Insight into Li-Ning's 2023 financial report: Gross profit margin remains stable at 48.4%, supported by the strength of high-quality brand, ensuring resilient performance

In 2023, as public awareness of health continues to rise and the social atmosphere of nationwide sports becomes stronger, sports consumption is also experiencing vigorous development.

Against this backdrop, Li-Ning has been deeply cultivating its "single brand, multiple categories, multiple channels" strategy to comprehensively enhance its brand competitiveness. Li-Ning (02331), one of the leading sports brands, has also delivered a steady and progressive "report card" in this financial reporting season.

In 2023, Li-Ning achieved a record high revenue of RMB 27.598 billion, a year-on-year increase of 7%. Compared to 2019, the group's revenue doubled over the past five years, with a compound annual growth rate of 15%.

In terms of net profit, the company focused on investing and layout to drive long-term business returns. During the reporting period, the company achieved a net profit of RMB 3.187 billion, with a net profit margin of 11.5%. From 2019 to 2023, the net profit after deducting one-time non-operating income increased by 142% over five years, with a compound annual growth rate of 19%.

At the same time, Li-Ning also disclosed an important message in the financial report - a significant year-on-year improvement in gross profit margin in the second half of the year. In 2023, the company's gross profit increased by 6.9% year-on-year to RMB 13.352 billion, with a stable gross profit margin of 48.4%. The gross profit margin improvement in the second half of the year was evident, with offline discounts also showing improvement year-on-year. While gross profit margin is not the sole criterion for investment decisions, it is the key to unlocking analysis and undoubtedly reflects Li-Ning's emphasis on developing efficiency and quality.

The improvement of the above core financial indicators clearly highlights Li-Ning's performance resilience in an uncertain market environment.

However, it is worth further considering what strategic layouts Li-Ning has made behind its steady growth and how its future growth potential will unfold.

Deeply Strengthen Brand Power to Support Stable Growth

Looking at the uniqueness of consumer brands, each brand has its own circle of capabilities. This is especially true for mature group companies, which often have mature brand images and strong brand effects, thereby strengthening the resilience and elasticity of performance from multiple aspects.

The reason Li-Ning can continue to cross uncertainties and grow resiliently in 2023 is also rooted in this.

In 2023, Li-Ning continued to leverage its brand effect, using the "Li-Ning" brand as the cornerstone to enter China's most popular core sports projects, further consolidating its market dominance in core categories such as basketball, running, and sports lifestyle.

Specifically, looking at Li-Ning's strategic layout:

In terms of brand power, increasing investment in single-brand research and development to stimulate growth in various product categories. During the reporting period, Li-Ning's R&D investment increased by 16% year-on-year. Over the past 10 years, Li-Ning's total R&D investment in single brands has exceeded RMB 3 billion.

Moreover, Li-Ning has also solidified the company's brand barriers from various dimensions. On one hand, enhancing core product technology and design to help Li-Ning's various professional categories gain recognition in vertical tracks and promote Li-Ning YOUNG as the preferred professional children's sportswear brand in China; on the other hand, Li-Ning has also increased its strategic layout for top professional sports resources during the period, strengthening Li-Ning's brand professional recognition and influence For example, since the 2012-2013 season, Li-Ning Group has collaborated with the CBA for 12 seasons, providing over 47,650 pairs of shoes in more than 5,020 top-level matches. Leveraging the platform of China's highest-level professional basketball league, Li-Ning basketball, as evidenced by the CBA's actual combat, continues to consolidate its professional sports strength and image.

Thanks to the comprehensive layout of brand strength, the growth data of Li-Ning's major products during the reporting period is also quite impressive, contributing significantly to the brand's performance.

In 2023, Li-Ning's three core professional sports categories - basketball, running, and fitness - accounted for 64% of the revenue, with running and fitness categories showing outstanding performance, with revenue growth of 40% and 25% respectively. In terms of the revenue contribution from footwear, apparel, and accessories, due to the strategic deep cultivation of professional categories, the revenue contribution from the higher-tech footwear business accounts for 49%, surpassing the apparel business, highlighting the brand's professional sports competitiveness. Additionally, the potential of Li-Ning YOUNG children's wear segment continues to be unleashed, with revenue growing significantly in the range of 30% to 40%, bringing strong momentum.

