Li Ning Company Limited (2331) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning to you. Welcome to the Li Ning Company Limited 2021 Interim Results. Today, we will have a webcast and online conference. You'll be able to see the PPT from our online platform, and we have simultaneous interpretation for you. And then we will have the relevant information available on our IR platform. We have Chairman and CEO, Mr. Li Ning; and we also have Terence and also Mr. Qian with us. First of all, we have the CFO, Mr. Tsang, to review the financial highlights with us, and then Mr. Li Ning will be talking about the strategic directions. And then Mr. Qian Wei will be talking about the developments of our business, and then we will have a Q&A session for further discussion with the management. First of all, the management, please.

During first half of 2021, along with the recovery of negative impact from COVID-19 and the high recognition and support towards local sports brands as well as the continued operation improvements that we implemented, we have achieved solid performance, both financially and operationally. Financially, we're able to achieve a net profit margin improvement of 810 basis points to reach 19.2%, with our revenues up 65%. Such improvement was mainly driven by 6.4 percentage points in gross margin expansion as well as 4.8 percentage points in expense ratio reduction. Our operating cash flow increased almost sixfold and our net cash increased 44% to CNY 8.3 billion compared to same period last year. While revenues went up by 65%, our average gross working capital was down over 10%, and our cash conversion cycle further improved by 17 days to 13 days level. Operationally, we achieved low-90s growth in our retail sell-through for total platform, including both online and offline channels for the Li Ning core brand. Both our channel inventory and company inventory decreased, notwithstanding such a high growth in sell-through and revenues, thus improving our inventory turnover with enhanced aging structure. Our offline new product performed very well, with retail sell-through register a mid-90s increase coupled with high single-digit percentage point improvement in retail discount rates compared to the same period last year. New product sell-out rate for both 3 months and 6 months improved by approximately 21 percentage points compared to same period last year. Even compared to same period in 2019, the pre-COVID-19 sellout rate also improved over 15 percentage points for both 3-month and 6-month period. Clearly, you can see our greatly improved performance in the channel operation during the first half of the year. Now let's take a look at the revenues. During the first half of 2021, our revenues rose 65%, with all product categories driving the increase. Our balanced channel strategy for Li Ning core between wholesale and the direct-to-consumer channels, which is also known as the DTC, has played a very important part at times like this. DTC has been leading the way with the mix, increasing from 50% to 55% during the comparable period. Our direct retail, recovering from a low base last year due to store closure in Q1 of 2020, increased 87% and expand its mix 3 points to 25% of total. Electronic commerce channel continued its growing trend over the past few years, with sales revenue rose 78%, driving its contribution to 30% of the total from the previous 28%. Our wholesale revenues grew 47%, with revenues mix declined 5 points to 45%. On the right-hand side of the slide, you can see that our sell-through from new products category aged 6 months or less improved by 3 points to 85%. As I said during our last conference call, a healthy retailer should be at the mid-80s level, and we are encouraged to hit that initial target in the first half. Coming to the same-store sales performance. As there is no offline store that opened throughout Q1 last year, hence, we will just discuss the Q2 performance. Our overall same-store sales in Q2 increased low-80s, with offline SSSG stood at high-70s increase, driven by low-90s increase in direct retail as well as a low-70s increase in the wholesale channel. Meanwhile, our online SSSG accelerated to high-80s in both Q2 and the first half. As you can see, our revenues' increase is driven by healthy organic growth in all the channels. As far as our channel strategy is concerned, the number of stores for total platform stood at 6,745, a decrease of 238 stores as compared to June of 2020. Of this decline, Li Ning core brand accounted for 269 stores and offset by Li Ning Young's addition of 31 stores during the last 12 months. Comparing to end of 2020, our Li Ning core brand store counts also declined by 208 as we continue with our channel optimization of closing the below-standard stores and expansion of bigger high-productivity stores. So even with mid-single-digit decline in store count, our selling square footage actually went up by low teens as compared to end of June 2020. From the sell-through standpoint, our offline channel has propelled to a high-80s growth. With the e-commerce sell-through doubled, the total online and offline sell-through stood at an impressive low-90s growth during the first half. Our offline channel growth is driven largely by the low-60s increase in units sold and, to a smaller extent, a high single-digit percentage point in discount improvement at the retail end. Wholesales of Li Ning brand, excluding international and Li Ning Young channel, saw a 47% increase with the number of stores decreased 118 over same period last year. This growth is all due to the high-40s increase in the new product unit sell-in