18 Feb 2021

CMB International Securities | Equity Research | Company Update

Li Ning (2331 HK) BUY (Maintain) Solid brand elevation and reform plan Target Price HK$67.66 (Previous TP HK$36.52) We believe Li Ning has outperformed its peers in 2H20E, thanks to: 1) better Up/Downside +27.4% marketing, 2) greater ASP and GP margin increase, and 3) more effective cost Current Price HK$53.10 control. With the solid reform plan laid down by the new CEO, we are confident on its FY21E outlook, hence reiterate BUY and raised TP to HK$67.66, based on China Sportswear Sector 48x FY22E P/E (rolled over from 37x FY21E).  We expect sales/ core net profit to grow by 8%/32% YoY in FY20E (and Walter Woo 15%/ 40% in 2H20E). We attribute such a strong growth (even with drags (852) 3761 8776 [email protected] from COVID-19 in 1H20) to: 1) rapid e-commerce sales growth of 27%, 2)

stable GP margin helped by ASP increase and limited retail discounts and Stock Data 3) meaningful opex control such as minimal A&P, travelling expenses and Mkt Cap (HK$ mn) 132,173 certain rental reliefs. Avg 3 mths t/o (HK$ mn) 518.92 52w High/Low (HK$) 57.6/ 14.8  4Q20E retail sales growth may accelerate to 11% YoY, vs MSD in 3Q20. Total Issued Shares (mn) 2,489.1 We believe Li Ning’s 4Q20E retail sales growth could be fast at 11%, much Source: Bloomberg better than Xtep’s HSD and Anta’s LSD, as supported by: 1) rising popularity of “China Li Ning” products, 2) successful digital marketing (more creative, Shareholding Structure Mr Li Ning & Family 14.23% trendy and youth oriented), 3) better branding building through more crossovers FMR LLC. 4.94% (i.e. Li Ning x Hajime Sorayama/空山基, Li Ning x Line Friends), and 4) strong Schroders Plc. 4.94% e-commerce sales growth (CMBIS est. of 40-50% during Nov-Dec 2020). Blackrock Inc. 4.84% Free Float 70.05%  We remain highly optimistic about FY21E. We believe Li Ning retail sales Source: Bloomberg, HKEx growth in FY21E could be fast at 15%+, thanks to: 1) robust online sales with about 40% growth achieved in Jan 2021, despite high base last year; 2) Share Performance Absolute Relative increases in ASP through brand elevation (by successfully tapping into 1-mth 4.6% -2.8% customer base similar to FILA, sales of higher-priced items was meaningfully 3-mth 19.7% 2.7% improved), room for further price hike could be 20-30% in 1-2 years, in our 6-mth 68.5% 38.0% view; 3) speed up of “China Li Ning” expansion, with about 100 new stores 12-mth 133.1% 110.9% Source: Bloomberg for each year in FY21E-22E (vs CMBIS est. of 80 in FY20E); and 4) rising store productivity and efficiency, after series of reforms (e.g. trimming the 12-mth Price Performance (HK$) numbers of SKUs, sizes and fabrics used) under the new CEO. Stock HSI  Maintain BUY and lifted TP to HK$ 67.66. We maintain BUY and lifted TP 55.0 to HK$ 67.66, based on 48x FY22E P/E (rolled over from 37x FY21E), still 45.0 justified given a 3-year core NP att. CAGR of 33%. Current valuation at 41x 35.0 FY22E P/E, in our view, is still attractive. We revised up our FY20E/ 21E/ 25.0 22E NP att. estimates by 4.1%/ 5.5%/ 9.2%, to factor in CNYHKD rate 15.0 change, faster online sales, better GP margin and operating leverage.

Earnings Summary Source: Bloomberg (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E Auditor: PricewaterhouseCoopers Revenue (RMB mn) 10,511 13,870 14,946 18,510 21,667 YoY growth (%) 18.4 32.0 7.8 23.8 17.1 Related Reports Net income (RMB mn) 715 1,499 1,666 2,344 2,946 1. Li Ning (2331 HK, BUY) - Margin EPS (RMB) 0.29 0.60 0.66 0.93 1.17 expansion and solid reforms ahead - YoY growth (%) 38.0 106.0 10.0 40.7 25.7 17 Aug 2020 Core NP (RMB mn) 715 1,265 1,666 2,344 2,946 2. Li Ning (2331 HK, BUY) - Industry YoY growth (%) 38.8 76.9 31.7 40.7 25.7 leading momentum and recovery - 9 Consensus EPS (RMB) n/a n/a 0.64 0.88 1.13 Apr 2020 3. Li Ning (2331 HK, BUY) - Prudent P/E (x) 159.8 78.9 71.8 51.0 40.6 sales but upbeat margin guidance - P/B (x) 19.3 16.4 13.9 11.3 9.2 15 Aug 2019 Yield (%) 0.2 0.3 0.3 0.5 0.6 ROE (%) 12.3 21.0 19.8 22.7 23.2 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

