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

Investors, good morning. Welcome to Li Ning Company Limited 2021 Annual Report Presentation. Today, we will do this presentation via webcast and also Zoom, so you may be able to see our presentation on Zoom, and the PPT can be downloaded from the website. At the same time, we offer simultaneous interpretation into English and Chinese. Let me introduce our management: Executive Chairman and Joint CEO, Mr. Li Ning; Joint CEO, Mr. Qian Wei; CFO, Mr. Terence Tsang. In today's presentation, first of all, our CFO, Mr. Terence Tsang, will go through a financial review. After that, our Executive Chairman and Joint CEO, Mr. Li Ning, will go through our strategic directions. After that, Mr. Qian Wei will go through our operational highlights and progress. Finally, there will be a Q&A session. You are welcome to ask questions. [Operator Instructions] Now let me defer to our management.

Good morning. Thank you, and welcome, everyone. During 2021, along with the recovery of the negative impact from COVID-19 and the high recognition and support towards local sports brands as well as the continued operation improvement that we implemented, we have achieved solid performance, both financially and operationally. Financially, we were able to achieve a net profit margin improvement of 610 basis points to reach 17.8%, with our revenues up 56%. Such improvement was mainly driven by 3.9 percentage points in gross margin expansion as well as 4.1 percentage points in expense ratio reduction. Our operating cash flow increased over 136% to CNY 6.5 billion. And adding in the net proceeds from top-up placing, our net cash increased CNY 11 billion to CNY 18.48 billion compared to same period last year. While revenues went up by 56%, our average gross working capital was up only 10%. And our cash conversion cycle, we remain flat at a very efficient level of 20 days. Operationally, we achieved high 50s growth in our retail sell-through for total platform, including both online and offline channels for the Li Ning core brand. Our channel inventory increased low 30s compared to the high 50s sell-through increase, further improve our inventory turnover with enhanced aging structure. Our new product performed very well, with retail sell-through in the offline channel register a high 60s increase, coupled with approximately 350 basis points improvement in retail discount rate compared to the same period last year. Our new product sell-through mix further improved 7 percentage points to 86%. New product sellout rates for both 3-month and 6 months improved by approximately 13 and 14 percentage points, respectively, compared to the same period last year. Even compared to same period in 2019, sell-out rates also improved over 12 and 10 percentage points for both 3-month and 6-month period, respectively. Clearly, you can see our greatly improved performance in the channel operation during the year. Now let's take a look at the revenues. During 2021, our revenues rose 56%, with all categories growing healthy across the board, driving the increase. Our balanced channel strategy for Li Ning core brand between wholesale and the direct-to-consumer channels, which also known as the DTC, has played a very important part in times like this. With all channels performing well, the mix remained relatively unchanged, with DTC mix up 1 point to 53% during the comparable period. This stable mix across all channels validate the improvement of our product offering as well as the Li Ning brand strength. 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 7 point to 86%. As I said before, a healthy retailer should be at the mid-80s level, and we are encouraged to hit that initial target during 2021. We shall continue to strive for further improvement in this area as we continue with our retail operation capabilities optimization. Coming to the same-store sales performance. As there's no offline store that opened throughout Q1 last year, hence, we will just discuss the Q2 to Q4 performance. Our overall same-store sales for the 3 quarters increased low 40s, with offline SSSGs stood at high 30s increase, driven by mid-40s increase in direct retail as well as a mid-30s increase in the wholesale channel. Meanwhile, our online SSSG for the full year accelerated to high 40s. As you can see, our revenues increase is driven by healthy organic sell-through growth in all channels. As far as our channel strategy is concerned, the number of stores for total platform stood at 7,137, an increase of 204 stores as compared to end of 2020. Of this increase, Li Ning core brand accounted for 23 stores, while LI-NING YOUNG contributed 181 stores during the last 12 months. As we continued with our channel optimization of closing the below standard stores and expansion of bigger high productivity stores, our selling square footage for core Li Ning Brand actually went up by approximately 20% compared to end of 2020. From the sell-through standpoint, with our e-commerce expansion strategy driving a high 60s growth, the total online and offline sell-through grew by high 50s, continue to break new high. Our offline channel recorded a growth of mid-50s, driven by a low teens increase in average selling price as well as low 40s growth in unit volume. Wholesale of Li Ning brand, excluding international and LI-NING YOUNG channel, saw a 55% increase, with the number of stores increased 7 over the same period last year. On the right-hand side of this slide, you can see our core wholesaler sell-through increase by mid-50s, which compared to the high 50s growth in selling, demonstrating our sell-through and channel inventory focus in our wholesale business priority. Moving on to retail channel. The revenues of directly managed stores grew 52%, with 16 stores increase in ending store count compared with end of 2020. 