Key points of investment:

The company released operating data for the third quarter of 2024, and sales performance was in line with expectations. The number of units in the 24Q3 omni-channel retail sales (excluding Li Ning YOUNG) declined year-on-year (data from company announcements and public conference calls, same below). By channel, the number of units in offline channels declined higher. Among them, the number of units in offline direct management declined, the number of units in offline wholesale fell higher, and the number of units in e-commerce channels increased year-on-year. Offline direct management is better than franchise mainly due to Ole channels. Most Ole stores are directly operated. Although the performance in the third quarter also weakened somewhat from month to month, it was still better than regular price stores. 24Q3 Ole channel traffic remained about flat year over year. Excluding Ole channels, the decline in direct-run regular price stores was similar to that of wholesale channels.

The running shoe category is growing rapidly, and the channel side continues to be optimized and adjusted. 1) By category, running shoe products continue to lead the growth rate, and basketball is still being adjusted in the short term. According to the company's public conference call, running traffic increased by high double digits in the third quarter, and the performance of basketball brands was weak. The company's basketball products faced pressure from a certain high base and high penetration rate. Currently, more attention is being paid to optimizing inventory and discounts, and improving product mentality. At the same time, in order to meet current consumer demand and actively launch cost-effective and outdoor products, the cumulative sales volume of low-priced soft series shoe products is close to 2 million pairs. Lu, an outdoor cross-country running shoe, has iterated to version 2.0, and the terminal feedback is positive.

2) Offline stores were still being optimized in the third quarter. As of September 30, '24, Li Ning's sales outlets (excluding Li Ning YOUNG) had a total of 6281 sales outlets, a net increase of 42 compared to 24Q2, and a cumulative net increase of 41 during the year. Among them, there was a net decrease of 14 direct sales channels and a net increase of 55 wholesale channels. As of September 30, '24, Li Ning YOUNG had 1,459 sales outlets, a net increase of 21 compared to 24Q2, and a cumulative net increase of 31 during the year. Currently, the company's stores cover about 90% of the high-level market, and through optimization and adjustments to improve operational efficiency, a total of 14 stores have been closed during the year, and a net closure of 20 is expected for the whole year. Low-tier cities plan to net open more than 100 stores. By the end of the third quarter, 55 stores have already been opened, and progress will continue in the fourth quarter.

Inventory levels are healthy and manageable, and discounts have been strengthened. According to the company's open management data exchange conference, as of the end of September, the company's omni-channel inventory sales ratio was about 5 months, slightly higher than the same period in '23. Among them, direct management was slightly higher than wholesale. Since the third quarter involves the preparation of winter clothes and double eleven, generally speaking, inventory will increase compared to the second quarter, and it is still at a healthy and manageable level. Furthermore, the storage age structure remains healthy. More than 80% of products are new products within 6 months, and the company's inventory sales ratio target is still maintained for 4-5 months throughout the year. Due to the month-on-month weakening of the retail environment in the third quarter, in order to maintain a good inventory and sales pace, the company's discount intensity increased to a certain extent. Among them, offline channels deepened lower the number of units, wholesale channel discounts deepened higher than direct management, and e-commerce channel discounts were still lower than those of direct management.

Announced the establishment of a joint venture to boost overseas markets. The announcement of the establishment of a joint venture was announced on 10/22. Its wholly-owned subsidiaries LN Co, Founder Co (Li Ning himself is the ultimate beneficiary), and external investors HongShan Venture and HongShan Motivation jointly formed a joint venture to inject 58 million/ 52 million/ 62.73 million/ HK$27.27 million in cash, with shareholding ratios of 29%/26%/31% and 14%, respectively. The listed company and Mr. Li Ning collectively hold 55% of the shares. The core purpose of the joint venture is to help the brand expand overseas markets. The company values Sequoia China's professional investment team and cross-border investment network, which can provide support in overseas resource empowerment and talent development. The two parties agreed that if the revenue in the fourth year of the joint venture was less than 1 billion US dollars, the company has the right to recover up to 25% of the shares, and Li Ning Company has the right to recover all shares in the eighth year of the establishment of the joint venture. Considering that the company's total investment amount is only HK$58 million, the short-term financial impact is small. It mainly lays the foundation for expanding overseas markets in the medium to long term and promoting the brand to go overseas.

The company continues to cultivate sports tracks, has unique brand assets, and has strong product development and product development capabilities. The company's product matrix is clear. Under professional focus, core products continue to lead business growth, brand recognition continues to increase among young consumers, and the expansion of new categories such as outdoor is expected to contribute to growth. Short-term adjustments do not change the medium- to long-term positive trend and maintain profit forecasts. The company's net profit for 24-26 is estimated to be 3.1/3.3/3.6 billion yuan, corresponding to PE of 12/11/11 times, respectively, maintaining the “increase in holdings” rating.

Risk warning: Consumption recovery falls short of expectations, inventory risk increases; market competition intensifies risk