Retail flow growth is expected to improve rapidly after the second quarter, leading industry recovery 4Q22 offline passenger flow weak, leading to a sharp slowdown in flow growth. We expect Li Ning Co. Ltd. to face the same challenges as his peers, with deeper retail discounts and operating leverage or deterioration, and profit margins will be under pressure.
We downgrade the basic EPS 8.5-24 for 2022-24 to RMB 1.54 for 6.7 to RMB 1.99 for 2.50.
Nevertheless, we expect Li Ning Co. Ltd. to maintain a healthy and better level of channel inventory than his peers, as well as his brand image to benefit from the national trend, and his retail performance is expected to improve quickly after the second quarter. We raised the target PE to 39.0 times (based on the historical PE average + 0.5 standard deviation over the past three years) and raised the target price by 25% to HK $90.3 based on the 12-month dynamic EPS of RMB2.01. Li Ning Co. Ltd. 's current share price corresponds to a 12-month dynamic PE of 30.8 times and a PEG of 1.1 times (we expect net profit growth CAGR of 28% in 23-24). Maintain "buy".
Offline passenger flow is gradually recovering, and retail flow growth can be expected to rebound in 2023. According to our estimates, the average daily subway passenger flow in 23 core cities across the country fell by 18% and 29% respectively from October to December compared with the same period last year. Although subway passenger traffic has picked up somewhat since the beginning of 2023, narrowing the year-on-year decline to 16 per cent (as of January 8), it has not fully returned to positive growth, and clothing retail growth is expected to remain under pressure in the short term. According to the latest data from the National Bureau of Statistics, retail sales of domestic clothing, footwear, needles and textiles fell 15.6% in November from a year earlier, further expanding from January to October (down 5.8% from a year earlier). Nevertheless, with the optimization of the epidemic prevention policy, we remain more optimistic about the prospects for the improvement of the retail environment in 23 years, and believe that Li Ning Co. Ltd. is expected to rely on its stronger brand and product strength than its peers. after the recovery of offline passenger flow growth and the decline of the retail water base, the leading industry recorded a recovery in retail performance.
Channel inventory is healthier than its peers, which is conducive to 23-year recovery.
By the end of September 2022, the inventory ratio of Li Ning Quan channel was slightly higher than 4 months, and the proportion of new products within 6 months was close to 90%, and the inventory was healthier than its peers. We expect Li Ning Co. Ltd. to maintain a healthier level of channel inventory at 4Q22 by increasing retail discounts and continue to outperform his peers. This will help Li Ning Co. Ltd. in 2023 as the retail environment improves, quickly introduce new products, promote the recovery of flow growth, and is expected to record an improvement in operating leverage.
Net profit forecast for 22-24 is lowered by 8.5% to RMB 100 million on 40-52-66. We downgrade revenue forecast for 22-24 by 3.6% to 3.3% to reflect that 4Q22 terminal retail flow growth is under pressure due to weak retail environment. Gross margin forecast 0.7/0.4/0.2pp is lowered to reflect higher retail discounts. Cut the operating margin by 1.2/0.7/0.5pp to reflect the weakening of operating leverage due to slower retail growth. To sum up, we cut our 22-24 net profit forecast by 8.5% to RMB 100 million in 40-52-66.
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 spreads again.