Monday, November 16, 2015
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
361 Degrees (1361 HK) Eugene MAK Lewis WONG 852-3189 6343 852-3189 6160 Attractive risk/return driven by strong sportswear sector [email protected] [email protected] ■ 361 Degrees (361) has been relatively overlooked despite the current sportswear sector upcycle due to company specific risks. WHAT’S NEW ■ We view the realization of the risks to be unlikely and hence 361 Assume coverage to be undervalued, making it a potential laggard play ■ Attractive risk/reward given 9x FY16E P/E vs 13x sector average BUY and earnings growth outlook. Assume coverage with BUY rating Previous N/A
Riding the sportswear upcycle wave Price HK$2.99 We expect a FY15E/16E/17E earnings growth of 20%/11%/14% YoY with 12-month Target Price HK$3.61 (+21%) upcoming share price catalysts from i) FY15 annual results and ii) double (Potential upside) digit sales fair value YoY growth figures to be maintained for its upcoming 3Q/4Q16 sales fairs. Earnings growth will be driven by FY5E/16E/17E Previous N/A revenue growth of 11%/14%/13% YoY as China’s sportswear sector Price Performance continues to turnaround from increased consumer demand (from (%) increased demand in sports performance products as health awareness 60 1361 HSI Index grows and participation in sports by the Chinese increases). As one of the leading Chinese sportswear brands, we expect 361 to continue to 40 benefit from this sector upcycle which can be seen through successive 20 improvements in 361’s SSSG (1Q14’s 2% to 3Q15’s 8%) and sales fair figures while channel inventory remains healthy at 4x inventory-to- 0 monthly sales. Our FY15E-17E forecast is -1%/-12%/-18% vs consensus. -20 Valuation punished by unlikely to be realized risks Nov/14 Mar/15 Jun/15 Oct/15
Given the certainty in the sportswear sector’s upcycle and 361’s earnings Source: Bigdata outlook, we consider 361’s risk/return attractive despite risk factors (high % 1m 6m 12m receivable days of >160, weaker brand positioning than several HK-listed 1361 HK 7.1 (0.0) 36.9 HSI 0.7 (16.5) (4.4) peers and possible share placement) which is unlikely to be realized yet the market has still punished 361 through its valuation. Sector: Textile & Garment Assume coverage with BUY rating, TP HK$3.61 Hang Seng Index 22396 TP based on an 11x FY16E target P/E, 1SD above 361’s 8x forward HSCEI 10181 mean P/E, which is justified by the sportswear sector’s current upcycle Key Data turnaround. Our target P/E is still conservative as it is below the current 52-week range (HK$) 1.7-3.35 sportswear sector average of 13x P/E which is justified by the company Market cap (HK$ mn) 6182 specific risks. In all, we assume coverage with BUY on attractive Avg. daily volume (mn) 2.39 risk/return given positive earnings outlook and undemanding valuation. BVPS (RMB) 2.4 Shareholding Structure Financials Ding Wuhao 18.27% RMB mn 2013 2014 2015E 2016E 2017E Ding Huihuang 17.41% Ding Huirong 17.41% 3,583 3,906 4,336 4,922 5,546 Revenue Wang Jiabi 9.38% -27.6 9.0 11.0 13.5 12.7 Growth (%) No. of shares outstanding (mn) 2068 Recurring net profit 169 422 507 561 638 Free float 28.77% -74.9 149.1 20.2 10.6 13.6 Growth (%) Related Research 0.08 0.20 0.25 0.27 0.31 Recurring EPS (RMB) 1. Xtep International (1368 HK) 2Q16 sales fair takeaways: DPS (RMB) 0.04 0.08 0.10 0.11 0.12 Confident on FY16E outlook, “BUY” October 02, 2015 2. Xtep International (1368 HK) 1H15 earnings up 21% YoY, 30.2 12.1 10.1 9.1 8.0 P/E (x) - recurring stronger 2H15E ahead, “BUY” August 21, 2015 P/B (x) 1.1 1.0 0.9 0.8 0.8 3. Xtep International (1368 HK) Successive improvements continue, “BUY” July 08, 2015 ROE (%) 4.5 8.1 9.6 9.6 9.9 Sources: Company data, CMS (HK) estimates
Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1 Monday, November 16, 2015
China sportswear sector continues to improve and so will 361 Degrees We are currently experiencing a turnaround in the China sportswear sector driven by several factors coinciding. The first major contribution is due to current market supply returning back to a healthy level which can be seen through channel inventory of all major sportswear brands returning to a normal healthy level (4-5 months’ worth of inventory-to-monthly retail sales, consolidation of China sportswear market share, consolidation of POS of individual sportswear brands. The second major contribution is the improvement in the brands themselves in terms of technology, brand building, store design, customer service and management quality. Lastly, with major players returning back to health plus competitive products, we have a new growth driver in demand of sports products which is the increase emphasis of health and participation in exercise by the Chinese. According to CEIC and Euromonitor, China’s sportswear market is expected to grow from RMB140bn in 2014 to RMB180bn by 2017 equating to a 3-year CAGR of 8%. Given this expected growth, we believe most HK-listed sportswear brands such as 361 will be able to outperform this annual growth as market consolidation continues as smaller less known brands lose out in competition given deficiencies in their smaller scales and inferior products. According to Euromonitor, most HK-listed Chinese sportswear brands have grown in market share since 2013 (361 market share increased from 3% in 2013 to 4% in 2014).
