The adjustment of the epidemic policy in December 2022 not only had an impact on the passenger flow, supply chain, retail discount and many other factors of Li Ning Co. Ltd. 's terminal stores, but also brought a huge test to Li Ning Co. Ltd. 's 2H22 income.

Management said the decline in retail flows in December was greater than that in November. Considering the negative leverage effect that the income decline may bring, we think that the pressure of Li Ning Co. Ltd. 2H22 from profit is much greater than income.

Fortunately, Li Ning Co. Ltd. 's running water has improved significantly after entering January 2023. Looking back at December 2022, the extent to which different regions and forms of business were affected by the epidemic was different, with northern cities larger than southern cities, high-line cities greater than low-line cities, and direct stores greater than wholesale. These trends made Li Ning Co. Ltd. more affected by the epidemic in December than the industry as a whole, but it could also make the epidemic in Li Ning Co. Ltd. 's main markets peak earlier than competitive products, thus witnessing a faster rebound in 2023.

By the end of December, Li Ning Co. Ltd. 's channel inventory-to-sales ratio (compared with less than 4x at the end of June was slightly higher than 4x at the end of September), but still maintained a relatively healthy level (4-5x). The company will maintain a high discount level in 1Q23, hoping to reduce channel inventory to a lower level. We believe that Li Ning Co. Ltd. 's healthier inventory levels compared with other domestic brands will also help it improve retail discount rates, wholesale income growth and gross profit margins, with a view to returning to normal levels earlier than their peers.

Based on the above, we cut our forecast for Li Ning Co. Ltd. 's income and net profit by 1% and 8% respectively in 2022.

Out of a relatively cautious and optimistic attitude towards 2023, we keep Li Ning Co. Ltd. 's profit forecast of 2023MB 2024E basically unchanged. Considering that the sharp improvement in market sentiment will push the valuation hub up, we raised Li Ning Co. Ltd. 's target price to HK $87.6 (35 x 2023 Pmax E) to maintain Li Ning Co. Ltd. 's "buy" rating.