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Li Ning (2331 HK) Equity Research Summary

Core Content

This equity research report from GF Securities (Hong Kong) provides an analysis of Li Ning's financial performance and outlook for the year 2018 and beyond. The report maintains a Hold rating and updates the target price to HK$8.50. It also compares Li Ning with its peers and outlines key financial metrics and assumptions.

Main Points

• Stock Performance:

  • Current price is at HK$8.50, matching the target price.
  • The 52-week high is HK$9.82 and the low is HK$5.48.
  • The company's shares are in issue of 2,186 million.

• 1H18 Results:

  • Net profit increased by 42% YoY to Rmb269 million, in line with expectations.
  • Revenue grew by 18% YoY, driven by strong SSSG growth and the take-back of Li Ning Young.
  • Gross margin widened by 1pp to 48.7%, due to improved channel mix and retail new product performance.
  • SG&A expenses ratio decreased by 0.2pp to 43.1%, but staff costs rose by 26%.
  • Operating profit increased by 52% YoY to Rmb386 million, with OPM expanding to 6.2%.
  • Net finance income declined due to investment in wealth management products.
  • Effective tax rate dropped to 18.0% due to tax loss utilization.

• FY18 Guidance:

  • Management has maintained its guidance for mid-teen revenue growth, 100pp GPM expansion, and NPM of 6.5–7%.
  • The company expects SSSG growth to remain at high single-digit for the third quarter.

• Store Expansion:

  • The core Li Ning brand will maintain 100 net store openings, but will focus on improving store efficiency.
  • Li Ning Young plans to increase net store openings to 250, aiming for 750 stores by end-FY18.
  • Danskin store count is expected to increase to 15–20.
  • A premium fashion store, 中國李寧時尚店, was opened in Zhuhai.

• Margin Performance:

  • Retail GPM improved to mid-sixties (~65%).
  • Wholesale GPM remained at 40%.
  • E-commerce GPM stayed at low-fifties (~55%).
  • OPM increased to 6.2% in 1H18.

• Peer Comparison:

  • Li Ning's SSSG growth is high single-digit, similar to Anta and 361 Degrees.
  • Anta is expected to have a higher valuation than Li Ning due to a larger market share and better execution.

• Valuation and Financials:

  • The target price is raised to HK$8.50 based on a 22x FY19E P/E.
  • The report includes detailed financial statements, cash flow statements, and balance sheets for FY16 to FY20E.
  • ROE is expected to increase to 15.1% in FY20E.

Key Information

Financial Highlights (FY16–FY20E)

Store and Brand Strategy

• Core Li Ning:

  • Net store openings remain at 100.
  • Focus on store efficiency rather than expansion.

• Li Ning Young:

  • Net store openings to increase to 250, leading to 750 stores by end-FY18.

• Danskin:

  • Store count to increase to 15–20.

• Premium Store:

  • 中國李寧時尚店 opened in Zhuhai with an ASP of Rmb699–999.

Financial Ratios (FY16–FY20E)

Analyst Certification and Disclosure

• The analyst certifies that all views expressed reflect personal opinions.
• No part of the analyst's remuneration is tied to specific recommendations.
• GF Securities (Hong Kong) does not hold shares in the mentioned securities.
• No investment banking relationships exist with the mentioned companies in the past 12 months.
• The report is for informational purposes only and does not constitute a recommendation or offer to buy/sell.
• The report is subject to change without notice.

Conclusion

Li Ning is expected to maintain a Hold rating with a target price of HK$8.50. The company is showing steady growth in revenue and margins, with a focus on improving store efficiency and expanding its sub-brands. While the company's performance is positive, macroeconomic uncertainties and a high base make future growth cautious. Anta is viewed as a more attractive investment due to its larger market share and execution track record.