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机构：招银国际
研究员：Walter WOO
Even though the FY24E guidance was revised down, we still see some risks and pressure. Management pointed out that the retail sales were weak and fell by HSD in Jul to mid-Aug 2024 (the completion rate is obviously below 100%), and therefore they have decided to revise down the FY24E guidance to LSD sales growth (cut from MSD) and a low-teen net profit margin (maintained). However, from our point of view, we are still quite cautious about 2H24E. On sales, we are cutting our retail sales growth forecasts in 3Q24E/ 4Q24E to -4%/ +6% (from +3%/ +13%) because the recovery rate (vs 2019) continued to weaken and the value for money product strategy was not too effective (sales mix of product priced between RMB 300-600 did increase from 56% to 62%, but the overall retail was growth was still at negative). Moreover, since the top priority right now is to preserve the healthiness of the Company (that includes keeping the inventory to sales ratio at about 4x in 2H24E), under such a weak retail sales growth environment, we believe the risks of potential trade fair orders adjustment and increases in retail discounts in 2H24E have become much higher, this would likely translate into lower sales or GP margin. On top of these, we believe there is still certain pressure on OP margins, because of: 1) unfavorable channel mix (direct retail could continue to outperform just because of sales growth in outlets), 2) operating deleverage (SSSG in the regular stores for both wholesale/ direct-retail channel could still be falling), 3) limited improvement in rental expenses (we do see some room for rental costs reductions as the shopping mall vacancy increases, but Li Ning may not benefit too much as it is already enjoying the low rent since the launch of China Li Ning in 2018 and XJ cotton incident in 2021), and 4) relatively fixed opex (D&A expenses could still increase YoY in 2H24E and so as the A&P expenses, due to the advertising around the 2024 Paris Olympics.
Maintain BUY but trim TP to HK$ 16.18, based on 12x FY24E P/E (cut from 15x). We have revised down our FY24E/ 25E/ 26E net profit by 9%/ 12%/ 13%, to factor in: 1) weaker-than-expected retail sales growth, 2) less-than-expected improvement in retail discounts, 3) less operating leverage, 4) higher A&P expenses and 5) some potential impairment losses. The stock is now trading at 10x FY24E P/E and 9x FY25E P/E. Considering the 5x-6x ex-cash P/E, plus our long-term positive view, we still have a BUY rating on Li Ning.
1H24 results beat on GP margin and dividends. Li Ning’s sales grew by 2% YoY to RMB 14.35bn, inline with CMBI/ BBG est., while net profit dropped by 7% YoY to RMB 1.96bn, beating CMBI/ BBG est. by 7%/ 17%, mostly thanks to the better-than-expected GP margin expansion (+1.7ppt to 50.4% vs CMBI est. of 49.5%), but slightly offset by higher-than-expected admin costs and tax. However, the OP margin has still decreased slightly to 16.8%, from 17.7% in 1H23, largely due to changes in channel mix (wholesale business has dropped the most while it has the highest OP margin). Noted that the DPS has actually increased by 4% YoY to RMB 0.3775 (from RMB 0.3620 in 1H23), thanks to buyback of shares and increased payout ratio to 50% (from 45% last year).
Online growth was the fastest while direct retail continued to outperform wholesale. In terms of channel, sales growth for e-commerce/ direct-retail/ wholesale were 11%/ 3%/ -2% in 1H24. We believe that the direct retail growth was mainly driven by robust performance in the outlet channel. In terms of categories, sales growth for running/ fitness/ sports causal/ basketball were at 25%/ 7%/ -7%/ -20%, all had slowed down from the 40%/ 25%/ flat/ flat in FY23.
But the retail sales growth was a miss and inventory condition has worsened. The Company also reported a LSD retail sales decline, which is actually a miss vs CMBI est. of LSD increases. The drop was a mixture of LSD increase in ASP (tag price was flattish) and MSD decrease in volume. We attributed this to the weaker-than-expected macro, rising competition, lack of popular new products and ineffective marketing. Although the condition of channel inventory is still very healthy, where the retail sale to inventory ratio was at 3.9x in 1H24, vs 3.6x in 2H23 and 3.8x in 1H23, we have become slightly worried as the new product inventory mix has just started to fall to 83% in 1H24, vs 87% in 2H23 and also 87% in 1H23.