LI NING's "Cycle"

Li Ning (02331.HK), who has had a tough year, has yet to show signs of a rebound.

On the evening of December 10th, Li Ning announced its plan to acquire a Grade A office building called "Harbour East" located at 218 Electric Road, North Point, Hong Kong, from a wholly-owned subsidiary of Henderson Land Development (0012.HK) for HKD 2.208 billion. Part of the property will be used as Li Ning's headquarters in Hong Kong.

The transaction price is a 10% discount compared to the HKD 2.46 billion valuation given by a third-party evaluation commissioned by Li Ning on December 5th.

UBS released a research report stating that this non-core business expenditure is expected to have a negative impact on the stock price.

Li Ning stated in the announcement that this acquisition demonstrates the company's "confidence" in the prospects of its Hong Kong business and marks the implementation of its plan to strengthen international business development.

TradeWind01 asked Li Ning officials whether the purchase of this office building implies that Li Ning will vigorously expand its overseas market business, but as of the time of writing, no response has been received.

In the fragile market sentiment, Li Ning seems to be "making more mistakes."

At the opening today, the secondary market immediately gave feedback, with Li Ning's stock price opening significantly lower, falling more than 15% during the day. The stock price hit a new low since March 2020 and closed at HKD 18.3 per share.

This year, the market has been concerned about Li Ning.

On October 25th, Li Ning released its operating data for the third quarter of this year, and the next day Li Ning experienced a drop of over 20 cm. Now, Li Ning's year-to-date decline has exceeded 70%, with a market value of less than HKD 50 billion, equivalent to only one-fourth of Anta Sports (2020.HK), further widening the gap between the two.

In an article titled "Li Ning's Dream" published by Global Entrepreneur magazine in 2011, founder Li Ning once raised four soul-searching questions:

"Why can Jinjiang brands catch up with us in just two or three years? Where is our current advantage? What is the problem? What should we do?"

That long crisis ended with Li Ning returning to power and refocusing on the Li Ning brand.

Thirteen years have passed, and Li Ning's current situation seems to mirror that of thirteen years ago, entering a kind of "cycle."

When the momentum of consumption upgrading abruptly stops, the challenges of inventory clearance and brand positioning once again confront Li Ning. How will Li Ning navigate this cycle?

The Dilemma of Inventory Clearance

For Li Ning, which relies on distributors for nearly half of its revenue, inventory clearance is even more challenging than imagined.

When online and offline channels, distributors, and direct stores all discount to clear inventory, distributors under pressure to recover cash flow may not have other options. After all, whether they choose to sell through Pinduoduo or discount in stores, it doesn't make much difference to them in terms of urgent cash recovery.

However, this will inevitably affect the sales of Li Ning's e-commerce channels and full-priced products in some offline stores.

TradeWind01 learned from a source close to Li Ning that the inventory problem was evident in the third quarter of this year.

On the one hand, this is due to the market supply of Li Ning products exceeding demand, resulting in disorderly pricing by distributors. On the other hand, the shipment discounts of certain business units within Li Ning are not consistent, and price control is not strict. Huatai Securities analyst Luo Yixin attributes Li Ning's channel stuffing this year to a weak recovery in the consumer market and slower retail sales growth compared to the target set last year.

In the third quarter of this year, the growth rate of Li Ning's various channels further slowed down.

Offline channels only achieved high single-digit growth YoY, with direct sales channels recording low double-digit growth of 20% to 30% and wholesale channels recording low single-digit growth. Online channels, on the other hand, saw a low single-digit decline YoY.

Guoyuan International Securities analyst He Limin pointed out that in the third quarter, Li Ning's offline direct sales performance was better than that of wholesale channels, partly because the offline direct sales stores include 500 outlet stores, which performed better than full-price stores. Another reason is that the speed of opening direct sales stores is faster than that of wholesale channels.

The negative impact of a large number of products being discounted to clear inventory has also had an immediate effect on Li Ning's profit margin.

In the first half of this year, Li Ning's gross profit margin decreased from 50% in the same period last year to 48.8%, net profit margin decreased from 17.6% to 15.1%, and operating profit margin decreased from 21.3% to 17.7%.

