Li Ning: Staying Neutral Following First Quarter Disclosures

seekingalpha04-27

On one hand, Li Ning has shown improvement in metrics pertaining to inventories and discounts for the recent quarter, and its Q1 online sales growth was strong.On the other hand, LNNGF suffered from ...

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Robert Way/iStock Editorial via Getty Images Elevator Pitch Li Ning Company Limited (OTCPK:LNNGF) (OTCPK:LNNGY) [2331:HK] is assigned a Hold investment rating. On its investor relations website, Li Ning refers to itself as \"one of the leading sports brand companies in China\" selling \"professional and leisure footwear, apparel, equipment and accessories under the LI-NING brand.\" The company recently revealed its key Q1 2024 operating metrics with an announcement and analyst briefing (transcript not publicly available) on April 22. Li Ning only discloses its detailed financial results on an semi-annual basis as a Hong Kong-listed company, and it shares brief operational updates in Q1 and Q3. Li Ning's Q1 disclosures point to a mixed outlook for the company that justifies a Hold rating. The company's first quarter metrics relating to discounts, inventories, and online sales were favorable. On the flip side, LNNGF witnessed an contraction in offline sales for the most recent quarter, and the company chose to stick with its modest full-year financial guidance. Investors should be aware that Li Ning's shares can be bought and sold on the Stock Exchange of Hong Kong and the Over-The-Counter market. The 10-day mean daily trading values for the company's Hong Kong-listed and OTC shares were $50 million and $1.3 million (source: S&P Capital IQ), respectively. Readers can deal in the company's Hong Kong shares with US stockbrokers such as Interactive Brokers. Discounts And Inventories There was an improvement in Li Ning's metrics associated with discounts and inventories for the most recent quarter. At the Q1 analyst call, LNNGF revealed that its overall (both online and offline) retail discount rate and the discount rate for its self-operated offline stores decreased by low-single digit percentage points and mid-single digit percentage points, respectively on a YoY basis. Less aggressive discounting is likely to translate into higher profit margins for Li Ning, all else being equal. Separately, Li Ning highlighted at the company's latest quarterly analyst meeting that its actual inventory turnover ratio \"improved slightly YoY\" to between 4.0 months and 4.5 months in Q1 2024. Furthermore, the company indicated that close to 90% of its inventories were new offerings introduced to the market in the past half-year period. In other words, LLNGF's working capital situation has gotten much better in the recent quarter. Online Sales In its April 22, 2024 announcement, Li Ning disclosed that its \"e-commerce virtual stores business registered a low-twenties (percentage) growth\" for the first quarter of the current year. As a comparison, the company's actual online sales growth rate for Q4 2023 was a much more modest mid-single digit percentage increase. As per its disclosures at the Q1 2024 analyst briefing, LNNGF was successful in growing its sportswear product sales through the online channel, especially with new sales platforms like Dewu, in the recent quarter. Chinese consulting firm Daxue describes Dewu as a \"comprehensive marketplace and social media app targeting Chinese Millennials and Gen-Z.\" Offline Sales In contrast with its strong online sales performance, the company's \"offline channel\" witnessed \"a low-single-digit (percentage) decline\" in Q1 2024 as indicated in the company's April 22, 2024 disclosure. There are two key reasons for the weakness associated with Li Ning's offline sales. Firstly, the first quarter of 2023 was a tough base for a YoY comparison. China pivoted away from the COVID-zero policy in December 2022 which drove a recovery in offline sales activity for Q1 2023. Secondly, Chinese consumers' spending power appeared to remain weak implying a preference for lower-price products, and this affected the company's overall offline sales. In its April 22, 2024 announcement, Li Ning revealed that its offline \"retail (direct operation)\" sub-segment registered a mid-single-digit\" percentage growth in Q1 2024. At its Q1 2024 analyst call, LNNGF shared that the \"retail (direct operation)\" sub-segment benefited from Chinese consumers seeking bargains at its directly-operated outlet stores that offered products at lower prices. In a nutshell, the outperformance of the directly-operated outlet stores was more than offset by the underperformance of the franchised stores which sold products at regular pricing levels. Full-Year Financial Guidance It came as a disappointment that Li Ning left its existing full-year fiscal 2024 guidance unchanged when it reported its first quarter operating metrics. Li Ning indicated at the first quarter analyst meeting that the company is sticking to its guidance of a \"mid-single digit\" percentage top line expansion and a \"low-teens\" percentage net profit margin for the current year. This modest guidance points to revenue growth deceleration and a limited degree of profitability improvement for LNNGF in FY 2024. As a comparison, Li Ning's actual FY 2023 revenue expansion and net margin were +7% and 11%, respectively as per S&P Capital IQ data. I am of the view that the company's lackluster FY 2024 guidance is pretty realistic. Firstly, Li Ning's offline sales growth was negative in Q1 2024 (as mentioned above). Also, the company's total point-of-sales also declined by 27 to 6,214 (source: April 22 announcement) between January 1 and March 31 this year. Secondly, the company might suffer from an unfavorable sales mix due to growing online sales. This is because an increase in sales contribution from the lower-margin online channel is likely to hurt Li Ning's overall profitability. Thirdly, LNNGF's marketing costs could also rise this year because of a major sporting event. The Paris Olympics will be held between July 26 and August 11 this year, and it is highly probable that this will translate into higher marketing expenses for Li Ning in 2024 vis-a-vis 2023. Concluding Thoughts An evaluation of Li Ning's latest disclosures with its announcement and analyst meeting implies that a Hold rating for the stock is warranted. There are both positive and unfavorable read-throughs pertaining to the company's most recent metrics. Also, Li Ning is now valued by the market at a Price-to-Earnings Growth or PEG multiple of 1.0 times indicative of fair valuation. I have calculated Li Ning's PEG ratio by dividing its consensus next twelve months' normalized P/E metric of 14.6 times by its consensus FY 2023-2026 normalized EPS CAGR projection of +14.2% (source: S&P Capital IQ).  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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