Li Ning (2331

17 Aug 2020

CMB International Securities | Equity Research | Company Update

Li Ning (2331 HK) BUY (Maintain) Margin expansion and solid reforms ahead Target Price HK$36.52 (Previous TP HK$29.73) Despite the rather bumpy post-virus retail sales recovery, we continue to like Li Up/Downside +15.8% Ning in 2H20E and FY21E, due to: 1) strong ASP and GP margin increase, 2) Current Price HK$31.55 effective cost control and 3) a solid reform plan laid down by management. Thus we reiterate BUY and raised TP to HK$36.52, based on 37x FY21E P/E (from China Sportswear Sector 30x, since its industry leading profit recovery should drive a re-rating).  Strong 1H20 results, driven by other income, better retail and Walter Woo wholesale pricings and cost control. Li Ning sales/ net profit fell by 1%/ (852) 3761 8776 [email protected] 14% YoY in 1H20, 4%/ 19% above BBG’s cons. The beat was because of:

1) better GP margin from ASP increase in both MSRP and IMU, 2) better Stock Data gov. grants and 3) rigid cost control (staff and travelling costs, etc.). Note Mkt Cap (HK$ mn) 78,066 that core NP att. (adjusted for RMB 234mn one-off gains in 1H19) was up Avg 3 mths t/o (HK$ mn) 382.32 22%, while adjusted NP att. (excluding also the other income) was up 11%. 52w High/Low (HK$) 32.3/ 14.8 Total Issued Shares (mn) 2,474.4  Retail sales growth in 2Q20 and 3QTD20 remained bumpy but should Source: Bloomberg gradually improve. Retail sell-through for direct retail and wholesale in 2Q20/3QTD were -ve HSD/-ve MSD and -ve low-teens/-ve HSD, which were Shareholding Structure Mr Li Ning & Family 14.23% somewhat weak and slightly behind management’s and our expectation. We FMR LLC. 5.41% estimate overall retail sales growth to be -ve high-teens/ -ve LSD in 1Q20/ Blackrock Inc. 5.29% 2Q20E and forecast 7%/ 12% YoY growth in 3Q20E/ 4Q20E. Schroders Plc. 4.97% Free Float 70.10%  NP margin guidance raised to 10.5%+ on likely GP margin expansion Source: Bloomberg, HKEx and cost control, even if high retail discounts stay. Management is confident on margin recovery and raised FY20E guidance to 10.5%+ (from Share Performance Absolute Relative 10%-10.5%). We believe GP margin can still improve in 2H20E, thanks to 1-mth 27.0% 28.5% IMU or initial markup increases even if new/old product mix is stable and 3-mth 19.7% 13.1% retail discounts stay at 4-6ppt deeper than last year (discounts were 4/ 6ppt 6-mth 38.4% 52.8% deeper YoY in 1Q/ 2Q20E). We also expect OP margin to reach 13.6% in 12-mth 55.0% 57.0% Source: Bloomberg 2H20E with 1.4ppt opex savings mainly from labour costs and other opex. Moreover, a lower retail discounts and rebates to distributor can also drive a 12-mth Price Performance (HK$) better GP margin in FY21E. Stock HSI  Maintain BUY and lifted TP to HK$ 36.52. We maintain BUY and lifted TP 31.0 to HK$ 36.52, based on 37x FY21E P/E (up from 30x), given a 3-year core 27.0

NP att. CAGR of 29%. The counter is undemanding and trading at 32x 23.0 FY21E P/E. We adjusted our FY20E/ 21E/ 22E NP att. estimates by +1.9%/ 19.0 +0.6%/ -1.2%, to factor in better GP margin and opex savings onwards. 15.0 8/2019 10/2019 12/2019 2/2020 4/2020 6/2020 Earnings Summary Source: Bloomberg (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E

Revenue (RMB mn) 10,511 13,870 14,646 17,545 20,169 Auditor: PricewaterhouseCoopers YoY growth (%) 18.4 32.0 5.6 19.8 15.0 Net income (RMB mn) 715 1,499 1,601 2,222 2,697 Related Reports EPS (RMB) 0.29 0.60 0.64 0.88 1.07 1. Li Ning (2331 HK, BUY) - Industry YoY growth (%) 38.0 106.0 5.7 38.8 21.4 leading momentum and recovery - 9 Apr 2020 Core NP (RMB mn) 715 1,265 1,601 2,222 2,697 2. Li Ning (2331 HK, BUY) - Prudent YoY growth (%) 38.8 76.9 26.5 38.8 21.4 sales but upbeat margin guidance - Consensus EPS (RMB) n/a n/a 0.63 0.85 1.06 15 Aug 2019

