Huatai Securities: Dual improvement in cash flow and profitability by 2025

361 Degrees released its 2025 performance: Revenue for 2H25/25FY increased by 10.3%/10.6% year-over-year to RMB 5.44 billion/11.15 billion; Net profit attributable to shareholders grew by 25.7%/14.0% year-over-year to RMB 450 million/1.31 billion (excluding a donation increase of approximately RMB 90 million, the 2025 net profit attributable to shareholders increased by 24.6% year-over-year), meeting expectations. The full-year dividend is 31.7 Hong Kong cents per share, maintaining a payout ratio of 45.0%, corresponding to a dividend yield of about 6%. We believe the company has a strong cost-performance brand positioning advantage, with professional product categories driving robust e-commerce growth, offline exploration of multiple retail formats, and overseas market expansion, which are expected to drive continuous high-quality earnings growth. We maintain a 'Buy' rating.

Professional product categories drive strong growth in children's and e-commerce segments, while offline focus remains on 'Super Stores' and store upgrades

By category: 1) Running: The racing matrix continues to iterate, with key new products such as 'Feiran 5' and 'Feiran 5 FUTURE' launched to further penetrate the professional runner community; 2) Basketball: Deeply exploring the commercial value of star IPs, Jokic, Aaron Gordon, and Spencer Dinwiddie’s China/Asia tours drove all-channel hot sales of products like Suppai, AG6, and JOKER exceeding 17.5 million units; 3) Children: Continuing the positioning of 'Youth Sports Expert', supported by the three core sectors of 'jump rope, football, and basketball', revenue increased by 10.4% year-over-year to RMB 2.58 billion. By channel: 1) Online: E-commerce revenue increased by 25.9% year-over-year to RMB 3.29 billion, with over a thousand stores connecting to platforms such as Meituan, Ele.me, and JD.com within the year, making 'instant retail' a key growth engine. 2) Offline: Advancing store upgrades and format innovations, by the end of 2025, domestic adult/children stores numbered 5,394/2,364, with average store size increasing by 16/12 square meters year-over-year respectively. While store images continue to upgrade, innovative super store formats have achieved breakthroughs. 'Super Stores' offer an optimal combination of cost-effective and unique products along with one-stop shopping experiences, with operational efficiency expected to surpass regular stores. By the end of 2025, 127 such stores were opened (105 adult, 21 children, and 1 overseas), with plans to expand by another 100 stores in 2026.

Cost control and efficiency improvements drive steady profit growth and a leap in cash flow

In 2025, the company's gross margin was 41.5% (flat year-over-year). Benefiting from continued operational efficiency improvements and controlled advertising and marketing expenses, the sales expense ratio decreased by 1.8 percentage points year-over-year to 20.2%, A&P ratio decreased by 2.3 percentage points to 10.5%, and the management expense ratio increased due to donations. Under the combined effect, the net profit margin attributable to shareholders increased by 0.6 percentage points year-over-year to 11.9%. In terms of operations, inventory scale decreased by 2.1% year-over-year to RMB 2.07 billion in 2025, and inventory turnover days increased by 10 days year-over-year to 117 days, mainly due to proactive stockpiling to support e-commerce business growth. Accounts receivable turnover days improved to a healthy level of 149 days, with the proportion of accounts receivable within 90 days continuously improving. Improvements in inventory and accounts receivable led to a year-over-year increase of 1067% in net operating cash flow, reaching RMB 820 million. The net cash ratio improved from 0.6 in 1H25 to 0.62 for the full year. We expect that the accelerated layout of retail formats such as Super Stores will enhance offline product turnover efficiency and improve the net cash ratio. At the end of the year, net cash amounted to RMB 3.8 billion, indicating ample cash reserves.

Multi-brand and overseas expansion accelerating, top-tier events jointly building brand momentum

1) Overseas: In 2025, the company's international business/cross-border e-commerce retail sales increased by 125.4%/approximately 200% year-over-year. The overseas offline presence is rapidly shifting to direct operation, with the first directly operated store in Kuala Lumpur and the first premium store in Cambodia opening successively, bringing the total number of overseas sales outlets worldwide to 1,253. 2) Multi-brand: The Finnish outdoor brand ONEWAY, under the company, has expanded its stores to 7, with revenue increasing 17-fold, demonstrating the potential of the outdoor market. 3) Brand momentum is expected to improve further: The company is seizing the opportunity presented by a major sports year, planning to actively deploy pop-up stores and premium stores in core areas such as the Nagoya Asian Games, enhancing brand awareness and sales. Additionally, leveraging sponsorship opportunities with World Aquatics (2026-2029) and the Olympic Council of Asia (2026-2030), the company will continue to enhance its global brand momentum.

Profit Forecast and Valuation

We largely maintain our 2026-27E net profit forecast of RMB 1.49/1.66 billion and introduce a 2028 forecast value of RMB 1.84 billion. Referencing the average 26E PE of 13.1x from comparable companies on Wind (previous value: 12.9x), and considering that 361 Degrees' current brand scale and market share are both lower than those of comparable companies, we apply an appropriate discount, assigning a target PE of 9.8x for 26E (previous value: 10.1x, HKD to CNY exchange rate 0.88). We maintain our target price of HKD 8.0 and reiterate our 'Buy' rating.

Risk Warning: Intensified industry competition, slower-than-expected consumption recovery, e-commerce growth, and store adjustments.

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