20161125-交银国际证券-李宁-02331.HK-Further_re-rating_on_shaped-up_innovation_and_retailing_muscles__initiate_at_BUY_26页_2mb

Li Ning (2331 HK) Summary

Core Content

Li Ning is a domestic sportswear brand with a strong legacy and a promising transformation strategy. The report initiates the stock at BUY with a target price of HK$7.00, which is 1SD above Anta's historical median and reflects its long-term strategic value and potential for earnings recovery.

Main Points

1. Brand Legacy and Transformation

• Li Ning was founded by a legendary gymnast, Mr. Li Ning, and has a rich history in sports.
• The brand was once the top sportswear company in China but lost market share due to overpricing and poor brand positioning.
• The company has since repositioned itself as a value-for-money brand, focusing on product innovation and competitive pricing.
• This transformation has led to market share recovery and a renewed focus on retail sell-through.

2. Product Innovation

• Li Ning has a strong track record of innovation, with several notable product lines:
  • Super Light: A running shoe series that has become lighter each year, incorporating FoamEVAlite midsole and breathable MONO yarn outsole.
  • "Smart": A line of smart running shoes and basketballs, integrating Huami chips and military-grade motion sensors for data collection.
  • Cloud: A midsole technology known for cushioning and rebounding, with multiple applications across different sports.
• These innovations have driven revenue growth and earnings beat in recent quarters.

3. Strategic Pricing and Market Positioning

• Li Ning has reduced pricing to align with the mass-market segment, making it more accessible than Nike and Adidas, but still above Anta and other domestic brands.
• Its main pricing range for running and basketball shoes is RMB200–300, which is competitive and has contributed to its revenue recovery.

4. Online Penetration and Channel Strategy

• Li Ning has shifted from a wholesale-dominated model to a blended retail/wholesale model, with a strong emphasis on online sales.
• In 1H16, 13% of revenue came from online channels, with 80% from Tmall.com, JD.com, and lining.com.
• The company aims to have 20% of revenue from online sales by 2018–19E, which is considered conservative.
• Li Ning's online strategy includes exclusive product launches, which have driven significant sales (e.g., 500,000 pairs of Super Light v.13 sold in 3 months).

5. Asset-Light Model and Flexibility

• Li Ning operates an asset-light business model, which allows for greater flexibility and efficiency.
• The company is decreasing reliance on wholesale distributors, aiming to control the channel and invest more in online retail.
• This shift is expected to reduce cannibalization risks and improve margin expansion.

6. Favorable Industry Backdrop

• The sportswear industry in China is experiencing recovery and growth, driven by rising participation in sports.
• Innovation and product functionality are becoming key differentiators, and Li Ning is well-positioned to benefit from this trend.

7. Earnings Recovery and Financial Outlook

• Li Ning is expected to deliver recurring net profit of RMB690m in 2017E and RMB900m in 2018E, following a turnaround in 2016E.
• The company is projected to achieve a net profit CAGR of 66% from 2016–2018E, driven by revenue growth and margin expansion.
• Key financial highlights for 2016–2018E include:
  • Revenue: RMB8,186m, RMB9,311m, RMB10,636m
  • Gross margin: 45.5%, 48.3%, 49.2%
  • Operating margin: 5.7%, 9.4%, 10.4%
  • Core net profit: RMB327m, RMB690m, RMB900m
  • Core EPS (RMB): 0.13, 0.28, 0.37
  • P/E: 37.1x, 17.6x, 13.5x
  • P/B: 3.3x, 2.5x, 2.2x
  • P/S: 1.5x, 1.3x, 1.1x
  • ROE (average): 9.6%, 16.3%, 17.6%

Key Information

• Stock data:

  • 52-week low-high: HK$3.07–HK$5.97
  • Market cap: US$1,406m
  • 3-month average daily trading volume (ADTV): US$5m
  • Number of shares: 1,944m
  • Free float: 77%
  • 1-month price change: -5%
  • Year-to-date (YTD) change: 34%
  • Auditor: PwC

• Earnings forecast:

  • 2017E: RMB690m net profit
  • 2018E: RMB900m net profit
  • CAGR (2016–2018E): 66%

• Valuation:

  • The target price of HK$7.00 is based on a 21.8x 2017E P/E.
  • The report highlights a "call option" in Li Ning's share price due to its strategic value to global peers with limited exposure to China.

• Strategic alliances:

  • Li Ning has formed a strategic alliance with JD.com, which is expected to streamline supply chain operations and reduce costs.
  • The Jingmen logistics center plays a crucial role in enhancing delivery efficiency and cost control.

• Competitive landscape:

  • Li Ning is competing with Anta, 361°, and Xstep in the domestic market.
  • It is also challenging Nike and Adidas in the mainstream segments.
  • The report notes that Under Armour (UA US) also trades at a premium over global peers, suggesting a similar trajectory for Li Ning.

• Risks and Catalysts:

  • Risks: The company is at an earlier stage of earnings recovery, and market conditions could affect performance.
  • Catalysts: Sustainable SSSG (Same Store Sales Growth), successful new product releases, potential share buybacks, and margin expansion from improved product mix and lower wholesale rebates.

Conclusion

Li Ning's transformation from a wholesale-focused company to a blended retail/wholesale model has been successful, driven by product innovation, strategic pricing, and online channel expansion. The company is expected to recover earnings and outperform its domestic peers, with a target price of HK$7.00 reflecting its long-term value and growth potential.