P/E (x) 94.9 46.9 44.4 32.0 26.3 Please cast your valuable vote P/B (x) 11.5 9.7 8.3 6.8 5.6 for CMBIS research team in the Yield (%) 0.3 0.5 0.6 0.8 0.9 2020 Asiamoney Brokers Poll: ROE (%) 12.3 21.0 19.2 21.8 21.9 https://euromoney.com/brokers Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 17 Aug 2020

Updates on channel inventory and future reform:  Wholesale sell-in and sell-through mismatching should not be a worry, given a healthy level of channel inventory. Investors might be worried to see a 3% wholesale sales growth and a low-teens decline in wholesale sell-through in 1H20E. But it was, in our view, firmly supported by 1) low-teen increases in MSRP or tag price (gap between volume sell-in and volume sell-through was only MSD, not much) and 2) ~10% increases in retail sales area despite ~7% drop in store counts (more larger stores but less non-performing ones). Also, channel inventory was only 4.7 months in Jun 2020 (vs 4.2 months in Dec 2020), not particularly high.  A sounding plan for future reforms and efficiency gains. We have become more positive on Li Ning’s mid-term reform, where its new CEO (Mr. Kosaka) listed out various efficiency improvement plans, as follows: . #1 Product planning and development - 1) integrate various functions into a product department at headquarters, to monitor developments on a monthly and weekly basis, 2) rationalize number of SKUs to improve the “depth and width” by cutting 20% of SKUs and increasing 10% size choices, and 3) trimming number of fabric types by 10%, and patterns/colours by 30% to increase efficiency. . #2 Channel expansion and optimization - 1) unify the channel expansion, store format design and construction functions, 2), carry out assessments on potential store level profitability for all stores and 3) speed up closure of non- performing stores and new store format and big store designs. . #3 Omni-channel integration - 1) integrate various functions into an E- commerce system and platform to create more synergy and resources sharing, and 2) continue to achieve better integration in inventory, pricing, marketing, channel, membership management and services. . #4 Store operation - 1) separate wholesale and direct-retail business into two teams, 2) increase incentives for frontline staffs by rolling out monthly/ weekly planning and communications, and 3) provide more trainings, reviews and supports for frontline staffs. . #5 Supply chain management - 1) integrate various functions (including all adult, kids and e-commerce) into only two supply chains (footwear/ apparel), 2) introduce a competitive and dynamic system to refine suppliers, cutting 30% of current suppliers which are neither non-performing or having unstable supply, and 3) establish a new footwear and apparel R&D innovation centre.

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Focus Charts

Figure 1: 2Q retail sales drop (CMBIS est.), by brands Figure 2: Retail sales growth (CMBIS est.), by brands

20% 30% 16% 25% 15% 16% 15% 9% 8% 8% 10% 6% 4% 6% 0% 5% 0% 0% 0% -3% -5% -5% -15% -5% -3% -18% -5% -23% -23% -10% -30% -25% FILA Anta Pou Li Ning Xtep Li Ning Anta FILA Xtep Pou Sheng Sheng (Nike, Adidas) 1Q20E 2Q20E 2H20E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 3: Li Ning’s retail sales growth Figure 4: Li Ning’s retail sales growth, by channels

40 (% yoy growth) Mid 30% 60 (% yoy growth) 30 45 30 20 15 10 0 0 (15) -ve High- (10) teens -ve LSD (30) (20) (45)

Retail sales (overall) Direct retail Wholesales E-commerce

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 5: GP/ OP/ NP att. margin Figure 6: Working capital condition

55% 130 (Days) 112 100 45% 50.5% 50.6% 110 94 48.1% 49.1% 49.5% 85 85 47.1% 93 93 82 80 84 90 91 87 78 74 35% 71 69 85 83 82 68 70 72 64 76 70 56 74 25% 52 66 63 62 15.3% 15.7% 14.0% 50 90 42 36 15% 11.1% 76 7.4% 75 24 22 5.0% 30 59 56 21 20 13.4% 49 45 40 5% 10.8% 10.9% 12.7% 32 26 30 28 5.8% 6.8% 10 -5% FY17A FY18A FY19A FY20E FY21E FY22E CCC Inventory days GP margins OP margins NP margins Receivable days Payable days