to the wholesalers, driven by the significant growth in the retail sell-through. On the right-hand side of this slide, you can see our core wholesaler sell-through increased by high-80s, which far exceeded the high-40s growth in sell-in, demonstrating our sell-through and channel inventory focus on our wholesale business priority. As you can imagine, our wholesale channel inventory is further optimized. Moving on to retail channel. The revenues of directly managed stores grew 87%, with 151 stores less in ending store count compared with June of 2020. Building on the low base from first half of last year due to temporary store closures, the revenues growth was largely driven by the existing stores increase in productivity. As you can see from the right-hand side of this slide, the increased revenues from the existing stores contributed CNY 965 million, accounting for 84% of the total increase. We believe in addition to the macro and market dynamics, the impressive growth is also driven by our continued improvement in our retail operations as well as merchandising. This can be witnessed by the fact that our retail discount rate has improved a high single-digit percentage point to go along with high-80s increase in retail sell-through. Consequently, our four-wall store contribution margin rate improved to high-20s, which has been the highest we ever achieved in the recent years. Turning to gross margin. Our gross margin accelerated 6.4 percentage points. The major drivers were: improvement in e-commerce gross margin resulted from improved retail discount rate, contributing 2.5 percentage points; improvement in product gross margin in direct retail due primarily in improvement in discount on new products as well as the improvement of new and old product mix in our retail sell-through, contributing 1.5 percentage points; reduction in inventory provision due to lower inventory and better aging structure as well as lower R&D costs as a percentage of revenues, adding 1.5 percentage points; improvement in channel mix due to higher growth in revenues from the direct-to-consumer channels, which have higher gross margin than the wholesale channels, adding 0.5 percentage point; improvement in other wholesale business units, contributing 0.4 percentage point. Now let me walk you through the profitability analysis, driven by a 65% increase in revenues and 6.4 percentage point improvement in gross margin rate, saw a CNY 2.64 billion addition in gross profit. As far as expenses are concerned, we carried out disciplined cost control on variable costs to ensure better leverages. As you can see from this slide, the total sales-related variable costs such as commissions, direct store expenses as well as logistic costs increased a total of CNY 648 million, representing 16.1% of incremental revenues, which is reasonable considering our variable cost structure. Even with such a high revenue growth, we still have our cost control focus on productive spending only, making sure there is a return on investment. Our advertising and promotion expenses increased CNY 191 million or 34% comparing to a much reduced spending level during first half of last year. As a percentage of revenue, it stood at 7.3% of revenues, down from the 9% of revenues in the comparable period. Other platform expenses increased CNY 140 million, mainly due to the increase in incentives accrual resulted from overtarget performance. Other income and interest increased CNY 55 million, mainly due to increase in share of profit from investment in joint venture and associates during the comparable period. As a result, our operating margin improved from 14.5% in the first half of 2020 to 24.9% in 2021. Consequently, our net margin improved by 8.1 percentage points to 19.2% from 11.1% last year. Moving on to channel inventory. Our channel inventory decreased mid-single-digit, notwithstanding such a significant growth in retail sell-through. Consequently, our inventory turnover cycle has improved to 3.1 months. Our effort is more evident if you look at the aging. The proportion of inventory aged over 6 months improved to 17% from 29% a year ago. Even if you look at the pre-COVID-19 level, during first half of 2019, it still represents a 9 percentage point improvement. At the company level, our gross inventory declined 17% compared to a 65% increase in revenues. The proportion of inventory aged over 6 months declined 8 percentage points to 23%, from 31% in the comparable period last year. This result validated the effectiveness of our inventory control. And this improved balance and aging structure provides a good foundation for a sustainable business growth. As far as trade receivables are concerned, our gross trade receivables increased a mere 2% in relative to the 65% revenues growth. That's why our days sales outstanding has improved to a very impressive 13 days level. As far as working capital efficiency is concerned, we continued our trend of improvement since 2015, and our working capital remained at a very healthy level. Gross average working capital was down by almost 11% to support 65% growth in revenue. The working capital as a percentage of our revenue further declined by 4 percentage points to 6%, giving us sufficient resource to capitalize on future growth opportunities. We were able to capitalize on the impressive revenues and retail sell-through increase and convert that into substantial operating cash flow growth. Our operating cash flow increased almost sixfold to CNY 3.3 billion. And consequently, our net cash improved by CNY 2.55 billion to CNY 8.31 billion compared to CNY 5.76 billion at the same period last year. We