We initiate BUY on 361 Degrees with TP of HK$6.23 based on 10x FY24E P/E. We forecast 16%/20% sales/ NP CAGRs in FY22-25E vs 7%/20% during FY19-22, driven by major improvements in: 1) star products and endorsement quality, 2) offline store images and e-commerce strategy, and 3) kids business. Noted that 361 Degrees' YTD returns was 25%, the highest among all peers.

361 Degrees is the 4th-largest domestic sportswear brands in China. 361 Degrees (1361 HK) is the 4th-largest domestic sportswear company, with a 3.1% market share in China in 2022, estimated by Euromonitor. It had a store network of around 5,480 adult stores and 2,288 kids stores in FY22, which generated sales and net profit of about RMB7.0bn and RMB747mn.

The brand has successfully turned around, thanks to rebranding. We find 361 Degrees' 2019 rebranding strategy successful. Since 2Q22, its retail sales growth has started to outperform with an improved sell-through rate. Not only its inventory and receivable days have improved significantly since FY18, store expansion has started to resume since FY20. Moreover, its e-commerce and kids businesses are growing at an even faster rate.

Solid product upgrades around running and basketball. By increasing its R&D expense ratio and focusing on a smaller number of SKUs, the star product launches have been highly successful. Hence, the ASP for footwear/apparel managed to grow by a 5.2%/4.8% CAGR during FY19-22. Going forward, we continue to be upbeat about the launches of more innovative running shoes and basketball series built around Nikola Jokic.

Upgrading its "professional" image and build a stronger tie with young customers. The sponsorship for the Asian Games was fairly influential, which has effectively shaped its professional image and showcased its new and innovative products. And the self-owned sports events"3#Track/三号 赛道"and"Light Up/触地即燃"are also highly rewarding, as they have helped the brand build a strong bond with targeted customers.

We foresee a 16% sales and 20% NP CAGR during FY22-25E. Key drivers are: 1) solid sales from new products (aided by upgrades in design and brand equity), 2) increases in 9th-gen stores, which has a sharper store image, larger area and lower capex, 3) robust e-commerce sales growth, due to excellent A&P and exclusive product strategy, 4) strong kids business growth and 5) great resilience under consumption downgrades.

Initiate with BUY and TP of HK$6.23, because we find its turnaround rather solid, hence a 16% sales and 20% NP CAGR should be achievable in FY22-25E. We think current valuation of 7.0x FY24E P/E is still attractive, as it has a 29% discount to China sportswear average. Our TP is based on 10x FY24E P/E, about 1 s.d. higher than its 5 years average of 7x, roughly at par with peers' average. Note that 45% of its market cap is net cash.