Incident Overview

Li Ning announced the latest operating conditions. In 24Q3, Li Ning (excluding Li Ning YOUNG) achieved a year-on-year decline in the number of units. Among them, offline/e-commerce showed a decrease in the number of units in high units/an increase in the number of units in medium units, respectively, and retail/wholesale showed a decrease in the number of medium units/increase in the number of units respectively.

The company announced that its indirect wholly-owned subsidiary LN Co has signed subscription and shareholder agreements with Founder Co, HongShan Venture, HongShan Motivation and joint ventures to establish a joint venture. The joint venture's total share capital is HK$0.2 billion; Li Ning will inject HK$58 million and hold 29% of the shares; Founder Co will invest HK$52 million, or 26%; HongShan Venture will invest HK$62.73 million, accounting for 31.36%; and HongShanMotivation will inject HK$27.27 million, accounting for 13.64%. The main goal of the joint venture is to exclusively develop and operate the Li Ning brand business, including product design, manufacturing, procurement and marketing, expanding overseas markets, especially in the “Belt and Road” region, and using the joint venture's multinational resources and experience to accelerate the brand's internationalization process.

Analytical judgment:

The decline in retail turnover was lower than that of wholesale, and e-commerce growth was slowing down. Looking at the breakdown, 1) 24Q3 offline channels (including retail and wholesale) achieved a high number of unit declines. Among them, retail channels achieved a high number of unit declines, and the wholesale channel achieved a high number of unit declines. We analyzed that retail flow was better than wholesale mainly because Ole stores in direct management performed better than regular price stores; 2) the increase in the number of units in e-commerce, which slowed 11% compared to 24H. Our analysis is mainly due to the impact of marketing activities and platform schedule adjustments. Double Eleven is still worth looking forward to.

By the end of 24Q3, Li Ning (excluding Li Ning YOUNG) had a total of 6281 stores, a net increase of 42 from the end of the previous quarter, and a net increase of 41 year-on-year to date, including a net increase of 14/55 retail/wholesale stores. The number of Li Ning YOUNG stores at the end of 24Q3 was 1,459, a net increase of 21 compared to Q2, and a net increase of 31 this year.

Investment advice

According to our analysis, (1) maintain the expectation of a low number of units of revenue growth for the whole year; it is expected that the main brands will directly operate and close net stores; only children's clothing and 1990 will maintain net sales, and inventory pressure will increase in Q3, but Q4 e-commerce is expected to improve month-on-month and contribute to the main revenue growth. By category, basketball is under pressure, but running is still growing rapidly, and the SOFT series is growing better in the sports lifestyle category. (2) Considering that this year is the year of the Olympics, cost investment increased and discounts deepened in the second half of the year, but there were many deductions last year, and improvements are expected this year. Therefore, the net interest rate for 24 is expected to remain low in double digits, and there is still room for improvement in non-net interest rates over the long term. (3) In the long run, children's clothing is expected to become a new growth point. In 1990, it is still in the cultivation period, and the outdoor category still has a lot of room for improvement. Maintain the profit forecast, maintain the 24/25/26 operating income forecast of 28.7/30.5/33.5 billion, maintain the 24/25/26 net profit forecast of 3.32/3.62/4.11 billion, corresponding to the 24/25/26 EPS forecast of 1.29/1.41/1.61, and the closing price of HK$16.06 on October 22, 2024 corresponds to a PE of 12/11/9 times (1 HKD = $0.92) RMB), maintaining a “buy” rating.

Risk warning

Risk of worsening inventory backlog, increased risk of terminal discounts, slowing e-commerce growth, systemic risk.