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Focus Charts

Figure 1: 4Q retail sales growth (CMBIS est.), by Figure 2: Retail sales growth (CMBIS est.), by brand brand

30% 25-30% (YoY) 50% (YoY) 45% 25% 40% 34% 32% 31% 20% 29% 30% 28% 15% 11% 20% 16% 10% HSD 11%12% 6% 8% 5% LSD 10% 4% 1% 3% 1% 2% 0% 0% FILA Li Ning Xtep Anta Pou Li Ning Anta FILA Xtep Pou Sheng -10% Sheng (Nike, Adidas) 4Q20E 1Q21E 2Q21E 2H21E

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 +ve low 45 teens 30 20 +ve MSD 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: Sales/ NP att. growth Figure 6: GP/ OP/ NP att. margin

120% 110% 55% 102% 100% 45% 49.7% 50.7% 51.1% 47.1% 48.1% 49.1% 80% 35% 60% 39% 41% 25% 40% 32% 14.3% 15.3% 16.0% 24% 26% 11.1% 18% 11% 17% 15% 7.4% 20% 11% 8% 5.0% 5% 12.7% 13.6% 0% 10.8% 11.1% 5.8% 6.8% FY17A FY18A FY19A FY20E FY21E FY22E -5% FY17A FY18A FY19A FY20E FY21E FY22E Sales growth (%) NP from con. businesses growth (A) (%) GP margins OP margins NP margins

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 14,946 18,510 21,667 14,646 17,545 20,169 2.0% 5.5% 7.4% Gross profit 7,428 9,391 11,064 7,244 8,858 10,200 2.5% 6.0% 8.5% EBIT 2,132 2,824 3,467 2,049 2,677 3,171 4.1% 5.5% 9.3% Net profit att. 1,666 2,344 2,946 1,601 2,222 2,697 4.1% 5.5% 9.2% Diluted EPS (RMB) 0.66 0.93 1.17 0.64 0.88 1.07 4.1% 5.5% 9.2% Gross margin 49.7% 50.7% 51.1% 49.5% 50.5% 50.6% 0.2ppt 0.2ppt 0.5ppt EBIT margin 14.3% 15.3% 16.0% 14.0% 15.3% 15.7% 0.3ppt 0ppt 0.3ppt Net profit att. margin 11.1% 12.7% 13.6% 10.9% 12.7% 13.4% 0.2ppt 0ppt 0.2ppt 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 14,946 18,510 21,667 14,706 18,102 21,539 1.6% 2.3% 0.6% Gross profit 7,428 9,391 11,064 7,221 9,080 10,914 2.9% 3.4% 1.4% EBIT 2,132 2,824 3,467 1,970 2,836 3,701 8.2% -0.4% -6.3% Net profit att. 1,666 2,344 2,946 1,596 2,201 2,819 4.4% 6.5% 4.5% Diluted EPS (RMB) 0.66 0.93 1.17 0.64 0.88 1.13 2.7% 5.4% 3.1% Gross margin 49.7% 50.7% 51.1% 49.1% 50.2% 50.7% 0.6ppt 0.6ppt 0.4ppt EBIT margin 14.3% 15.3% 16.0% 13.4% 15.7% 17.2% 0.9ppt -0.4ppt -1.2ppt Net profit att. margin 11.1% 12.7% 13.6% 10.8% 12.2% 13.1% 0.3ppt 0.5ppt 0.5ppt Source: Company data, CMBIS estimates