Figure 1: China’s sportswear historical and expected market size
RMB bn 200 35.0% 180.3 180 31.5% 166.5 30.0% 160 153.5 141.8 139.2 142 25.0% 140 130.6 134.7 115.4 20.0% 120 103.9 100 15.0% 79 13.2% 80 11.1% 10.0% 8.6% 8.1% 8.5% 8.3% 60 5.4% 5.0% 40 0.0% 20 -1.8% -3.2% 0 -5.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E China sportswear market size YoY change
Source: Euromonitor, CEIC, CMS (HK)
Figure 2: 2013 and 2014 China sportswear brands market share
2013 2014 Nike, 13% Nike, 13%
Adidas, 12% Adidas, 13%
Others, 48%
Others, 56% Anta, 6%
Anta, 10% Li Ning , 4%
Xtep, 3% Li Ning , 5%
Xtep, 5% Peak, 3% 361 Degrees, 3% Peak, 2% 361 Degrees, 4%
Source: Euromonitor, CMS (HK)
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China sportswear market inflection point confirmed, recovery just the beginning, listed brands benefit The growth of China’s sportswear wear market resumed growth with an inflection point in late 2013 to 2014 (refer to figure 1) as China’s sportswear market resumed growth from RMB135bn in 2013 to RMB142bn in 2014. Data from listed sportswear companies indicated that the growth was driven by the recovery of most listed sportswear brands which confirmed that it was a sector turnaround rather than purely company specific as all major listed sportswear brands reported a turnaround in revenue, SSSG and sales fair orders during that period.
Figure 3: China’s sportswear historical revenue growth
Source: company data, CMS (HK)
Figure 4: Major listed sportswear brand historical sales fair sales growth (YoY) Anta Li Ning China Dongxiang 361 Degrees Peak Xtep Guirenniao (2020 HK) (2331 HK) (3818 HK) (1361 HK) (1968 HK) (1368 HK) (603555 SH) 1Q11 23% 12% 12% 20% 24% N/A 2Q11 21% 0% 3% 23% 24% N/A 3Q11 20% -14% -40% 27% 21% N/A 4Q11 25% -1% -40% N/A 1Q12 0% to 5% 0% to 5% -59% 23% -ve 15% N/A 2Q12 0% to 5% 0% N/A 6% N/A 3Q12 -ve high SD -ve mid SD -ve mid DD 2% -ve 15% N/A 4Q12 -ve low teens -ve high teens -ve 15% 0% 1Q13 -30% to -20% N/A N/A -23% 0% -15% to -20% 2Q13 -25% to -15% N/A N/A -ve 20% to 30% -15% to -20% 3Q13 -20% to -10% N/A N/A -19% N/A -20% 4Q13 -15% to -5% N/A N/A -17% N/A -15% to -17% 1Q14 +ve high SD N/A N/A -8% N/A -ve high SD -13% 2Q14 +ve high SD N/A N/A N/A -ve mid SD 3Q14 +ve high SD N/A N/A -7% 15% -ve low SD 2% 4Q14 +ve low DD N/A N/A 8% 15% 0% 1Q15 +ve low DD N/A 40% to 60% 11% 15% +ve low SD +ve SD 2Q15 +ve low DD N/A 15% +ve low SD +ve SD 3Q15 +ve low DD N/A 20% to 30% 16% 15% +ve low SD +ve SD 4Q15 +ve low DD +ve low teens 18% 15% +ve low SD 1Q16 +ve low DD +ve mid teens 30% to 40% 15% 15% 10% 2Q16 +ve low DD +ve high teens 15% 15% 10%
Note: SD means single digit % and DD means double digits % Source: Company, CMS (HK)
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Figure 5: Major listed sportswear brand historical SSSG Anta Li Ning China Dongxiang 361 Degrees Peak Xtep (2020 HK) (2331 HK) (3818 HK) (1361 HK) (1968 HK) (1368 HK) 1Q11 5% to 10% 0% to 5% 5% 15% 13% 7% 2Q11 5% to 10% 0% to 5% -5% to 0% 14% 12% 15% 3Q11 4% to 6% 0% to 5% -ve 18% 6% 15% 4Q11 0% -ve low SD -ve 14% 2% 15% 1Q12 -ve low SD -ve low SD -ve 9% 0% 15% 2Q12 -ve low SD -ve -ve 7% -19% N/A 3Q12 -ve low SD -ve -2% 5% 0% N/A 4Q12 -ve low SD -ve Mid SD 4% 0% N/A 1Q13 0% N/A Low SD 4% 0% N/A 2Q13 0% N/A N/A -2% 0% 0% 3Q13 0% N/A N/A -1% Low SD 0% 4Q13 High SD N/A N/A 0% Low SD 0% 1Q14 High SD N/A N/A 2% Low SD N/A 2Q14 Low DD N/A N/A 3% Low SD Low Sd 3Q14 High SD N/A N/A 5% Low SD Mid SD 4Q14 High SD N/A N/A 6% Low SD Mid SD 1Q15 High SD Mid SD 23% 6% Mid SD Mid SD 2Q15 High SD Low DD 22% 7% Mid SD High SD 3Q15 Mid to high SD Mid SD 8% High SD High SD
