FY2023 results beat consensus

During 2023FY, 361 Degrees International Limited (361 Degrees) recorded a revenue of RMB8,423.3mn, increasing 21.0% YoY. Profit attributable to the equity shareholders of the Company was RMB961mn, representing a YoY increase of 28.7%. A total dividend of HK20.4 cents per ordinary share (equivalent to RMB18.7 cents), representing a dividend payout ratio of 40.2%.

In terms of product segment, sales of the company's two core product lines, namely footwear and apparel, increased by 23.0% YoY and 9.8% YoY respectively. For the year under review, the proportions of total revenue of footwear and apparel sales were slightly increased from 41.0% to 41.7% YoY and slightly decreased from 35.2% to 31.9% YoY of the total revenue respectively. This was mainly due to the increase in proportion of sales revenue from 361 Degrees Kids from 20.7% to 23.2% of the total revenue for the year under review, which in turn affected the proportion of sales of various products to total revenue. The average wholesale price (AWP) of footwear and apparel edged up by 3.0% and 0.5% year-on-year respectively. The increase in footwear's and apparel's AWP was mainly due to the upward adjustments of the wholesale prices of the existing products across different product lines in order to cover the increase in cost of production and reflect the continuous brand image enhancement; the upgrade of product mix by launching a variety of new products with a higher AWP; and the increase in proportion of sales revenue generated from the e-commerce business which has a higher AWP than the sales made to distributors, above reasons contributed to increase in AWP as compared to that of last year. In addition, the sales volume of footwear and apparel products increased by 19.4% and 9.4% YoY, respectively.

As to the accessories, the sales volume of the accessories rapidly increased by 63.4% and the AWP of the accessories sharply decreased by 12.4% YoY. This was mainly attributable to the change in the category structure of the accessories products by selling lower AWP products. As a result, revenue from sales of accessories during the year increased by 43.0% YoY to RMB137mn (FY2022: RMB95.718mn) and accounted for approximately 1.6% (FY2022: 1.4%) of the total revenue of the company.

During the year, approximately 96% of the 2023's spring, summer, fall and winter products were delivered, and their respective revenue were recognised, and the remaining 4% of the 2023's winter products were delivered at the beginning of 2024.

Gross profit margin and operational efficiency improved

Cost of sales comprised the cost of in-house production and outsourcing cost and it was increased by 19.8% YoY to RMB4,961mn (FY2022: RMB4,140.2mn). During the year, the cost of internal production increased by 5.4% YoY and the cost of outsourced products increased by 26.9% YoY. Included in the cost of sales, there was an additional provision for slow-moving inventories amounted to RMB5.89mn (FY2022: a writeback of provision for slow-moving inventories of RMB3.417mn) during the year. The company has shifted more orders for outsourced production during the year. As a result, the increase in the overall cost of sales was less than the increase in revenue. The company recorded a gross profit of RMB3,462mn (FY2022: RMB2,821mn), representing a YoY increase of 0.6 percentage points in the gross profit margin to 41.1%. The gross profit margins of footwear, 361 Degrees Kids and others products increased by 1.2, 0.9 and 12.1 percentage points YoY, respectively while that of apparel and accessories slightly dropped by 1.1 and 1.3 percentage point YoY, respectively.

Retail sales in the 2Q2024 saw 10% growth

For the 2Q2024, the retail sales (in terms of the retail value) of core branded products recorded approximately 10% growth compared to the same period of 2023. The retail sales (in terms of the retail value) of kids branded products recorded approximately mid-teens growth compared to the same period of 2023. Meanwhile, overall e-commerce products recorded approximately 30% to 35% growth compared to the same period of 2023.

The retail sales of sports & entertainment products maintain high growth

According to data from the National Bureau of Statistics, in May, the total retail sales of social consumer goods in the domestic market amounted to RMB3,921.1bn, reflecting a YoY growth of 3.7%. Among these, the retail sales of consumer goods excluding automobiles were RMB3,533.6bn, growing by 4.7% YoY. From January to May, the total retail sales of social consumer goods reached RMB19,523.7bn, an increase of 4.1% YoY. Of this total, the retail sales of consumer goods excluding automobiles were RMB17,670.7bn, growing by 4.4% YoY. By location of the operating units, in May, the retail sales of urban consumer goods were RMB3,411.1bn, an increase of 3.7% YoY; while in rural areas, the retail sales were RMB510.0bn, growing by 4.1%. From January to May, the retail sales of urban consumer goods reached RMB16,941.8bn, growing by 4.0% YoY; while in rural areas, the retail sales were RMB2,581.9bn, growing by 4.7% YoY. By type of consumption, in May, the retail sales of goods were RMB3,493.7bn, an increase of 3.6% YoY; from January to May, the retail sales of goods were RMB17,360.3bn, growing by 3.5% YoY. Among these, the retail sales of sports & entertainment products in May were RMB11.8bn, growing by 20.2% YoY; from January to May, the retail sales of sports & entertainment products were RMB52.5bn, growing by 15.2% YoY.

Company valuation

In recent years, as China's consumer preferences leaned towards specialisation, diversification, and cost effectiveness, the company positions as a "professional, youthful, and internationalised" brand. The company has built a diversified brand matrix based on professional functions and its own-branded IP. With 2024 bringing numerous international and domestic sports events, including the highly anticipated Paris Olympics, which are expected to stimulate a broader participation in sports and increase consumer demand. We expect 2024-2025 EPS to be RMB0.49 and RMB0.53 respectively, with PT of HKD4.02, implies a FY2024E P/E of 7.47x (~2-yrs historical average). Our investment rating is “Accumulate”.

Risk factors

1) Weak domestic growth and consumer spending (including online & lower-tier cities) in sportsware; 2) Intensified competition in the industry; 3) the spread of COVID-19 variants affects the consumer spending; and 4) Slower-than-expected revenue growth.

Financial

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