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 1.37 billion, accounting for 81% of the total increase. We believe, in addition to the macro and market dynamics, impressive growth is also driven by our continued improvement in our retail operations as well as merchandisers. This can be witnessed by the fact that the major key performance indexes, such as completion rate, unit per transaction, retail discount as well as sellout rate, all improved during the year. Consequently, our forward store contribution margin rate improved to mid-20s, which has been the highest we ever achieved annually in the recent years. Turning to gross margin. Our gross margin accelerated 3.9 percentage points. The major drivers were: improvement in e-commerce gross margin, resulted from improved retail discount rate, contributing 2 percentage points; improvement in gross margin in direct retail, due primarily in the improvement in discounts on new products as well as the improvement of new and old product mix in our retail sell-through, contributing 0.9 percentage points; reduction in R&D cost as a percentage of revenues, adding 0.3 percentage points; improvement in all other wholesale business units such as badminton and soccer, contributing 0.7 percentage point. Now let me walk you through the profitability analysis. Driven by a 56% increase in revenues and 3.9 percentage points improvement in gross margin rate, we saw a CNY 4.88 billion addition in gross profit. As far as expenses are concerned, we carry out disciplined cost control and variable cost 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 1.14 billion, representing 14% of incremental revenues, which is efficient consider our variable cost structure. Even with such high revenue growth, we still have our cost control focus on productive spending only, making sure there is a good return on investment. Our advertising and promotion expenses increased CNY 499 million or 39%, comparing to a much reduced spending level during last year. As a percentage of revenue stood at 7.9% of revenues, down from the 8.9% of revenues in the comparable period. Other platform expenses increased CNY 344 million, mainly due to the increase in incentives resulted from our over target performance. Our other income and interest increased CNY 189 million, mainly due to increase in share of profit from investment as well as interest income due to much higher net cash balance during the comparable period. Consequently, our net margin improved by 6.1 percentage points to 17.8% from 11%. Our net income increased CNY 2.31 billion or 136% to CNY 4.01 billion. Moving on to channel inventory. Our channel inventory increased approximately 30%, to support a high 50s growth in retail sell-through. Consequently, our inventory turnover cycle has further improved to 3.9 months. More importantly, our effort is more evidence if you looked at the aging. The proportion of inventory aged over 6 months improved to 8% from 22% a year ago, a remarkable 14 percentage point improvement. While we are pleased by this improvement, we also understand this industry is very volatile, as inventory aging can deteriorate quickly if not managed intensely. At the company level, our gross inventory increased 28%, to support a 56% increase in revenue. The proportion of inventory aged over 6 months declined 10 percentage points to 18% from 28% in the comparable period last year. This result validated the effectiveness of our inventory control. This improved aging structure provides a good foundation for a sustainable, healthy business growth. While we are pleased with both our channel and company inventory management effectiveness, now we need to focus even more on the efficiency of the inventory. Simply put, is to drive continued healthy business growth with more productive inventory. As far as trade receivables are concerned, our gross trade receivable increased 18% in relative to the 56% revenue growth, further improve our receivable turnover days to a remarkable 13 days level. On the right-hand side of the slide, you can see the mix of current receivables. That's improved to 83% from 72% in the comparable period. As far as working capital efficiency is concerned, we continued our trend of improvement since 2013, and our working capital remain at a very healthy level. Gross average working capital was up by 10.5% to support 56% growth in revenue. As a result, the working capital as a percentage of our revenue further declined by 2 percentage point to 6%, giving a sufficient resource to capitalize on future growth opportunities. We capitalized on the impressive revenues and retail sell-through increase and convert that into substantial operating cash flow growth. [Audio Gap] adding the CNY 8.57 billion net proceeds from the top-up placing completed on November of [ 2020 ] [Audio Gap] to CNY 18.48 billion in the comparable period. We will be making further appropriate investment in our brand elevation, infrastructure, as well as operations and organization improvement 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. The Board of Directors has recommended a dividend of CNY 1.2 billion or CNY 0.4597 per share upon shareholders' approval. This represent 30% payout ratio on the net income. In conclusion, we are pleased with the 2021 result and the progress of the operations improvement. We recognize the macro and market dynamics has played a big part in the results, particularly in the first half. But make no mistake, our brand strength improvement in product and operations definitely played a significant part of the 2021 results. Specifically, we have put ourselves in a solid cash flow and net cash position. We have a very healthy working capital structure, with improved aging in inventory and receivables. More importantly, we have a strong and differentiated brand as our core competence. Our single market focus had put us in a relatively less exposure to geopolitical uncertainties, though nothing new. Looking forward, we expect 2022 a year of risk and opportunities, with geopolitical uncertainties and the fact that COVID-19 is not over and still unstable, as well as supply chain challenge and inflation pressure on cost. All these are riding on the backdrop of a very strong base, partially driven by the market dynamics in 2021. Hence, we need to remain prudently conservative with our 2022 targets, particularly with the recent resurgence of COVID-19 and lockdown in certain cities in China. We are looking at a target of top line growth at high teens to low 20s and net profit margin remained at high teens. And now Chairman will walk you through our strategic direction. Thank you.

