Summary. Mid to high-end items (priced at RMB 500+) now accounted for 50%+ of retail sales, enjoying at least 5% faster growth rate (vs low-end items). This has marked Li Ning's successful brand upgrade. We expect momentum to last, thus reiterated BUY and lifted TP to HK$24.43, based on 32x FY20E P/E.
- Strong beat despite positive alert. 1H19 net profit surged by 196% YoY to RMB 795mn, 11%/44% above CMBI/ BBG's est. Excluding sales of 160 stores for RMB 234mn, core net profit was up by 109% (vs the pre-announced 90%+). The beat was due to: 1) impressive wholesale growth of 45%, as distributors are committed to open more larger-sized and high-end causal stores, 2) e-commerce growth acceleration to 38%, thanks to rollout of exclusive China LN products and 3) the associated operating leverage, where OP margin actually jumped by 4.6ppt to 10.8%.
- Retail sales growth is trending up in Jul-Aug 2019. Overall retail sales growth was at low 20% in 2Q19, same as 1Q19, but the trend is improving in Jul-Aug 2019. As stated by management, retail sell-through growth for direct retail/ wholesale/ e-commerce are at low-teens/ low 30%/ ~40%, all trended up from HSD/ mid 20%/ high 20%-30% in 2Q19.
- 1Q20 trade fair sales growth further speeded up. 1Q20 trade fair sales growth reached high-teens, quickest pace in four years. However, the China LN series was not even included. Note that China LN sales contribution to retail offline sell-though was only 3% in 1H19, but it reached 7% in Jul 2019 and is targeted at 8% by 4Q19E. Number of China LN stores may reach 100-120 by FY19E (~50 more in 2H19). Sales per store remained at 4-5x greater vs regular LN store while retail discounts was only 6% off in 1H19.
- Upbeat FY20E-21E OP margin guidance. Despite a conservative mid to high-teens sales growth target in FY19E (direct retail and wholesale may slow down while e-commerce may last) and a 8.5%-9.0% NP margin guidance in FY19E, we are still positive on margins as the Company incurred more incentive and hiring fees in 1H19. More importantly, 2ppt OP margin expansion per year is feasible in the next two years, thanks to 1) better input costs by lowering payable days, 2) continual improvements in rebates and delivery discounts, 3) ramp up of self-owned footwear factory, etc.
- Maintain BUY and lift TP to HK$ 24.43. We maintain BUY and lift TP to HK$ 24.43, based on 32x FY20E P/E (unchanged), implying a 1.1x 3 years PEG (vs int'l avg. of 1.3x). The counter is attractive, trading at 26x FY19E P/E and 0.9x PEG. We lifted our FY19E/20E/21E EPS estimates by 0.6%/4.9%/7.6%, to factor in better-than-expected margins and operating leverage. We have an bullish EPS estimates, 19-22% above BBG's est.