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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Earnings revision

Figure 7: Earnings revision New Old Diff (%) RMB mn FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Revenue 14,646 17,545 20,169 15,372 18,523 21,271 -4.7% -5.3% -5.2% Gross profit 7,244 8,858 10,200 7,561 9,203 10,618 -4.2% -3.7% -3.9% EBIT 2,049 2,677 3,171 1,794 2,538 3,145 14.2% 5.5% 0.8% Net profit att. 1,601 2,222 2,697 1,571 2,209 2,730 1.9% 0.6% -1.2% Diluted EPS (RMB) 0.64 0.88 1.07 0.63 0.89 1.09 0.9% -0.4% -2.2% Gross margin 49.5% 50.5% 50.6% 49.2% 49.7% 49.9% 0.3ppt 0.8ppt 0.7ppt EBIT margin 14.0% 15.3% 15.7% 11.7% 13.7% 14.8% 2.3ppt 1.6ppt 0.9ppt Net profit att. margin 10.9% 12.7% 13.4% 10.2% 11.9% 12.8% 0.7ppt 0.7ppt 0.5ppt Source: Company data, CMBIS estimates

Figure 8: CMBIS estimates vs consensus CMBIS Consensus Diff (%) RMB mn FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Revenue 14,646 17,545 20,169 15,019 18,347 21,657 -2.5% -4.4% -6.9% Gross profit 7,244 8,858 10,200 7,310 9,144 10,901 -0.9% -3.1% -6.4% EBIT 2,049 2,677 3,171 1,792 2,560 3,283 14.3% 4.6% -3.4% Net profit att. 1,601 2,222 2,697 1,545 2,078 2,614 3.6% 6.9% 3.2% Diluted EPS (RMB) 0.64 0.88 1.07 0.63 0.85 1.06 1.3% 4.2% 0.7% Gross margin 49.5% 50.5% 50.6% 48.7% 49.8% 50.3% 0.8ppt 0.6ppt 0.2ppt EBIT margin 14.0% 15.3% 15.7% 11.9% 14.0% 15.2% 2.1ppt 1.3ppt 0.6ppt Net profit att. margin 10.9% 12.7% 13.4% 10.3% 11.3% 12.1% 0.6ppt 1.3ppt 1.3ppt Source: Company data, CMBIS estimates

Figure 9: Forward 1 years P/E band

(HK$) 32.0

27.0

22.0

17.0

12.0

7.0

2.0

16x 22x 28x 34x 40x Last price

Source: Company data, Bloomberg, CMBIS estimates

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Results Summary

Figure 10: Results summary – Half Year Half yearly 1H19 2H19 1H20 2H20E 1H20E Actual vs (RMB mn) 1H19 2H19 1H20 2H20E YoY YoY YoY YoY CMBIS CMBIS Revenue 6,255 7,615 6,181 8,465 33% 31% -1% 11% 5,839 6% COGS (3,147) (3,917) (3,124) (4,278) (2,978) Gross profit 3,108 3,698 3,057 4,187 35% 34% -2% 13% 2,861 7% GP margins 49.7% 48.6% 49.5% 49.5% 49.0% Other income & gains 44 94 136 98 53 159% S & D expenses (2,023) (2,422) (1,949) (2,596) 17% 23% -4% 7% (1,827) 7% S & D exp / sales -32.3% -31.8% -31.5% -30.7% -31.3% Admin expenses (451) (505) (346) (539) 52% 39% -23% 7% (409) -15% Admin exp / sales -7.2% -6.6% -5.6% -6.4% -7.0% Other opex 0 0 0 0 0 Operating profit (EBIT) 678 865 898 1,151 131% 79% 32% 33% 677 33% OP margins 10.8% 11.4% 14.5% 13.6% 11.6% Other items 0 0 0 0 0 Net finance income (8) (22) (12) (2) 0 n/a Net finance income / sales -0.1% -0.3% -0.2% 0.0% 0.0% Profit after financing costs 670 843 885 1,149 677 Associated coms 0 0 0 0 0 Jointly controlled coms 310 33 22 37 35 -38% Pre-tax profit 980 876 907 1,185 199% 68% -7% 35% 712 27% Tax (185) (172) (224) (268) (135) 65% Tax / sales -3.0% -2.3% -3.6% -3.2% -2.3% Effective tax rate -18.9% -19.6% -24.7% -22.6% -19.0% Minority interests 0 0 0 0 0 Net profit att. 795 704 683 917.5 196% 58% -14% 30% 577 18% NP margins 12.7% 9.2% 11.1% 10.8% 9.9% Sales by channels Franchises 3,040 3,826 3,109 4,132 45% 36% 2% 8% 2,827 10% Self-owned 1,758 1,862 1,335 1,918 12% 19% -24% 3% 1,371 -3% E-commerce 1,357 1,763 1,669 2,292 38% 42% 23% 30% 1,561 7% International 100 163 68 123 33% -8% -32% -25% 80 -15% Total 6,255 7,615 6,181 8,465 33% 31% -1% 11% 5,839 6% Breakdown by segment A & P (557) (770) (556) (836) 13% 29% 0% 9% (467) 19% Labour (725) (793) (623) (896) 34% 32% -14% 13% (689) -10% Rent (471) (517) (409) (551) 6% 14% -13% 7% (426) -4% D & A (212) (249) (270) (264) 5% 19% 28% 6% (234) 16% R & D (133) (230) (139) (198) 115% 37% 5% -14% (105) 32% Others (376) (367) (298) (390) 29% 19% -21% 6% (315) -5%

