Sales recovery since July
- Li Ning reported total revenue growth of 21.7% yoy to Rmb12.4bn in 1H22, in line with our expectation. Net profit grew 11.6% yoy to Rmb2,189m in 1H22, slightly lower than our expectation, due to a weaker gross margin.
- Management noted a sales recovery since July, and maintains its full-year guidance of 15–20% yoy sales growth with a net profit margin in the high teens.
- Reiterate Add, since we believe Li Ning still has large room to improve its store efficiency and margins in the long run. We lower our DCF-based TP to HK$113 since we cut our FY22–24F EPS forecasts.
1H22 net profit slightly below expectation due to weaker GPM
Revenue grew 21.7% yoy in 1H22; wholesale, direct retail and online channels sales grew by 28.5%, 10.8% and 19.2%, respectively, yoy. The slower growth of the direct sales channel was a result of most of its stores being located in first-tier cities, which were more impacted by Covid. The GPM contracted by 5.9ppt yoy to 50.0% in 1H22, due to 1) a larger discount rate, 2) higher raw material costs, and 3) a smaller sales contribution from the direct sales and online channels, which have higher margins. But Li Ning improved control of expenses, reducing its distribution and admin expenses ratios by 0.8ppt and 0.1ppt, respectively, yoy to 27.3% and 4.2% in 1H22. Overall retail sell-through increased by 8% in 1H22. Channel inventory grew by the mid-forties in 1H22, due to larger sales size, low inventory levels last year, and the company’s proactive increase in new products in the channels to prepare for a likely sales recovery in 3Q22F. Management said revenue has grown by the mid-teens yoy in 3Q22 to date.
Further efficiency improvement in 2H22F
Inventory turnover days remained healthy at 3.6 months in 1H22 vs. 3.1 and 3.9 months for 1H21 and FY21. The inventory structure also improved in 1H22, with new products within six months accounting for 88% vs. 83% in 1H21. Management expects the discount rate and inventory level to improve qoq in 3Q22F. The offline average label price increased by low-single-digits yoy in 1H22. Li Ning opened 240 stores in 1H22. The monthly store efficiency also improved by the mid-teens yoy in 1H22. Li Ning maintained its store opening plan for FY22F. The net increase in the Li Ning brand, China Li Ning, Li Ning Young and Li Ning 1990 stores will be 200–250, less than 50, 150–200 and 10–20, respectively. The speed of new store openings was a bit slow in 1H22, but it will speed this up in 2H22F (according to management in the analyst conference).
Functional products to drive growth
Li Ning facilitated its R&D investment in the past two years. The retail sell-through for running shoes and basketball products grew by 10% and 30%, respectively, yoy in 1H22, driven by strong growth of functional products. The new boom fiber shoes reached 2m pairs in 1H22, and management said (in the analyst conference) it will use this new technology in more product categories in FY22F. Li Ning Young also achieved strong growth in 1H22 with retail sell-through increasing by the mid-40s, the average label price up by the mid-teens, and monthly store efficiency growing by the mid-30s.
Reiterate Add with a lower DCF-based TP of HK$113
We reiterate our Add rating, since we believe it has large potential to further improve its store efficiency and margins in the long run. We cut our EPS forecasts for our FY22F–24F forecasts by 4.7–5.4% to reflect gross margin pressure. The key positive catalyst is higher than-expected sales growth in 2H22F. The key risks are weaker consumption demand and a higher discount rate, which would impact margins. We derived our TP from DCF valuation with 7% WACC and 3% terminal growth rate.