Note: SD means single digit % and DD means double digits % Source: Company, CMS (HK)
Realization of risk factors unlikely as sector continues its upcycle turnaround i) High receivable days will continue but unlikely to affect cashflow of the group severely: 361 historically had high receivable days (+160 days) which was due to its past policy to extend receivable days to support rapid expansion of distributers to gain market share during the late-2000s to 2012. Although the group no longer focuses on POS expansion, receivable days remain at +160 days and despite 361’s efforts to try to renegotiate with distributers to lower receivable days, we believe that the high receivable days will continue. However, we do not expect any risks from the high receivable days for the time being given improving sales from distributers and the positive sector outlook. Note that even during the sportswear sector downturn during 2012- 2014, the group did not experience any bad debt from the receivables and given the current recovery, we expect the chances of bad debt to be even less. Hence, we do not currently see the group’s high receivable days to bear any significant risk in default. ii) Despite weaker brand positioning than some HK-listed peers, we expect sales growth to be sustainable as it is still one of the better sports brands in China: 361 has weaker brand positioning compared to some of its HK-listed peers such as Anta (2020 HK, non-rated) which is known as China’s largest sportswear brand with its strength in basketball, Xtep (1368 HK, BUY, TP: HK$4.88) which specializes in running and Peak (1968 HK, non-rated) which is also renowned for basketball. Despite so, we expect sales momentum to be sustainable as it is still one of the top Chinese brands in China with 2014 market share of 4.1% (6th largest in China market share out of all sports brands and 4th largest in terms of Chinese brands only) and will be able to continue to grow together with China’s sportswear market as well as grow in market share together with the other HK-listed sportswear brands. iii) Possible share placement: The group has unsecured senior notes with a principal value of RMB1.5bn due in September 2017. As the senior note is offshore, despite the group having a cash position of more than RMB4bn, the group may not want to repay the senior notes given the 10% withholding tax in China. Coupled with expectation in increasing interest rates in HK, we do not rule out the possibility of a share placement for the required funding. However, we do not see this likely for the time being given 361’s low valuation.
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361 valuation punished by risk factors that are unlikely to be realized 361’s valuation has been punished by the risk factors mentioned above, as you can see in figure 6, 361 is currently only trading near mean forward P/E whilst its HK-listed peers are trading at 1-2 SD above mean forward P/E driven by sportswear sector upcycle (Li Ning P/E band was not included as the group was loss-making while Dongxiang P/E band was not included as its P/E is inflated from significant investment gains). Given our previous justification that 361’s company specific risks are unlikely to be realized at least during the current upcycle and that 361 will also benefit just like its listed peers, we argue that 361 is currently more undervalued than its other listed peers and a prime candidate for a laggard play.
