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

Investors, friends, good morning. Welcome to Li Ning Company Limited's 2024 Interim Results Announcement. Let me introduce to you our management. Executive Chairman and Joint CEO, Mr. Li Ning; Executive Director and Joint CEO, Mr. Qian Wei; and our company Vice President and CFO, Mr. Zhao Dong Sheng. Today, Mr. Zhao will first present the 2024 financial review. After that, our Chairman will talk about our strategic direction. Finally, Mr. Qian will go through our outlook and strategies, followed by Q&A. First of all, over to Mr. Zhao.

Good morning, everyone. I am Zhao Dong Sheng. Now I will review with you our company's financial situation in the first half of the year. In first half, we focused on laying a solid foundation and pragmatic development. We put stability first and achieved the following operating results. In terms of financials, our revenue increased by 2.3%, reaching RMB 14.345 billion. Gross profit margin was up 1.6 percentage points to 50.4%. In uncertain market environment, we prudently controlled expenses and focused on investment and deployment to drive long-term business growth. Coupled with reduction of nonoperating income, such as interest income, we finally achieved net profit of RMB 1.952 billion, and net profit margin is 13.6%. Overall funding situation is sufficient. Operating cash flow increased by 40.6% to RMB 2.73 billion. Average working capital to revenue ratio was 7.1%. Cash conversion cycle was 31 days, remaining healthy. The Board of Directors recommended interim dividend of RMB 0.3775 per share, dividend payout was further increased from 45% last year to 50% this time to ensure continued shareholder returns. In terms of operations, LI-NING core brand, retail sell-through, recorded low single-digit decrease across all channels. Offline retail environment faced challenges. And during the period, off-line new product retail sell-through recorded a middle to low single-digit decrease -- medium single-digit decrease. At the end of the period, omnichannel inventory [indiscernible] increased by mid-single-digit year-on-year. Omnichannel inventory to sales ratio, 3.9, maintaining a healthy level. Revenue in the first half of the year was up 2.3% year-on-year, thanks to a strategic focus on professional categories, and footwear revenue accounted for 55%. We continue to maintain this proportion advantage. Under uncertain market environment, we adhere to channel strategy of balanced development. Balanced proportion of wholesale and DTC helps us better balance the opportunities and risks between channels and finance as well as operating funds and profit and loss. Overall proportion of channel sales remained stable and healthy. Online business environment has improved, driving recovery of online customer flow and sales. Proportion of e-commerce revenue has increased by 3 percentage points to 30%. Direct sales revenue has remained at 25%. In order to ensure health of the channel, we proactively strengthened dealer delivery rhythm and management. And proportion of wholesale revenue decreased by 3 points to 45%. Proportion of off-line sales, new products within 6 months, accounted for 87%, a healthy level. For channel development, there were a total of 7,677 POS in the first half, an increase of 229 compared with the same period last year. LI-NING brand POS increased by 72, LI-NING YOUNG up 157. LI-NING core brand actively optimized channel layout to consolidate and expand competitive advantage in high-level market. At the same time, we'll actively explore emerging markets to further enhance our brand image and market influence. During the period, affected by the volatile market environment, overall sales volume, overall retail sell-through fell low single-digit year-on-year with e-commerce sales achieving mid-10% to 20% growth. Off-line sell-through decreased mid-single digit year-on-year. Average off-line [indiscernible] remained stable, off-line discount improved low single digit, driving the average unit price to increase low single digit. However, sales volume declined due to pressure of passenger flow by middle single digit. LI-NING brand wholesale business, excluding international market and LI-NING YOUNG business saw a year-on-year decrease of 3% in revenue in the first half, while number of POS remained stable. During the period, we strictly controlled delivery pace of distributors after deducting revenue from professional channel shipments. Wholesale revenue fell by high single digit. The decline in wholesale flow rate was consistent with revenue ensuring health of terminal channels. In the long term, we'll continue to empower distributors and improve efficiency of terminal retail operations to promote healthy development and sustainable growth of channels. Direct retail revenue was up 2% year-on-year. Number of POS increased by 72, mainly due to the addition of new stores in the second half of 2023. The number of stores decreased by 3 stores month-on-month or quarter-on-quarter. As shown in the revenue change analysis chart, revenue growth was mainly contributed by the growth of new stores. While consumption environment is not as good as expected, we continue to strengthen our retail capabilities. At the same time, we closed inefficient stores and strengthened renovation and expansion of high-quality stores to ensure improvement of efficiency of direct retail channels and promote steady growth of direct retail revenue. In the first half, gross profit margin increased by 1.6 percentage points to 50.4% in an environment of strong competition