As % of total sales A & P -10.5% -10.3% -8.9% -10.1% -8.9% Labour -11.5% -10.3% -11.6% -10.4% -11.6% Rent -9.4% -7.8% -7.5% -6.8% -7.5% D & A -4.3% -3.6% -3.4% -3.3% -3.4% R & D -1.3% -2.9% -2.1% -3.0% -2.1% Others -6.2% -5.3% -6.0% -4.8% -6.0% Source: Company data, CMBIS estimates

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Figure 11: Results summary - Full Year FY19 FY20E FY21E Full yearly (RMB mn) FY19 FY20E FY21E YoY YoY YoY Revenue 13,870 14,646 17,545 32% 6% 20% COGS (7,064) (7,402) (8,687) Gross profit 6,805 7,244 8,858 35% 6% 22% GP margins 49.1% 49.5% 50.5% Other income & gains 139 234 211 S & D expenses (4,445) (4,545) (5,273) 20% 2% 16% S & D exp / sales -32.0% -31.0% -30.1% Admin expenses (956) (885) (1,119) 44% -7% 26% Admin exp / sales -6.9% -6.0% -6.4% Other opex 0 0 0 Operating profit (EBIT) 1,543 2,049 2,677 99% 33% 31% OP margins 11.1% 14.0% 15.3% Other items 0 0 0 Net finance income (30) (15) 13 Net finance income / sales -0.2% -0.1% 0.1% Profit after financing costs 1,513 2,034 2,690 Associated coms 0 0 0 Jointly controlled coms 343 59 88 Pre-tax profit 1,857 2,093 2,777 118% 13% 33% Tax (357) (492) (555) Tax / sales -2.6% -3.4% -3.2% Effective tax rate -19.3% -23.5% -20.0% Minority interests 0 0 0 Net profit att. 1,499 1,601 2,222 110% 7% 39% NP margins 10.8% 10.9% 12.7% Sales by channels Franchises 6,865 7,241 8,327 40% 5% 15% Self-owned 3,620 3,253 4,067 16% -10% 25% E-commerce 3,121 3,961 4,952 41% 27% 25% International 264 191 200 4% -28% 5% Total 13,870 14,646 17,545 32% 6% 20% Breakdown by segment A & P (1,327) (1,391) (1,667) 22% 5% 20% Labour (1,519) (1,519) (1,810) 33% 0% 19% Rent (989) (960) (1,057) 10% -3% 10% D & A (461) (534) (611) 12% 16% 15% R & D (362) (337) (421) 58% -7% 25% Others (744) (688) (825) 24% -7% 20%

As % of total sales A & P -9.6% -9.5% -9.5% Labour -10.9% -10.4% -10.3% Rent -7.1% -6.6% -6.0% D & A -3.3% -3.6% -3.5% R & D -2.6% -2.3% -2.4% Others -5.4% -4.7% -4.7% Source: Company data, CMBIS estimates