Figure 6: Forward P/E bands of HK-listed sportswear retailers Anta (2020 HK) 361 Degrees (1361 HK)
23.00 22.00 21.00 20.00 +2SD = 17.8x 19.00 18.00 17.00 +1SD = 14.9x 16.00 15.00 14.00 13.00 Mean = 11.9x 12.00 11.00 10.00 -1SD = 8.9x 9.00 8.00 7.00 -2SD = 5.9x 6.00
SharePrice (HKD) 5.00 4.00 3.00 2.00 1.00 0.00 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Xtep (1368 HK) Peak (1968 HK)
7.00 8.00 6.00 7.00
6.00 5.00
5.00 +2SD = 12.5x 4.00
4.00 +2SD = 14x +1SD = 10.3x 3.00 +1SD = 12.3x Mean = 8.2x 3.00 Mean = 10.6x 2.00 -1SD = 8.9x -1SD = 6.0x -2SD = -7.2x
2.00 SharePrice (HKD) SharePrice (HKD) -2SD = 3.9x 1.00 1.00
0.00 0.00 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Source: CMS (HK), Bloomberg
Figure 7: 361’s historical quarterly sales fair and major operational metrics
Sales fair FY-end Dec 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Wholesale value growth -8% -8% -7% 8% 11% 11% 16% 18% 15% 15% (YoY)
Operational performance FY-end Dec 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 SSSG -0.8% 0% 1.5% 1.8% 2.8% 4.7% 5.5% 6.3% 7.2% 8.1% SSSG (kids) N/A N/A N/A 2.8% 3.1% 5.0% 6.3% 7.0% 8.0% 8.4% Inventory to 4.4 4.4 4.2 4.2 4.1 4.3 4.2 4.1 4.0 4.1 sales ratio (x) Source: Company, CMS (HK) 100005000
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Figure 8: 361’s revenue forecast
FY-end Dec (RMB mn) FY13 FY14 FY15E FY16E FY17E
Total revenue 3,583 3,906 4,336 4,922 5,546 % growth -27.6% 9.0% 11.0% 13.5% 12.7% - Footwear revenue 1,521 1,554 1,813 2,054 2,305 % growth -31.2% 2.2% 16.6% 13.3% 12.2% - Wholesale ASP (RMB) 94 86 92 94 96 % growth -11.9% -7.8% 6.0% 3.0% 2.0% - Wholesale volume ('000) 16,226 17,996 19,796 21,775 23,953 % growth -22.0% 10.9% 10.0% 10.0% 10.0% - Apparel revenue 1,576 1,754 1,840 2,085 2,339 % growth -30.9% 11.3% 4.9% 13.3% 12.2% - Wholesale ASP (RMB) 68 74 79 81 83 % growth -14.5% 8.2% 7.0% 3.0% 2.0% - Wholesale volume ('000) 23,213 23,876 23,398 25,738 28,312 % growth -19.2% 2.9% -2.0% 10.0% 10.0% - Accessories revenue 66 91 98 108 122 % growth -25.3% 36.6% 8.3% 10.0% 13.3% - Kidswear 420 508 585 675 780 % growth 13.6% 20.7% 15.2% 15.5% 15.5% - Wholesale ASP (RMB) 59 64 61 65 68 % growth 3.1% 8.3% -4.0% 5.0% 5.0% - Wholesale volume ('000) 7,114 7,931 9,517 10,469 11,516 % growth 10.2% 11.5% 20.0% 10.0% 10.0% Source: Company, CMS (HK)
Figure 9: 361’s historical and forecast GPM
FY-end Dec FY13 FY14 FY15E FY16E FY17E
Overall GPM 39.5% 40.9% 41.5% 41.5% 41.6% - Footwear 41.0% 38.6% 41.3% 41.3% 41.5% - Apparel 38.1% 43.0% 42.0% 42.0% 42.0% - Accessories 42.2% 38.7% 40.0% 40.0% 40.5% - Kidswear 39.2% 40.7% 40.5% 40.5% 41.0% Source: Company, CMS (HK)
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Figure 10: 361’s historical and estimated profit and loss summary
FY-end Dec (RMB mn) FY13 FY14 FY15E FY16E FY17E 1H14 2H14 1H15 2H15E