for the following reasons: One, optimization of e-commerce channel operating environment and sales efficiency led to improved discounts, increased group's gross profit margin by 0.9 percentage points. Two, optimizing sales efficiency through direct retail channels led to improved discounts, increasing group's gross profit margin by 0.5 percentage points. Increase in proportion of DTC has driven the group's GP margin to increase by 0.4 percentage points. Changes in product structure of other business units affected the group GP margin to decrease by 0.2 percentage points. Revenue growth or in terms of expenses, we actively promote cost reduction and efficiency improvement through strategic expense, investment and control so as to further optimize resource utilization efficiency. Sales related non-fixed expenses such as direct retail store expenses, platform commission and logistic expenses increased by RMB 205 million, mainly due to expansion of direct retail channels and consolidation of core business districts, which increased our expenses and recovery of e-commerce platform commission increases. Advertising and marketing expenses increased by RMB 207 million and expense rate increased by 13 percentage points year-on-year to 8.7%. Increase in marketing expenses was mainly due to the increased investment in brand marketing under background of the sports year as well as increase in promotion and sales promotion expenses driven by recovery of revenue. In order to consolidate and enhance core competitiveness of the brand, R&D and personnel expenses as a depreciation increased, resulting in an increase of RMB 81 million in other platform expenses. Other income decreased by RMB 92,000, mainly due to decrease in investment and financial management income. Overall, group operating profit margin dropped 10 percentage points to 16.7% from 17.7% in the same period last year. Net profit margin dropped 15 percentage points from 15.1% in the same period last year to 13.6%. Chanel inventory, in the first half, total inventory increased mid-single digit and was at a reasonable level. For all channels, inventory turnover months is 3.9. Inventory structure fluctuated slightly, but it is at a healthy level. In the future, we'll continue to implement rigorous inventory management measures to ensure inventory turnover efficiency and inventory structure remain healthy. For our inventory, pre-provision inventory cost amount increased by 9% year-on-year in the first half comparing with revenue growth of 2.3%. The growth rate is controllable. The overall inventory is healthy. Of course, there are still some challenges. Our inventory aging structure has improved. Overall speaking, our entry is at healthy and controllable level. A healthy aging structure is an important foundation for supporting healthy and sustainable business growth. We believe that through continuous improvement in product efficiency and operational efficiency, there is room for further improvement in the future. For trade receivables, relative to revenue growth of 2.3%, our pre-provision trade receivables decreased by 6%. Receivable turnover days, 15 days. Trade receivables are in reasonable healthy level. As shown in the figure on the right, proportion of trade receivables within 90 days increased from 84% in the same period last year to 85%. Based on [indiscernible] support for strategic partners and joint effort of both parties, we have optimized channel efficiency management with our partners. Overall operating situation has become healthier. In the future, we'll continue to maintain strategic support for our partners and promote win-win co-operation between both parties. In terms of working capital efficiency, our working capital remains at a healthy level. Operating capital accounted for 7% of annual revenue, giving us sufficient resources to drive business growth. Our cash flow from operating activities was sufficient. It went up 40.6% to RMB 2.73 billion. Our net cash decreased by RMB 1.644 billion compared with the same period last year to RMB 17.581 billion. Abundant cash reserve enables us to better manage pressure and risk in the face of complex terminal environments and also allow us to be in a better position to flexibly seize new business growth opportunities in the future. At present, China's economy is showing an orderly recovery trend. But overall, consumer confidence still has room to recover. Challenge of weak consumer demand and expectations continues. Entering the second half of the year, the consumption situation has not yet shown good flexibility, and the space for further improvement in discount is narrowing, putting pressure on improvement of GP margin. Secondly, due to impact of timing, expenses in the second half of the year are usually higher than the first half, which makes our expectations for the second half of the year more cautious and pragmatic. Therefore, we adjusted our full year revenue target, and we expect full year revenue growth to slow down to low single digit. At the same time, we will conduct more rigorous expense planning and control to maintain full year net profit margin at low double-digit level goal. Currently, we adhere to the direction of steady operation and pragmatic development and strive to be fully prepared for long-term growth. We are full of confidence in the future development of China's sports, footwear and apparel industry and the LI-NING brand. So that's all for the financial performance. Now I would invite our Chairman to introduce to you key strategic directions for the first half of the year. Thank you.

