The turning point was not reached, and the “holding” rating was maintained: although Li Ning's 3Q24 turnover performance was slightly better than market expectations, it still lags far behind major domestic competitors. At the same time, management said in a conference call that the company's short-term channel inventory pressure has increased, and emphasized that 4Q24 revenue performance is highly uncertain. We believe that although the certainty of Li Ning's 2024 performance has increased, investors should be cautious about Li Ning's stock price performance when the company's brand strength, fundamentals, and terminal sales trends have not shown significant signs of recovery, and should not easily fall to the bottom. We kept our profit forecast unchanged, but rolled the valuation to 2025, thereby slightly increasing Li Ning's target price to HK$15.94 (based on 12x 2025E P/E). Maintain Li Ning's “hold” rating.

3Q24 sales performance was slightly better than expected: Li Ning's overall 3Q24 omni-channel traffic volume declined in the year-on-year decline, slightly better than the decline in medium to high units expected by the market. Among them, offline channel traffic declined by a higher number of units year over year, better than the low double decline expected by the market. The 3Q24 sales volume of offline direct-run stores declined year-on-year, which was slightly better than the franchisee's offline store turnover performance (decline in the number of high units). However, excluding the influence of Ole stores, offline direct-run regular price stores and franchise stores are basically the same in terms of sales performance. Management said that with the deepening discount rate at regular price stores, the 3Q24 Ole store turnover was basically the same year on year, and decreased compared to 1H24. The year-on-year increase in e-commerce turnover in 3Q24 is in line with market expectations. Management added that the average sales unit price in 3Q24 fell year-on-year in the number of units (the number of units where the tag price fell lower, and the discount deepened the number of units), while sales volume remained basically the same.

The management maintained the same guidelines throughout the year, but the outlook for 4Q24 was more conservative: during the National Day holiday in October, Li Ning's omni-channel traffic recorded a positive single-digit year-on-year increase. Among them, the flow of all offline channels has been corrected, while e-commerce sales have increased by 30%-40% over the same period last year. Management said that if the year-on-year growth rate of 4Q24 turnover continues the trend from October to now, the company is expected to meet the 2024 full-year performance guidelines proposed by management in August by the end of the year: revenue growth is low year-on-year, and net interest rates remain low in double digits. However, management also said that there has been no significant improvement in terminal demand in the industry, short-term inventory and discounts are still under some pressure, and there is still great uncertainty about revenue and turnover after 4Q24 (including the performance of Double Eleven).

Channel inventory and discounts are under pressure in the short term, but the impact on gross margin for the whole year is limited: management said that due to weakening terminal consumption, the company's short-term inventory pressure has increased, but the omni-channel inventory ratio has remained around 5 months, which is basically manageable. The company aims to return the omni-channel inventory sales ratio to the 4-5 month range by the end of the year. To achieve this goal, the company appropriately increased retail discounts on 3Q24. Among them, offline discounts deepened the number of units year over year, while online discounts improved the number of units year over year. Since discounts in offline wholesale channels have deepened more than offline direct sales, we believe that the impact of deepening offline discounts on 2H24's gross margin is limited. Management anticipates that 2H24 gross margin may decline slightly year over year, but gross margin is still expected to expand by around 1ppt for the full year of 2024.

The establishment of a joint venture is expected to accelerate the expansion of overseas business: Li Ning announced the establishment of joint ventures with founders Mr. Li Ning, HongShan Venture, and HongShan Motivation. Since its establishment, Li Ning Company and Mr. Li Ning held 29% and 26% of the shares in the joint venture, respectively. Starting in 2025, the company will inject its overseas business into a joint venture, hoping to use Sequoia's external resources to accelerate the expansion of the Li Ning brand in overseas markets. The overseas business currently accounts for only about 2% of the company's overall revenue (the share of profit is expected to be even smaller), so this change in equity has limited impact on the company's overall financial impact. According to the announcement, Li Ning Company has the right to take back part of its shares after 4 years and all of its shares after 8 years. We believe that the establishment of a joint venture has had a positive effect on the Li Ning brand going overseas, but it also shows that Li Ning itself lacks the ability to independently expand overseas markets.

Investment risk: Industry demand is slowing down, domestic brand competition is greater than expected.