Passenger traffic pressure continued, and sales were under pressure in the 3rd quarter. Li Ning's omni-channel retail sales in the 3rd quarter of 2024 fell by a single digit year on year, and the month-on-month pressure increased (compared to the low single-digit decline in the 2nd quarter). By channel, the offline retail channel did not perform well due to customer traffic pressure. The third quarter showed a mid-single digit decline (compared to the flat year-on-year performance in the second quarter); the offline wholesale channel continued its performance of about a single-digit decline in the second quarter. Overall, offline channels showed a high single-digit decline trend. Online channels performed well and recorded mid-single digit growth in the 3rd quarter.

Fourth quarter performance is expected to be better than the previous three quarters. Overall performance in the 3rd quarter of this year was under pressure. The e-commerce channels that performed well also fluctuated during the 3rd quarter, mainly due to time differences or activity schedule adjustments on the platform.

During the National Day holiday, various channels recovered sequentially, offline traffic achieved single-digit growth, and e-commerce channels showed impressive growth of 30-40%. Looking ahead to the fourth quarter, although the pressure in the third quarter was higher than in the first half of the year, and the pressure on passenger traffic is expected to continue, the performance for the fourth quarter of this year is expected to be better than the first three quarters, given that the current Double Eleven pre-sale situation is in line with the company's expectations and that various sales indicators (such as turnover, customer unit price, and associated rate) have improved month-on-month, compounded by factors such as a low base for the same period last year.

The discount rate is expected to be under pressure. Due to poor passenger traffic performance since this year, in order to ensure a steady level of inventory (more than 80% of inventory is new within 6 months, and the storage structure is healthy), the company has increased terminal discounts. The discount rate for offline channels deepened by a single digit year-on-year in the 3rd quarter. Among them, the increase in wholesale channel discounts was higher than that of direct sales channels. Management indicated that the discount rate trend will extend to the fourth quarter.

It is worth noting that despite poor sales performance for regular-priced products, professional categories (such as badminton, running; the running series achieved high double-digit growth in the 3rd quarter) performed well, providing positive support for the improvement of discount rates. Management maintained the forecast of an improvement in gross margin of about 1 percentage point for the whole year.

Maintain the target price of HK$14.89 and the neutral rating. The discount rate performance for the 3rd quarter and management's expectations for gross margin were in line with our previous expectations. We maintain our full-year financial forecast, which shows low single-digit growth on the revenue side and low double-digit net profit margin. This forecast is in line with market expectations. Maintain the target price of HK$14.89 and the neutral rating.