Insight into LI NING's semi-annual report: Prioritizing stability, performance meets expectations

Although the Paris Olympics have come to an end, the "Olympic effect" in sports consumption continues. Meituan data shows that since July, the search volume for sports has increased by 180% compared to June, with consumers aged 20-35 being the main force, igniting summer consumption with enthusiasm for sports.

However, compared to the booming sports market, the secondary market's sports industry sector has been fluctuating. From the beginning of the year to the end of April, the Hong Kong stock sports goods sector experienced a period of upward trend, but with no clear realization of domestic policy expectations, the Hang Seng Index started to decline after May, dragging down the Hong Kong stock sports goods sector, and valuation levels also fell to a low point.

On one hand, there is a wave of consumption sparked by the Olympic effect, while on the other hand, there is a period of calm in the secondary market sports goods sector, which greatly tests the response capabilities of related sports concept stocks. During the sector's calm period, how should sports concept stocks achieve steady growth; and during the market's hot period, how should related companies achieve sustainable development in intense competition. The market's contradictions pose challenges for companies.

In response to this, Li Ning, one of the top sports brands, has provided its "answer" with a "steady" performance report.

On August 16, Li Ning released its mid-year performance report for 2024. According to financial data, in the first half of 2024, Li Ning achieved revenue of 14.345 billion yuan, a year-on-year increase of 2.3%; despite the pressured market environment, it still achieved margin improvement, with a gross profit margin of 50.4%, and a net profit attributable to shareholders of 1.952 billion yuan, meeting market expectations. In addition, the company's operating cash flow remained healthy and sufficient during the period, increasing by 40.6% to 2.73 billion yuan, showing a trend of steady growth in overall performance.

However, the market seems to have not yet noticed the investment value brought by Li Ning's steady growth during the fluctuation period.

Currently, Li Ning's stock price is 13 Hong Kong dollars per share, with a TTM P/E ratio of just over 10 times, clearly at a low level, indicating that its long-term market value has not been fully explored.

So, how exactly did Li Ning achieve steady growth during the fluctuation period? And how can investors fully recognize the company's investment value?

Increasing Innovation

Looking through the financial report, increasing innovation is Li Ning's first and foremost "weapon" to deal with the complex and delicate industry environment.

Since the beginning of 2024, the valuation of Hong Kong stock sports goods has continued to decline, especially in mid-July when sports goods stocks collectively fell, until mid-August when the valuation dropped significantly to 13.56 times, reflecting a decrease in market confidence in the sports goods industry. Under the multiple influences of declining consumer spending, weakening end demand, and increasingly fierce competitive environment, the fact that the "Olympic effect" did not ignite investors' enthusiasm for investment is already evident.

Faced with such a fluctuation cycle, Li Ning still chooses to persist in research and development investment to solidify the company's "moat".

According to the financial report, in the past 10 years, Li Ning's cumulative investment in single-brand research and development has exceeded 3 billion yuan, and in the first half of 2024, Li Ning continued to increase research and development investment, with the growth rate of research and development investment exceeding that of revenue.

Continuously increasing the innovation gene has also brought Li Ning professional breakthroughs and growth. In the first half of this year, Li Ning continued to upgrade its existing Li Ning Future Technology, launching Super Future Technology to achieve lightweight and innovative improvements in appearance. At the same time, the shoe surface technology was upgraded to Extreme Surface Technology. In addition, the Carbon Core Technology has been applied to the Wade's Way, Yushuai, Jimmy Butler, and Gamma four flagship basketball shoes, and the Fastest Curve System has also been applied to Li Ning's top racing shoe series, the Feidian series.

At the performance report press conference, Li Ning Group's Co-CEO Qian Wei summarized Li Ning's technological innovation capabilities, stating, "Li Ning has formed a systematic and platform-based strength in technological innovation, possessing the ability to translate from sports insights to technological innovation, and then to product strength. Around the application of sports technology, the company has matured in expanding sports categories, product matrixing, and product series iteration."

With the support of the above-mentioned innovation capabilities, Li Ning's professional sports category development has reached a new level in the first half of this year, especially with the impressive growth momentum in the running category.

In the first half of the year, the running category saw a 25% year-on-year increase in revenue. The three core running shoe IPs built around technologies such as Li Ning Future Technology, the Chitu, and Feidian series have sold over 5 million pairs in total. Among them, the professional running shoe Chitu 7PRO performed exceptionally well, selling over 1.9 million pairs in the first half of the year, a significant year-on-year increase.

In the sports goods industry, the technology and product development capabilities of sports shoes are key indicators of a company's core competitiveness and an important barrier for sports goods brands. During the period, the company's footwear product revenue increased to 7.84 billion yuan, about 3.6 times that of the same period in 2018; the revenue proportion was 54.7%, an increase of 8.2 percentage points compared to 46.5% in 2018.

Of course, in addition to the significant growth in the running shoe market that reflects the company's core competitiveness, Li Ning's innovation in other product categories has also brought positive feedback. For example, in the sports lifestyle category, focusing on comfort and healthy walking with the SOFT product IP, capturing the needs of daily leisure and commuting for the general public, the entire series saw sales exceed 1 million pairs in the first half of the year, nearly quadrupling year-on-year.

