The joint venture is still in its infancy. The management team and operation strategy have not yet been finalized, but the board configuration is basically in place;

The joint venture was chosen based on Li Ning's current capabilities; the advantages outweigh the disadvantages;

Maintain profit and buy ratings, and maintain a target price of HK$19.30, corresponding to 14 times the 2025 P/E.

Li Ning recently announced the establishment of a joint venture company. The joint venture is still in its infancy, and the management team and operation strategy have not been finalized, but the board structure is basically in place — Li Ning and Chairman Li Ning himself each appoint 2 people, and Sequoia Capital appoints 1 person, no more than 5 people overall. An independent board of directors leads a management team independent of Li Ning Company to operate the joint venture. In the future, Hong Kong and Singapore store operations, including the design, production, and channels of overseas products, will all be incorporated into joint ventures.

Why choose a joint venture and choose to go overseas? Because the competitive environment in mainland China is too intense, Li Ning will concentrate all his energy on operating the mainland market and has no time to consider overseas business. However, overseas expansion is a major trend in the sports footwear industry. Li Ning did not want to lose his first-mover advantage, so he set up a joint venture to cooperate with a third-party professional team. This was a choice made based on Li Ning's current capabilities. Li Ning's 1H24's overseas business accounts for only ~ 2%. The board of directors has higher expectations for this. The joint venture is a solution proposed by the company after various trade-offs.

What can Sequoia Capital bring to Li Ning? 1) Sequoia Capital does not directly participate in the operation of joint ventures, but Sequoia has rich investment in consumer goods companies and can give suggestions during operation; 2) Sequoia Capital has rich resources to help Li Ning find the right management team to run joint ventures and expand overseas markets; 3) Sequoia also has rich overseas channel resources, including cross-border e-commerce platform resources, which can help the company save a lot of time, manpower, and material costs. For example, if Li Ning chooses to expand overseas independently, he must first face the dilemma of diversified needs in different countries. Even if only a distribution model is used in the early stages, the cost of finding a local partner is very high, and it is impossible to avoid many uncertainties in this process. If you choose direct management, the upfront investment and risk will be greater. Choosing cooperation to avoid and share risks to help Li Ning get through the early stages smoothly is a smarter choice.

What is the revenue target of the joint venture company? It is planned that the overseas business will reach 1 billion US dollars in the fourth full year (vs our estimated overseas revenue of 0.52 billion yuan in 24 years). The target is very aggressive. However, it also reflects the importance that the company attaches to going overseas. Chairman Li Ning also invested HK$52 million in his personal name, holding 26% of the shares; Li Ning Company invested HK$58 million and held 29% of the shares. Even if the revenue target is not achieved, Li Ning can choose to buy back no more than 25% of the shares after four years, or take back the entire joint venture's own operations after eight years. It is more flexible whether to repurchase or not, or how much.

We believe that the advantages of setting up a joint venture outweigh the disadvantages for Li Ning. The only risk currently foreseeable is an initial investment of HK$58 million. If things go well, Li Ning can recoup in the future. Even if it doesn't meet expectations, it should be better than the current ~ 2% share of overseas business, not to mention charging licensing fees. Li Ning will also be relatively cautious about subsequent investments in joint ventures. This year's HK$58 million investment will be paid on 4q24, which has no impact on this year's income statement, and the impact on the cash flow statement is also very limited (up to 1H24, Li Ning's cash and short-term bank deposits combined ~ $12.7 billion).

Profit forecast and valuation: We expect Li Ning's revenue to increase 2.2%/3.9%/3.6% year-on-year to 282.2/293.3/ 30.38 billion yuan respectively in 2024-26; net profit to mother is expected to be -3.3%/+6.4%/+5.7% year-on-year to 30.8/ 32.8/ 3.47 billion yuan, respectively. We continue to give Li Ning 14 times the 2025 P/E, keeping the target price unchanged at HK$19.30, and there is still room for 25% increase compared to now. Risk warning: macroeconomic downturn; performance falls short of expectations; industry competition intensifies.