In terms of channel strength, focusing on channel expansion and optimization to better align with the company's development strategy has further enhanced the consumer shopping experience.

In 2023, Li-Ning continued to optimize its channel structure and improve channel efficiency, actively addressing inefficient stores, improving the overall store structure, and continuously expanding its business footprint in premium shopping centers, achieving a major breakthrough in the super factory outlet channel.

As of the end of 2023, Li-Ning had a total of 7,668 sales points, a net increase of 65 compared to the same period in 2022. Over a period of 3 years, Li-Ning has also completed its goal of high-level market channel expansion layout, with the core commercial body occupancy rate approaching 90%. Furthermore, the company has accelerated the upgrade of store image, with a total of over 230 new or upgraded ninth-generation stores opened by the end of 2023, further enhancing the consumer shopping experience.

In addition to continuously optimizing the channel structure, Li-Ning has also strengthened its retail operation capabilities, striving to improve the performance of directly operated channels, thereby driving momentum for the group's development. In 2023, the number of Li-Ning directly operated stores reached 1,498, a net increase of 68 compared to the previous year.

While strengthening retail operations, Li-Ning continues to support and empower its distribution partners, pursuing long-term and steady development. In order to ensure healthy channels, the company strategically adjusted the shipment volume of distribution channels in the second half of the year based on market dynamics to ensure efficient synergy in end business. In the long run, Li-Ning will continue to empower distributors, enhance end retail operation efficiency, and promote the healthy development and sustainable growth of channels.

It is evident that after continuously optimizing channel structure and improving channel efficiency, Li-Ning not only provides consumers with a better shopping experience but also inadvertently strengthens the company's brand effect, thereby empowering the company's performance growth According to the latest financial report data, in 2023, the company's direct revenue increased by 29%, offline discounts improved year-on-year, and the annual wholesale turnover achieved a low-end growth of 10%-20%, with overall offline business performance remaining stable.

Taking all the above actions into consideration, Li-Ning has undoubtedly solidified the company's brand "moat" from multiple aspects, accumulating stronger strategic momentum for the company while providing a continuous growth vitality.

Seizing the "Sunrise" Track, Waiting Quietly for Steep Slopes and Deep Snow

If Li-Ning's strong brand power provides the driving force for the company's performance, then the development momentum of the sports consumption industry has opened up Li-Ning's growth ceiling.

Reviewing the domestic sports footwear and apparel market, it can be roughly divided into three stages: from 2001 to 2010 was a period of rapid development, with a significant increase in mass consumption capacity combined with the sports boom brought by events such as the Olympics, local sports footwear and apparel brands developed rapidly. From 2011 to 2013 was a period of industry stagnation, with the growth rate of the sports footwear and apparel industry slowing down due to factors such as the subprime mortgage crisis; after 2014 was a period of steady growth, although the development stagnated in 2020 due to the pandemic, the industry steadily recovered post-pandemic era driven by multiple factors such as policy promotion and increased resident income. In 2021, the market size increased by 13.66% to 354.947 billion yuan, with a slight increase in 2022, and the industry size is expected to grow steadily at a rate of 5%-12% from 2023 to 2027.

With a scale of hundreds of billions and double-digit growth, this clearly highlights the significant development potential of the current sports consumption market, providing endless imagination for related sports footwear and apparel companies.

However, analyzing from the source, the vigorous development of sports consumption is built on "change." For Li-Ning, this "change" is undoubtedly positive and constitutes a unique "strategic window of opportunity" for the company.

On one hand, as the social atmosphere of nationwide sports becomes stronger, the public's attitude towards sports events shifts from viewing to participating, accelerating the release of public enthusiasm for sports consumption and increasing the demand for professional sports equipment. On the other hand, driven by policy guidance, popular culture, and other factors, trendy sports continue to be popular, leading to the continuous hot sales of "trendy sports" equipment, thereby promoting strong growth in niche categories of sports products such as skateboarding, skiing, and outdoor hiking.

Why is the above positive change considered a unique "strategic window of opportunity" for Li-Ning?

Firstly, the strong brand effect formed by Li-Ning's "single-brand" strategy.

