LI NING (2331 HK) Rising with China trend, the Former King set sail again December 17, 2020 368

PSR Recommendation: ACCUMULATE Status: Initiation
Target Price: HKDHKD48.55

Investment Summary
Li Ning Company was founded in 1990 and has a history of 30 years. It was founded by the famous domestic gymnast Li Ning. In the 30-year history, the brand has experienced rise, peaks, adjustments, and then started again. In recent years, it has successfully completed the brand upgrade with the rise of sports fashion and national fashion. After three years of reform, the company’s revenue has returned to positive growth. The company recorded a revenue of RMB 13.870 billion in 2019, an increase of approximately 138.15% from 5.82 billion in 2013 in the past six years.
“single brand, multi-category, and multi-channel”
In 2018, Li Ning proposed a “single brand, multi-category, and multi-channel” development strategy, and extended the product lines of Li Ning, China Li Ning and Li Ning Young from the “Li Ning” brand to cover different positions, accounting for nearly 99% of total revenue. In addition to the core brands, the company also owns, licenses or joint ventures with third parties other brand sports products, including DHS table tennis, AIGLE outdoor sports products, DANSKIN dance and yoga fashion fitness products and Kason badminton products.
Core categories accounted for most of the company’s revenue
The company’s product categories cover five core categories, including basketball, running, training, badminton and sports fashion. In terms of products, it takes into account the brand’s sports genes while enhancing the product’s fashion and cultural attributes. Among the core categories, the badminton business is mainly sold through professional channels, while the others are mainly sold through retail. In terms of retail sales, the company’s retail sales of core categories accounted for 98% of the overall retail sales in 1H20. When continuously investing resources in core products, the company can more effectively improve product competitiveness and create product differentiation in a market that tends to be homogeneous.
Rising with China trend, brand image improved
In February 2018, during the New York Fashion Week, Tmall and the American Fashion Designers Association jointly organized the “Tmall China Day”, and Li Ning became the first Chinese sports brand to land in New York Fashion Week. Overnight, China Li-Ning became a popular keyword in online social media. China Li-Ning first appeared at the end of October 2017 and was mentioned in the official WeChat account. As the company’s deployment in the sports fashion series, it emphasizes being “Li Ning’s original endorsement” and “Being Li Ning of China”. Prior to this, China trend has been promoted by niche designer brands. After Li Ning joined, a new wave of China trend has been set off.
Valuation and Investment Recommendation
The company has completed a number of reforms in recent years. With more efficient operating capabilities and the rise of the national trend, we expect the company’s revenue growth in FY20/FY21/FY22 to be 5%/25%/25%. During the epidemic, the company’s direct business has a greater impact, but it is expected that the overall year-round will still record a mid-single-digit positive growth. With the increase in the proportion of the company’s direct operation and the establishment of its brand image, the company’s GPM is expected to increase YoY. The GPM in FY20/FY21/FY22 is predicted to be 50%/51%/52%. Considering that the company’s brand has huge growth potential and future revenue growth potential, we expect the company’s FY20/FY21/FY22 EPS be RMB 66.58/82.54/107.58 cents. The target price of HK$48.55 corresponds to the expected P/E of 61.98/50.00/38.36x for 2020/2021/2022, and the current price is given a Accumulate l rating.
(Closing price as at 14 December)

About the author

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Timothy Chong
Analyst
Research

Timothy Chong received Bachelor’s Degree with first class honor in Banking and Finance from University of Leicester. He is currently studying Master of investment management in Hong Kong Polytechnic University. Before joining Phillip Securities, Timothy worked at BOCOM international and he is equipped with years of experience in the capital market. Timothy is now a licensed research analyst at Phillip Securities and covers Consumer / Property Management sectors.

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