Thank you, Dong Sheng. Good morning. In the first half of 2024, the orderly recovery of the macro-economy promoted recovery of consumer confidence. Driven by a number of sports events, national enthusiasm for sports has increased and the demand for sports goods has been further released. Favorable national policies continue to support high-quality development of the sports industry. During the period, we took advantage of the policies and relied on the brand's professional sports genes to give full play to our insights in the sports industry, understanding of sports categories and technological innovation and R&D capabilities. We focus on 5 core categories and promote upgrade of product capabilities, we optimize consumer experience and further enhance the value of LI-NING style experience. The company will continue to focus on single brand, multi-categories diversified channels as our strategy. We'll continue to strengthen our DNA in sportswear and to clarify our positioning as a professional sports brand. Through multi-categories and diversified channels, we will provide professional and fashionable sportswear for our consumers in order to consolidate our competitiveness. In the first 6 months, we focus on Running, Gyms, Badminton, Basketball and Sports Lifestyle. These are our 5 core categories. We will continue to focus on technological innovation and also want to connect with the trends of doing sports so that we can provide sportswear, which is both of tech elements and fashionable and to consolidate our core competitiveness. We will continue to focus on our professional category, and our general decrease in the first half year in all channels is around 1%. But for the jogging, we have an increase of 25% and gyms, increase of 7%, laying a solid foundation for overall development. As for the increase and the portion of basketball has dropped drastically. It is basically because the overall market of basketball has slowed down its growth. And we are determined to control the delivery of basketball goods and to reduce our inventory so that we can optimize our overall depreciation and inventory level. In the same period of time, we will continue to deeply cultivate the professional running shoe matrix and expand market share in the running sector. In the first half of this year, the 3 core products have a total sales of over 5 million pairs, providing a pillar to our overall development. And in this year, we are also creating The Shadow 3 brand, which is both innovative and full of design elements, and we are continuing to provide excellent sports experience for our consumers. On one hand, we want to strengthen our products. On the other hand, we also want to increase our exposure in professional sports events so that we can enhance our brand image. Within the same period of time, our professional running shoes have signed different athletes, and we have won a total of 30 marathon and cross-field champions and we are on the champion platform for a total of 56 times. Speaking of basketball, we will continue on our direction of being balanced, and we want to focus on our starting point and activation point, so that we can continue to focus on our functional metrics and to consolidate our position in the market. Within the same period of time, Wade 11 continued to increase its value. On one hand, we have increased our GCU, ground control system, and our Carbon Core technology. It is easy to adapt, so that each, every single moment, the basketball player can seek breakthrough. At the same period of time, LI-NING also promote the basketball among youth. This July, we sponsored the China girls' basketball team in the ISF World School Basketball Championship 2024, and they have won the first place. And we look forward to provide multifacet and professional platform for them to grow and to infuse energy into the youth basketball sector in China. In terms of fitness, we continue to expand our sports scenario with functional technology. We focus on permeability and flexibility as well as protection function. We want to cover different types of clients and to cover the needs in different sports scenarios. We want to offer sports scenarios, goods and to create multi-scenario fitness equipments and to focus on the women's market so that we can continue to improve our connections and communications with female consumers. Looking into the future, we will continue to take functional technology as a core and to provide fitness wear for different sports scenarios. As for Sports Casual, we will continue to look for connection between the daily life and sportsmanship, so that we can present diversified and unique sports trendy product. In this period, we have focused on the sports series, which is a collection for relaxing stroll because the general public have such needs to commute and to use sportswear in the casual daily life. And the total sales in the first 6 months has gone beyond 1 million pairs. And in order to continue to innovate for LI-NING, we also launched the designer platform of Chuang in order to put together all the creativity of Chinese over the world. And the first group of designers who worked together include [indiscernible]. They have a lot of experience in designing fashionable sportswear for different sports events. Together with the designers, we will continue to cultivate a Chinese culture and deepen our brand LI-NING as an original brand. And this year is a momentum sports event year. Therefore, we have launched another campaign called "In My Name". We are providing multiple brands and multiple products for our athletes, and we also invite our athletes become KOL in order to [indiscernible] the story to present the technological capability of LI-NING brand. And we also have a thematic series products and thematic ambiance creation in order to strengthen our professional image and to create our connection with our product with the consumers so that each and everyone of them can become the lead actor in sports event. And in sports events like basketball, marathon, badminton and table tennis, we continue to deploy our efforts so that we will continue to invest in the sports sector. In this period of time, we have sponsored Hong Kong Open Badminton Championship in 2024 to 2026, encouraging the athletes to showcase their talents and to deepen our influence in the badminton sector. In order to deepen the consumers' understanding of our product, we have provided for a technological show, concentrating the display of different innovative products and it is a fun immersive experience conference focusing on 6 different technology. And we also launched 3 innovative accomplishments for the first time. Through our continued efforts in technological innovation and product, we will continue to consolidate our position as the market first and to strengthen our core competitiveness. That's all about our strategic direction, and I would like to invite Qian Wei, our CEO, to talk about our operational progress. Thank you.

