3Q22 retail flow is in line with our expectations; keep the annual guidance unchanged. Li Ning Co. Ltd. 3Q22 recorded a year-on-year growth in the middle of the 10-20% range in all channels, which was in line with our previous expectations. In a challenging retail environment, Li Ning Co. Ltd. 's final inventory-to-sales ratio of 3Q22 is more than four months, which is higher than that of 1H22 and still ahead of its peers; at the same time, retail discounts are slightly deeper than the same period last year. Management maintains the 2022 sales guidance (from the high range of 10-20% to the low range of 20-30%) and net interest rate (the high range of 10-20%). We reduce the basic EPS forecast for 22-24 by 5.3% to RMB 1.81, and the target price based on the DCF model by 17% to HK $75, taking into account the exchange rate. "Buy".
E-commerce and direct store development drive 3Q22 retail stream growth
3Q22 Li Ning online channel retail flow recorded a year-on-year growth of 20% in the middle of the 30% range, while offline channels (including retail and wholesale) recorded a year-on-year growth of 10% in the middle of the 20% range, of which the year-on-year increase in direct channels was 20% in the lower segment, significantly faster than the same-store sales growth in the number of units in the channel, and also faster than that in the low range of 10% in wholesale channels. Mainly due to Li Ning Co. Ltd. to speed up the direct channel to expand stores. 9M22 has 166net Li Ning Co. Ltd. stores, of which 179are direct sales / franchise stores / 13 are net customs. The growth rate of retail flow has slowed since September due to the decline in offline passenger traffic, but the omni-channel still recorded year-on-year growth in the middle of the 10-20 per cent range during the National Day holiday, management said.
4Q22 expects to continue to promote discounts, with a slight increase in the number of days of channel inventory turnover under inventory pressure less than that of peer 3Q22 Li Ning Co. Ltd., mainly due to deteriorating retail performance and advance stock preparation for the new season and "Singles Day". Retail discount month-on-month has also deepened. Taking into account the increase in inventory levels and consumer sentiment remains weak in the short term, we expect 4Q22 to continue to step up promotional efforts to drive inventory reduction. Nevertheless, as the channel inventory turnover days of 3Q22 Li Ning Co. Ltd. is still better than that of Anta brand slightly more than 5 months and Xtep brand 4.5-5 months, we believe that Li Ning Co. Ltd. faces less inventory clearance and promotion pressure than his peers in 4Q22. Management said that it will continue to promote high-quality sales growth through measures such as improving the product matrix, opening high-quality stores and deeply empowering dealers.
The current stock price is attracted by 1.0x PEG; valuation.
In view of the current weak retail environment and the fact that competitors are likely to step up promotional efforts, the competitive landscape is full of challenges, so we have lowered our 22-24 net profit forecast by 5.3pm 6.5pm 7.7% to RMB 47pm 60 / 7.3 billion.
Li Ning Co. Ltd. 's share price fell 24% after it was disclosed. Based on our forecast of 22-24e net profit CAGR 22%, Li Ning Co. Ltd. 's current share price corresponds to 22.2x 12-month dynamic PE and 1.0x PEG, which is about 40 per cent off the historical average of 36.9x PE over the past three years.
Risk tips: 1) the growth of retail sales is weaker than expected; 2) the inventory of fashion products accumulates; 3) the pace of store expansion slows down; 4) the epidemic is making a comeback; and 5) special public opinion affects the company's brand marketing.