The FY24 result was a small beat, and we are not concerned about the short- term volatility in inventories and cashflow. We remain positive because the industry trend is improving, even thou management’s FY25E guidance is conservative. Moreover, the Super Premium store may be a wild card and we should continue to track this closely. Maintain BUY and raise TP to HK$ 5.97 (mostly roll over).
　　So far so good for retail sales growth, discounts and inventories in 2025 YTD. Management has highlighted that in Jan-Feb 2025, the retail sales growth for adult/ kids/ e-commerce were at 10%-15%/ 15%+/ 20%+ (vs 10%/ 10%-15%/ 30%-35% in 4Q24). Therefore, based on our estimates, the total retail sales growth should have been either similar or accelerated in 2025 YTD vs 4Q24. Moreover, the inventory to sales ratio was at 4.5 months in 2025 YTD, slightly better than the 4.5-5.0months in 4Q24 and similar to 1Q24. Retail discounts in 2025 YTD was at about 27% to 29% off, similar to 27% to 30% in 4Q24 and better than the 30% off in 1Q24.
　　FY25E guidance is quite conservative. Management has announced its FY25E guidance, which consisted of 10%-15% sales growth (mostly from volume growth), 40%-42% GP margin, 10%-13% A&P expenses, 3%-4% R&D expenses and 10%-12% NP margin. This, in our view, is rather conservative but reasonable given the macro environment (we are positive about the government’s support on consumer sector and do expect a mild turnaround for sportswear sector, but still there are many external risks such as the trade war and etc.).
　　Therefore, we do think the guidance is highly achievable, thanks to various growth drivers. We are confident that 361 Degrees to achieve its targets, because of: 1) the decent sales momentum of its running products (e.g. the Flying flame 4 is still very hot-selling), 2) potential acceleration of basketball segment, thanks to the launches of product series around Nikola Jokic (such as the Joker 1, already sold 30K pairs), 3) launches of more new categories (namely Tennis in 2Q25E and Badminton in 3Q25E) on top of the healthy growth of female/ skateboard/ outdoor products and lastly 4) the opening of more 361 Degrees Super Premium store (targeting 100 by FY25E), which may be able to generate a sales per store of around RMB 8mn to 10mn. We believe the e-commerce sales growth may only stay at about 20% in FY25E, because the base is quite high last year.
　　Maintain BUY and raise TP to HK$ 5.97. We have raised FY25E/ 26E net profit forecasts by 3%/ 2%, in order to factor in the beat in net profit but a slightly slower sales growth target. Our TP is based on 9x FY25E P/E (rolled over from 9x FY24E P/E). The stock is trading at 7x FY25E P/E with a 7% yield, not demanding at all.
　　The 361 Degrees Super Premium store could be a big wild card. The Company currently has five Super Premium stores, but the total number may reach 30/ 50/ 100 by the end of Mar/ Jun/ Dec 2025. Types of SKUs that are likely to be featured at this store will be the top and hot-selling, the value for money and the off-season items (about 1 to 2 season old), where the mix could be 30%/ 20%/ 50%. 361 Degrees will develop exclusive products for this line in the future if the model goes well. They will encourage the distributors to open new stores in those areas that 361 Degrees has a strong presence (not bounded by tier cities). The store size of a typical store is at around 800 sq.m (vs about 200-250 sq.m for adult and 130-150 sq.m for kids stores). Based on the data from the first five stores, sales per store may reach RMB 8mn to 10mn per year, and hence about RMB 650K to 850K monthly sales (vs around RMB 220K for adult and RMB 160K for kids stores).
　　FY24 result was a slight beat and we are not worried about inventories and cash flow. In FY24, 361 Degrees’ sales has increased by 20% YoY to RMB 10.0bn, 2% above both CMBI/ BBG estimates. During the same period, net profit has climbed by 19% YoY to RMB 1.15bn, 7%/ 5% above CMBI/ BBG estimates, thanks to better-than- expected GP margin at 41.5% (vs CMBI/ BBG est. of 41.1%/ 41.2%). By category, footwear/ apparel sales growth were at 21%/ 17%. By segment, 361 Degrees adult/ kids/ others sales growth were at 20%/ 18%/ 46%. By channel, offline/ online sales growth were at 22%/ 12%, noted that the discrepancy between retail level and listed co level e-commerce sales growth was mainly due to the O2O sales for offline stores. In terms of sports, sales growth for running/ basketball/ sports fashion were at 40%/ 17%/ 16%. Moreover, if we adjust the provisions for receivables, the adjusted net profit growth is rather impressive at around 30% YoY. Some investors might be concerned about the surge in inventory days (up 14 days from 93 days to 107 days in FY24) and the 83% drop in operating cash flow, but we are not that worried as this was partly due to the early CNY in 2025. The warm winter did play a part to that and lead to pile up of some inventories in southern China, but according to management, many of those were already de-stocked in 1Q25E. The dividend payout ratio has also been raised to 45% in FY24 (from 40% in FY23).