Li Ning Company (2331) H2 2018 earnings summary

Executive summary

• FY2018 revenue exceeded CNY 10bn for the first time, rising 18% to CNY 10.5bn; net profit rose 39% to CNY 715m.

• Core strategy centers on one brand, multiple product categories and diversified channels, with growth led by product upgrades, retail execution and e-commerce.

Financial highlights

• Revenue grew 18% to CNY 10.5bn; apparel rose 27% and footwear 11%, with double-digit growth across product groups.

• Gross margin expanded 1 percentage point; gross profit increased CNY 876m, while operating margin rose to 7.4% from 5%.

• Net profit increased CNY 200m, or 39%, to CNY 715m; net margin rose to 6.8% from 5.8%.

• Operating cash flow rose 44% to CNY 1.67bn; net cash increased CNY 1.14bn to CNY 3.67bn.

• Sales-related variable costs rose CNY 339m, equal to 20.6% of incremental revenue vs. 27.5% in 2017; A&P was 10.4% of revenue vs. 11.1%.

Outlook and guidance

• FY2019 revenue target: high-teens growth, driven by mid-single-digit offline SSSG; net margin target 7.5%-8%, with operating margin improvement of 150-200 bps.

• FY2019 e-commerce revenue growth plan is low 20s, with profitability expected to remain in the high 20s.

• Q3 2019 wholesale orders showed low-teens growth; wholesale sell-in will remain balanced against sell-through to protect channel health.

• Store profit margin target is mid-teens in 2019; China LI-NING store count target is 100 by year-end, while LI-NING YOUNG targets 1,100-1,200 stores.

• Guidance reflected macro uncertainty and execution risk; international development will be measured while focus remains on China.