Li Ning Earnings: Selloff Following Disappointing Guidance; Fair Value Estimate Cut 15% to HKD 37.50

Li Ning’s 02331 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.

In the third quarter of 2023, Li Ning, excluding its kidswear business, recorded about 5% year-over-year growth in retail sales, coming below the double-digit growths that its peers have reported. Li Ning’s management blamed weak sales on channel conflicts and deteriorating macroeconomic conditions. We, however, believe the fundamental issue facing Li Ning is the fading nationalist buying frenzy that started in March 2021. This issue is likely exacerbated by Li Ning’s overly optimistic sales forecast, resulting in an excessive influx of product orders and an inventory level that has reached a multiyear high at 5 times its sales, up from 3.8 times at the end of June. Excessive inventory has turned an increasing number of wholesalers (retail partners) into unauthorized sales outside their designated markets, disrupting Li Ning’s pricing strategy and brand image, and hurting Li Ning’s revenue and margins in the second half of 2023.