[Interpreted] Thank you, Terence. Now I'm going to present to you our business in 2021 and also our strategies. In 2021, Chinese economy was stable and started to recover and control of the pandemic has been orderly. Under the state's leadership, people's health consciousness has been enhanced so the passion for sportswear products has been strong. At the same time, the Tokyo Olympics and Beijing Winter Olympics organization has raised people's awareness in relation to healthy life and sports. Mainland consumers are giving more recognition and support to homegrown sportswear brands. And for Li Ning brand, there are good opportunities for us to further enhance our influence. Given this backdrop, we continue to create and improve the Li Ning star resources to experience and value so that's how we can enhance consumer experience, and there is much better brand resilience as a result. In 2021, we continue to deepen single-brand, multi-category, diversified channel strategy. We enriched the professional product system, and we integrated diversified fashion trends. And with a multi-category matrix and diversified channels layout, we improved our business model. We will continue to dig deep into different categories and our target markets to enhance our brand competitiveness. In 2021, our core categories, whole platform retail sell-through grew 59%. For Sports Casual category, it continued to perform very well. For the whole year, retail sell-through growth was 71%. For professional categories, running and fitness categories, growth improved significantly. The basketball continue to maintain strong growth rates. And then for other categories centered around basketball -- badminton, table tennis and football, well, for revenue for the whole year, there's 40% growth. And they are mainly stored higher specialty stores than offline channels. And then on specific categories, basketball continued to deepen professional product matrix. We integrated technology basketball star resources and apparel wear and store repackage. And then our products cover both training grounds as well as the race ground. And there are very excellent products. Practice so we are able to seize many basketball fans attention. Besides, with the BADFIVE series, we're able to create a street basketball culture. And we integrated into Chinese city culture and sports leisure interesting elements so that we are able to attract the young fashion lovers. For running, we use LI-NING BOOM technology platform as the core. And we realized the transformation of professionalism. And we concentrated on raising high resilience, protection and superlight series to unlock diversified use scenarios. And within the year, we made wide use of the LI-NING BOOM technology. Right now, for BOOM technology running shoes, the price range is already at JPY 1,000 high-end price range. And it is also being extended to the JPY 400 to JPY 500 mass price level. So in other words, we have both elite runners as well as amateur runners as our markets. And we want more people and the mass consumers to identify Li Ning as best choice. We continue to pay attention to niche markets. And we seize female fitness markets. We signed contract with top-tier Chinese actress, Zhong Chuxi as our sports image ambassador. So we focus on yoga, cross-fit and dance. These are some female sports areas. We wanted to reinforce our professional fitness image. In terms of material signs, we continued to upgrade the protective equipments, which are end -- which are wind resistant and splash resistant. We rejuvenated our products and we shaped very lively functional products. Besides, there is demand from gym-related fitness items. For the first time, we made use of the LI-NING BOOM technology in fitness shoes. Especially, we upgraded No Boundaries III fitness shoes. And then for our Sports Casual, we very precisely captured consumers' needs in sports leisure area. We created original and also classic IP. And we made a layout on skate boarding, bridge every day and classic multi color series. We continue to interact with young consumers. And then among young consumers, we have enhanced our brand influence. We continued to reinforce our professional sponsorship resource matrix. So for some high-level racers and athletes sponsorship, we put in a lot of resources. So we work together with CBA Basketball League and also Qingdao Marathon. And then in the areas of running, basketball, badminton and table tennis, we sponsored champion athletes and teams. And we help the professional athletes to achieve very good performance in races and leagues. So as a result, both sales and also attention given to the Li Ning brand has been enhanced. With the -- with more and more attention being paid to the Winter Olympics and winter sports games, we are going to sponsor athletes for snowboard and ice skating. And we will then expand our professional sponsorship layout for our brand. We continue to work with artists, celebrities and different brands in crossover. So artistic design streets fashion and Chinese Kung Fu elements are incorporated into our products. So consumers in different circles and segments will know our brand philosophy. Our brand image can expand to diversified groups. In 2021, in Hainan, Sanya, we organized the power of thoughts, Fashion Music Festival. The background is winter beach and sunlight. So sports, avant-garde music and installation art, news culture and panel Li Ning new products are being incorporated and integrated. So there is a very fun carnival on that coastal island. So in terms of Chinese culture, sports DNA and fashion, we deepened our exploration into these 3 elements. So we wanted to showcase the power, of course, of Li Ning brand. We broke through exploration -- the use of exploration and spiritual elements. So that's all in relation to our major strategies. For the way forward, now I'll defer to our CEO, Mr. Qian.