will be making further appropriate investment in our brand elevation and operations to support a consistent healthy business growth as well as to capitalize on the ample growth opportunities in this market, particularly at the current state of economy. In conclusion, we are pleased with the first half results and the progress of the operations improvement. Nonetheless, we also recognize the macro and market dynamics also played a big part in the first half results. No one can predict how the market dynamic plays out in the second half. And as a reasonable and responsible management team, we need to be prudently conservative. In addition, as I said during March presentation, the COVID-19 is far from totally over in impacting our daily life and economy. Just look at what happened on the recent rebound on infection cases in many parts of the world, including China. Hence, for the full year of 2021, we revised our target with top line growth at low- to high-40s, with net profit margin expected at 16% to 17.5% of revenues. And now, Chairman will walk you through our strategic direction. Thank you.

Thank you, Terence. Good morning. In the first half of the year, China's economy gradually stabilized and a national policy helped the development of sports undertakings. In addition, the pandemic boosted people's health wellness, And the China sports industry assured in more business opportunities. At the same time, more and more domestic consumers have affirmed the progress of domestic brands in science and technology, design and the quality. And under these circumstances, Li Ning brand focuses on the innate sports genes, strengthens product technology and design, continuously release market potential and deepens Li Ning style experience value. And we continue to deepen our genes and upgrade our values. The company continued to adhere to the strategy of single brand, multi-category and multichannel, focusing on strengthening the sports attributes of the products and the -- infusing diversified fashion styles, cooperating with multi-category metrics and a multichannel layout and then continuously optimizing the business model. With the continuous upgrading of brand power and product power and the continuous attention of domestic consumer to domestic brands, the whole platform retail sell-through of the 5 core categories of the group recorded a strong growth of 92% in the first half of the year. And among them, the performance of the sports -- casual sports fashion category is still outstanding. And in this -- retail sell-through is increased by 116% in the first half of the year. In addition to running category, [ obvious ] achieved a [ quantified ] breakthrough in the growth rate with an 87% increase in retail sell-through in the first half of the year. In terms of the categories, basketball continues to be guided by specialty and its core product combines with the science and technology, thus establishing a good reputation among Chinese fans. The BADFIVE series enriches basketball product line with the street style and the combined trendy design with -- out of the circle marketing so as to continuously achieve breakthroughs in consumer circle. And for the marketing, we fully focused the contracted resources at home and abroad and improved the total product through exclusive color-matching story package of the stars. And this has also boosted performance of the basketball categories. In terms of running, we focus on the application and upgrading of the technology platform with Li Ning BOOM technology as the core and constantly extend the matrix of professional running shoes. And from the protection to raising and to satisfy the needs of our consumers. And in the first half of the year, the word of mouth accumulated in the early stage of the running category began to turn into business opportunities. At the just concluded Tokyo Olympic Games, our elite running shoes, Feidian 2.0 Elite, appeared in the marathon, and it was the only Chinese brand running shoes among the runners who finished the marathon. And the choice of the Olympic athletes represents the recognition of product professionalism, and we firmly believe that Li Ning's professional running shoes will have more potential in general in the future. In terms of training, we are deeply involved in the fitness center training and the women's fitness and sports dance. For the first half of the year, the business share and the sold -- sell-out rate of women's training increased significantly. And in the future, we will continue to explore business opportunities for women's training. In terms of materials technology, in the first half of the year, we upgraded technology of quick-drying fabrics and focusing on the actual needs of consumers and creating the best sports experience. In addition, we continue to upgrade the star IP No Boundaries series of training categories to create professional-strength training shoes. In sports casual sports fashion, we highlight creative, interesting and young design style. In the first half of the year, we focused on launching skateboarding series, enriching the sports fashion product line with the street element. At the same time, we catch the potential of women's consumption and the women consumption power and -- in the targets in order to reach more female consumers. And in terms of the marketing, we cooperate with young high-quality artists to increase product exposure by bringing goods with stars and continuously expand the brand's influence among young people. In terms of professional sponsorship, we deeply cultivate the professional resource metrics and endorse the brand with high