Li Ning's 1Q24 retail sell-through was up by low-single digit YoY, largely in line with market expectations. The figures were relatively weaker than its peers, reflecting pressure from both weak retail market and its internal reforms. We reiterate our view that it could take some time for Li Ning to fix its own issues, such as its control on wholesalers and product offerings. While we expect Li Ning's retail sales should turn better in subsequent quarters, we do not expect the turning point to be around the corner. Maintain HOLD.

Key Factors for Rating

1Q24 retail sales not so strong but has been expected. 1Q24 retail sell- through was up by low-S.D. as offline sales were facing headwinds due to the high base in 1Q23 after China reopened. By channel, sell-through of direct retail (+ve mid S.D.) performed better than wholesale (-ve mid S.D.). However, it was driven by directly-operated outlets. Excluding these, the performance of direct retail was similar to wholesale, reflecting LN is still in the process of clearing inventory. On the bright side, e-commerce achieved a low-20s growth in 1Q24, as some customer traffic returned to online.

Improvement in operating metrics but still a long way to fix. LN's 1Q24 retail discount has seen some YoY improvement, reaching 30-35% off (1Q23: c.35% off), while channel inventory-to-sales ratio is around 4x. However, such discount level is still steeper than major peers, reflecting the needs to keep discount low for smooth sell-through.

Still staying cautious on full year outlook. While mgt. expected 2H24 may turn better in terms of YoY growth (due to a low base), they reiterated that they still target full year revenue to be up mid S.D., with low-teens NPM. We believe this is unlikely a lowball guidance, as weak 1Q24 operating data reflects that LN is facing headwinds, and its own internal issues are not yet fully fixed. For example, its direct retail still faces pressure, and LN expects there would be more closure of directly-operated stores in 2024. Hence, we believe it could take months for LN to settle its legacy issues, and the company would prefer to stay prudent in 2024 before positioning itself for faster growth.

Valuation

Maintain HOLD as we believe the weak fundamentals of Li Ning could take time to improve, and this could weigh on the potential of its re-rating.

We revise down our TP of HK$20.90, based on 15x 2024E P/E (previous: 16x). We believe Li Ning may trade at a lower multiple after the release of weak 1Q24 figures which reflect deteriorating same-store sales and a large gap with its major peers.