[Interpreted] Thank you, Chairman. Good morning. I am Qian Wei. Now I am going to talk about our 2021 operation progress. So I'm going to make a report on that. Last year, we continued to follow our core business development strategy. So product channels, e-commerce, retail, supply chain and kid's wear, we improved the efficiency for all these segments. While we maintain high revenue growth, we focused on enhancing operating efficiency. We improved discount rates and sellout rate. And when production costs rose, we are able to lower the expense ratio and improve gross margin. At the same time, we created a muscular organization and we did away with unnecessary expenses to optimize our operating profit margin. So for the whole year, net profit margin was 17.8%, up 6.1 percentage points and net profits reached -- or the growth in net profit was 136%. So for our strategy, next page. We focus on efficiency enhancements. And we wanted to achieve a muscular organization, so we built sustainable development. At the same time, we wanted to enhance or maintain our high earnings capability. We continued to strengthen our competitiveness. We focus on consumers, markets, products and point-of-sale merchandising. So from wholesale to retail operation model change, in the past 1 to 2 years, we continued to go for product merchandise, inventory, store operation, channel, cost, and organizational structure, efficiency enhancement. With the above strategies in 2021 in various business segments, we saw significant improvements. Now I'm going to elaborate on progress and achievements made in 2021. Concerning product operation, we continue to enhance our product management capability and we completed our product planning system. We improved efficiency. At the same time, this can also drive business growth. We have a monthly sales plan and also weekly sales review. So merchandise point of sale, marketing, inventory are the core elements. And we regularly do review and optimization. Product sales plan is being implemented in directly operated provinces and regions, cities and retail outlets. And we enhanced the synergy between wholesale plan and also customers. So we also narrowed the product breadth and we improved the depth. So in this way, we enhanced the product mix so that new product discount and product efficiency is being improved. There is very systematic plan to enhance sellout rate and discount rate. As at the end of the year, there is a high single-digit decrease in the product breadth. And that's increased mid-range of 60% to 70%, new product discount, 20% or above, sellout rate, more than 60%. For inventory, overall speaking, inventory control is being done. We optimize inventory structure. At the end, we use reasonable inventory to do better business. Besides, we clarified the monthly inventory targets for different business units. And we followed up on inventory management progress and we did inventory sharing in the whole company. We digested old and poor selling products. And we make sure that the new product inventory management is reasonable. We improve stores' inventory efficiency and strengthen new product supply, protection and product delivery management. By having a true chain, so from entry into warehouse, product delivery, product reaching the stores and so on, all these are transparent so that we can take actions very promptly. As of the end of the year, inventory increased 20% to 30% high range. But then new and old inventory structure is optimized. For inventory over 12 months, their share is down to high single-digits. So we continue our strategy on high-quality action stores. We expedited our store opening optimization. We lower the rent over sales ratio. We improved our store image and quality. We expedited the closing of low productivity and loss-making stores. And we accelerated the opening of higher productivity stores. As of the end of the year, total selling square footage increased high double-digit rates and single store average selling footage, more than 200 square meters. For a single store monthly store productivity, up 50% to 60% high-end. And for big stores, there are more than 1,200 stores. And for the area of big store, more than 400 square meters. Monthly average store productivity, 600,000. So we enhanced the high-tier cities share. We continue to create regional market with high potential and capacity. We expedited the low-tier market layout of big stores. And for those stores opened before 19 -- 2019 and also those under the seventh generation image store, we expedited the upgrading of image of these stores. And then for mega and also Tier 1 city regular store, the retail sell-through contribution has risen to low single-digit. Shopping mall sell-through contribution also rose to high single-digits. We upgraded O2O integration. In 2021, we are able to deliver a high turnover business and strengthened product supply protection management. We improved our inventory management efficiency so that there is a synergistic growth between online and offline. So online direct operation sell-through improved 60% to 70% high range and average discount rate also improved by high single-digits. So we improved the online ecosystem to make sure that our brand can have a good business environment online. At the same time, we improved the self-operation channel efficiency online. In 2021, for low productivity distributor