Key points of investment

The company announced 2024Q3 operating data and the establishment of a joint venture announcement: 1) 24Q3 operating data:

The number of units in Li Ning's (excluding Young) omni-channel retail sales declined year over year. Among them, offline/e-commerce channel traffic fell by higher units/number of growing units year over year, while direct marketing/wholesale in offline channels fell by the number of units/high units year over year, respectively. 2) Establishing a joint venture: LN Co, a wholly-owned subsidiary of the company, established a joint venture with Founder Co, HongShan Venture, and HongShan Motivation, with a total capital of HK$0.2 billion, with shareholding ratios of 29%, 26%, 31.36% and 13.64% respectively. The aim is to focus on domestic market development while continuing to explore international business development with the experience and resources of international institutions.

Q3 sales declined month-on-month compared to Q2. Continuing the trend of online being better than offline and direct management being better than wholesale, we expect Q4 sales to improve month-on-month. Affected by the sluggish domestic consumption environment, the year-on-year decline in Li Ning (excluding young) omni-channel traffic in 24Q3 deepened compared to Q2. Structurally, online is better than offline, and direct management is better than wholesale. The main reasons are: ① the e-commerce business environment has recovered, the company's e-commerce channels have strengthened the launch of professional products, and e-commerce exclusive products are more in line with current consumer trends; ② Ole's performance in direct management channels is relatively good (24Q3 Olay channels remained flat year on year, and the performance of direct regular price stores was similar to that of wholesale channels). Under active policies and climate catalysts, traffic through various channels improved month-on-month during the National Day. Offline sales increased by single digits year-on-year, and e-commerce increased by 30-40%. The current Double Eleven pre-sale is in line with expectations, and it is expected that Q4 sales will improve compared to Q3.

Q3 Inventory pressure increased, and offline discounts deepened slightly year over year. 1) In terms of inventory, due to weak terminal sales, 24Q3 inventory sales accounted for 80% + of new products within 6 months, and the overall inventory was still within a manageable range. The company aims to fall back to 4-5 months by the end of the year; 2) In terms of discounts, based on the background of offline sales pressure, 24Q3 offline discounts deepened by a low single digit year on year, and e-commerce discounts improved by a low single digit year on year. It is expected that Q4 will continue the discount promotion strategy.

The company maintained the double-digit guidelines of year-on-year revenue growth of a low number of units and low net profit margin for the year. 1) Revenue: Based on the sales improvement trend since October, the company maintained the year-on-year revenue growth guideline of a low number of units for the year. 2) Profit margin: The deepening of discounts in the second half of the year had an impact on gross margin. Combined with a 1.6 pct year-on-year increase in gross margin in the first half of the year, gross margin is expected to improve year-on-year. The company continues to promote cost reduction and efficiency. It is expected that the annual A&P fee rate will be kept within 10%. Net closing of direct stores will drive rent and labor cost savings. At the same time, as management efficiency and operational efficiency improve, the annual net profit margin is expected to maintain a low double-digit level.

Profit forecast and investment rating: 24Q3 is affected by the weakening of the macro-consumption environment. The company's turnover is under pressure, inventory pressure is increasing, and discounts are deepening. Based on the month-on-month improvement trend in sales since October, we expect Q4 sales to improve month-on-month and inventory pressure to ease. The company set up a joint venture to develop international business, with a shareholding ratio of 29%. Currently, the international business volume is small and the impact on the company's finances is small. Maintain the 24-26 net profit forecast of 3.13/3.56/3.91 billion yuan, corresponding PE to 12/11/10X, maintaining the “buy” rating.

Risk warning: Weak consumption environment, terminal inventory risk.