Total Revenue 3,583 3,906 4,336 4,922 5,546 2,090 1,816 2,208 2,128 YoY change -27.6% 9.0% 11.0% 13.5% 12.7% 4.6% 14.6% 5.7% 17.1% -Footwear wholesale revenue 1,521 1,554 1,813 2,054 2,305 835 719 969 844 YoY change -31.2% 2.2% 16.6% 13.3% 12.2% 0.0% 4.9% 16.0% 17.3% -Apparel wholesale revenue 1,576 1,754 1,840 2,085 2,339 1,004 750 969 871 YoY change -30.9% 11.3% 4.9% 13.3% 12.2% 8.8% 14.8% -3.5% 16.2% -Accessories wholesale revenue 66 91 98 108 122 35 55 37 61 YoY change -25.3% 36.6% 8.3% 10.0% 13.3% 7.4% 65.4% 5.5% 10.1% -Kidswear wholesale revenue 420 508 585 675 780 216 292 233 351 YoY change 13.6% 20.7% 15.2% 15.5% 15.5% 4.0% 36.9% 8.3% 20.3% COGS (2,166) (2,309) (2,538) (2,882) (3,238) (1,259) (1,050) (1,297) (1,241) Gross Profit 1,417 1,597 1,798 2,041 2,308 831 766 911 886 YoY change -28.2% 12.7% 12.6% 13.5% 13.1% 6.6% 20.2% 9.7% 15.7% Gross margin 39.5% 40.9% 41.5% 41.5% 41.6% 39.7% 42.2% 41.3% 41.7% SG&A expenses (1,154) (973) (1,007) (1,185) (1,343) (493) (479) (497) (510) % of revenue 32.2% 24.9% 23.2% 24.1% 24.2% 23.6% 26.4% 22.5% 24.0% -Advertising & promotion (576) (653) (529) (665) (776) (298) (355) (269) (260) YoY change -20.8% 13.4% -19.0% 25.6% 16.9% 8.8% 17.7% -9.7% -26.8% % of revenue 16.1% 16.7% 12.2% 13.5% 14.0% 14.3% 19.5% 12.2% 12.2% -R&D (86) (96) (104) (118) (133) (52) (44) (54) (50) YoY change -0.9% 11.5% 8.7% 13.5% 12.7% 6.1% 18.6% 5.0% 13.1% % of revenue 2.4% 2.4% 2.4% 2.4% 2.4% 2.5% 2.4% 2.5% 2.3% -Provision for trade receivables (152) 111 0 0 0 0 111 0 0 YoY change N/A N/A -100.0% 0.0% 0.0% N/A N/A 0.0% -100.0% % of revenue 4.2% -2.9% 0.0% 0.0% 0.0% 0.0% -6.1% 0.0% 0.0% Other income 36 22 15 28 28 14 8 10 5 EBIT 299 647 806 883 994 352 295 424 382 YoY change -64.4% 116.2% 24.7% 9.6% 12.5% 25.2% 1517.4% 20.7% 29.5% EBIT margin 8.3% 16.6% 18.6% 17.9% 17.9% 16.8% 16.2% 19.2% 17.9% Net finance income (26) (15) (33) (29) (23) (26) 11 (2) (32) Non-recurring gains/(loss) 42 (24) 0 0 0 43 (67) 0 0 Pre-tax profits 315 607 773 855 971 369 239 423 350 Tax (100) (202) (255) (282) (320) (99) (103) (150) (105) Effective tax rate 31.8% 33.3% 33.0% 33.0% 33.0% 26.9% 43.2% 35.5% 30.0% Minority interest 3 8 10 11 13 0 3 6 1 Recurring net profit 169 422 507 561 638 220 202 270 238 YoY change -74.9% 149.1% 20.2% 10.6% 13.6% 15.0% N/A 22.3% 17.8% Net margin 4.7% 10.8% 11.7% 11.4% 11.5% 10.5% 11.1% 12.2% 11.2% Recurring EPS (RMB) 0.08 0.20 0.25 0.27 0.31 0.11 0.10 0.13 0.12 YoY change -74.9% 149.1% 20.2% 10.6% 13.6% 15.0% N/A 22.0% 18.2% DPS (RMB) 0.04 0.08 0.10 0.11 0.12 0.05 0.03 0.08 0.02 Payout Ratio 39.1% 41.6% 40.0% 40.0% 40.0% 46.9% 30.7% 62.9% 14.0%
Source: Company, CMS (HK)
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Figure 11: 361’s historical and forecast POS 8,200 8,082
8,000 7,865 7,800 7,739 7,589 7,600 7,439 7,404 7,439 7,400 7,299 7,319 7,319 7,200 7,140
7,000
6,800
6,600 FY11 FY12 FY13 FY14 FY15E FY16E FY17E 1H14 2H14 1H15 2H15E
Source: Company, CMS (HK)
Balance sheet and cashflow Despite high receivable and payable days of +160days and +260 days respectively, we expect the risk to be low as it has been in line with the group’s historical working capital and the group has not experienced any bad debt or debtors requiring early payment even during the sector downturn in 2012-2014. Meanwhile inventory days for the group remains stable and healthy at about 70-80 days. The group has a healthy cash position with a net cash position of RMB2.6bn as of end-FY14. In terms of cashflow, we expect the group’s cash position to continue to improve driven by improving earnings from operations and undemanding capex needs.