standard professional events and athletes' resources and focusing on the company's key core categories. We have deep cooperation with Qingdao Marathon and CBA and other events and sponsored champion athletes and the teams in the fields of running, basketball, badminton and the table tennis. So as to increase brand exposure in different professional fields and drive the attention and the sales of professional products. In addition, at the just concluded Tokyo Olympic Games, Li Ning brand joined hands with 3 gold medal teams, national shooting team, national diving team and national table tennis team, and they returned from the Olympic Games with honors. And the 3 teams won a total of 15 gold metals, 9 silver and 6 bronze metals this time. And the Olympic athletes explained the belief and attitude of everything is possible to the public with their achievements. In terms of brand co-branding, in the first half of the year, we cooperate with international artists to convey brand value and attitude through fashionable art design. In the future, we will continue to convey Li Ning's brand values to outside world through diversified joint names and then deepen the brand influences. In fashion week, we constantly explore the combination of Chinese culture and avant-garde design. And in April this year, we held a press conference and China Li Ning's autumn and winter 2021 trends in fantasy city of drama in Zhengzhou, Henan Province. And this event breaks the tradition and it combines catwalk and live performances and [ trendy guests ], and it also showed infinite potential of Li Ning brand. The strategic direction of the first year is -- ended here. And I will introduce company's operation, and our CEO, Qian, Mr. Qian, to share with you on this business development strategy.

Good morning, and then thank you, Chairman Li Ning. And for the first half of the year, based on the business development strategy, we continue to strengthen the company's core competitiveness and promote the realization of muscling enterprise values so as to establish an enterprise management and operation system with sustainable development and a sustainable improvement of profitability. We promote the transformation from wholesales to retail operation mode by focusing on consumers' markets and commodities and stores. At the same time, we constantly pursue efficiency optimization in commodity operation and inventory store operation, channel, cost and organizational structure. And based on the above business development strategy, in the first half of the year and in the background of the positive recovery of the economy and industry development, we focus on the optimization of the company's operating efficiency, and we accelerate the business strategy in the aspects of the commodity operation and the channel development, e-commerce business, retail operations, supply chain management, and the key to our business. I will introduce the operation progress and the treatment of the above aspects one by one. In terms of the commodity and operation, we set up the commodity plan management system to realize this commodity operation. We adhere to the monthly sales planning meeting and this weekly sales review meeting and implements the collaboration -- commodity sales plan with different stores and marketing and inventories management, and we also increase our wholesale and also the retail, the synergy. And we will increase -- narrow down this width of our commodities and increase the debt. In the first half of the year, the commodity width has been reduced to low teens, and the debt has increased by 40% to 50%. At the same time, the quarter discounts of new products has increased to 80% to 90%. And we also accelerate the digestion of the unsalable goods in the current quarters. In this period, the sales rate of the new products increased to 60% to 70% in the current quarter. In terms of the inventory, we finally achieved our goal and continue to optimize the inventory structure. For the strategy implementation, we defined the fundamental inventory targets. And we actively digested these old inventories. And we also -- to increase the efficiency of our store efficiency and strengthen the supply guarantee management and the delivery management to -- of new products and ensure the new products are used to do the business. And all the inventory chain is transparent. And we see this is as a very big adjustment in our first half of the year and in terms of our inventory. And for our channels, we adhere to the strategy of expanding high-quality, profitable stores and accelerate opening of high-quality stores and open landmark flagship stores, improved channel efficiency, reduced rental and the sell-through ratio and improved store image and store construction quality. In the first half of the year, we continue to accelerate the closure of inefficient and the loss-making stores, and also strengthen the strategic cooperation with important commercial entities and accelerated distribution of channels. And during the period, the total area of our store increased by low double digits. An average area of single store exceeds 180 square meters and average monthly store efficiency increased by 80% to 90%. And for our large stores -- and we opening up channels in high-level markets and increased the proportion of the business in high-level markets. And for the core cities, we see this sell-through rate increased by the high teens. For e-commerce, we continue to drive the development of our Li Ning omnichannel business model. We were able to specify the omnichannel business strategy to enhance integration and synergy of our online