Earnings Report 2023｜Did 361 Degrees Fall Victim to Misjudgment?

The 20cm yin line that appeared after the release of the China Daily really cooled the hearts of 361 degree (1361.HK) shareholders. On August 15, 361 degrees of intraday release of the 2023 mid-year report, continuing the trend of double increase in revenue and net profit since the 2021 mid-year report, with an increase of 18 percent and 27.7 percent, respectively. However, after the midday results were released, the 361-degree share price dived, falling 20% at one point. The sharp fluctuations in the share price may be related to the lower-than-expected medium-term dividend payout ratio of 361 degrees. According to the financial report, the 361-degree board of directors decided to distribute a dividend of 6.5 Hong Kong cents per share, totaling about 0.124 billion yuan, with a dividend ratio of only 17.6 per cent. As of the end of the reporting period, 361 degrees had about 3.55 billion yuan in cash and cash equivalents, including 2 billion yuan in bank deposits. In terms of business fundamentals, whether 361 degrees will repeat the same mistake is also one of the doubts of the outside world. In the inventory removal cycle that began in 2012, 361 degrees were forced to close stores to remove inventory, and the number of stores decreased from 8082 in 2012 to 5539 in 2018. Since the sports shoes and clothing industry started a new round of inventory removal cycle in 2022, each company has once again put discount inventory removal on the daily basis, which also poses a challenge to 361 degrees, which focuses on the sinking market. In the first half of this year, the inventory level of 361 degrees increased by 3.06 year-on-year, and the number of inventory turnover days increased significantly by 10 days, increasing for three consecutive reporting periods. Since the beginning of this year, compared with the falling stock prices of Hong Kong stock peers, 361 degrees has stepped out of a unique curve, and even set a new high of HK $5.3 per share since its listing this year. As of August 15, it rose more than 40% during the year. However, just after the midday release of the interim report, the 361-degree share price plunged and went out of the "V"-shaped trend. During the period, the decline once reached 20%, and the decline narrowed before the close, closing at 4.71 Hong Kong dollars per share that day, a daily decline of 4.85. Judging from the performance of the 361 degree report, whether this is a "wrong killing" by investors to express their dissatisfaction remains to be verified. ## Operating cash flow under pressure In the case of 361 degrees of operating cash flow this year, the management who has experienced the company's high leverage period is probably more convinced that "cash is king". Investors are quite critical of the 361-degree dividend ratio, but dividends are already rare. Wind data show that 361 degrees of this interim dividend is its since 2020, after three years of dividend payout. Earlier in the 2019 annual report, its dividend payout ratio was only 6.5 per cent. Since its listing in 2006, 361 degrees has implemented 13 cash dividends, with a dividend rate of 24.55. Tebu International (1368.HK), which went public in the same year, paid 15 dividends, with a dividend rate of 58.06 per cent. Xinfeng (ID:TradeWind01) sent a letter to contact 361 relevant people asking about the company's consideration of the dividend ratio in the first half of the year, but no reply was received as of the time of publication. From 2016 to 2021, 361 degrees passed through a period of "bitter days" of tight money ". As a result of the issuance of $0.4 billion 7.25 per cent of five-year bonds in 2016, financial costs remained high, with the financial expense ratio at one point exceeding 400 per cent. It was not until June 2021 that these bonds were fully paid, and the gearing ratio plummeted to 23.87 per cent from 34.9 per cent the previous year. However, in the first half of this year, a transaction put pressure on 361 degrees of cash flow again, which may also be the incentive for its lower dividend ratio. During the reporting period, 361 degrees had another acquisition transaction expenditure involving the 0.55 billion of non-controlling interests, which directly resulted in a net decrease of 0.307 billion yuan in cash and cash equivalents during the reporting period. The 0.55 billion yuan expenditure for the above acquisition originated in April this year. 361 announced that its wholly-owned subsidiaries 361 degrees (China) and 361 degrees (Xiamen) would acquire shares of Jinfa Equity and shares of Jinjiang Jinfa No.1 Equity Investment Partnership (Limited Partnership) held by Zhejiang Yingshi Private Equity Management Partnership (Limited Partnership) (hereinafter referred to as "Zhejiang Yingshi"). After the completion of the transaction, 361 degrees of holding more than one degree of e-commerce company (Quanzhou) of the actual equity increased to about 87.17. It is worth mentioning that the above transaction 361 degrees need to be paid to Jinfa equity, Zhejiang Yingshi 0.549 billion yuan and 1.1 million yuan respectively, and the transaction amount is the amount of capital contribution of the two after the establishment of the partnership in 2020, there is no premium. Based on the partnership's unpaid investment income of 62.18 million yuan as of March 31, 2023, Jinfa Equity and Zhejiang Yingshi can obtain investment income of 31.02 million yuan and 62000 yuan, respectively, with an annualized rate of return of only about 2.05 percent. Some people in the industry said to the analysis of Xinfeng (ID:TradeWind01) that Zhejiang Yingshi, as the guiding fund of Zhejiang provincial government, is equivalent to GP of the above-mentioned projects, while Jinjiang's state-owned equity is equivalent to LP. The purpose of setting up the fund with 361 degrees includes helping private enterprises incubate industries, guiding development, and expanding taxation, but is necessarily aimed at earning income. ## E-commerce channel breakout Before 2021, the slow recovery 361 degrees are gradually "falling behind" in the industry, with a growing gap with the head companies. In 2006, when 361 degrees was first listed, the volume was about 1/5 that of Anta Sports (2020.HK), but by 2022, it was only 13% of the latter. It is the east wind of the "rise of the national tide" and the emerging channels of e-commerce that have brought 361 degrees back to the table. From 2020 to 2022, 361 degrees of revenue compound annual growth rate of 10.95, although not as good as the head of Li Ning (21.57), Anta (14.8), is also a return to high-speed growth. Compared with the inventory clearance pressure brought by more than 8,000 stores in the past, 361 degrees are now happy to bet on e-commerce channels with lighter assets. In the first half of this year, 361 degrees achieved revenue of 4.312 billion yuan, a year-on-year increase of 18%; a net profit of 0.704 billion yuan was recorded, a year-on-year increase of 27.7. Among them, the e-commerce channel is the fastest growing channel. During the reporting period, 361 degrees of e-commerce business contributed 1.079 billion yuan's turnover, up 38% year-on-year, accounting for 25% of the overall turnover. However, according to the calculation of Huaxi Securities, the store efficiency of 361-degree adult and children's offline stores increased by only 2% and 13% year on year. Due to the low price of 361-degree products that focus on the sinking market, nearly 80% of the stores are located in third-tier and lower cities. According to the data of West China Securities Research Report, the average price of 361-degree shoes is only 300 yuan, which is the highest price difference of 500 yuan compared with Li Ning. Therefore, the "buffer" between the online and offline price systems is small, and it is very easy to "grab" the performance of online channels and offline stores. In order to avoid affecting the dealer's income, the price system of online and offline channels is distinguished, 361 degrees in the e-commerce channel to put a large number of dedicated products. During the reporting period, products from 361-degree dedicated e-commerce channels contributed 1.079 billion yuan in revenue, up 38% year-on-year, accounting for about 25% of total revenue. In 2022, the proportion of exclusive products in e-commerce channels will reach 82%. In terms of products, 361 degrees and Li Ning showed a similar sales trend: shoes sold better than clothing. In the first half of this year, footwear products contributed 1.901 billion yuan in revenue, up 28.4 percent from the same period last year, while clothing products contributed 1.362 billion yuan, down 1.4 percent from the same period last year.