Thank you. Good morning. I'm Qian Wei. Coming next, I'll talk about the first half of 2024 and report to you about our operational progress. In the first half of 2024, we focused on stable business performance and our revenue and profits in line with expectations. In light of the instability of the market, our year-on-year increase is 2.3%, up to RMB 143.5 billion. And basically, it is up to our expectations. And our gross profit increased 1.6% to 50.4%. Although off-line sales is under pressure, but through improving our efficiency, we have improved our 3-month discount rate up to 20% off, which is a much better year-on-year. And although our professional matrix is not up to standard but the first 6 months, our new product sell-through up to 60% to 80%. And we will continue to focus on our professional product metrics as well as expanding our new scenario and new markets. And in the first 6 months, we have maintained our income in shoewear at 55%, while the apparel sales of professional products has increased up to 60%. And the core products, the total sales have been more than 5 million pairs as for [indiscernible]. In the first half, we have more than 1.9 million sales, and we have a great increase year-on-year. As for the soft series, we have sales more than 1 billion, a year-on-year increase by 4x. In order to better serve different tiers of market, we want to expand our product [indiscernible] to 20 to 30 [indiscernible], while the depth will increase by 10% to 20% in the top tier. And through practical inventory management, we will continue to maintain a good level of inventory. And all channel inventory sales is 3.9 months which is healthy and controllable. And the inventory cost is up to RMB 2.46 billion, a year-on-year increase of high unit figure, and it is up to our expectation. And our structure maintained healthy. And in 6 months, the new product inventory year-on-year increased 5%, and the old inventory structure continue to be optimized. And this has always been our focus businesses. In the second half of the year, we will continue to focus on the prudence of our channel inventory. In the first half of the year, off-line sales are under great challenge. And because of extreme weather, our customer flow continued to decrease. And we are having a decrease of year-on-year in the mid-single digit. And overall off-line retail sales also decreased in the mid-single digit. And in order to adapt to the ever-changing market, we would use week as our basic unit and to adjust ourselves as well as our product sales so that we can optimize our structure and to make sure that our depreciation rate will continue to be stabilized in order to reduce the operation pressure caused by the decrease of consumer flow. And in the first half of the year, we will continue to optimize the deployment of our channels and to maintain our core store income at 90% so that our core competitiveness can be maintained. We also want to focus on the top-tier market stores and to adjust the store that is not up to our standard or strategies. The new shops have changed from 75 to 74, and we have closed 74 stores. And in order to increase the speed of the emerging market channel, in the first half of the year, we have new [indiscernible] of up to 100, and we have revamped 80 and we have closed 80 low-efficiency stores. We also improved our speed in upgrading our image as we have -- compared to 2023, we have an increase of 96% and in every month, we have efficiency of RMB 450,000 each boutique. And in the first half of the year, the e-commerce operation environment continued to improve. Through online and offline products, through channels and through direct sales, we have achieved an increase of 10% to 20%. We will continue to improve our e-commerce efficiency and to deepen our sales deployment. And we also want to improve our investments in different e-commerce platforms in order to cope with the future changes, so that we can reach our target of 10% to 20% of increase in customers and to improve our depreciation rate year-on-year and low single digit. Focusing on the demand of different channels, we want to increase our accuracy in discrepancy of product combination so that we see the improvement of inventory circulation year-on-year. Speaking of child wear, we will continue to improve our professional products and to integrate different sales channels and to upgrade our secondary school and primary school basketball sponsorship and focus on soccer event resources so that we can have all channel retail of increase at mid-single digit, while retail deficiency can be improved to low single digit, and to increase the unit price to mid-single digit and to increase the gross profit of LI-NING YOUNG, as for the end of this period of time, children wear have up to 1,438 stores. And for each store, we have an efficiency of RMB 130,000. This is the business progress of the first half. In the second half, we will continue to be prudent and develop our businesses. And we will continue to deepen our efforts and to optimize our structure in order to achieve a long-term sustainable growth. [Statements in English on this transcript were spoken by an interpreter present on the live call.]