and offline business, and we also strengthened the high turnover product sales model and strengthen our product supply channels and also manage our inventory risk as well as increasing our inventory efficiency. We were able to -- in the first half of the year, with our efforts in retail sell-through, we were able to achieve sell-through of online retail business and increased by 100%. As for our retail indicators, our online traffic conversion rate increased by 0.3 percentage points, and our average retail discount rate increased by high single-digit percentage point. And at the same time, for our channel structure, the -- we were able to increase our single store sales. And also, we were able to provide active supply expansion on our online channels. And at the same time, the number of low efficiency online wholesale stores were decreased by mid-40s, and our sell-through contribution of online retail business increased by low teens, we were able to optimize our operation in our channel structure. For member developments, the number of our members exceeded 36 million and sales contribution of members increased by low teens. For omni-channel, we were able to, with our inventory sharing and logistics orders system, achieve omni-channel O2O cross-store sales increase of 120%. Next, let us go through the retail operation. We focus on the KPIs driving the enhancement of retail operation capability. We focus on progressively developing single store business model to achieve products and point of sales merchandising and efficiency. We continue to institute our sales weekly and monthly regular meetings. And with our KPI, we focus on conversion rate and our discount rate and also our unit sales linked rate. And we increased our wholesale and retail synergy, increase our accuracy by adopting the monthly planning and weekly feedback and management system. And we also looked at and focused on the implementation of our sales toolkit. We set up cases with follow-up resolution mechanism, and we were able to, for our direct operations subsidiaries, review the P&L and institute adjustments. We were able to build synergistic platform with our wholesale business and also strengthen large store operation. And also, we were able to increase our large store profitability, build single store operation model and also enhance our retail standard system. We were able to, in the period, also increase our store performance per square meter and also increase our store profitability overall. We were able to increase our customer professional sports expansion at the stores, increase our staff training and also build a career for them. We were able to build retail customers and also transform our store managers. And at the same time, for supply chain, there is continuous optimization of our supply chain organization. We transitioned from passive production to proactive production, ensuring production capacity and flexible supply. In terms of quality, we were able to strengthen our QC, quality control, and we were able to continuously enhance our product quality. In production capacity, we are capable of meeting large increase in orders, in increasing our production capacity in tandem so that more consumers can experience the Li Ning product experience. Our supply chain productivity raised some increase, from 20% to 30% during the period. And our shoes production capacity increased 30%. Apparel production capacity increased 20% to 30%. The production capacity for footwear increased by more than in the period, and apparel increased by mid-20s in the period. And for our suppliers, based on our strategy, we adopted a supplier matrix, ensuring our core suppliers' stability in their supply volume and also providing our products with insured product quality. In the first half of the year, there were 37 less suppliers. For our overall shoes, increased 1; apparel, decreased by 38. The top 3 suppliers is 40% of our total supply. For material integration, we continue to have cross-product use of materials, thus lowering our costs and also increasing our supply chain efficiency. For kidswear business, we define a clear positioning, driving our business growth. We focus on strategic positioning of our professional kidswear, improving product matrix, optimizing and upgrading our channels. For retail efficiency, the retail sell-through increased by 100%, and our average selling price increased by mid-teens. Retail discount rate improved by high single digit, and the same-store sales growth increased over 60%. As for our products, we rationalized our kidswear products on a matrix of professional sports technology and increased our professional positioning overall for kidswear. We also meet demand from our different scenarios with an increase in terms of our product synergy. We strengthened our merchandising management and increased our seller rate and also our discount rate, further digesting our aging products and optimize our overall inventory structure. At the same time, we -- in terms of product efficiency, we were able to achieve high single-digit in terms of product retail discount and new product 3-month sell-out rate improved by low-20s. Our channel efficiency was also achieved with a number of stores totaling 1,041 for kidswear, and average monthly store productivity increased by an impressive 70%. That was the review for you. And in the future, we will continue to increase our profitability and also to speed up our operation system enhancement so as to increase our profitability and also to cover more our high-tier markets and also optimize our operation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]