We believe Li Ning has outperformed its peers in 2H20E, thanks to: 1) better marketing, 2) greater ASP and GP margin increase, and 3) more effective cost control. With the solid reform plan laid down by the new CEO, we are confident on its FY21E outlook, hence reiterate BUY and raised TP to HK$67.66, based on 48x FY22E P/E (rolled over from 37x FY21E).
- We expect sales/ core net profit to grow by 8%/32% YoY in FY20E (and 15%/ 40% in 2H20E). We attribute such a strong growth (even with drags from COVID-19 in 1H20) to: 1) rapid e-commerce sales growth of 27%, 2) stable GP margin helped by ASP increase and limited retail discounts and 3) meaningful opex control such as minimal A&P, travelling expenses and certain rental reliefs.
- 4Q20E retail sales growth may accelerate to 11% YoY, vs MSD in 3Q20. We believe Li Ning’s 4Q20E retail sales growth could be fast at 11%, much better than Xtep’s HSD and Anta’s LSD, as supported by: 1) rising popularity of “China Li Ning” products, 2) successful digital marketing (more creative, trendy and youth oriented), 3) better branding building through more crossovers (i.e. Li Ning x Hajime Sorayama/空山基, Li Ning x Line Friends), and 4) strong e-commerce sales growth (CMBIS est. of 40-50% during Nov-Dec 2020).
- We remain highly optimistic about FY21E. We believe Li Ning retail sales growth in FY21E could be fast at 15%+, thanks to: 1) robust online sales with about 40% growth achieved in Jan 2021, despite high base last year; 2) increases in ASP through brand elevation (by successfully tapping into customer base similar to FILA, sales of higher-priced items was meaningfully improved), room for further price hike could be 20-30% in 1-2 years, in our view; 3) speed up of “China Li Ning” expansion, with about 100 new stores for each year in FY21E-22E (vs CMBIS est. of 80 in FY20E); and 4) rising store productivity and efficiency, after series of reforms (e.g. trimming the numbers of SKUs, sizes and fabrics used) under the new CEO.
- Maintain BUY and lifted TP to HK$ 67.66. We maintain BUY and lifted TP to HK$ 67.66, based on 48x FY22E P/E (rolled over from 37x FY21E), still justified given a 3-year core NP att. CAGR of 33%. Current valuation at 41x FY22E P/E, in our view, is still attractive. We revised up our FY20E/ 21E/ 22E NP att. estimates by 4.1%/ 5.5%/ 9.2%, to factor in CNYHKD rate change, faster online sales, better GP margin and operating leverage.