store, the number is reduced to mid-range of 40% to 50%. Online directly operated sell-through accounted for mid-single-digit share. We improved customer experience at the same time. As of the end of 2021, number of members exceeded 40 million. Member sales contribution was up low single-digits -- or low double digits. For O2O omnichannel store sales, up 70% to 80% high range. So our product and point of sale is our core and also efficiency, we improved single-store operating efficiency. We attach importance to the development of retail talents and we created a retail culture. We completed a single store operation model and retail target or standard system. We enhanced the store efficiency. And we completed a retail operation menu and store operation journal so that there are rules to follow in managing the stores. And then for the directly operated subsidiary P&L review and reform system that was put in place, we built a wholesale synergy system and platform. We strengthened big store operation. We continued to improve performance of big store. At the same time, we started to open store of the brand-new brands of Li Ning 1990, the first store in Beijing, Fengtai performed better than expectation. In the first month of operation, sell-through exceeded 2.5 million. So this exceeded our expectation about Li Ning 1990. With all these measures, there was improvement in all retail indicators. Overall, conversion rate was up low single-digits. And then overall retail margin was up mid single-digits. And also, ASP increased, posing a double-digit unit per transaction, up high double-digits. And we have already clarified a direct operation, high efficiencies to our main checks, and also synergy and upgrading of wholesale. And then in 2021 October, for the first time, we achieved the first retail big store with retail sell-through of over 10 million. So with such a successful case and also coordination of different departments, we created a single store sales plan for high productivity stores. And we also built a single-store operation case for flagship stores. Now this is also transferred to various big stores. We focus on provinces in main regions to build the big store matrix system. When we are enhancing that system, we will put in place of measures to leads to our wholesalers. So we want to improve customer operation efficiency. And between direct operation and big wholesale stores, we want to cover our core cities and business circles so that we can enhance our brand strength and performance. By making breakthrough in store productivity of big stores, we're able to improve our business together with our front end, mid office and back end. The single store profitability enhanced and our lead and competitiveness can only improve, distributors earnings will improve. And by optimizing our sell-in discount, we hope to also improve wholesale business profitability. And then in terms of supply chain, so our strategy is to turn passive production into active. We pay attention to upgrading of quality. And in terms of capacity, we increased capacity to satisfy supply increase so that more consumers will have the opportunity to experience Li Ning products. In 2021, overall capacity of supply chain was up 50%, for footwear, 50% to 60% high range, apparel, 40% to 50% midrange. And then for our business strategies and supplier matrix, we enhanced core suppliers share to ensure product quality. For core materials, there is cross-category use in order to enhance our efficiency and lower cost. And there are increase of suppliers of 4 suppliers or 3 suppliers for footwear. And for top 3 suppliers, they accounted for more than 40% for footwear. Then in terms of kids wear, we enhanced our professional kids wear image and we drive efficiency and business growth. We deepen our channels and optimize our channel discounts. With Li Ning brand competitiveness, we improved our kids wear business, and we enhanced the share of professional elements together with customers use scenarios, we optimized our product structure. In the year, retail sell-through accounted 70% to 80% low-end growth. And then average selling price increased by high teens. Retail discount rates improved by mid-single digit. SSSG increased by mid 30s. And for kids wear products, we enhanced product management and improved sell-out rate and discount rates. For all products and poor selling products, digestion of them improved. We enhanced the product efficiency and channel efficiency. For new product, discount rates improved mid single-digit. A new product 3-month sell-out rate improved by mid-teens. For channels, we enhanced the expansion of self-operated stores and we lower the share of distributor customers. We increased 200 square meter kids wear store. And we accelerated the closing of low productivity stores and enhance channel efficiency. And then we will bring in retail style customers. And for low product customers, we will phase them out. We are doing a lot about kids wear. So online sales of kids wear will be managed by our e-commerce department. In this way, our operating efficiency can improve. Number of stores totaled 1,202. Average monthly store productivity, up 50%. So the above are our operating results and progress, in the future, we will continue to do more to enhance our operating efficiency. We want to enhance our sustainable earnings growth. Thank you very much.