Company background 361 Degrees International Limited (“361” or “the group”) is one of China’s leading domestic sportswear companies, which was founded in 2003 and listed on HKEx in 2009. The group designs, develops, produces, markets and distributes high performance, innovative and stylish athletic footwear, apparel and accessories, majorly targeting the mass market. By the end of 1H14, the Group had a franchised network of 7,404 stores across China, with c. 70% located in tier-3 or smaller cities. The group has also kick-started its overseas business during FY14 by launching outlets in Brazil, Europe, and the US, in order to generate new earnings stream in the future. There are currently four brands under 361, including 361°, 361° Kids, Innofashion and One Way. 361° focuses on performance apparel and footwear for running, basketball, cross-training and outdoor. 361° Kids produces apparel and footwear that features sports themes, serving children between the ages of 3 and 12. Innofashion is a fashionable sports brand, providing urban wear for the young generation in China. One Way is a Finnish Sports brand, under which the Group supplies products through a 70% owned joint-venture formed with One Way Sport OY, offering high performance products for cycling, running and Nordic sports, and it is the only brand under 361 which is positioned in the premium market while the rest focuses on the mass market.
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Figure 12: 361’s brand positioning
Source: Company, CMS (HK)
Business model 361 designs and develops all of its own products by its in-house R&D team, and produces up to 70% and 20% of its required footwear and apparel respectively by two self-owned factories in Jinjiang (Jiangtou and Wuli), Fujian province while the remaining is outsourced to third party OEMs. The group adopts a franchised distributorship model, and it sells products at a uniform discount to 31 single-brand only distributors, which in turn sell products at a structured marked-up to more than 3,000 retailers who run the franchised stores nationwide. There are now four trade fairs annually for all franchised retailers to choose their merchandise, which their orders will be consolidated and placed with the group by the distributors. In order to cope with the changing consumer habit from purchasing products at traditional stores to ordering goods online, 361 has chosen an e-commerce company, “One Extra Degree” as its sole distributor and coordinator of its online sales, and it provides web-only products and serves as a central clearance channel for the Group’s slow- moving merchandise. Web-only products are targeted by the Group to account for 50% of all available products online.
Figure 13: 361’s value chain
Note: Components of 361’s business model indicated by solid lines represent aspects of the value chain controlled by the Group, while those indicated by dotted lines are not controlled by the Group Source: Company, CMS (HK)
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Figure 14: 361’s five year forward PE band
10.00
9.00
8.00
7.00
6.00
5.00 +2SD = 13.1x 4.00 +1SD = 10.5x 3.00
Mean = 8.0x SharePrice (HK$) 2.00 -1SD = 5.5x
1.00 -2SD = 3.0x
0.00 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Source: CMS (HK), Bloomberg
