20180709-中国银河国际证券-李宁-02331.HK-Still_on_the_Way_to_Recovery._Initiate_with_BUY._14页_1mb

Li Ning Company [2331.HK] Summary

Core Content

Li Ning Company (LNC) is a leading Chinese sports brand with a strong presence in the sportswear market. The report highlights that LNC is on the path to recovery, with 2018E identified as the first full year of recovery due to stabilized corporate structure and normalized advertising and promotional spend (A&P). The report initiates with a BUY recommendation, based on a target price of HK$11.00, which is derived from a 23.0x 2019E PER. This valuation is considered reasonable given the Company's earnings growth and PEG ratio of < 0.8x.

Main Points

• Recovery Timeline: LNC has been undergoing a turnaround since Mr. Li Ning returned as Chairman in 2014. The recovery is expected to be solid and sustained, with 2018E as the first year of full recovery.
• Sales Performance: Sales have shown resilience since 2014, with a healthy sell-through mix and positive same-store sales growth (SSSG) in 2017. E-commerce now accounts for 19% of total sales and has been a key growth driver.
• Margin Improvement: The EBIT margin is expected to improve significantly, reaching 8.3% in FY2018E, with a CAGR of 32.8% in FY2017-FY2020E. Despite being lower than global and Chinese peers, the margin is on a recovery path.
• Dividend Resumption: LNC is expected to resume dividend payments in 2018E, with a payout ratio of 30% and a DPS of RMB0.09 for 2018E. This marks another milestone in the Company's recovery.
• Financial Outlook: The report forecasts continued revenue growth and improved profitability, with the EPS expected to grow at 39.3%, 33.7%, and 29.3% in FY2018E, FY2019E, and FY2020E respectively.

Key Financials (RMB m)

Investment Highlights

• 2018E is the First Year of Full Recovery: LNC's recovery is attributed to a stable corporate structure and normalized A&P spend.
• Sales Continue to Show Resiliency: Despite challenges, sales have grown since 2014, with SSSG in positive territory and a healthier product mix.
• Still Huge Room to Raise EBIT Margin: EBIT margin is expected to improve, with a sharper increase in FY2018E to 8.3%.
• Initiate with BUY: Based on a target price of HK$11.00 (up 30.2% from the close of HK$8.45 on July 6, 2018).

Risks

• Slowdown in SSSG: If same-store sales growth declines, it could negatively impact revenue and operating profit.
• Worsening Inventory Turnover: Intensified competition and potential difficulties in selling old inventory could affect the financial position of retail stores and franchises.
• Worse-than-Expected SG&A Control: Increased marketing and promotional expenses to compete with rivals could raise the SG&A ratio, reducing operating profit margin (OPM).

Company Description

Li Ning Company Limited is headquartered in Beijing and operates as a leading Chinese sports brand. It provides sporting goods such as footwear, apparel, equipment, and accessories under the LI-NING brand and other sub-brands like Double Happiness, AIGLE, Danskin, Kason, and Lotto. Viva China, controlled by Mr. Li Ning, holds a 14.93% stake in the Company.

Additional Information

• Market Cap: US$2,354m
• Shares Outstanding: 2,158.3m
• Auditor: PwC
• Free Float: 82.6%
• 52W Range: HK$5.48–HK$9.90
• 3M Average Daily T/O: US$15.7m
• Dividend Yield: Expected to rise to 2.2% by 2020E

Conclusion

The report presents a positive outlook for Li Ning Company, highlighting its recovery from past challenges, improved financial metrics, and strategic initiatives. The Company is expected to benefit from the growing Chinese sportswear market and its own margin recovery efforts, making it a promising investment opportunity.