Leading In The Revival Of Domestic Sports Brands
We believe sportswear demand has been delayed by the spreading pandemic. Li Ning
maintained its guidance of a high-teen to low-twenties sales growth in 2022. We believe
Li Ning is leading in the revival of domestic sports brands. Its high-quality products
backed by rising R&D abilities and high operational efficiency would continue to drive
earnings growth ahead. Maintain BUY with a target price of HK$96.00.
WHAT’S NEW
• New store opening plan in 2022. Li Ning Company (Li Ning) plans to open ~250 Li Ning
mass product stores, 150-200 Li Ning Young stores, 10-20 Li Ning 1990 stores, and dozens
(vs 93 in 2021) of China Li Ning stores in 2022. Moreover, it will open 300-400 (vs ~400 in
2021) large-sized (>300sqm) stores with high operational efficiency in 2022, which will be
mainly in the shopping malls. It will continue to open the large-sized and high-efficient stores
in the future.
• Demand exists despite pandemic. Despite the continued spread of the pandemic, Li Ning
sees a relatively stable supply chain nationwide as the goods for April and May have already
arrived for most of the stores while the goods for June have arrived for some stores. Unlike
restaurant operations, we believe demand for sportswear would remain solid and be only
delayed by the spreading pandemic.
STOCK IMPACT
• Best representative in revival of domestic sports brands. Thanks to the fashion show
held on the Tmall China Day during the New York Fashion Week in Feb 18, China Li Ning
became the pioneer of the revival of domestic sports brands. We believe that: a) the
company’s abundant top-tier sports resources (eg China national sports teams, Wade), and
b) its ability to expand crossover resources (eg Dunhuang Fashion week in the desert in Aug
20, and Fashion Music Festival in Dec 21) would allow the Li Ning brand to reach diverse
segments of consumers and enlarge its customer base. Hence, this would strengthen brand
recognition of Li Ning and its leading position among domestic sports brands.
• Increasing R&D competence. Beng (?) technology can offer 80% energy feedback, and
Jiang (?) technology can provide a quick rebound and the protection to body joints during
running. The two technologies are considered to be the first-class globally. Li Ning plans to
expand the usage of Beng technology to mid-to-low tier running shoes, and other segments’
products (eg basketball and training) in 2022. Its R&D cost saw a 24.6% 4-year CAGR in
2017-21, indicating the company’s efforts in manufacturing high-quality products. We believe
Li Ning’s products would gain further recognition from customers and become more popular
in the future.
• Effective channel restructure. Li Ning started its channel restructure in 2012 and targeted
to lift retail sales efficiency and achieve high-quality growth. In recent years, its efforts were
mainly focused on: a) opening efficient and large-sized stores in the core cities (especially
the Tier 1 & 2 cities), and closing the underperforming or loss-making stores; b) upgrading
the decoration of stores that were opened before 2019 to improve consumers’ purchase
experiences; c) raising the franchised stores’ operational efficiency based on experiences
gleaned from self-operated stores; d) replicating the standardised operational model of high
operational efficiency stores in all other stores. Hence, the proportion of stores in Tier 1 & 2
cities and in Tier 3 & 4 cities increased 10ppt and 3ppt respectively, and the proportion of
stores in shopping malls hiked more than 15ppt as of end-21, compared with end-19. Its
overall annual per store sales surged more than 60% in 2021, and the large stores’ annual
per store sales reached Rmb7.2m in 2021, higher than Rmb4.2m for self-operated stores
and Rmb2.1m for franchised stores. Also, Li Ning will decide the sell-in plan based on the
sell-through situations, which we think would lower the risks from high inventory.
• Rising direct sales with strong online sales expansion. The share of sales revenue from
franchised distributors continuously dropped to 48.1% in 2021 from 79.0% in 2011.
However, its online sales recorded 55.6% 7-year CAGR in 2014-21, accounting for 28.4% of
total revenue in 2021 from 4.9% in 2014. The number of online members reached 40m as of
end-21, and their sales contributions increased by low-teens in 2021. In addition, the number
of low-efficiency online wholesale stores declined by mid-forties in 2021. With Li Ning’s
effective e-commerce strategies (eg the omni-channel inventory and resources sharing), we
believe its online sales would continue to grow fast in the future. The company guided for
online sales to grow 20% per year in the next few years.
• Solid sales expansion with multiple drivers. Li Ning achieved a 26.3% 4-year revenue
CAGR in 2017-21, and guided for a high-teen to low-twenties top-line growth and a highteen net profit margin for 2022. It achieved high-thirties to low-forties offline sales growth in
some cities before the resurgence of the pandemic in Mar 22. It also expects a mid-singledigit revenue growth in 2Q22 despite the high base in 2Q21. The company stated that Li
Ning mass products (offline) would contribute a mid-to-high single-digit in the total revenue
growth in 2022, while China Li Ning and Li Ning Young would likely see 40-60% sales
growth and a mid-single-digit revenue growth in 2022. With a clear and firm long-term
strategy, we expect China LN and LN Young to continue the fast expansion and contribute
more in the top line growth in the future.
• Expecting stable gross margins ahead. Although the company guided a 1% drop in gross
margin in 2022 given the high material costs, we reckon that Li Ning would likely see a
margin recovery after 2022 thanks to its brand elevation and high operational efficiency. The
potential improvement in new products’ sell-out rate, retail discount rate, and the delivery
discount and rebate rate to distributors would improve gross margin.
• Stable supply chain. Li Ning’s production capacity hiked 50% in 2021. It is lifting the share
of orders to the core suppliers. Its top three suppliers’ capacity accounted for 45% of total
capacity as of end-21. We think the top suppliers would facilitate flexible production for Li
Ning. Li Ning has also planned its logistics in the next 3-5 years to further lift its operational
efficiency and customers’ purchase experiences.
EARNINGS REVISION/RISK
• Earnings forecasts. We estimate 17.2%/24.4%/26.0% earnings growth for 2022/23/24.
• Risks. a) Continuous spread of pandemic, b) costs of materials remaining high.
VALUATION/RECOMMENDATION
• Maintain BUY with a target price of HK$96.00. We believe Li Ning brand is the leader in
the revival of domestic sportswear brands. Its increasing R&D capabilities and operational
efficiency would further strengthen Li Ning’s brand power in customers’ minds. Maintain
BUY. Our target price implies 45.5x 2022F PE and 36.6x 2023F PE.