We are impressed by Li Ning’s retail sales growth in YTD 2021, and we believe it can outperform the industry in FY21E, thanks to: 1) better brand popularity, 2) meaningful GP margin increase, and 3) solid cost control. As its reform is being implemented, we are upbeat on its long-term NP margin potential. Hence we reiterate BUY and raised TP to HK$68.62, based on 45x FY22E P/E (vs prior 48x FY22E P/E to factor in the recent sector de-rating).
- FY20 results roughly inline. Sales and core net profit managed to grow by 4% and 34% YoY in FY20, 3% below and 2% higher than CMBI est. Slightly weaker-than-expected offline sales and GP margin were offset by stronger than expected costs control (esp. A&P and labour). Despite a flattish GP margin of 48.8% in 2H20 (vs 48.6% in 2H19), a significant net profit margin improvement to 12.3% in 2H20 was achieved (vs 9.2% 2H19), reaffirming our confidence on its reforms and re-acceleration in growth onwards.
- Stellar retail sales growth achieved in YTD 2021. The Company guided a 20-25% listed co. sales growth and a high-teen to low 20% retail sales growth for offline/ online and wholesale/ retail. We think it is conservative because 1) offline retail sales growth in Jan to mid-Mar 2021 was already ~70% YoY (high 30% growth vs 2019 level) which is way faster than CMBI est. of 34% for 1Q21E, 2) channel inventory is healthy, and 3) number of store growth will resume (China Li Ning to add 100 stores) and sales area growth will accelerate.
- NP margin of ~13% in FY21E and 15%+ in longer run are not aggressive. The Company also targets a 1ppt increase in NP margin in FY21E, which is again greatly prudent, because 1) 75% recovery of retail sales discounts (MSD lower in FY20 vs normal level) could drive 0.6-0.7ppt improvement in GP margin; 2) channel mix would be better as self-owned sales growth picks up again; and 3) there are rooms for IMU (initial markup) to increase by brand elevations (more high-end and function items are introduced) and refinements in costs and supply chain. In addition, 0.6-0.7ppt OPM improvement can be achieved through operating leverage every year (assuming 15-20% sales CAGR onwards).
- Maintain BUY and lifted TP to HK$ 68.62. We maintain BUY and lifted TP to HK$ 68.62, based on 45x FY22E P/E (down from 48x FY22E), given a 3-year core NP att. CAGR of 32%. Current valuation at 31x FY22E P/E, in our view, is highly attractive. We revised up our FY21E/ 22E NP att. estimates by 7%/ 8% to factor in better GP margin and operating leverage.
