361 Degrees International is engaged in the manufacture and distribution of sports footwear, apparel, and accessories – with a leading presence in third and lower-tier cities throughout China. It sponsors various high-profile events (including the Hangzhou Asian Games in 2022), the Chinese national team in several sports, and several celebrities.
It operates primarily in two market segments – Adults (85% of sales) and Kids (15% of sales). Product segments within Adults is primarily comprised of footwear (42% of total sales), and apparel (41%).
Sales and earnings were hit due to Covid-19, with both dropping by 16 and 17% respectively over the previous year. Overall gross margins dropped by 3% to 38%. In addition, receivables have increased to help distributors cope with adverse operating conditions during these months. Further, the company has pursued partnerships to increase its e-commerce distribution.
Sales and earnings grew steadily to $6.4b and $490m respectively in 2019. Ttm sales and earnings fell to $5.6b and $405m.
The financial position is strong with $3.9bn in net cash. The current asset and liquid asset ratios were above 2:1 indicating comfortable ability to meet near-term obligations. The net current asset value (net of long-term liabilities, and a proxy for liquidation value) stood at $5.9b. This was primarily represented by cash and receivables.
The equity is selling for $2.1bn, which is 36% of net current asset value and about 5x depressed earnings.
This analysis ascribes zero value to the $1bn in buildings (at cost) or the value of the brands.
72% of receivables were due within 90 days, and 99% within 180 days. Credit terms offered were 30 to 180 days, and impairment losses of $35m were taken on receivables in the last six months.
There were $400m in US$ notes due in 2021 and listed on the Hong Kong exchange. The company has been gradually repurchasing these notes and it’s now down to $274m. Recent repurchases indicate a cost price of 95 cents on the $, which doesn’t imply solvency problems.
Management paid consistent dividends in the last five years averaging 50% of earnings – but the interim dividend was cancelled.
We are unable to find other indications to the contrary as the stock appears to be selling as if it’s going out of business. Even if it does go out of business, patient stock investors are unlikely to lose capital at this price - and are likely to gain substantially over time.