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Figure 12: Historical sales growth trend, by brands Operating numbers 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E Nike China sales 15.0% 16.0% 12.0% 15.0% 19.0% 25.0% 20.0% 31.0% 24.0% 22.0% 27.0% 23.0% -4.0% 1.0% Adidas China sales 30.3% 27.7% 28.0% 32.0% 26.0% 27.0% 26.0% 23.0% 16.0% 14.0% 11.0% 15.0% -58.0% 0.0% Anta brand's SSSG +ve Low- +ve 20%- +ve Mid- +ve 20%- +ve 20%- +ve Low- +ve Mid- +ve Mid- +ve Low- +ve Mid- +ve Mid- +ve High- -ve 20%- Anta brand's retail sales -ve LSD 5.0% 10.0% teens 30% teens 25% 25% teens teens teens teens teens teens teens 25% +ve Mid- +ve Mid- +ve Mid- +ve Low- +ve Low- +ve Low- -ve 20%- Core brand +ve LSD +ve MSD +ve HSD +ve HSD +ve HSD +ve HSD -ve LSD teens teens teens teens teens teens 25% -ve 20%- Kids over 30% 25%-30% over 30% over 40% over 40% over 25% Over 25% Over 25% Over 20% 30% Over 25% 25% +ve MSD 25% +ve Mid- Online over 50% over 50% over 50% over 40% over 40% over 25% Over 20% Over 25% 25% 35% Over 40% +ve MSD Over 40% teens +ve 40%- +ve 50%- +ve 40%- +ve 85%- +ve 80%- +ve 90%- +ve 90%- +ve 80%- +ve 65%- +ve 55%- Non-Anta brands (FILA/ Desecente/ Kolon/ Sprandi/ King Kow) 50% 60% 50% 90% 85% 95% 95% 85% 70% 60% FILA brand's retail sales 50%-55% 50%-55% -ve MSD +ve MSD 20.0% 30.0% -ve 20%- Classic/ Core brand Over 40% +ve MSD 25% Kids Over 70% -ve LSD Over 30% Over Fusion +ve MSD Over 70% 100% Online Over 70% 160% Over 80%

Other brands 30%-35% 25%-30% -ve HSD 25%-30% +ve Low- +ve Low- +ve Low- +ve Mid- +ve Mid- +ve Mid- +ve High- +ve Low- Li Ning group's SSSG Flat +ve HSD -ve LSD +ve HSD n/a -ve MSD teens teens teens teens teens teens teens twenties +ve Low- +ve Low- +ve Low- +ve Low- +ve High- -ve High- Direct retail -ve MSD Flat -ve MSD +ve HSD +ve HSD +ve MSD +ve HSD n/a teens teens teens teens teens teens +ve Low- +ve Low- +ve Low- +ve Mid- -ve Low- Wholesales -ve MSD +ve LSD -ve MSD +ve HSD +ve MSD +ve LSD +ve HSD +ve MSD n/a teens teens teens teens teens +ve High- +ve High +ve Mid- +ve High +ve Mid +ve High +ve Mid +ve Mid +ve Low +ve Low- +ve Mid E- Commerce Mid-60% Mid-90% Low 30% teens 30% 30% 30% 50% 30% 30% 50% 40% teens 20% +ve Mid- +ve Low- +ve Mid- +ve High- +ve Low +ve Low +ve Low +ve Mid -ve High- Li Ning group's retail sales -ve LSD 7.0% 12.0% teens teens teens teens 20%-25% 20%-25% 30%-35% 30%-40% teens Low 20%- +ve Mid- +ve Mid- +ve Low- +ve Mid- +ve High- -ve Mid -ve Low- Direct retail +ve HSD +ve HSD 30% teens teens teens teens teens 30% teens +ve Low- +ve Low- +ve Low +ve Mid- +ve Mid- +ve Low -ve High- Wholesales +ve MSD +ve MSD -ve HSD teens teens 20%-25% 20% 30% 40% teens +ve High +ve High +ve Low +ve Mid +ve Low +ve High +ve Low +ve Low +ve Low- +ve Mid E- Commerce 30% 30% 30% 50% 40% 20% 50% 40% teens 20% +ve Low- +ve Mid- +ve Mid- +ve Mid- +ve Low- +ve Low- +ve Low- Xtep's SSSG +ve LSD +ve MSD +ve MSD +ve HSD 10% teens teens teens teens teens teens teens -ve 20%- Xtep's retail sales Over 20% Over 20% 20% Over 20% -ve LSD 3.0% 5.0% 25% 361 Degrees' SSSG 7.0% +ve HSD +ve HSD +ve HSD +ve HSD +ve HSD +ve MSD Flat +ve LSD +ve LSD +ve LSD +ve LSD -ve 20%- -ve Low- 361 Degree's retail sales 25% teens Pou Sheng's SSSG 1.9% 5.6% 1.5% 12.0% 10.1% 2.2% 8.9% 8.7% 8.4% 4.2% 6.0% 1.9% Pou Sheng's sales 14.4% 14.5% 13.4% 21.6% 17.7% 17.7% 24.4% 22.0% 19.9% 18.9% 21.9% 19.1% -25.1% 3.0% 6.0% 9.0% +ve Mid -ve Mid +ve Mid +ve Mid -ve Low- -ve Mid Dong Xiang's SSSG Flat -ve LSD -ve MSD +ve LSD +ve MSD +ve LSD -ve LSD +ve MSD to High to High to High to High Mid SD SD +ve Low- +ve Low- -ve Low to Direct retail +ve HSD Flat +ve HSD Flat +ve LSD +ve HSD -ve LSD teens teens Mid-teens +ve 35%- +ve 30%- +ve 55%- +ve 40%- -ve Low- +ve 30%- E- Commerce 45% 35% 60% 45% teens 35% Source: Company data, CMBIS estimates

