April 28, 2017 / 7:13 AM / 3 months ago

Fitch Affirms 361 Degrees at 'BB'; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG, April 28 (Fitch) Fitch Ratings has affirmed 361 Degrees International Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB'. The Outlook is Stable. The company's senior unsecured rating and the rating on its outstanding USD400 million 7.25% senior notes due 2021 have also been affirmed at 'BB'. The ratings are supported by the Chinese sportswear brand's stable margins and working capital, as well as its sustained net cash position. However, the company's small scale and market share in an industry characterised by limited brand recognition beyond global foreign brands constrains its rating. KEY RATING DRIVERS Stable Operations: 361 Degrees' stable market share as China's fourth-largest domestic brand and healthy EBITDA margins are underpinned by its strong production capabilities and ongoing efficiency gains, as well as an extensive distribution network with more than 6,000 outlets. In addition, 361 Degrees' flexible pricing strategy and inventory monitoring systems allow it to adapt quickly to changes in market conditions. The company has maintained a reasonable inventory level of 4.0x-4.2x average monthly sales. Promising Industry Prospects: Fitch expects China's sportswear industry to benefit from rising disposable incomes, increasing health consciousness and supportive policies. The sales value of sportswear in China is projected to increase at a compounded annual growth rate of 6.4% in 2016-2018, versus 6.2% in 2008-2013, according to Euromonitor International. 361 Degrees' expansion has been in line with the industry average in the past few years. Sales Growth to Moderate: Fitch expects revenue growth for 361 Degrees to moderate in the next few years, but the company should still benefit from the continued expansion of China's sportswear industry. Revenue in 2017 is expected to rise in line with trade-fair orders for the group's core brand, implying high-single-digit to low-double-digit growth as compared with 13% yoy growth in 2016. Investment in Brands: 361 Degrees may benefit from growth in brands other than its core brand, including 361 Degrees Kids, the e-commerce business, its international operations and the high-end outdoor brand, One Way. The company remains highly dependent on its core brand, which accounted for approximately 85% of total sales in 2016, but Fitch expects it to continue diversifying earnings as contribution from new brands increases. 361 Degrees is likely to allocate more resources to build brand awareness, promote its technical products and invest in international expansion and its multi-brand platform. However, we do not expect this to have a large negative impact on margins, as the pace of investments is unlikely to exceed sales growth. Healthy Financial Profile: 361 Degrees has a record of stable recurring EBITDA margins and operating cash flow, and has maintained a net cash position for the past four years. FCF turned positive in 2016 to CNY540 million thanks to prudent working capital management and lower capex. Fitch expects the company to continue generating positive FCF in 2017-2019. DERIVATION SUMMARY 361 Degrees has a smaller operating scale and is less diversified in terms of geography and product portfolio compared with global peers. However, the company has a strong financial profile, with a sustained net cash position and consistently positive FCF. 361 Degrees has a smaller scale - of approximately 24% of EBITDA - compared with branded apparel company, Levi Strauss & Co. (BB/Stable), but benefits from higher profitability, a higher coverage ratio and is in a net cash position against Levi's FFO net leverage ratio of over 3x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Mid- to high single-digit revenue growth in 2017-2020 - EBITDA margin in the range of 18%-19% in 2017-2020 - Capital expenditure of CNY200 million annually - Receivable days and inventory days similar to 2016 levels RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action No positive rating action will be considered until 361 Degrees significantly boosts its operating scale and market share. Developments that May, Individually or Collectively, Lead to Negative Rating Action -EBITDA margin below 15% for a sustained period (2016: 19%) -Negative FCF for a sustained period -Failure to sustain a net cash position -Deteriorating working capital, such as worsening trade receivables (including bill receivables) days or a significant increase in channel inventory LIQUIDITY Sufficient Liquidity: 361 Degrees had sufficient capital and liquidity resources at end-2016, as reflected by the total debt balance of CNY2.8 billion - of which CNY76 million was current borrowings - and a readily available cash balance of CNY5.6 billion. Besides, the company's unutilised banking facilities amounted to almost CNY4 billion in 2016. Fitch expects 361 Degrees to continue generating positive FCF from 2017 thanks to working capital management and limited capex requirements. Contact: Primary Analyst Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Yee Man Chin Director +852 2263 9696 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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