Figure 15: Valuation – Hong Kong listed sportswear retailers 3-mth Price Mkt cap avg t/o PER Hist PER FY1 PER FY2 EPS FY1 EPS FY2 3-Yr EPS Div yld Div yld P/B Hist P/B FY1 Company Ticker (LC) (US$m) (US$m) FY-end (x) (x) (x) YoY% YoY% CAGR (%) PEG (x) Hist (%) FY1 (%) (x) (x) 361 Degrees 1361 HK 2.99 798 0.6 Dec 12.1 10.1 9.1 20.1 10.6 14.7 1.2 3.2 4.0 1.0 0.9 HSI 22,396 9.8 11.2 10.6 (12.4) 5.8 0.8 13.33 3.8 3.5 1.2 1.2 HSCEI 10,181 7.5 7.6 7.3 (1.3) 4.5 4.4 1.74 3.9 4.0 1.0 1.0 CSI300 3,746 15.5 14.3 12.9 8.0 11.2 10.3 1.4 1.8 1.9 2.1 2.0 Adjusted sector avg* 14.6 13.3 13.2 17.0 7.6 13.6 1.2 5.1 3.7 2.1 1.9 Anta Sports 2020 HK 22.25 7,178 13.6 Dec 26.9 22.7 19.4 18.3 17.2 16.3 1.6 3.0 3.1 5.7 5.3 Li Ning Co Ltd 2331 HK 4.10 997 4.8 Dec N/A 146.6 18.8 N/A 678.3 (185.6) N/A N/A 0.1 2.0 2.0 Xtep Intl 1368 HK 4.27 1,202 3.0 Dec 16.0 12.7 11.3 25.5 12.3 15.2 1.1 3.8 4.3 1.6 1.5 361 Degrees 1361 HK 2.99 798 0.6 Dec 12.1 10.0 9.1 20.1 10.6 12.6 1.0 3.3 4.0 1.0 0.9 China Dongxiang 3818 HK 1.92 1,372 3.1 Dec 9.5 20.0 20.2 (52.4) (1.3) (22.9) N/A 9.1 4.3 0.9 0.9 Peak Sport 1968 HK 2.39 737 1.8 Dec 12.9 11.4 10.7 12.6 6.4 10.3 1.2 6.7 6.3 1.0 0.9 Hosa Intl Ltd 2200 HK 3.09 661 1.1 Dec 10.6 9.8 9.8 8.3 0.0 N/A N/A 4.8 N/A 2.4 N/A
Figure 16: Valuation – Hong Kong listed sportswear retailers (continued) EV/ EV/ Net Net Gross Net Rev Hist NP Hist EBITDA EBITDA gearing gearing Unlev margin margin ROIC Hist ROE Hist ROE FY1 Sh px Sh px Company (US$m) (US$m) Hist Cur Yr Hist (%) FY1 (%) beta Hist (%) Hist (%) (%) (%) (%) 1-mth % 3-mth % 361 Degrees 613 66 3.6 2.7 0.0 0.0 0.9 40.9 10.8 6.4 8.1 9.6 6.8 9.1 HSI 12.3 10.5 (0.9) (6.8) HSCEI 13.6 13.0 (2.5) (8.1) CSI300 13.7 13.9 8.7 (8.1) Adjusted sector avg* 7.9 7.8 3.3 0.0 0.5 44.7 16.7 8.7 11.8 11.7 6.9 7.7 Anta Sports 1,400 267 18.6 15.3 0.0 0.0 0.27 45.1 19.1 19.8 24.2 24.3 13.5 11.3 Li Ning Co Ltd 1,056 (123) (20.6) 12.6 23.3 0.0 N.A 44.6 (11.6) (5.7) (8.5) 1.9 5.9 (1.4) Xtep Intl 750 75 7.2 6.1 0.0 0.0 0.27 40.8 10.0 9.6 11.4 11.6 11.5 33.4 361 Degrees 613 66 4.8 3.9 0.0 0.0 0.91 40.9 10.2 6.4 8.0 9.1 6.8 9.1 China Dongxiang 198 144 33.5 6.7 0.0 N/A 0.46 50.8 72.5 2.0 12.3 4.0 2.7 (1.5) Peak Sport 446 50 4.8 3.9 0.0 N/A 0.54 38.0 11.3 6.3 8.9 8.4 15.5 19.5 Hosa Intl Ltd 191 63 6.5 6.0 0.0 N/A 0.67 52.6 33.1 22.8 26.2 22.8 (7.8) (16.5)
* “N/A” entries excl. from calculations of averages Li Ning and China Dongxiang excluded from P/E sector average Source: CMS (HK), Bloomberg Based on November 13, 2015 closing prices
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Financial Summary
Balance Sheet Profit & Loss Statement RMB mn 2013 2014 2015E 2016E 2017E RMB mn 2013 2014 2015E 2016E 2017E Current assets 5,816 7,224 7,872 8,379 9,390 Revenues 3,583 3,906 4,336 4,922 5,546 Cash & equivalents 2,494 2,130 2,303 2,570 2,819 Cost of sales (2,166) (2,309) (2,538) (2,882) (3,238) Trading investments 0 0 0 0 0 Gross profit 1,417 1,597 1,798 2,041 2,308 ST bank deposits 360 1976 1976 1976 1976 SG&A exp (1,154) (973) (1,007) (1,185) (1,343) Trade receivables 1,916 1,656 2,168 2,215 2,773 Operating expenses 36 22 15 28 28 Other receivables 637 892 867 984 1,109 Operating Profit 299 647 806 883 994 Inventories 409 570 558 634 712 Net fin. Costs (26) (15) (33) (29) (23) Other current assets 0 0 0 0 0 Share of results of JV 0 0 0 0 0 Non-current assets 1,303 