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Figure 13: GP margin Analysis

Source: Company data, CMBIS estimates

Figure 14: Profitability Analysis

Source: Company data, CMBIS estimates

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Valuation

Figure 15: Peers valuation table 3yrs 12m Up/ ROE Yield Price Mkt. Cap Year P/E (x) P/B (x) PEG TP Down- (%) (%) (x) Company Ticker Rating (LC) (LC) side (HK$mn) End FY1E FY2E FY1E FY2E FY1E FY1E FY1E H shares Sportswear Li Ning 2331 HK BUY 36.52 31.55 16% 78,066 Dec-19 44.4 32.0 8.3 6.8 21.0 2.1 0.7 Anta Sports 2020 HK BUY 92.78 83.00 12% 224,350 Dec-19 38.0 26.2 8.3 6.8 29.8 1.8 0.9 Xtep Intl 1368 HK HOLD 2.70 2.59 4% 6,525 Dec-19 11.5 8.2 0.8 0.8 11.9 3.9 5.0 361 Degrees 1361 HK NR n/a 1.14 n/a 2,357 Dec-19 5.1 4.4 0.3 0.3 7.2 0.7 8.8 Topsports 6110 HK NR n/a 9.94 n/a 61,640 Feb-20 22.6 17.4 4.7 4.0 36.9 1.6 2.2 Pou Sheng 3813 HK NR n/a 1.67 n/a 8,946 Dec-19 18.3 7.1 1.0 0.9 5.6 1.0 0.9 China DX 3818 HK NR n/a 0.92 n/a 5,415 Mar-20 11.0 9.7 0.4 0.4 n/a 0.7 6.1 Avg. 21.5 15.0 3.4 2.9 18.7 1.7 3.5 Med. 18.3 9.7 1.0 0.9 16.5 1.6 2.2 International Sportswear Nike Inc NKE US NR n/a 106.43 n/a 1,286,763 May-20 45.8 32.6 21.0 18.1 29.7 1.4 1.0 Adidas ADS GY NR n/a 265.90 n/a 489,246 Dec-19 102.0 30.3 7.3 6.4 8.5 25.3 0.9 Puma PUM GY NR n/a 69.48 n/a 96,207 Dec-19 142.4 37.0 5.3 4.8 3.3 10.1 0.3 Under Armour UAA US NR n/a 10.74 n/a 35,635 Dec-19 n/a 102.3 3.3 3.3 (39.5) 0.0 0.0 Lululemon LULU US NR n/a 349.12 n/a 352,330 Feb-20 81.0 55.6 19.4 16.9 36.1 5.4 0.0 Skechers SKX US NR n/a 29.77 n/a 36,427 Dec-19 50.5 14.5 1.8 1.6 6.6 (43.1) 0.0 Vf Corp VFC US NR n/a 64.24 n/a 194,008 Mar-20 60.5 25.1 8.7 8.8 9.8 2.9 3.0 Columbia COLM US NR n/a 80.86 n/a 41,457 Dec-19 42.5 19.6 2.9 2.4 11.1 (42.1) 0.6 Wolverine WWW US NR n/a 25.05 n/a 15,897 Dec-19 23.4 12.4 2.7 2.4 7.4 1.7 1.6 Mizuno Corp 8022 JP NR n/a 1911.00 n/a 3,697 Mar-20 n/a 14.6 0.5 0.5 2.3 0.0 2.6 Asics Corp 7936 JP NR n/a 1448.00 n/a 20,012 Dec-19 n/a 35.0 1.8 1.8 (3.1) 0.0 1.8 Avg. 68.5 34.5 6.8 6.1 6.6 (3.5) 1.1 Med. 55.5 30.3 3.3 3.3 7.4 1.4 0.9 Source: Bloomberg, CMBIS estimates