Historically, the outside world has liked to compare Li-Ning's "single-brand" strategy with the industry's "multi-brand" strategy, believing that multiple brands can better expand into segmented populations, share backend resources, and facilitate business growth. However, in reality, the strategy itself is neither superior nor inferior, but rather a choice based on different corporate genes and advantages to select their own development path. The market seems to have overlooked the powerful effect brought by the focused single-brand strategy, that is, a single brand can help a company establish a unified brand image Enhancing visibility and recognition; consumers are more likely to be loyal to a single brand, reducing the possibility of switching brands, which is more conducive to the long-term development of the enterprise.

Take Li-Ning for example, using founder Li Ning's sports story as a carrier to build the brand image. Then further focusing on a single-brand strategy, highlighting the "professional" characteristics, mentioning professional sports immediately brings Li-Ning to mind. Such brand awareness is undoubtedly strong and long-lasting.

Comparing with global sports brands, currently dominant global sports brands also mainly focus on a single brand. Taking Nike as an example, its brand revenue in the 2023 fiscal year (June 2022-May 2023) reached as high as $48.7 billion, with Nike brand revenue accounting for around 95%. It can be seen that relying on the thriving domestic sports consumption market, reinforcing consumers' awareness with the "Li-Ning brand" undoubtedly has huge market exploration space for Li-Ning.

Secondly, by focusing on a single brand as the foundation and deeply cultivating multiple category tracks, the incremental space opened up is also considerable.

According to Li-Ning's development strategy, its original intention is mainly to use the Li-Ning brand to enter core sports categories such as basketball, running, badminton, and table tennis, entering China's most popular core sports projects. In fact, through the deep cultivation of multiple categories by the Li-Ning brand to achieve multidimensional expansion, the product power brought by this approach is evergreen. That is, after the overlay of corporate brand and product brand, the vitality of the product brand continues to extend, and the accumulation becomes deeper.

In addition, in the author's view, whether it is a multi-brand or a single-brand strategy, the ultimate focus is on product power, which also means that product power is the key to company growth. CITIC Securities analysis believes that Li-Ning's core foundation and background (i.e. outstanding product matrix and product development team) are expected to help the company maintain a leading position in the next round of industry technological iteration. Li-Ning mainly adopts a centralized + decentralized research and development model, that is, by increasing research and development investment in a single brand, achieving cross-category technological innovation, which can promote the development of products in various categories to be more "specialized". For example, in terms of cushioning technology, Li-Ning has achieved cross-category technological innovation, with applications in basketball, running, fitness, badminton, and even sports lifestyle products.

Obviously, the technological and product power built by Li-Ning has also been well reflected in performance. Taking running category data as an example, in 2023, Li-Ning's core running and basketball shoe products IP sales exceeded 12 million pairs, with the total sales volume of the three core running shoe IPs for daily jogging, advanced training, and competitive racing needs - Ultra Light, Chi Tu, and Fei Dian reaching 9 million pairs for the whole year. Among them, the Fei Dian 3 Challenger single model accumulated sales exceeded 1.3 million pairs for the whole year, becoming a phenomenon-level IP in carbon plate running shoes.

From the above, it can be seen that under Li-Ning's single-brand strategy, it has already achieved a layout of a multi-category product matrix. This approach not only has the characteristic of "specialization", but also has a diversified development feature, accumulating its own brand assets, leveraging brand value, and taking a more long-term and stable path This approach currently matches well with the comprehensive and professional strategic window in the sports consumer industry, so for Li-Ning, although it has been working hard on "single-brand" for ten years, its long-term efforts have begun to show results.

Conclusion

In summary, it is not difficult to see that Li-Ning's steady growth in 2023 is not accidental, but the result of strong growth logic support from the company.

More importantly, looking ahead in the long term, the brand power, product power, and channel power that Li-Ning has devoted to building may lay a solid foundation for its steady performance in 2024 and beyond.

With ample confidence in its development, Li-Ning also rewards shareholders and investors with tangible cash dividends. For the year ended December 31, 2023, Li-Ning's full-year dividend will be 54.74 cents per ordinary share, with a full-year payout ratio of 45%, which is at a relatively high level in the same industry. Such a generous dividend not only reflects the company's emphasis on shareholder returns but also demonstrates shareholders' confidence in the company's future prospects and growth value recognition