1,310 1,383 1,459 1,531 Non-recurring gains/(loss) 42 (24) 0 0 0 Prepayment & deposits 121 97 97 97 97 PBT 315 607 773 855 971 Property, Plant & Eqt. 1,072 1,146 1,219 1,295 1,366 Taxes (100) (202) (255) (282) (320) Deferred tax assets 92 50 50 50 50 Profit after tax 215 405 518 573 651 Other non-current assets 18 18 18 18 18 Minority interests (3) (8) (10) (11) (13) Total assets 7,119 8,535 9,255 9,838 10,921 Reported net profit 211 398 507 561 638 Current liabilities 1,606 2,013 2,224 2,230 2,668 Recurring net profit 169 422 507 561 638 Bank loans 16 15 15 15 15 Recurring EPS (RMB) 0.08 0.20 0.25 0.27 0.31 Trade payables 1,469 1,851 2,031 2,017 2,428 Other liquid liabilities 121 146 178 197 224 Long term liabilities 773 1,485 1,485 1,485 1,485 Interest bearing borrowings 768 1,485 1,485 1,485 1,485 Financial Ratios Others 5 0 0 0 0 2013 2014 2015E 2016E 2017E Total liabilities 2,379 3,498 3,709 3,715 4,153 YoY growth Total equity 4,741 5,037 5,546 6,123 6,767 Revenue -27.6% 9.0% 11.0% 13.5% 12.7% Issued capital 182 182 182 182 182 Op profit -64.4% 116.2% 24.7% 9.6% 12.5% Reserves 4,494 4,783 5,291 5,869 6,513 Net profit (recurring) -74.9% 149.1% 20.2% 10.6% 13.6% Minority interests 64 72 72 72 72 Profitability Total equity and liabilities 7,119 8,535 9,255 9,838 10,921 Gross margin 39.5% 40.9% 41.5% 41.5% 41.6% NP margin (recurring) 4.7% 10.8% 11.7% 11.4% 11.5% ROAE 4.5% 8.1% 9.6% 9.6% 9.9%
Cashflow Statement Liquidity RMB mn 2013 2014 2015E 2016E 2017E Debt to Asset 11.0% 17.6% 16.2% 15.2% 13.7% Operating cashflow 323 911 438 546 538 Net Debt to Equity N.Cash N.Cash N.Cash N.Cash N.Cash Pretax profit 315 607 773 855 971 Current ratio 3.6 3.6 3.5 3.8 3.5 Deprec & amort. 65 65 69 73 78 Quick ratio 3.4 3.3 3.3 3.5 3.3 Finance costs 79 92 126 126 126 Operating efficiency Finance income (53) (78) (92) (97) (103) Asset turnover 0.5 0.5 0.5 0.5 0.5 Working capital chg (88) 425 (296) (253) (350) Inventory days 73 77 81 76 76 Others 5 (201) (142) (157) (183) AR days 205 167 161 163 164 CF from IA 348 (1,665) (38) (41) (35) AP days 258 262 279 256 251 Capital expenditure (44) (135) (142) (150) (150) Per share data (RMB) Other investments 392 (1,530) 104 109 115 Recurring EPS 0.08 0.20 0.25 0.27 0.31 CF from FA (282) 387 (227) (238) (253) CFPS 0.16 0.44 0.21 0.26 0.26 Borrowings (26) 519 0 0 0 BVPS 2.29 2.44 2.68 2.96 3.27 Dividends (227) (103) (101) (112) (128) DPS 0.04 0.08 0.10 0.11 0.12 Others (28) (29) (126) (126) (126) Valuation ratios Net cash flow 389 (367) 173 267 250 P/E (recurring) 30.2 12.1 10.1 9.1 8.0 Forex effect (2) 3 0 0 0 P/B 1.1 1.0 0.9 0.8 0.8 Ending cash 2,494 2,130 2,303 2,570 2,819 EV/EBITDA 8.5 3.6 2.7 2.2 1.8
Sources: Company data, CMS (HK) estimates
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Investment Ratings
Industry Rating Definition OVERWEIGHT Expect sector to outperform the market over the next 12 months NEUTRAL Expect sector to perform in-line with the market over the next 12 months UNDERWEIGHT Expect sector to underperform the market over the next 12 months
Company Rating Definition BUY Expect stock to generate 10%+ return over the next 12 months NEUTRAL Expect stock to generate +10% to -10% over the next 12 months SELL Expect stock to generate loss of 10%+ over the next 12 months
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