[Interpreted] Thank you, management for the presentation. So Li Ning's 2021 annual results, you now should have better understanding. Now we will move on to Q&A. [Operator Instructions] Now let's take the first question. First question from Citi, Xiaopo Wei.

[Interpreted] Can you hear me? Can you hear me?

[Interpreted] Yes.

[Interpreted] I'm Wei Xiaopo from Citi. Can you hear me?

[Interpreted] Yes, yes.

[Interpreted] I have 3 questions. First, about financials, for Terence. And after Terence answers, I have 2 questions about operation for Mr. Qian. First question for Terence. This time, your results exceeded expectation a lot every year. You are leading the industry. So at the same time, you have some kind of day. So [Technical Difficulty] and the margin, just now Terence said for 2022, there are a lot of uncertainties. Growth will be high teen to low teens. Can you give us a split on growth drivers? Where are the growth drivers? And for net margins, it's high teen. High teen is quite broad and -- as a range. So can you narrow down? Or can you give a scenario analysis?

If you're looking at where our business is now, right, our core business is still coming in very strong. I mean, in fact, first quarter retail sell-through is still stronger than last year's second half. Now except this week because of the lockdown in certain cities, there's a little impact. But I mean, the Q1 so far, including that, is still better than second half last year trend, so -- which is a very strong number. Now but bear in mind, we're always conservative. And I think, I mean, any responsible management at this point need to be conservative. Because why? Coming in from the last week of March to the whole second quarter, that 14 weeks is up to a really, really strong comp, right? So I think that's where we are. But looking at growth drivers, so what I was saying is the core Li Ning brand, we're still expecting to grow in the high single low teens business area, with where our product performing, everything else. And then we have the LI-NING YOUNG, which is growing very well. And between LI-NING YOUNG, China Li Ning, those 2 account for about low teens of our revenue. And those are growing definitely in a 40%, 50%, 60% level, right? So -- and then we add on the newly launch. Just now, our CEO, Mr. Qian, just talk about the 90-90. Yes, this is a new launch. It's not going to be a huge driver in -- growth driver. But between that and the newly launched category last year in the women's sports and the action sport, all these together, it's going to contribute another, a low single-digit to the business growth. Then you have our EC business, which has been still very, very strong, right? I mean with the mixed -- in the mid-20s of our company revenue, growing 20%, that's another contribution of mid single-digit, right? And then you have all the other business, that the past 2 years, we've been doing a lot of optimization in both in inventory and the business model, and start showing the growth potential is up on a very healthy growth rate. So that's going to contribute another low single-digits. So I think if you add all these together, you can understand our top line guidance are being prudently conservative, just -- expecting there's too many uncertainties. But I will also say, the risk, there's also opportunities, right? And people will say, well, what is that opportunities? Because we assess a certain -- a prudent estimate on this risk factor. And if we come in better, right, that's where the opportunity comes in. And in terms of net margin, I think high teens, yes, it's not that far. I mean, you're talking about '17 to '19, on 5% or 20% level. But I think it's not as important as what exactly is that number. But I'll talk about the direction, right? With the top line growing in even a low end high teens, you should get a pretty good expense leverage. Now we talk about we're going to make some big investment. But overall said and done, our expense ratio should have some improvement. If not the worst, should be stay flat. Gross margin, this is frankly, and I talk about it, is where the challenge is. And we've been planning a slightly down to maybe up to a 1% down in gross margin. But on the other hand, and so from an operating expense standpoint, we're looking at relatively breakeven to 2021. But then if you look at the below line, look at the cash flow we have, look at the cash balance, right? We're starting the year with $11 more billion. With a very safe interest rate, that will bring in more than 1.2% of the income improvement -- income margin improvement. So I think that's where we look at it. I mean, I would say, yes, it's conservative, but it's prudent considering the risk. But on the other hand, are there opportunities? Definitely so, particularly when we look at the Q1 performance so far. So I hope I answered your question.