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Assumption

Figure 16: Li Ning’s key assumptions Major assumptions FY18A FY19A FY20E FY21E FY22E Sales by segment (RMB mn) Shoes 4,601 6,085 6,472 7,698 8,869 Clothes 5,316 7,110 7,465 9,033 10,388 Equipment 594 674 708 814 912 Others 0 0 0 0 0 Total 10,511 13,870 14,646 17,545 20,169

Sales by segment growth (%) Shoes 11.0% 32.3% 6.4% 18.9% 15.2% Clothes 27.4% 33.7% 5.0% 21.0% 15.0% Equipment 18.5% 13.6% 5.0% 15.0% 12.0% Others -100.0% n/a n/a n/a n/a Total 18.4% 32.0% 5.6% 19.8% 15.0%

Sales by channel growth (%) Franchises 15.7% 39.9% 5.5% 15.0% 11.0% Self owned 15.0% 15.6% -10.1% 25.0% 14.0% E-commerce 32.9% 40.7% 26.9% 25.0% 23.0% International 5.3% 4.5% -27.7% 5.0% 0.0% Total 18.4% 32.0% 5.6% 19.8% 15.0%

Sales network by segment Self owned 1,506 1,292 1,242 1,267 1,292 Franchise 4,838 5,157 4,807 4,862 4,917 Total 6,344 6,449 6,049 6,129 6,209 LN Young 793 1,101 1,101 1,251 1,351 Sum-total 7,137 7,550 7,150 7,380 7,560

GP margins 48.1% 49.1% 49.5% 50.5% 50.6%

Opex breakdown A & P/ sales 10.4% 9.6% 9.5% 9.5% 9.7% Labour/ sales 10.8% 10.9% 10.4% 10.3% 10.2% Rental/ sales 8.5% 7.1% 6.6% 6.0% 5.7% D & A/ sales 3.9% 3.3% 3.6% 3.5% 3.4% R & D/ sales 2.2% 2.6% 2.3% 2.4% 2.4% Provision/ sales 0.0% 0.0% 0.0% 0.0% 0.0%

Selling & distribution costs / sales 35.3% 32.0% 31.0% 30.1% 29.7% Admin expenses / sales 6.3% 6.9% 6.0% 6.4% 6.3%

OP margins 7.4% 11.1% 14.0% 15.3% 15.7%

Effective tax rate 15.9% 19.3% 23.5% 20.0% 19.0%

Net profit margins 6.8% 10.8% 10.9% 12.7% 13.4% Net profit att. growth (%) 38.8% 109.6% 6.8% 38.8% 21.4% Source: Company data, CMBIS estimates

