Incident: Li Ning announced the 2024Q3 business situation. The number of units in adult turnover declined year-on-year. In the short term, due to fluctuations in the consumption environment, the company's terminal sales were under pressure.

Li Ning Adult: Fluctuations in passenger flow+drop in ASP have put pressure on offline traffic, and e-commerce performance is superior to offline. In 2024Q3, the number of units in Li Ning's adult omni-channel traffic declined year on year. Among them, the number of high units of offline channel traffic declined (the number of units in direct sales decreased year on year, the number of units in wholesale channel traffic decreased higher year on year), and the number of units in e-commerce sales growth. By channel, look at it:

Offline channel optimization continues to advance, and fluctuations in customer flow combined with ASP reduction put pressure on single-store sales. Since 2024, we expect the company to accelerate the profitability of direct-run stores in high-tier cities and close inefficient stores; on the other hand, in response to declining consumption, the company will increase its efforts to expand stores in low-tier cities. Since 2024, there will be a net decrease of 14 direct-run stores and a net increase of 55 wholesale stores. At the single-store level, the overall domestic consumer environment has fluctuated since the beginning of the year, and the customer flow at Li Ning brand terminal stores is relatively weak; in 2024Q3, due to the demand for channel inventory control (we expect the omni-channel inventory ratio to be around 5 at the end of Q3, and expected to return to 4-5 by the end of the year), we expect offline channels or appropriate deepening discounts. Taking into account the launch of low-cost products, we determine that Q3 offline terminal ASP may decline year-on-year.

Q3 The number of units in e-commerce turnover is growing, maintaining a rapid growth trend. The number of units in the 2024Q3 e-commerce business flow rate is growing year on year. We judge that the rapid growth of e-commerce channels is due, on the one hand, to the year-on-year improvement in the e-commerce consumption environment, and on the other hand, the company continues to improve the efficiency of e-commerce channel operation, increase efforts to expand new platforms, optimize the price order of e-commerce channels, and combine multiple factors to promote the excellent performance of e-commerce channels.

Li Ningyoung: Short-term sales performance may fluctuate, and the trend of net store opening continues. In the first half of the year, Li Ning's children's clothing turnover increased year-on-year. Since the third quarter, we have determined that the sales volume of children's clothing may also fluctuate quite a bit. As of the end of Q3 2024, Li Ning Young had 1,459 stores. Compared with the end of Q2, there was a net increase of 21 companies, and a net increase of 31 compared to the beginning of the year. The company focused on professional sports children's clothing to accelerate the establishment of a product matrix and channel structure optimization.

Set up a joint venture to operate overseas business, focusing on Southeast Asia in the short term. Li Ning Company, along with founder Mr. Li Ning and Sequoia China, set up a joint venture to expand the overseas business of the Li Ning brand. According to the company's disclosure, the shareholding ratios of Li Ning Company, Mr. Li Ning, and Red Shirt China are 29%, 26%, and 45%, respectively. We judge that the establishment of a joint venture will help explore international business with multiple forces. Judging from the pace of expansion, after considering cultural customs and geographical factors, we anticipate the short-term operating priorities of Southeast Asia or the company's overseas business.

In 2024, we expect the company's revenue to grow 1%, and the performance will remain flat year over year. Facing the fluctuating trend of the consumer environment in the short term, we expect that the company may actively reduce shipments to control channel inventory. After taking into account the performance of direct-run stores and e-commerce businesses (we expect terminal sales to improve in Q3 since October), we expect the company's annual revenue to increase 1%. Although non-operating income such as interest income is expected to decrease, benefiting from improvements in gross margin and cost control optimization throughout the year, the company's annual performance is still expected to remain flat year on year.

Profit forecast and investment advice: As one of the leaders in the domestic sports industry, considering short-term sales fluctuations, we adjusted the company's 2024-2026 performance forecast to 3.19/3.446/3.732 billion yuan, corresponding to a 24-year PE of 12 times, maintaining a “buy” rating.

Risk warning: Operational changes brought about by fluctuations in the consumer environment, the rate of improvement in profitability falling short of expectations, and changes in management.