20220815-招银国际-李宁-02331.HK-Guidance_maintained_with_healthy_inventory_13页_2mb

Li Ning (2331 HK) Company Update Summary

Core Content and Key Highlights

Li Ning, a leading player in the China sportswear sector, reported its 1H22 results with a mix of weaker gross profit (GP) margins and improved sales, other income, and cost control. The company maintained its FY22E guidance, indicating a high-teens to low 20s sales growth and high-teens net profit (NP) margin. The analysts reiterated their BUY recommendation and raised the target price (TP) to HK$80.64, based on a 32x FY23E P/E, from the previous 35x FY22E P/E. The current valuation of 28x FY23E P/E is considered not too demanding, especially against the 5-year average of 30x.

Main Points and Analysis

1H22 Performance

• Sales: Increased by 22% YoY to RMB 12.4bn, exceeding Bloomberg and CMBI estimates by 7% and 13%, respectively.
• Net Profit: Rose by 12% YoY to RMB 2.2bn, 4% and 7% above estimates.
• GP Margin: Missed expectations at 50.0% vs. CMBI estimate of 54.1%, but other income and operating cost control offset this.
• Inventory: Channel inventory remained low and healthy at 3.6 months, down from 3.1/3.9 months in 1H21/2H21.

2Q22 Retail Sales

• Retail sales slightly missed expectations but showed an encouraging trend in July–August 2022, with a 10%+ growth.
• Analysts forecasted 20% / 25% retail sales growth for 3Q22E / 4Q22E, considering the low base and positive performance in the first half of 2022.

Guidance and Confidence

• The FY22E guidance remains unchanged, and the analysts are more confident due to:
  • Strong performance in professional running shoes (e.g., super light series with 3 million pairs sold).
  • Low base for growth.
  • Positive sales area growth of 20%+ YoY.
  • High sales per store in new stores (RMB 450K vs. RMB 350K group average).
  • Successful retail operation reforms, including weekly reviews and conversion rate optimization.

Margin and Cost Management

• Healthy Inventory: Reduced pressure for retail discounts in 2H22E despite industry inventory.
• Exceptional Opex Control: Especially on staff costs, contributing to better margin performance.
• GP Margins: Revised down slightly for FY22E–FY24E, but remain stable at around 50.8%–51.3%.
• EBIT Margins: Slight decline from 22.1% to 21.5%–21.7%.
• NP Margins: Slightly adjusted downward, but remain at 17.7%–18.4%.

Earnings Revisions

Analysts revised their earnings estimates downward by 3%/2%/5% for FY22E/FY23E/FY24E to factor in faster sales growth but lower margins. The revised estimates are:

Key Growth Drivers

• New Products: Equipped with evolutionary technology, with success in running shoes expected to extend to other categories like basketball shoes in FY23E.
• Kidswear: Rapid growth with upgraded products and distributors.
• Womenswear: Great potential with a long-term game plan in place.
• Brand Refinement: Management is revising and rationalizing expansions to improve product quality, uniqueness, and trendiness, aiming to restore credibility and consumer image.

Stock Performance

• Market Cap: HK$183,513 million.
• 3-Month Trading Range: HK$1,048.91 million.
• 52-Week High/Low: HK$108.2 / HK$48.6.
• Share Performance:
  • 1-Month: -2.6% (Absolute), +2.4% (Relative)
  • 3-Month: +16.4% (Absolute), +15.0% (Relative)
  • 6-Month: -19.1% (Absolute), +0.3% (Relative)
  • 12-Month: -22.7% (Absolute), +2.7% (Relative)

Shareholding Structure

Financial Ratios

Channel Inventory and Sales

• Channel Inventory: Incl. Online and Offline, remained healthy at 3.6 months in 1H22.
• Sales by Channels:
  • Franchises: 1H22 sales at RMB 5,894 million, with 28% YoY growth.
  • Self-owned: 1H22 sales at RMB 2,792 million, 11% YoY growth.
  • E-commerce: 1H22 sales at RMB 3,536 million, 19% YoY growth.
  • International: 1H22 sales at RMB 186 million, 52% YoY growth.

Growth Trends and Comparisons

• Same Store Sales Growth (SSSG):
  • Li Ning's core brand and other segments showed positive growth trends.
  • Anta's SSSG was strong, with growth rates ranging from low-teens to high-teens.
  • FILA's SSSG was in line with expectations, while Xstep's SSSG showed mid-teens growth.
• Li Ning's Super Light 19 Running Shoes:
  • A key product line that performed well, with a sales volume of 3 million pairs.
  • Technology improvements are expected to drive growth in other categories.
  • Sales on Tmall and other platforms indicate strong market presence.

Conclusion

Despite some setbacks, Li Ning's performance in 1H22 shows resilience, with healthy inventory levels and strong cost control. The company is well-positioned for growth with its new product lines, brand refinement strategies, and expansion in key segments like kidswear and e-commerce. The analysts remain confident in the company's future prospects and have adjusted their estimates accordingly, supporting their BUY recommendation with an increased TP.