occurrences

Li Ning released 3Q24 operating data on 10.22. The number of units falling in retail sales across platforms, including the number of units falling in offline channel traffic (the number of units in the year-on-year decline in direct management, the number of units in the year-on-year decline in wholesale sales), and the number of units in the year-on-year increase in e-commerce turnover, in line with expectations.

On the same day, Li Ning announced the establishment of a joint venture. Its wholly-owned subsidiaries LN Co, FounderCo, and Sequoia China set up a joint venture with a total capital injection of HK$0.2 billion, with shareholding ratios of 29%, 26%, and 45% respectively. The founder, Mr. Li Ning and Li Ning Company, held a total of 55% of JV's shares, and plans to explore international business development using international institutions and other resources.

Management analysis

The flow in the third quarter was still under pressure, and the inventory remained healthy. Due to the overall weak customer flow, the company actively and dynamically adjusts discounts and increases the launch of cost-effective and quick return products to reduce the pressure on channel inventory. The 3Q24 discount deepened the number of low units year over year, the number of units in the decline in ASP, and the number of units sold decreased slightly year over year. The inventory sales ratio at the end of the period was about 5, slightly higher than the same period last year. Among them, direct sales were slightly higher than wholesale, and more than 80% of the products were new within 6 months and remained healthy. The month-on-month increase was mainly due to increased preparations for winter clothing and Double Eleven.

Looking ahead to Q4 and the whole year: Guidelines maintained. The company's performance improved markedly during the National Day. Online traffic increased by 30% to 40%, and offline traffic returned to single digits. It is expected that due to peak season catalysis, improved passenger flow, and low base effects, the Q4 traffic growth rate is expected to increase sequentially. Looking ahead to the whole year, the company will maintain the double-digit guidance of low unit revenue growth and low profit margins over the same period last year. Benefiting from the company's active cost reduction and efficiency improvement, the company's annual gross margin is expected to improve by about 1 pct year-on-year, although the Q4 discount is expected to remain under pressure.

Set up a JV to explore overseas markets, and use multiple resources to help open up space for imagination. Considering that the company and founders hold 55% of the JV shares in total and the company holds 29% of the shares separately, it not only guarantees control over the JV, but also properly isolates business risks, and can utilize the overseas operating resources and experience of international organizations such as Sequoia. Therefore, the establishment of a joint venture will help the company increase opportunities to explore overseas markets and create other growth curves while ensuring that the original management's energy and company resources continue to focus on domestic professional sports tracks.

Profit Forecasts, Valuations, and Ratings

The continuous improvement of the company's brand and product strength drives steady improvement in performance, and continues to practice internal skills to enhance the efficiency of products and retail operations. We are firmly optimistic about the company's deterministic growth under the major trend of consumer recovery and upgrading. As sales improve and operating indicators continue to improve, the subsequent recovery of profit guidelines can be expected. We expect the company's net profit for 24-26

3.188/3.543/4.079 billion yuan. The current stock price corresponding to PE is 11/10/9 times, maintaining a “buy” rating.

Risk warning

Discounts have deepened, gross margin improvements have fallen short of expectations, and industry competition has intensified.