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361 Degrees: June '21 Dollar Bonds Yield 13-14% But Should Be Money Good

Jeremy Raper profile picture
Jeremy Raper


  • I stumbled across their 7.25% Jun'21 USD bonds, which currently trade around 93.5 - 13% yield, 1.25 years to maturity.
  • Moreover, the company appears to have been solidly profitable on a consistent basis over the last five years.
  • This is a family-controlled business (not uncommon in HK), with management owning >65% of the company.

361 Degrees (OTCPK:TSIOF) (1361.HK) is an HK-listed Chinese shoe and sports clothing retailer. You can read about the company and see their products here. I stumbled across their 7.25% Jun'21 USD bonds, which currently trade around 93.5 - 13% yield, 1.25 years to maturity - and was expecting to see a highly leveraged, distressed business (like Tupperware (TUP)); or an obvious fraud. Instead what I saw was this (from the last reported financials, Jun'19):

All these figures are in RMB. So the company says they have 6.1bn RMB - that's ~$900mm USD - in cash on the balance sheet - against just 2.6bn RMB of long-term debt (entirely the USD bonds) and basically no short-term debt, with net assets close to $900mm USD to boot.

Moreover, the company appears to have been solidly profitable on a consistent basis over the last five years:

So if the company is making money consistently, can cover the bond repayment 2x over with cash on hand, there is almost no other debt outstanding, and the bonds are almost 3x covered by gross assets, then why would the bonds trade at 13% yield??

Is this a fraud?

In situations like this you don't need to make many judgements about the future growth of the business or its underlying quality, you only need to figure out if the numbers are close enough to real to get paid. Indeed, the risk of fraud was the proximate cause of why the bonds crashed to the mid-70s last November (the auditor resigned in a pay dispute, and this was interpreted as being but the first of many accounting cockroaches, even if it was simply a pay dispute), so it is really the only thing worth spending time on here.

But how do you figure out if the numbers are

This article was written by

Jeremy Raper profile picture
Full-time investor. Going forward all my write-ups/content will be exclusively at rapercapital.com.You can read about my approach here:https://rapercapital.com/investment-philosophy/You can see my past performance here:https://rapercapital.com/historical-idea-performance/You can contact me at rapercapital@gmail.com or follow me on Twitter @puppyeh1

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Comments (4)

Tom Sandlow profile picture

I always appreciate your articles and appreciate you pointing out this opportunity. After doing my own work I have purchased some.

I found that a review of the Independent Auditor's (KPMG) Report was helpful. It's much more detailed regarding the auditor's procedures than the info received in the US. In the case of 361 Degrees there is a solid explanation of KPMG's check on sales, sales agreements, returns, etc. I tend to think that revenue and revenue recognition would be the most likely areas to commit fraud (it's big enough to matter and hard to pin down). Maybe I'm naive, but I have a hard time imagining that KPMG doesn't independently check the bank accounts and cash. I take a lot of comfort from the fact that the reported bank deposits and cash are significantly higher than the debt (I know that the cash is needed for operations, etc, but as an owner I think it would be very hard to walk away from the company instead of paying back the debt).

As you pointed out, I think the family purchases of stock (and debt) are very helpful signs, especially since they are occurring relatively shortly before the debt is due.
Jeremy Raper profile picture
hi Tom - always good to hear from you and thanks for your kind words. thanks also for pointing out the detail in the KPMG audit report; you're right it seems quite thorough. having said all that - at the end of the day I only trust what the company is doing, not what the auditors are saying about the accounts. thus, the fact they are actively deploying cash to buy as many of these bonds back at discounts to par suggests very strongly there is little to no refinancing risk. without this piece of info, i probably wouldn't have gotten involved.

also please sign up to my blog at www.rapercapital.com, you will get these ideas in real time!
Tigerbond profile picture
Just starting to do some light DD of my own. Couple quick notes to add - helpful for readers to include the CUSIP / ISIN in any bond article. XS1415758991 is the ISIN for this one.

Also, it's a Reg 144a / Reg S issue, thus it's only available for trading by institutions and non-US residents.

@Jeremy Raper - what are you seeing currently for a spread & liquidity for this bond on your broker platform? IB only shows an ask at the moment (no bid), ask price $93.50, size $290k.

IB's displayed pricing & liquidity on Reg S issues can be rather spotty at times (displaying a price quote for only one side of the market, such as this bond currently showing just an ask price). Curious if there's a better broker for issues like this, one that connects to deeper liquidity sources.
Tigerbond profile picture
Great article!

This is the precise type of content I wish there was far more of on SA. The global OTC corporate bond market is so incredibly vast ($7T in the US alone) that at any given time, there's likely to be a significant number of advantageous mis-pricings out there. But it can take quite an effort to find them & conduct proper DD on them.

It seems like 95% of fixed-income SA authors focus solely on preferreds and baby bonds, a far smaller universe than OTC bonds (by several orders of magnitude). Truly advantageous mis-pricings in preferreds & baby bonds are harder to come by given their overall limited size and with so many eyes following every tick.
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