361 DEGREES INTERNATIONAL(01361.HK)：PREANNOUNCED 1H22 ATTRIBUTABLE NET PROFIT UP MORE THAN 30% YOY-格隆汇

机构：中金公司
研究员：Wenhui SONG/Runbo YANG/Haiyan GUO

　　Preannounced 1H22 attributable net profit up more than 30% YoY
361 Degrees International (361 Degrees) preannounced net profit attributable to shareholders increased more than 30% YoY in 1H22, in line with our expectation.
　　Trends to watch
　　Improved product power boosted growth of gross billings; distributor orders increased notably. 361 Degrees focuses on sports products. It offers high-quality track shoes and basketball shoes. Meanwhile, the company has also cooperated with celebrities to launch fashionable sports products. It continues to improve its brand and product power to boost the growth of retail sales. Gross billings of its main brand recorded low-teens YoY growth in 3Q21 and high-teens YoY growth in 4Q21. Gross billings of its children's clothing business climbed 15-20% YoY in 3Q21 and jumped 25-30% YoY in 4Q21. 361 Degrees utilizes a wholesale model that allows distributors to place most orders 6 months before the sales of its products. We think the notable growth of end-market sales in 3Q21 and 4Q21 boosted distributors' confidence in the company, and that increased orders fueled revenue growth in 1H22.
　　Gross billings increased notably YoY in 2Q22; sales value grew rapidly YoY during 618 shopping festival. Gross billings of the firm's main brand achieved low-teens YoY growth, and gross billings of children's clothing and e-commerce platform businesses increased about 20-25% YoY and 40% YoY in 2Q22, despite the impact from the COVID-19 resurgence in several regions of China. The impact of COVID-19 on the retail sales of 361 Degrees was limited in 2Q22, as the firm sold products via distribution channels in tier-3 and lower-tier cities. 361 Degrees continued to improve its e-commerce business in 2Q22. Data from www.stockstar.com shows the sales value of its products in online stores jumped 95% YoY during China’s 618 shopping festival in mid-June. Specifically, sales value increased more than 60% YoY in Tmall.com stores, over 60% YoY in JD.com stores, more than 140% YoY in VIPshop stores, and over 300% YoY in Douyin stores. By product category, sales value of track shoes rose more than 50% YoY and that of basketball shoes climbed 110% YoY. The sales value of BIG3 and BIG3 Pro basketball shoes exceeded Rmb5mn, and that of Feiran, Feibiao and FeiranST running shoes surpassed Rmb6.1mn. In addition, the sales value of the Guiji 2.0 series reached Rmb5.6mn, that of the Life series increased more than 180% YoY, and that of slippers and foam clogs exceeded Rmb8.7mn[1].
　　Reducing expense ratios; preannounced 1H22 attributable net profit up more than 30% YoY. 361 Degrees continued to improve expense control and reduce expense ratios by enhancing its operating and management capabilities via delicacy management and digitized operations. The company fully redeemed the outstanding principal amount of its 7.25% senior notes (US$400mn) in 1H21, and reduced its interest expenses in 2021. In addition, 361 Degrees cut taxation expenses after reducing debt repayment funds remitted from the Chinese mainland. Management estimates attributable net profit increased more than 30% YoY in 1H22.
　　Financials and valuation
　　We keep our 2022 and 2023 EPS forecasts at Rmb0.33 and Rmb0.38. The stock is trading at 10x 2022e and 9x 2023e P/E. We maintain an OUTPERFORM rating and our target price of HK$5.04. Our TP implies 13x 2022e and 11x 2023e P/E, offering 26% upside.
　　Risks
　　COVID-19 resurgence; disappointing end-market retail environment; volatile raw material prices.