Li Ning attributes the decline in gross profit margin to increased discounting in online channels and retail terminals, a decrease in the proportion of DTC channels (including e-commerce and direct stores), and an increase in inventory provision (an increase of 34.4% YoY to CNY 143 million).

Brand positioning dilemma

Today, Li Ning's predicament is somewhat similar to that of 13 years ago when the founder asked a soul-searching question: both face pressure to clear inventory and a brand positioning dilemma.

From 2011 to 2013, Li Ning's revenue declined for three consecutive years, with a large amount of inventory piled up in its extensive distributor network.

To make matters worse, the then CEO made a "violation of ancestral instructions" decision to rebrand Li Ning, cutting a large number of SKUs priced below CNY 299 in order to capture a higher-end purchasing power.

However, due to insufficient product preparation and a lack of confidence from distributors in promoting new products, the plan failed. In 2011, Li Ning's net profit decreased by more than 60% YoY, far behind its peers such as Peak and Anta during the same period.

Ultimately, Li Ning, who had been away from frontline business for a long time, took back the helm. He first changed Li Ning's slogan back to "Anything is Possible" and then used e-commerce platforms to clear inventory, leading the company back to growth and eventually benefiting from the rise of "China Li Ning" in 2018.

Now, Li Ning's situation is similar to that time. Products are sold at higher prices, inventory remains high, and there are frequent instances of distributor channel stuffing, despite management emphasizing that inventory is "completely controllable" during performance briefings.

In terms of brand positioning, the once popular star brand "China Li Ning" is now losing momentum.

It should be noted that the efficiency of China Li Ning stores is three times that of regular Li Ning stores. However, the concern about the revival of China Li Ning has now become the focus in sell-side research reports. In a research report, CICC analyst Lv Haojiang pointed out that China Li Ning's revenue declined by 6% YoY last year.

Another sub-brand that Li Ning has high hopes for, LI-NING 1990, seems to be "out of sync" with the times. It positions itself as a high-end sports fashion brand with prices close to luxury brands and has entered high-end shopping malls such as Beijing Guomao and Shanghai Jing'an Kerry Center. However, LI-NING1990 has become one of the reasons why the management explained the lower-than-expected revenue growth in the third quarter. Huatai Securities analyst Luo Yixin stated in a research report that the management has proactively postponed the expansion of this brand to readjust its positioning, which has affected the brand's revenue growth.

The reason behind this is that Li Ning, who tried to bet on the trend while occupying the mass fashion and high-end markets, may not have expected the "Guochao" trend to fade so quickly.

In fact, it's not just the Guochao trend, most fashion-forward brands cannot escape the trend cycle, especially in the current era of "decentralized" fashion. Legendary streetwear brands like Supreme are also gradually declining and facing pressure from their parent company, VF Corporation, to sell.

For Li Ning, there is also a warning from Adidas, which is no longer "cool". Adidas' situation is even more difficult, as it finally returned to growth in the Chinese market after eight consecutive quarters of decline.

Li Ning himself has long been aware of the limitations of being close to trends. In an interview in 2011, he pointed out the problem that plagued Li Ning at that time, which was swinging between sports and fashion: "We are not swinging, but we are not professional. If we become professional, no matter how fashionable we are, it will be based on professionalism. Because we are not professional, it seems like we are doing fashion."

This has significant implications for Li Ning today. How to make consumers feel "professional" again or what direction Li Ning should take next.

Undeniably, the current times are indeed different from the past, and the changes in the consumer environment are perhaps even greater than Li Ning's own changes. After the end of consumption upgrading, the industry's direction is visibly shifting.

For example, Hema is no longer pursuing the goal of allowing consumers to eat king crabs flown in on the same day, but instead launched the "Mountain Moving Price" to lower the prices of daily necessities such as meat, poultry, eggs, and dairy products. The high-end snack brand, Liangpinpuzi (603719.SH), which once boasted about its high-end positioning, took the first step to survive by significantly reducing prices. Even Guizhou Maotai (600519.SH), representing high-end consumption, has started to feel anxious about opening bottles and has partnered with Luckin Coffee to launch a sauce-flavored latte...

In this environment, Li Ning, who once focused on consumption upgrading, will face even greater difficulties in shifting direction. Heraclitus said, "No man ever steps in the same river twice." Today, Li Ning is also the same, don't step into another "cycle" again.