The Zhitong Finance App learned that CICC released a research report stating that it maintains a 361 degree (01361) “outperforming the industry” rating and is optimistic about long-term business development space. Considering the short-term impact of spending on brand, marketing and R&D expenses, the 2024/25 EPS forecast was lowered by 6%/7% to $0.52/0.6, and the target price was HK$4.77. The company's 2023 performance is in line with previous forecasts. Sales continued to grow well in January-February this year. Management expects 1Q24's main brands/children's clothing offline to increase by 10%-15%/20% +, maintain rapid online growth, and guide revenue growth of about 15% to 20% in 2024.

The main views of CICC are as follows:

Deeply involved in sports technology innovation, children's clothing and e-commerce continue to increase rapidly.

361 is deeply involved in sports technology innovation, and its brand power and product strength continue to improve. In 2023, 361's main brand revenue also increased 17% to 6.3 billion yuan. Among them, revenue from highly functional footwear increased 23%, and average wholesale prices and sales volume increased by 3%/19%, respectively, accounting for 0.7 ppt to 42% of total revenue. By the end of 2023, there were 5,734 domestic sales points for 361 major brands, a net increase of 254 over the beginning of the year. The proportion of stores in third-tier cities and below remained basically 76%. Supported by professional products, 361 Degrees Children continued to expand its campus layout. Revenue increased 36% to 2 billion yuan in 2023. Average wholesale prices and sales volume increased 4%/31%, respectively. During the period, 361 Degrees Children's sales outlets were net of 257 to 2,545. On the online side, the company insisted on expanding “e-commerce of interest”, and targeted funding for precise development (online accounting for 87%) and offline products. E-commerce revenue increased 38% to 2.3 billion yuan during the period, and the revenue share increased by 3.4ppt to 28%.

Product optimization and an increase in the share of high-margin e-commerce business led to an improvement in gross margin.

Although the company's clothing category increased the share of sales of products with low gross margins, the company's gross margin also increased by 0.6ppt to 41.1% in 2023, thanks to price increases and combination optimization of footwear and children's clothing products, increased e-commerce share with high gross margin, and production cost control. The sales and management expenses ratio also increased by 1.2ppt to 29.6%, mainly due to the company's increased advertising and promotion efforts to drive sales and enhance brand power. The depreciation of accounts receivable was refunded to 50 million yuan (vs. 170 million yuan provision for 2022), and the net profit margin also increased by 0.7 ppt to 11.4%.

Shorter settlement periods for suppliers hamper cash flow efficiency.

Due to the company's e-commerce business stocking to meet online sales requirements, the number of inventory turnover days increased by 2 to 93 days in 2023. The number of payable turnover days decreased by 11 to 110 days, mainly because the company shortened the settlement period in order to maintain long-term relationships with suppliers and exchange for better terms of trade, and the cash cycle period also increased by 15 to 132 days. The net operating cash flow in 2023 was 410 million yuan, an increase of 7% over the previous year.

Risks: Industry competition intensifies, terminal retail environment falls short of expectations, raw material prices fluctuate.