Overall, by enhancing its innovation genes, Li Ning has clearly gained significant growth momentum.

Focus on Fine Management

With the industry sector in a period of calm, focusing on fine management and seeking internal growth appears to be Li Ning's second major "weapon" to alleviate survival pressure.

According to research from Guotai Junan International, the revenue of various brand sportswear in July is expected to maintain the weaker trend from June. The reason is that the decline in consumer purchasing power has brought some negative impact on the end demand of the Chinese sportswear consumption market, resulting in overall weak performance in end revenue for the industry. This also means that most players in the industry, under the backdrop of a weaker market, need to focus on improving the quality and efficiency of channels, inventory, supply chain, and other aspects to ensure stable fundamentals and profit margins.

It is worth noting that this industry trend awareness aligns with Li Ning's current focus on meticulous work and comprehensive enhancement of operational capabilities.

Mr. Li Ning once stated about Li Ning's development, "We cannot let the company become obese, we cannot simply pursue scale growth and neglect the improvement of operational efficiency." In this regard, improving store operation efficiency and omni-channel efficiency are two important aspects where Li Ning is building its strength In terms of inventory management, LI NING has established a weekly inventory management system to continuously optimize inventory management. On one hand, the flexible supply system has been upgraded from "passive production" to "active production" to produce more accurately and reduce inventory burden from the source. The core idea of inventory management, as summarized by Qian Wei at the press conference, is: "We set goals on an annual basis, but control them on a quarterly, monthly, and weekly basis; the idea is not to solve problems after inventory issues occur, but to solve potential causes of inventory risks before they occur."

This approach has also led LI NING's inventory levels to be at a leading healthy level in the industry.

In the first half of 2024, LI NING's omni-channel inventory-sales ratio was 3.9 months, with an inventory turnover days of 62 days, both at a leading healthy level in the industry. At the same time, the structure of new and old inventory ages remains healthy, with continuous optimization of inventory older than six months.

If the above data is not intuitive enough, let's look at a set of public data: In 2023, the inventory turnover days of three major sports apparel brands, ANTA, Xtep, and 361 Degrees, were 123 days, 90 days, and 93 days respectively, while LI NING's inventory turnover days were only 62 days. In the disclosed data for the first half of this year, LI NING's 62-day inventory turnover days are also much lower than 361 Degrees' 85 days.

In terms of channel layout, facing market fluctuations, the "single-brand" LI NING continues to focus on a multi-channel strategy, strengthening channel retail efficiency, breaking through with digitalization, and embracing digitalization across all channels while continuously improving operational efficiency.

In the first half of 2024, LI NING continued to optimize its channel layout by accelerating the closure of inefficient stores and strengthening the transformation and expansion of high-quality stores, with the core business store occupancy rate stable at around 90%. Meanwhile, in emerging markets, channel construction was accelerated, store image upgrades were expedited, and the number of ninth-generation stores has exceeded 450, a 96% increase compared to the end of 2023.

As of June 30, LI NING had a total of 7677 stores, with an increase of 9 stores from the end of 2023. Among them, there were 4744 franchise dealers, an increase of 2 from the end of 2023; 1495 directly operated retail stores, a decrease of 3 from the end of 2023; and 1438 LI NING YOUNG stores, an increase of 10 from the end of 2023.

Thanks to the improvement in channel layout, LI NING's offline direct sales business and online channel revenue saw a slight increase in the first half of the year.

According to financial report data, in the first half of 2024, even during market fluctuations, LI NING's direct sales channels and e-commerce channels maintained a slight increase, up by 0.1% and 2.3% respectively, accounting for 24.4% and 27.9% of total revenue, showing improvement compared to the same period last year.

It is evident that LI NING, which continuously adjusts, optimizes, and deepens its operational management, has also gained the growth momentum for long-term sustainable and steady development.

Conclusion

The outside world has always liked to compare LI NING's "single-brand" strategy with the industry's popular "multi-brand" strategy, believing that multi-brand strategies can better expand niche markets, share backend resources, and facilitate business growth. In fact, in the view of Zhitong Finance, there is no absolute good or bad in brand strategies, adaptability is more important Li Ning's adherence to the development strategy of "single brand, multiple categories, multiple channels" has its own business philosophy.

Using founder Li Ning's own sports story as a carrier to build brand image, the company further focuses on a single brand strategy, highlighting the "professional" trait, making people think of Li Ning when it comes to professional sports. Subsequently, the company enriches its product matrix through "multiple categories" and enhances service quality through "multiple channels," further strengthening brand awareness. In the meantime, Li Ning continues to consolidate the company's "both specialized and refined" brand moat through continuous technological innovation and refined management.

Guided by the above business philosophy, Li Ning's steady and upward growth characteristics in the face of market fluctuations are evidently expected. Currently, the company's valuation is clearly at a low level, and the market may well have a high expectation for its growth potential.