[Interpreted] I have 2 questions about operation for Mr. Qian. This is a valuable opportunities, so please allow me to verify question. In these 2 years and forward, where industry development, things are consumer-oriented. And in these patterns, you have very excess product and there is now about your excellence. And under the leadership of Mr. Qian, we can see big achievement channel and also overall operating efficiency. Beside, once you improve business for wholesale business. Now Mr. Qian, for the top retailers, for example, top, of course, are you going to cooperate with them so that you can relate on your channels so that you can achieve breakthrough? If you cooperate with them, what will be the situation? Second question. In these 2 -- in these few days, many people talked about supply chain issues. And we do know that the management also talked about the intention of products customs clearance. And then another European institution talked about supply chain issues. So many investors wanted me to ask you a question on their behalf. In the report, 3 specific suppliers were mentioned. So for these 3 suppliers, can you give us some elaboration? And then regarding ESG, what are your prelims to post and execution on integration?

[Interpreted] Thank you for your questions. Let me take the first question, first. Our goal is sustainable growth and also sustainable improvement of our profitability. And for Li Ning, well, wholesale business is core to us, it's very important. In the past 1 to 2 years, we kept on strengthening our direct operation efficiency. We wanted to transfer to our wholesale business. In the future, we'll continue to strengthen and optimize our wholesale business and help our wholesale business so that it can achieve a transformation as in retail operation. In the process, we will continue to improve efficiency of wholesale business. And we will work with distributors or partners so that we can grow together. And we will continue to optimize our supplier matrix. We want to rule out the possibility of introducing new partners in order to seize more business opportunities and growth potential. Now to answer your first question. You -- that's my answer to your first question. For your second question, in these past few days, you also talked about the [Technical Difficulty] and we have paid attention to that. After some investigation internally, we can confirm that in the past now, for the service manager in the port, there is no business relationship at all in the past and now. And these days, there are some doubts or queries about our supply chain, and we have made announcement. Well, please refer to the announcement on the Hong Kong Stock Exchange website and our website for details. Regarding ESG, Li Ning is a professional sportswear company. We have very comprehensive corporate governance system. We strictly comply with all the Chinese laws and regulations. And of course, when we develop our business, everything has to be law abiding. Given this precondition, we comply strictly with the stock exchange CSP guideline and requirements. We have been improving our implementation. And we are doing compliance and risk management. As in the past, we will pay attention to both our corporate social responsibility and also industry assets. We work with our partners and we will adhere to our principles so that all our working partners and our company can grow to that. That's all for me.

[Interpreted] Mr. Qian, I would like to follow up. You said you rule out the possibility of having new partners. So concerning wholesale business, can you share with us your selection criteria so that we can have better understanding, please?

[Interpreted] We hope that our working partners together with us can grow together and develop business together. So we help our working partners to do better business and achieve better results. And we hope our partners can help Li Ning Company to develop that to the market so that there is high efficiency operation in store. So when we select our working partners, I think there is an important criteria. And ESG is also one of the criteria. In terms of operation, we attach an importance to whether work partners have strong and sensitive operation mindset. This is one very important criterion. Thank you.

[Interpreted] So in other words, for top companies, definitely, they are your first choice.

[Interpreted] Omnichannel. So if the channel efficiency, the best at, that is the one important criterion. For a top company have strong operation capability and we saw less, and we take that into top consideration. However, we will not rule out the possibility of the top companies now. The Chinese market is so big so we need to look at all the Chinese market. At the same time, there should be regional and local considerations. We want to seize all regions in China, we want to do better in each region, so that there is more precise business development and channel layout so that we can meet the needs of all consumers. So when we choose working partners, we will not restrict ourselves only the top companies. As I said just now, on one hand, we want to have better and sales. At the same time, we want better retail operating capability so that we dig deep into the markets. We need such working partners. Thank you.

[Interpreted] Next question. Go to Mr. Chan.