Despite the rather bumpy post-virus retail sales recovery, we continue to like Li Ning in 2H20E and FY21E, due to: 1) strong ASP and GP margin increase, 2) effective cost control and 3) a solid reform plan laid down by management. Thus we reiterate BUY and raised TP to HK$36.52, based on 37x FY21E P/E (from 30x, since its industry leading profit recovery should drive a re-rating).
- Strong 1H20 results, driven by other income, better retail and wholesale pricings and cost control. Li Ning sales/ net profit fell by 1%/ 14% YoY in 1H20, 4%/ 19% above BBG’s cons. The beat was because of: 1) better GP margin from ASP increase in both MSRP and IMU, 2) better gov. grants and 3) rigid cost control (staff and travelling costs, etc.). Note that core NP att. (adjusted for RMB 234mn one-off gains in 1H19) was up 22%, while adjusted NP att. (excluding also the other income) was up 11%.
- Retail sales growth in 2Q20 and 3QTD20 remained bumpy but should gradually improve. Retail sell-through for direct retail and wholesale in 2Q20/3QTD were -ve HSD/-ve MSD and -ve low-teens/-ve HSD, which were somewhat weak and slightly behind management’s and our expectation. We estimate overall retail sales growth to be -ve high-teens/ -ve LSD in 1Q20/ 2Q20E and forecast 7%/ 12% YoY growth in 3Q20E/ 4Q20E.
- NP margin guidance raised to 10.5%+ on likely GP margin expansion and cost control, even if high retail discounts stay. Management is confident on margin recovery and raised FY20E guidance to 10.5%+ (from 10%-10.5%). We believe GP margin can still improve in 2H20E, thanks to IMU or initial markup increases even if new/old product mix is stable and retail discounts stay at 4-6ppt deeper than last year (discounts were 4/ 6ppt deeper YoY in 1Q/ 2Q20E). We also expect OP margin to reach 13.6% in 2H20E with 1.4ppt opex savings mainly from labour costs and other opex. Moreover, a lower retail discounts and rebates to distributor can also drive a better GP margin in FY21E.
- Maintain BUY and lifted TP to HK$ 36.52. We maintain BUY and lifted TP to HK$ 36.52, based on 37x FY21E P/E (up from 30x), given a 3-year core NP att. CAGR of 29%. The counter is undemanding and trading at 32x FY21E P/E. We adjusted our FY20E/ 21E/ 22E NP att. estimates by +1.9%/ +0.6%/ -1.2%, to factor in better GP margin and opex savings onwards.
