Q3 Turnover is in line with expectations, dynamic regulation of discounts to ensure healthy inventory, and maintain a “buy” rating

The Q3 consumer environment is still relatively weak. 2024Q3 Li Ning's bulk sales orders declined. Among them, online orders increased, and offline high orders declined (direct sales orders declined, wholesale high orders declined). The difference between direct management and wholesale sales mainly led to Ole's direct management performance. Regular direct management prices were consistent with the wholesale flow trend. During Golden Week, offline flow turned positive to unit growth and e-commerce growth of 30-40%, showing impressive month-on-month improvement in Q4. We maintain our profit forecast to 3.1/3.41/3.7 billion yuan. The current stock price corresponds to PE of 12.3/11.2/10.3 times. The company actively expands new products and channel construction to respond to changes in multi-level markets and consumer demand, and maintains a “buy” rating.

The high growth in Q3 running flow reflects professional mentality. The new Soft product has performed well, and I look forward to Q4's outdoor performance

New products and outstanding running performance: Among lifestyle products, the Soft series continues to perform well. As of Q3, sales have accumulated nearly 2 million pairs, and 2024H1 sales have exceeded 1 million. Among professional products, the running category saw a high increase in Q3 turnover.

In the outdoor category, the “Wanlong Breath” series of jackets and “Xing” family outdoor footwear products were launched to meet the diverse needs of consumers in urban commuting and nature exploration through two major product lines, specialized outdoor and lightweight outdoor products. Q3 dynamic regulation of discounts ensures healthy inventory: low offline discounts are deepening, and low e-commerce discount orders are improving. It is expected that Q4 discounts will still be under pressure, but annual discounts are expected to improve year over year; the omni-channel inventory sales ratio is around 5, slightly higher than the same period, but overall manageable. More than 80% of the warehouse age structure are new products within 6M. High offline orders declined. Looking at the split volume and price: Q3 saw the continued launch of low-priced products in Soft and emerging markets, leading to a decline in low offline label prices. At the same time, offline discounts deepened low orders. As a result, ASP's middle orders declined year-on-year, and low sales orders declined. Stores: It is estimated that large goods will open more than 20 direct sales, more than 100 wholesale stores, and 80 new children's clothing stores throughout the year. As of 2024Q3, Li Ning (excluding Li Ning YOUNG) stores had a total of 6281 stores, a net increase of 41 from the end of 2023, including direct-operated-14/wholesale+55; Li Ning YOUNG stores were 1,459, a net increase of 31 compared to the end of 2023.

Introduce Red Shirt Chinese portfolio companies to develop overseas markets, and Red Shirt China resources help accelerate overseas development

The company, Co-CEO Li Ning, and Sequoia China set up a joint venture with a total share capital of 0.2 billion yuan to exclusively develop and operate the Li Ning brand business in the region. The joint venture equity is calculated based on the respective shareholders' investment ratio. Li Ning invested 58 million Hong Kong dollars to acquire 29% of the shares, and Li Ning himself obtained 55% of the shares and has control over the joint venture. Sequoia China invested 90 million yuan to take 45% of the shares. Li Ning Company and Li Ning himself have the right to recover their shares from Sequoia China in the future. If the joint venture's operating income in the fourth year is less than 1 billion US dollars (about 7.8 billion HKD), they can buy part of the shares; in the 8th year of the joint venture, they can buy all of the shares. The purpose of this new purchase is to: (1) focus the energy of the existing core resources and management team on the domestic market; (2) use the experience and resources of external professional institutions to reduce the impact of overseas business uncertainty on the company.

Risk warning: Market competition intensifies, and product upgrades and channel optimization fall short of expectations.