Phillip Securities: 361 Degrees (1361.HK) Builds Moat in Lower-Tier Markets through Channel Cultivation and High Cost-Performance

The 361º brand was established in 2003, positioning itself as 'professional + youthful', focusing on mid-tier priced product lines within the mass consumer market. It covers multiple subcategories including running, basketball, cross-training, children's wear, and outdoor sports. The company continues to advance its 'single focus, multi-brand, globalization' strategy, centered around the main brand 361°, supplemented by 361° Kids and 361° International to form a multi-layered product matrix. Currently, 361º is popular in major cities and regions across China and is gradually expanding into overseas markets. As of June 30, 2025, the number of 361º stores in mainland China reached 5,669, with most located in third-tier and lower cities in China. The number of 361° Kids sales outlets stands at 2,494, and the number of 361° International sales outlets is 1,357.

In Q3 2025, both the 361º main brand and children’s wear brand achieved a 10% year-on-year positive growth in offline retail, while e-commerce platform sales grew by 20% year-on-year. In H1 2025, the company reported revenue of RMB 5.705 billion (hereinafter, RMB), representing an 11% increase year-on-year. Of this, footwear contributed RMB 3.29 billion in revenue, accounting for 57.6%; apparel contributed RMB 2.12 billion, accounting for 37.2%; accessories contributed RMB 0.21 billion, accounting for 3.7%; other categories contributed RMB 0.09 billion, accounting for 1.5%. In terms of channel structure, online exclusive products sold via e-commerce contributed RMB 1.82 billion in revenue, accounting for 31.8%, marking a 45% year-on-year growth, reflecting the ongoing success of digital transformation. Geographically, the domestic market remains the company's core sales region, while 361º International recorded revenue growth of 1.5% year-on-year, up 19.7%, primarily driven by expansion in Southeast Asia, the Americas, Europe, and countries along the 'Belt and Road' initiative. Looking ahead, the company will continue to strengthen its overseas market presence, and we believe that it still has significant room for growth in international markets. Continued brand-building efforts overseas could contribute more to the company's revenue in the coming years.

In H1 2025, the company’s gross margin stood at 41.5%, maintaining above 40% for four consecutive years since 2021. The selling and distribution expenses ratio was 18.2%, slightly increasing year-on-year due to the company investing more resources in advertising and promotional activities, especially through e-commerce platforms for brand promotion. Online sales are currently the mainstream trend in the consumer industry, and we speculate that the company will allocate more resources to e-commerce platforms, potentially causing the selling and distribution expenses ratio to maintain an upward trend. The net profit margin attributable to shareholders was 15.3%, growing by 2.94 percentage points year-on-year and 3.45 percentage points quarter-on-quarter, showcasing its resilient profitability through economic cycles. Earnings per share were RMB 0.41, up 8.6% year-on-year. The asset-to-debt ratio was 34.3%, with the company maintaining a debt-to-asset ratio below 30% over the past four years, indicating a healthy financial structure and low debt pressure.

The launch of ONEWAY outdoor stores and women's sports concept stores reflects deep exploration of niche markets and the contextual expression of brand value. This not only enhances brand image and customer loyalty but also helps test new product categories and gather valuable user data. The new ONEWAY stores primarily sell the key products from the Fall/Winter 2025 outdoor footwear and apparel collection, including the NUUKSIO, SISU, and LUXE product lines, covering professional skiing, professional outdoor activities, and urban crossover styles. Winter has arrived, and ice and snow facilities in northern regions have started operating, marking the beginning of a new winter sports season. The diversity of different types of ice and snow venues continues to grow, steadily expanding participation in winter sports across China, which bodes well for rapid growth in the winter sports industry. According to CCTV data, the total scale of China's winter sports industry reached 970 billion yuan in 2024, increasing by approximately 9% year-on-year, and is expected to exceed 1 trillion yuan in 2025. Coupled with the upcoming Double Twelve shopping festival, this could drive growth in skiwear sales, making ONEWAY’s performance promising.

361 Degrees’ Super Premium Store reinforces the brand’s differentiated advantage through an integrated, all-category consumer experience. As benchmarks, these Super Premium Stores (now totaling 93) work alongside diverse store formats to form a tiered retail network that covers different customer segments and consumption scenarios, effectively strengthening omnichannel operational capabilities and growth resilience.

According to data from the National Bureau of Statistics, from January to October 2025, the total retail sales of consumer goods reached 41.2169 trillion yuan, growing by 4.3%. Online retail sales of physical goods nationwide amounted to 10.3984 trillion yuan, increasing by 6.3% year-on-year. Retail sales of sports and entertainment products were 139.7 billion yuan, rising by 18.4% year-on-year. A report from the General Administration of Sport shows that more than 400 million people participate in outdoor sports in China. With the trend of mass participation in sports, this figure is expected to continue growing, driving sales of sportswear. 361 Degrees is actively targeting women and children’s niche markets, forming a differentiated competitive edge. This year, China initiated a unified national childbirth subsidy system. By reducing the costs associated with raising children and boosting willingness to have children, the policy is expected to support a long-term increase in the child population base. Combined with the ‘double reduction’ policy and the national fitness program, which boost demand for children's sports activities, parents’ willingness to spend on children’s sportswear is increasing. We believe the children's sports apparel market will remain highly robust, and 361 Degrees’ children’s business will provide steady growth momentum for the company. 361 Degrees will continue sponsoring various sporting events, such as the WTCC World Tennis Continental Cup, among others. NBA superstar Nikola Jokic officially became a 361 Degrees endorser at the end of 2023, entering into a long-term partnership with the brand and launching his signature shoe series (the JOKER series). He visited China in July this year. These activities have effectively increased brand awareness and exposure. We are optimistic about 361 Degrees’ advantages in lower-tier markets and its prospects for expanding into overseas markets.

We forecast the company’s revenue for 2025-2027 to be 11.265 billion yuan, 12.529 billion yuan, and 13.797 billion yuan, respectively, with EPS at 0.63/0.67/0.73 yuan. We apply two valuation methods: relative valuation (P/E) and absolute valuation (DCF).

Relative Valuation Method: We selected comparable companies for valuation, choosing firms with similar businesses like Li Ning, Anta, and Xtep for comparison. Based on this, we predict a target price of HK$7.36, corresponding to a forecast P/E ratio of 10 times for 2026.

Absolute Valuation Method: Key Assumptions in DCF Analysis: 1. WACC is calculated as 6.46% using the formula WACC=Kd*Wd(1-T)+Ke*(1-Wd). 2. The discount period runs from 2025 to 2029. 3. The perpetual growth rate is 3%. With a WACC of 6.46% and a perpetual growth rate of 3%, the company's fair value per share is HKD 7.58. Assuming a WACC range of 5.81%-7.11% and a perpetual growth rate between 2.7%-3.3%, the company's fair value per share would be within a range of HKD 6.48-9.56.

Considering the limitations of the DCF model, we averaged this valuation result with the P/E valuation method, ultimately deriving a target price of HKD 7.47. We are initiating coverage with a 'Buy' rating.

1) Growth in China’s domestic sportswear industry falls short of expectations; 2) Intensified industry competition; 3) Macroeconomic downturn impacting end-user consumption; and 4) Company sales underperforming expectations.