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Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Revenue 10,511 13,870 14,646 17,545 20,169 EBIT 777 1,543 2,049 2,677 3,171 Franchises 4,909 6,865 7,241 8,327 9,243 D & A 411 461 534 611 689 Self owned 3,132 3,620 3,253 4,067 4,636 Change in working capital 448 1,176 55 206 185 E-commerce 2,218 3,121 3,961 4,952 6,090 Income tax paid (9) (144) (357) (492) (555) International 252 264 191 200 200 Others 45 467 - - - Cost of goods sold (5,458) (7,064) (7,402) (8,687) (9,969) Net cash from operating 1,672 3,503 2,280 3,003 3,490 Gross profit 5,053 6,805 7,244 8,858 10,200 Other income 95 139 234 211 242 Capex & investments (431) (636) (672) (805) (925) Associated companies (44) (50) - - - Operating expenses (4,370) (5,401) (5,430) (6,392) (7,271) Interest received 51 15 8 12 16 D & A (411) (461) (534) (611) (484) Others (59) 97 39 49 60 Staff costs (1,139) (1,519) (1,519) (1,810) (2,051) Net cash from investing (483) (573) (624) (744) (849) S & D costs (ex-staff, D&A) (2,708) (3,252) (3,351) (3,847) (4,380) Admin exp. (ex-staff, D&A) (112) (170) (25) (123) (356) Equity raised 51 56 - - - Other operating expenses - - - - - Net change in bank loans - - - - - EBIT 777 1,543 2,049 2,677 3,171 Dividend paid - (215) (380) (390) (542) Others (117) (490) (54) (36) (23) Finance costs, net 10 (30) (15) 13 38 Net cash from financing (66) (649) (434) (426) (564) JVs & associates 64 343 59 88 121 Exceptional - - - - - Net change in cash 1,123 2,282 1,222 1,832 2,077 Pre-tax profit 850 1,857 2,093 2,777 3,330 Beginning cash balance 2,529 3,672 5,961 7,184 9,015 Exchange difference 19 8 - - - Income tax (135) (357) (492) (555) (633) Cash at the end of the year 3,672 5,961 7,184 9,015 11,092 Less: Minority interests 0 0 0 0 0 Net profit 715 1,499 1,601 2,222 2,697

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 2,341 4,008 4,197 4,466 4,807 Sales mix (%) Fixed asset 830 1,039 1,217 1,455 1,721 Franchises 46.7 49.5 49.4 47.5 45.8 Intangible assets & goodwill 308 265 224 180 150 Self owned 29.8 26.1 22.2 23.2 23.0 Prepaid lease payments 103 115 115 115 115 E-commerce 21.1 22.5 27.0 28.2 30.2 Interest in joint ventures - - 51 127 232 International 2.4 1.9 1.3 1.1 1.0 Other non-current assets 1,100 2,589 2,589 2,589 2,589 Total 100.0 100.0 100.0 100.0 100.0

Current assets 6,386 8,539 9,894 12,226 14,780 P&L ratios (%) Cash and cash equivalents 3,672 5,961 7,184 9,015 11,092 Gross margin 48.1 49.1 49.5 50.5 50.6 Inventories 1,240 1,407 1,475 1,731 1,986 Operating margin 7.4 11.1 14.0 15.3 15.7 Trade and other receivables 929 687 725 869 998 Pre-tax margin 8.1 13.4 14.3 15.8 16.5 Prepayments 546 483 510 611 702 Net margin 6.8 10.8 10.9 12.7 13.4 Other current assets 0 1 1 1 1 Effective tax rate 17.2 23.6 24.2 20.7 19.7

Current liabilities 2,777 4,717 5,039 5,809 6,548 Balance sheet ratios Bank loans - - - - - Current ratio (x) 2.3 1.8 2.0 2.1 2.3 Trade payables 1,133 1,348 1,413 1,658 1,903 Quick ratio (x) 1.9 1.5 1.7 1.8 2.0 Accruals & other payables 1,412 2,205 2,328 2,789 3,207 Cash ratio (x) 1.3 1.3 1.4 1.6 1.7 Tax payables 134 531 665 729 806 Inventory turnover days 112 105 105 105 105 Others 98 633 633 633 633 Trade receivables days 61 60 60 60 60 Trade payables days 40 40 40 40 40 Non-current liabilities 130 707 707 707 707 Total debt / total equity ratio (%) 1 1 1 0 0 Bank loans - - - - - Net debt / equity ratio (%) Net cash Net cash Net cash Net cash Net cash Deferred income - - - - - Returns (%) Deferred tax 54 54 54 54 54 ROE 12.3 21.0 19.2 21.8 21.9 Others 77 653 653 653 653 ROA 8.2 11.9 11.4 13.3 13.8 Per share Minority Interest - - - - - EPS (RMB) 0.29 0.60 0.64 0.88 1.07 Total net assets 5,820 7,124 8,345 10,177 12,332 DPS (RMB) 0.09 0.15 0.16 0.22 0.27 Shareholders' equity 5,820 7,124 8,345 10,177 12,332 BVPS (RMB) 2.41 2.90 3.40 4.14 5.02 Source: Company data, CMBIS estimates

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