Company Reports

Narrow-moat Li Ning's second-half 2023 results were below our expectations, and management’s guidance for 2024 also fell short. However, we believe management’s weaker-than-expected guidance is more of a reflection of continued effort to manage channel conflict, as opposed to a reflection of a weaker brand. As a result, we fine-tuned our near-term estimates but maintain our HKD 37.50 fair value estimate. With shares trading at just 14 times 2024 earnings, we view Li Ning’s shares as undervalued.

Li Ning's shares fell 20% on Oct. 26 after the company released disappointing third-quarter sales while cutting full-year revenue guidance. This is the last Chinese sportswear company to report third-quarter numbers, and its poor performance stood out. We believe Li Ning is facing company-specific issues, and investors should not extrapolate these issues as a sign of weakness across the entire industry. Considering management's latest guidance, we lowered our fair value estimate on Li Ning by 15% to HKD 37.50. While shares are more attractively priced now than they were six months ago, Li Ning is still facing heightened competition, particularly as the polarization of consumer spending continues to exert pressure on the midrange segment. Among our China sportswear coverage, our preferred picks remain Anta Sports and Shenzhou International, both trading at larger discounts to our fair values.

Product enhancements, unique brand propositions, and balanced distribution strategies remain vital to Li Ning's future success. We expect Li Ning to maintain shares in the Chinese sportswear market as it continues to execute on these three key areas.

Product enhancements, unique brand propositions, and balanced distribution strategies remain vital to Li Ning's future success. We expect Li Ning to maintain shares in the Chinese sportswear market as it continues to execute on these three key areas.

Narrow-moat Li Ning's first-half results mildly exceeded expectations, but management maintained its 2023 guidance, which aligns with our estimates. Overall, we are maintaining our HKD 44 fair value estimate, and we now view shares as fairly valued. Within our China sportswear coverage, our preferred picks are Shenzhou International and Anta Sports, both of which are trading at significant discounts to our fair value estimates.

Li Ning's share price fell 8% after management issued a soft revenue and profitability outlook for 2023. Although guidance is below Refinitiv consensus estimates, it is in line with our estimates. We have long had a bearish view on the valuation of the stock because we believe the market valuation baked in unsustainable growth and profitability assumptions. We expect positive sentiment around the stock to deflate, as nationalism-driven sales growth fails to materialize over the next few quarters. Despite today's sharp selloff, we still believe Li Ning's valuation is too high. We maintain our fair value estimate of HKD 44—which implies valuation of 21 times forward earnings multiple. Among our China sportswear coverage, our preferred picks are Shenzhen International and Anta Sports, both trading at significant discounts to our fair value estimates.

2023 will be a better year for Chinese sportswear manufacturers and retailers, and we see some attractive buying opportunities. These firms have struggled with many issues in 2022, including sporadic lockdowns in China, excess inventories, a more promotional environment, logistical challenges, and tough comparisons against 2021. But as China scraps its zero-COVID-19 policy, stores will reopen, and easing income pressure and an improving consumer mood will also lead people to spend more on discretionary items. This means consumption demand for sportswear will increase, and inventory levels should improve.

Product enhancements, unique brand propositions, and balanced distribution strategies remain vital to Li Ning's future success. We expect Li Ning to gain shares in the Chinese sportswear market as it continues to execute on these three key areas.

We initiate coverage of Chinese sportswear brand Li Ning with a narrow moat, a Standard capital allocation rating, and an HKD 44 fair value estimate. Our fair value estimate implies a 2023 price/earnings multiple of 18 times. Over the past five years, Li Ning has been trading between 16 and 65 times forward earnings—multiples that are more in line with Nike and at a premium to Anta But in our view, we think the firm faces more competition than its peer Anta, and we think frothy expectations around continued nationalism-driven buying patterns make the valuation unattractive. Among our China sportswear coverage, our preferred picks are Anta and Shenzhou.

Product enhancements, unique brand propositions, and balanced distribution strategies remain vital to Li Ning's future success. We expect Li Ning to gain shares in the Chinese sportswear market as it continues to execute on these three key areas.

Li Ning is the largest local sportswear brand in China. We like its leading position in the second- and third-tier Chinese cities, as well as its investment in brand building. The company should benefit from the favorable industry outlook in China's fast-growing sportswear market, but we expect Li Ning to face strong competition from international brands as the firm expands in affluent, first-tier cities.