OREANDA-NEWS. Fitch Ratings has assigned a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' and a senior unsecured rating of 'BB' to Chinese sportswear brand 361 Degrees International Limited (361 Degrees). The Outlook for the IDR is Stable. Fitch has also assigned 361 Degrees' proposed US dollar-denominated senior notes an expected rating of 'BB(EXP)'.

The ratings are supported by 361 Degrees' stable margins and working capital following the industry downturn in 2012-2013, and its sustained net cash position. Furthermore, the sportswear market in China continues to expand, driven by rising incomes and consumer spending. However, 361 Degrees' small scale and market share in an industry characterised by limited brand recognition beyond global foreign brands constrains its rating.

The senior notes are rated at the same level as 361 Degrees' senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS
Robust Operations: 361 Degrees' stable market share and healthy EBITDA margins are underpinned by its strong production capabilities and ongoing efficiency gains, as well as a extensive distribution network with more than 7,000 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, and has reported 8%-18% order growth in the seven quarters up to June 2016.

Resilience Following Downturn: The sportswear industry in China faced a significant downturn in 2012-2013, as overproduction and weaker-than-expected demand led to an inventory glut from which the industry took more than two years to recover. The slump - 2015 revenue was still below the level achieved in 2012 - prompted 361 Degrees to enhance inventory monitoring and order management systems, which appears to have resulted in more stable and sustainable growth.

Bright Industry Growth 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 grow at a compound annual growth rate (CAGR) of 6.4% in 2016-2018, versus 6.2% in 2008-2013, according to Euromonitor International. 361 Degrees' growth has been in line with the industry average in the past few years.

Competitive Industry, Low Differentiation: China's sportswear industry is highly price-competitive. The industry is led by Nike and Adidas, together accounting for 37% of the market. The top five domestic brands have a total market share of 28%, and there is limited pricing power due to low product differentiation and brand recognition. 361 Degrees is the fourth-largest among them, with a 4% market share over the past eight years.

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. Fitch expects the company to generate positive FCF in 2016-2018, driven by reduced capex requirements and prudent working-capital management.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for 361 Degrees include
- EBITDA margin in the range of 16%-17% in 2016-2019
- Capital expenditure of CNY200m in 2016 and CNY150m thereafter
- Receivable days and inventory days similar to the 2015 levels

RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- No positive rating action will be considered until 361 Degrees significantly boosts its operating scale and market share.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin sustained below 15%
- Sustained negative FCF
- Failure to sustain net cash position
- Trade receivables (including bill receivables) days sustained above 190 days and/or channel inventory sustained above 4.5x average monthly sales