We are impressed by Li Ning’s sales growth and working capital management in 2H19 and believe its recovery in FY20E to be industry leading. Thus we reiterated BUY and lifted TP to HK$29.63, based on 30x FY21E P/E (from 32x FY20E).
- We believe Li Ning’s retail sales recovery in 2Q20E is industry leading. After summarizing all the comments from various listed co.’s management, we believe Li Ning’s recovery in 2Q20E should be the second strongest, at -5% YoY, vs FILA’s +15%, Anta/ Pou Sheng’s -8% and Xtep’s -10%. This should point to an overall better performance onwards, both Li Ning and Anta are our top-picks within the sportswear sector in FY20E.
- A prudent FY20E guidance. No post-virus outbreak sales growth guidance was provided but NP margin of 10-10.5% in FY20E can still be achieved thanks to its flexible cost structure with ~40% opex from variable costs. Other target includes: 1) 1ppt drop in 1H20E GP margin due to greater retail discounts and supports to distributors, 2) 170-200 new stores (by 50 stores scheduled in 1H20E will be delayed) and 3) 20%+ online sales growth in FY20E (overly prudent in our view). Also, thanks to its super decent retail sales and working capital trend back in 3Q/ 4Q19, we are highly confident on its execution and outlook in FY20E.
- FMR’s stakes had surpassed 5%. On 1 Apr 2020, Fidelity management & research company LLC (FMR) had bought 21.65 mn shares in Li Ning at HK$ 21.52, raising its stake to 5.26%. Noted that FMR’s track record was very solid, with max return of 125%/50% achieved on Li Ning/ Anta after its meaningful rise in stakes (0.16%/ 0.07% in 1Q19 to 3.08%/0.69% in 1Q20).
- Placement by Viva China is expected. On 31 Mar 2020, Viva China (8032 HK) sold 2.85% of existing stakes (down from 16.33%, including convertible securities, to 13.48%), at HK$ 21.52 per shares (~5% discounts vs last closed price). We are not surprised as Viva China had shown certain interests back in 2019 by raising more capital for further business development, including M&As of sports related businesses.
- FY19 result recap. Li Ning’s sales/ net profit grew by 32%/ 110% YoY in FY19, beating CMBI est. by 3%/6%, due to better wholesale/ e-commerce sales and other income, despite slightly higher opex (rental, D&A).
- Maintain BUY and lifted TP to HK$ 29.63. We maintain BUY and lifted TP to HK$ 29.63, based on 30x FY21E P/E (rolled over from 32x FY20E), given a 3 years adjusted NP CAGR of 31%. The counter is attractive, trading at 23x FY21E P/E. We adjusted our FY20E/ 21E EPS estimates by -4.2%/+0.6%, to factor in lower sales due to virus outbreak but better margins.
