out across China. P/B 3.8x 3.1x 2.5x EV/EBITDA 10.7x 8.4x 6.9x Our checks at the company’s factory and recent trade fair reveal good Dividend yield 2.1% 3.4% 4.6% operations. ROE 30.9% 28.9% 27.8% FY10 results show decent momentum. We forecast EPS CAGR of 20% across FY10-13E. SAMSUNG vs THE STREET Samsung Street VALUATION Target Price HK$10.00 HK$8.09 EPS 06-11E Rmb0.53 Rmb0.52 We use a 10% discount to the peer group average 2010 P/E to arrive at a EPS 06-12E Rmb0.64 Rmb0.61 multiple target of 14.9x. Buy/Hold/Sell Buy Buy We use calendar 2011E EPS to arrive at a 12-month price target of AT A GLANCE HK$10.00, representing 39% upside and a Three-Star-BUY rating. Business summary We cannot help wondering if the market’s current valuation for some 361° is one of the leading mass market sportswear apparel stocks, relative to sportswear, smacks of irrationality. We think that brands in China. The company is the fourth-largest this will inevitably right itself in the longer-term, much to the benefit of 361° listed Chinese sportswear brand by revenue and market cap. shareholders. Sector Consumer Market cap. HK$14,830m TECHNICALS Market cap. US$1,911m Shares out. (float) 2.07bn (29%) With the major resistance level being breached in early August, our 52 week high-low HK$7.20-3.80 technical analysts see a continuing uptrend. Bloomberg 1361 HK Price performance 1M 6M 12M 361° +13% +16% +83% BEAR VIEWS & BLUE SKIES Hang Seng Index +7% +5% +5% In a bear view scenario, assuming slowing top line growth, declining net profit margin (to 18%) and low valuation multiple (11.8x P/E), we arrive at a valuation of HK$5.73, implying 20% downside. In a blue sky scenario using a DCF valuation, we arrive at a fair value of HK$12.20, implying 70% upside. The risk/reward scenario for the stock looks attractive. THREE NUMBERS THAT MATTER Trade fair YoY Sales Growth Oct-Dec 2010 EPS CAGR FY11-13E ROE FY11E 31% 20% 29% The 2Q FY11 trade fair saw an impressive 31% We see a bright future for the stock given our 361° offers a stable and attractive ROE of 29% in YoY increase in sales, reflecting the benefit of forecasted EPS CAGR of 20% across FY11-13E. FY11E. 361°’s prestige sponsorship of the Asian Games. September 27, 2010 361° INDEX Business fundamentals p3 Valuation p16 Technical analysis p20 Bear Views & Blue Skies p22 Business fundamentals ★★★ 361 has good brand differentiation, is Business Fundamentals entering into the kids’ marketplace and has decent prospects for sustained earnings growth. Power to the people! 361° is one of the leading mass-market sportswear brands in China. Just seven years after inception in 2002, the company listed on the HKEX and has become the fourth- largest listed Chinese sportswear brand by revenue (at end CY09 – see page 15). Over the past three years, the retail network at 361° has rapidly grown to around 7,000 points of sale. Over 70% of its stores are located in fast-growing tier-3 and 4 cities, with 21% of them in tier-2 cities. The company plans to open a further 600-800 361° stores, plus an additional 300 devoted kidswear stores, per year over 2010-2012. In this report, we explore the 361° brand and its growth prospects, and conclude that the shares are fundamentally undervalued.