361 Degrees International Ltd. #BB# Ratings Affirmed Despite Rising C Outlook Stable

Stocks and Financial Services Press Releases Friday May 19, 2017 17:49
HONG KONG--19 May--S&P Global Ratings

HONG KONG (S&P Global Ratings) May 19, 2017--S&P Global Ratings said today it affirmed its 'BB' long-term corporate credit rating on 361 Degrees International Ltd. The outlook is stable. We also affirmed our 'cnBBB-' Greater China regional scale rating on the China-based sportswear manufacturer. At the same time, we affirmed our 'BB' long-term issue rating and 'cnBBB-' long-term Greater China regional scale rating on the company's senior unsecured notes.

"We affirmed the ratings because we expect 361 Degrees to maintain its good sales growth and market position in the intensely competitive sportswear industry in China," said S&P Global Ratings credit analyst Sophie Lin.

"We also expect the company to sustain its debt leverage below 3.0x over the next 12 months, by gradually improving the turnover of its working capital and remaining disciplined with capital spending."

Plans by global sportswear brands to penetrate into lower-tier cities in China will intensify competition for domestic players, including 361 Degrees. Nevertheless, we expect the company to maintain its market position in the sportswear industry in China over the next 12-24 months. The company's strength is underpinned by its extensive distribution network across China, and active brand management, including through sponsorship of sports events and sports stars. 361 Degrees was the seventh-largest sportswear brand and the fourth-largest domestic sportswear brand in China, with about 4% market share in 2016, according to market-research group Euromonitor.

We believe 361 Degrees will benefit from the overall good growth prospects of the Chinese sportswear industry. Our base case assumes the industry will grow 6%-9% annually on average over the next two to three years. This is higher than our estimated GDP growth in China, and driven by a rising middle class, the growing popularity of sporting activities, and favorable government policy to encourage sports participation.

361 Degrees' small scale, limited product differentiation, and low pricing power will continue to constrain its competitive position over the next 12-24 months. Relative to major domestic peers, the company offers its distributors higher wholesale price discounts and longer accounts-receivable days. Although the company is investing in research and development capabilities and actively diversifying its business by expanding overseas and cooperating with foreign sportswear brands, these initiatives are in early stages and it may take time before they generate meaningful profit and cash flow.

We also expect that 361 Degrees will continue to generate positive operating cash flow and sustain its debt-to-EBITDA ratio comfortably below 3.0x over the next 12 months. The company's gradual improvement in accounts-receivable turnover, efficient inventory management, and disciplined capital spending underpin our estimate. We expect 361 Degrees to gradually shorten its accounts-receivable turnover days to 150-160 in 2017-2018, from about 163 days

in 2016, through a mix of active management of distributors, and continuous product-portfolio enhancement.

We view 361 Degrees' overall competitive position at the stronger end of the weak business risk profile category and its credit metrics as very solid for the rating. This relative strength is reflected in our positive comparable rating analysis assessment, resulting in a one-notch rating uplift from the company's anchor score of 'bb-'.

We equalize the issue ratings on the company's senior unsecured notes with the corporate credit ratings on 361 Degrees, reflecting our view of limited subordination risk. The majority of the company's debts are directly borrowed under its parent, which then passes through the funds to its operating subsidiaries in China, therefore alleviating subordination risks.

The stable outlook reflects our expectation that 361 Degrees will maintain its market position in the sportswear industry in China and good operating cash flow over the next 12 months, despite intense competition. We also expect the company to gradually improve its working capital management and remain disciplined with debt-funded capital spending.

We could lower the rating if 361 Degrees' debt-to-EBITDA ratio exceeds 3x without signs of improvement. This could happen if the company's sales growth or profit margin is materially below our expectation, due to intense competition or a material markdown on inventories or accounts receivable. This could also happen if the company undertakes more aggressive debt-funded investments or shareholder-friendly capital distributions than we expect.

We could raise the rating if 361 Degrees improves its debt-to-EBITDA ratio below 2x and EBITDA interest coverage above 6.0x on a sustained basis. This could happen if the company materially increases profit margins and operating cash flows by continuously upgrading its product mix toward higher margin sportswear products. This could also happen if the company uses cash to pay down its debts.

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