20180814-东英亚洲证券-李宁-02331.HK-1H18_results_up_to_expectations_8页_1mb

Equity Research Summary: Li-Ning (2331 HK)

Core Content

Li-Ning Company Limited is a leading player in the sports footwear, apparel, and accessories market. The company has recently announced its 1H18 results, which showed revenue and reported net profits increasing by 18% and 42% year-over-year to RMB4,713 million and RMB269 million, respectively. These results were largely in line with market and OP expectations.

Key Financial Performance

• Revenue: RMB4,713 million in 1H18, up 18% YoY.
• Reported Net Profit: RMB269 million, up 42% YoY.
• Gross Margin (GPM): Improved to 48.7%, driven by increased retail and e-commerce contributions, a better product mix, and higher margins for direct retail new products.
• Admin Expenses: Slightly higher than expected due to the accelerated growth of Li-Ning Young.

Earnings and Revenue Estimates

• FY18E Adjusted Net Profit: Trimmed to RMB834 million from RMB835 million.
• FY19E Adjusted Net Profit: Trimmed to RMB988 million from RMB1,052 million.
• Revenue Estimates:
  • FY18E: RMB10.3 billion (revised up by 0.6%).
  • FY19E: RMB11.5 billion (revised down by 0.8%).
• Operating Expenses (Opex):
  • FY18E: Revised up to RMB4.2 billion from RMB4.166 billion.
  • FY19E: Revised up to RMB4.7 billion from RMB4.636 billion.
• Diluted EPS:
  • FY18E: HK$0.414 (trimmed by 0.2%).
  • FY19E: HK$0.490 (trimmed by 6.1%).

Target Price and Rating

• Target Price (TP): Revised down to HK$9.80 from HK$11.50.
• Rating: Maintained as BUY, based on a 20x FY19E P/E, down from a previously estimated 22x.

Market and Macroeconomic Factors

• Market Sentiment: Cooling down in 1H18 due to geopolitical disputes and concerns over China's economic slowdown.
• Li-Ning Young: Showing faster-than-expected growth in POS and revenue contribution, which is partially offset by slower growth in the Li-Ning Brand due to macroeconomic uncertainty.
• Consumer Confidence: Expected to be deflated, impacting overall growth.
• Channel Inventory: Potential build-up remains a risk.

Financial Ratios

Peer Group Comparison

Li-Ning's financial metrics are compared against both domestic and international peers, with the following insights:

• P/E (x): Li-Ning's P/E is lower than the adjusted sector average, suggesting potential undervaluation.
• P/B (x): Li-Ning's P/B is also lower than the sector average.
• EV/EBITDA: Li-Ning's EV/EBITDA is lower than the adjusted sector average, indicating a more attractive valuation.
• Gross Margin (%): Li-Ning's gross margin is in line with or slightly better than its peers.
• Net Margin (%): Li-Ning's net margin is improving, showing better profitability.

Risks

1. Slower Ramp-Up of Li-Ning Young: Could impact growth expectations.
2. Deflated Consumer Confidence: May lead to slower sales growth.
3. Macro Economic Headwinds: Potential slowdown in China's consumption and economic growth.
4. Channel Inventory Build-Up: Could affect liquidity and profitability.

Conclusion

Li-Ning has shown strong performance in 1H18, with revenue and net profit growth exceeding expectations. Despite macroeconomic headwinds and geopolitical tensions, the company is expected to maintain its growth trajectory. The reduced target price reflects a more conservative outlook on future earnings, but the BUY rating remains due to its strong financial position and growth potential.