Li Ning: The goal is high-quality stability.
$ On March 17, 2023 at Hong Kong time, Li Ning (HK) released its 2022 annual results before the stock market opened:
I. Annual Report Core Data vs. Market Expectation Overview
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Revenue: 2H22 revenue was RMB 13.394 billion, YoY+8.2%, below market expectation (-1.09% miss).
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Gross margin: 2H22 gross margin was 46.9%, YoY-3.8pct, below market expectation (-4.6pct miss); gross sales ratio was 17.6%, YoY-6.6pct, below market expectation (-6.63pct miss).
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Net profit: 2H22 net profit margin was 14%, YoY-2.6pct, below market expectation (-2.06pct miss).
For more detailed financial information, please refer to Changqiao Dolphin's commentary: "Li Ning: Fight against life and death, a battle with backwater?"
II. Telephone Conference Information
Q&A Session
Q: Strategic Plan for 2023
A: Focusing on Core Business Segments
In 2023, we will focus on improving and implementing the following seven core business segments, promoting the implementation of key strategic tasks:
- Dual-drive of goods and products, construction and replication of efficient retail operation model; 2) Strengthening of R&D innovation driving force; 3) Upgrade of the supply chain system; 4) Comprehensive implementation and improvement of the e-commerce business system; 5) Marketing integration; 6) Consumer closed-loop operation; 7) Comprehensive reform of personnel business system.
Q: Improvement Areas for 2H22
A: Last year, the Group achieved the best results under the impact of the epidemic. Since Q1-Q3 has been affected by the epidemic, the Group has made preparations. Because the ordering cycle is longer, the orders for the subsequent quarters have been placed by Q1 and the potential business inventory has been seized.
Q: Inventory situation in 2022, and 2023
A: Inventory is not only about the absolute value, but also requires effective response mechanisms for inventory changes, focusing on inventory scale, inventory-to-sales ratio, and inventory aging structure.
Last year's inventory-to-sales ratio of 4.2 was healthy, but it may be slightly short for the subsequent high-speed growth stage, and it is a pity to have more inventory than needed.
Overall, from the perspective of enterprise management, inventory-to-sales ratio between 4-5 is healthy and controllable; but from the perspective of high-speed growth, efforts need to be made to optimize inventory this year.
Q: Product Layout
A: Li Ning is a professional sports brand, and the company's core is focusing on technology platform. Under the high-quality discount (overall 83% off), the Ultra Light series reached 3 million pairs in November, and 3.14 million pairs for the whole year. Ultra Light 19 is a channel to showcase the technology platform and explore efficient product operation.
This year, it will be changed from the Ultra Light series to the overall launch of Ultra Light 20, Chitu family, and Feidian family running shoe matrix, to meet consumers' needs with richer price ranges and segmented functions/scenarios. Last year's biggest achievement was not the excellent sales of the Ultra Light 19, but the recognition of Li Ning running shoes among runners.
Q: Opinion on product price range
A: Sales and price range improvement for professional products like running and basketball shoes are driving forces.
Currently, the Li Ning running shoes' core price range is 599. However, with the help of Feidian Challenger in the last three months, the growth of the 799 price range far exceeded the company's expectations.
Q: Opinion on operating profit margin
A: Maintaining caution.
Reasons for maintaining a cautious attitude: Considerate of the gradual improvement of external circumstances and the gradual recovery of discounts. It is expected to return to normalcy at the end of Q1 or the beginning of Q2.
Sources of growth: 1) Professional products like running and basketball shoes are driving sales and price range. 2) Women's products account for 20-30% of the low end. 3) They aim to break past 30% in the future. 4) Improve the development of children's clothing.
Q: Recent situation
A: In Q1-1/2, there has been a significant improvement in month-on-month comparisons, with SSSG approaching the YoY gap and low unit growth. It is expected that it will turn positive YoY in March and anticipate double-digit growth in revenue.
They are optimistic about the future, maintaining a cautious attitude, and keeping an eye on various operational segmentation indicators in the future.
Q: Future development of product line team
A: Hong's prospects for retirement and the departure of the designer: Companies do not rely on individuals to achieve operations. Instead, they establish a complete talent pool and system. Li Ning has the ability and soil to cultivate outstanding designers. This year, they will promote the landing of a new corporate culture, emphasizing a win-win relationship between the company and employees.
Q: Consideration for 1990's future
A: In 2022, it will increase from three to sixteen stores, but the company does not attach great importance to 1990's scale. What is more important is exploring a high-profit model. 1990 is an important component of Li Ning's future brand image and tone, but it will not be a significant source of revenue. The company's vision is to become the preferred sports brand for Chinese consumers.
Last year was still in the exploration stage, and there will be no hard indicators this year. The key is to explore product demand through these stores.
1990 company positioning -- testing: 1990 will be a very important product line under Li Ning's single-brand strategy. Although it will not be the main performance support, it is beneficial to enhance the recognition of Li Ning's entire brand. It was still in the trial stage last year.
1990 store situation: Four super first-tier cities, ten second-tier provincial capitals, and two relatively lower third-tier provincial capitals, but they are the best places in provincial capitals.
1990 testing harvest: Clearer future channel regional positioning; discovery of problems in product structure; whether the pricing strategy is the most suitable; how to require support from the supply chain and quality.
Q: Will the specifics of the 2023 guidelines be more conservative? A: The company's guidelines need to consider achieving high-quality growth on the basis of health and sustainability, and the company's development goal is not conservative - committed to becoming the preferred sportswear brand for Chinese consumers. The adjustments made during the difficult period last year laid the foundation for this year's recovery. The guidance of 15-20% this year is not conservative, the key is high-quality and robust growth.
Q: How do you view the synergies between discounts, inventory, and scale, as well as discount guidelines?
A: The deepening of discounts in 2022 is mainly in response to risks, as well as the analysis and review of the weekly targets of goods from the upper management to the lower levels. The core is the influence and bargaining power brought by the strength of the brand and the technology platform, which requires high-quality products to attract consumers.
Q: Future development expectations for clothing?
A: The increase in the proportion of shoes will inevitably lead to a decrease in clothing. The ideal shoe and clothing ratio is 50% for shoes, 45% for clothing, and 5% for accessories. Clothing will continue to improve its technology and fashion in the future. It is noteworthy that China's Li Ning will not be the core of Li Ning's revenue (the proportion is below the middle unit).
Q: Gross profit margin expectations?
A: The 53% in 2021 is a relatively special and high situation, and there will be an impact from the low unit price of raw materials in 2023 compared to 2019. There is a middle unit gap in discount year-on-year in January and February.
Q: Customer traffic situation?
A: Customer flow in 2022 is very poor, which will significantly recover in 2023. However, SSSG for apparel has not yet grown positively year-on-year in January and February. However, through the company's efforts, current revenue is faster than the recovery of customer flow.
Q: Online situation?
A: Growth has slightly declined, which is due to the diversion of offline recovery. However, Li Ning will still adhere to the big e-commerce plan in the future, connecting online and offline channels, and fully seizing opportunities online and offline.
Risk disclosure and statement for this article: Dolphin investment research disclaimer and general disclosure
