20210816-招银国际-李宁-02331.HK-Shifting_gears_from_margin_to_sales_14页_2mb

Li Ning (2331 HK) Company Update Summary

Core Content and Key Highlights

• Company Overview: Li Ning, listed on the Hong Kong Stock Exchange (2331 HK), has shown strong performance in the first half of 2021, with a notable shift from margin improvement to sales growth as the key driver for future performance.
• Performance in 1H21:
  • Net profit (NP) grew by 187% YoY to RMB 1.96 billion, exceeding profit alerts and Bloomberg Benchmark Group (BBG) estimates by 9%.
  • Sales increased by 65% YoY, and operating profit (OP) grew by 183% YoY, with OP margin rising to 24.9%, surpassing the CMBI estimate of 22.3%.
• Key Drivers of Growth:
  • Improved retail discounts (from 15-20% in 1H21 to 10-15% mid-term).
  • Better new/old product mix (from 15%/85% in 1H21 to 10%/90% mid-term).
  • Enhanced operational and supply chain efficiency, including frequent sales reviews, SKU optimization, and inventory sharing.
• Mid-Term Outlook:
  • Targeted 40-50% sales growth in FY21E, revised up from 20-25%.
  • Aiming for a 20% sales CAGR in the medium term.
  • The company is expected to achieve 24% sales growth in 2H21E, supported by strong consumer demand and low channel inventory levels.
• Profitability:
  • NP margin target for FY21E revised up to 16-17.5% from ~13%.
  • Gross margin expanded to 52.7% in 1H21, with EBIT margin at 20.9% and net profit margin at 17.1%.
• Target Price and Recommendation:
  • Target price adjusted to HK$102.84, up from HK$103.82, based on a 50x FY22E P/E.
  • Current valuation at 42x FY22E P/E is considered attractive.
  • The recommendation remains BUY.

Financial Performance Summary

Share Performance

Shareholding Structure

Earnings Revision

Earnings Growth Comparison

Strategic Reforms and Initiatives

• Product Merchandising: Strengthened product management, optimized inventory, and improved product efficiency.
• Channel Expansion and Optimization:
  • Expanded high-quality, profitable stores.
  • Increased the number of larger-sized stores from 850 to more, out of a total of 6,000.
  • Opened the largest flagship store in Chengdu, leveraging Chinese culture.
• Omni-Channel Strategy: Enhanced integration across online and offline channels.
• Store Operations: Improved store performance and management efficiency.
• Supply Chain: Focused on proactive production and ensuring production capacity and flexibility.

Competitive Landscape and Market Position

• Historical Sales Growth:
  • Li Ning's sales growth has been consistently positive, with 42% YoY growth in FY21E.
  • Other competitors like Nike, Adidas, and Anta have shown varying growth rates, with Li Ning outperforming in several segments.
• Segment Analysis:
  • Direct retail and e-commerce have seen strong growth, with e-commerce reaching 85%-90% of total sales in FY21E.
  • International sales have also seen growth, though at a slower rate compared to other segments.

Conclusion

Li Ning has demonstrated strong performance in 1H21, driven by sales growth and margin expansion. The company remains optimistic about continued growth in the second half of 2021, supported by a growing client base, effective marketing, and efficient operations. The revised target price of HK$102.84 reflects confidence in the company's ability to achieve its financial targets and maintain a competitive edge in the Chinese sportswear market. The strategic reforms in product planning, channel optimization, and supply chain management are expected to drive long-term growth and profitability.