Li Ning Earnings: Management Maintains 2023 Outlook As Market Shows Signs of Pricing Stabilization

Narrow-moat Li Ning’s 02331 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.

In the first half, sales grew 13% year over year, in line with industry peers. Gross profit margin, however, declined 120 basis points to 48.8% as competition drove down prices of sportswear, especially ones sold online. Due to higher rental and other sales-related costs, Li Ning’s operating margin declined to 17.7% from 21.3% last year.

During the earnings call, two management comments stood out to us. First, the firm reported that pricing discounts had narrowed sequentially in the second quarter, suggesting that the sportswear industry has finally navigated through inventory challenges. Second, management also said that recent floods and droughts have not negatively impacted sales in July and August, instilling some confidence in near-term revenue trends.

Although the company posted stronger-than-expected results, management maintained 2023 guidance, including about 15% percentage sales growth and a 15% net profit margin. We think this is largely due to the projected step-up in marketing spending as sporting events and shows make a return to China in the second half of the year.