20220420-招银国际-李宁-02331.HK-A_resilient_1Q22_but_we_are_prudent_on_2Q22E_7页_1mb

Li Ning (2331 HK) Company Update Summary

Core Content

Li Ning reported its 1Q22 results, which were inline with expectations, despite the worse-than-expected impact of the Covid-19 outbreaks. The company's retail sales growth was $25 - 30%$ YoY, slightly behind Xstep's $30 - 35%$, but significantly better than Anta and FILA's performance. E-commerce sales grew by $\sim 35%$, while direct retail sales showed even stronger growth at $\sim 35%$, indicating improved store productivity and performance.

The analysts have become more conservative in their estimates for 2Q22E, projecting a retail sales drop of $10%$ flat, which is a revision from the company's initial guidance of $5%$ growth. This is attributed to the high base effect from last year's XJ cotton sales. As a result, the analysts now expect $15%$ sales growth and $17.8%$ net profit margin for FY22E, down from previous estimates.

Despite the store count decrease by 63 to 5,872 in Mar 2022, the analysts are not concerned, as it reflects a seasonal adjustment and the company is closing smaller stores while opening larger ones, maintaining the retail area growth.

Key Financial Metrics

Target Price and Recommendation

• Recommendation: BUY (Maintain)
• Target Price: HK$75.43
• Previous TP: HK$81.04
• Up/Downside: +27.2%
• Current Price: HK$59.30

Earnings Revision

Performance Relative to Consensus

Company Overview

• Market Cap (HK$ mn): 155,179
• Average 3-month turnover (HK$ mn): 1,329.25
• 52-week High/Low (HK$): 108.2 / 48.6
• Total Issued Shares (mn): 2,616.8

Shareholding Structure

Share Performance

Valuation Comparison

Major Assumptions

Financial Summary

Income Statement

Cash Flow Summary

Key Viewpoints

• The analysts maintain a BUY rating due to the company's undemanding valuation and potential for improved investor sentiment.
• They have revised down the target price to HK$75.43, based on a more conservative estimate for FY22E.
• The company's direct retail sales growth was highly impressive at $\sim 35%$, even faster than the previous quarter, indicating the effectiveness of its store productivity reforms.
• Despite the store count decrease, the analysts are not concerned, as it reflects seasonal adjustments and a strategic shift towards larger stores.
• The company's healthy inventory levels help maintain retail discounts and gross profit margins in FY22E.
• The analysts have revised down their FY22E, FY23E, and FY24E net profit estimates by 7% each, due to slower sales growth and lower operating margins.

Conclusion

Li Ning's 1Q22 performance was resilient despite the challenges posed by the pandemic, with direct retail growth showing strong signs of improvement. However, the analysts have become more cautious about 2Q22E, projecting a retail sales drop of $10%$ flat. The company's current valuation is considered reasonable, and the analysts maintain a BUY recommendation with a revised target price of HK$75.43. The company's strategic store reforms and healthy inventory levels are viewed positively, even as operating leverage may be greater than previously anticipated.