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Results preview

Figure 9: Results preview - Full Year FY19 FY20E FY21E Full yearly (RMB mn) FY19 FY20E FY21E YoY YoY YoY Revenue 13,870 14,946 18,510 32% 8% 24% COGS (7,064) (7,517) (9,120) Gross profit 6,805 7,428 9,391 35% 9% 26% GP margins 49.1% 49.7% 50.7% Other income & gains 139 239 222 S & D expenses (4,445) (4,633) (5,601) 20% 4% 21% S & D exp / sales -32.0% -31.0% -30.3% Admin expenses (956) (902) (1,188) 44% -6% 32% Admin exp / sales -6.9% -6.0% -6.4% Other opex 0 0 0 Operating profit (EBIT) 1,543 2,132 2,824 99% 38% 32% OP margins 11.1% 14.3% 15.3% Other items 0 0 0 Net finance income (30) (14) 13 Net finance income / sales -0.2% -0.1% 0.1% Profit after financing costs 1,513 2,118 2,838 Associated coms 0 0 0 Jointly controlled coms 343 60 93 Pre-tax profit 1,857 2,177 2,930 118% 17% 35% Tax (357) (512) (586) 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 1,666 2,344 110% 11% 41% NP margins 10.8% 11.1% 12.7% Sales by channels Franchises 6,865 7,317 8,781 40% 7% 20% Self-owned 3,620 3,477 4,172 16% -4% 20% E-commerce 3,121 3,961 5,348 41% 27% 35% International 264 191 210 4% -28% 10% Total 13,870 14,946 18,510 32% 8% 24% Opex breakdown A & P (1,327) (1,420) (1,758) 22% 7% 24% Labour (1,519) (1,574) (2,030) 33% 4% 29% Rent (989) (960) (1,067) 10% -3% 11% D & A (461) (535) (619) 12% 16% 16% R & D (362) (344) (444) 58% -5% 29% Others (744) (702) (870) 24% -6% 24%

As % of total sales A & P -9.6% -9.5% -9.5% Labour -10.9% -10.5% -11.0% Rent -7.1% -6.4% -5.8% D & A -3.3% -3.6% -3.3% 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 10: Results preview – Half Year Half yearly 1H19 2H19 1H20 2H20E (RMB mn) 1H19 2H19 1H20 2H20E YoY YoY YoY YoY Revenue 6,255 7,615 6,181 8,765 33% 31% -1% 15%

COGS (3,147) (3,917) (3,124) (4,393) Gross profit 3,108 3,698 3,057 4,372 35% 34% -2% 18% GP margins 49.7% 48.6% 49.5% 49.9% Other income & gains 44 94 136 103 S & D expenses (2,023) (2,422) (1,949) (2,685) 17% 23% -4% 11% S & D exp / sales -32.3% -31.8% -31.5% -30.6% Admin expenses (451) (505) (346) (556) 52% 39% -23% 10% Admin exp / sales -7.2% -6.6% -5.6% -6.3% Other opex 0 0 0 0 Operating profit (EBIT) 678 865 898 1,234 131% 79% 32% 43% OP margins 10.8% 11.4% 14.5% 14.1% Other items 0 0 0 0 Net finance income (8) (22) (12) (2) Net finance income / sales -0.1% -0.3% -0.2% 0.0% Profit after financing costs 670 843 885 1,232 Associated coms 0 0 0 0 Jointly controlled coms 310 33 22 38 Pre-tax profit 980 876 907 1,270 199% 68% -7% 45% Tax (185) (172) (224) (288) Tax / sales -3.0% -2.3% -3.6% -3.3% Effective tax rate -18.9% -19.6% -24.7% -22.7% Minority interests 0 0 0 0 Net profit att. 795 704 683 982.5 196% 58% -14% 40% NP margins 12.7% 9.2% 11.1% 11.2% Sales by channels Franchises 3,040 3,826 3,109 4,208 45% 36% 2% 10% Self-owned 1,758 1,862 1,335 2,142 12% 19% -24% 15% E-commerce 1,357 1,763 1,669 2,292 38% 42% 23% 30% International 100 163 68 123 33% -8% -32% -25% Total 6,255 7,615 6,181 8,765 33% 31% -1% 15% Opex breakdown A & P (557) (770) (556) (864) 13% 29% 0% 12% Labour (725) (793) (623) (951) 34% 32% -14% 20% Rent (471) (517) (409) (551) 6% 14% -13% 7% D & A (212) (249) (270) (265) 5% 19% 28% 6% R & D (133) (230) (139) (205) 115% 37% 5% -11% Others (376) (367) (298) (404) 29% 19% -21% 10%

As % of total sales A & P -10.5% -10.3% -8.9% -10.1% Labour -11.5% -10.3% -11.6% -10.4% Rent -9.4% -7.8% -7.5% -6.8% D & A -4.3% -3.6% -3.4% -3.3%

R & D -1.3% -2.9% -2.1% -3.0%

Others -6.2% -5.3% -6.0% -4.8% Source: Company data, CMBIS estimates

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Figure 11: Historical sales growth trend, by brands Operating numbers 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E Nike China sales 19.0% 25.0% 20.0% 31.0% 24.0% 22.0% 27.0% 23.0% -4.0% 1.0% 8.0% 19.0% Adidas China sales 26.0% 27.0% 26.0% 23.0% 16.0% 14.0% 11.0% 15.0% -58.0% 0.0% -5.0% Anta brand's SSSG +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 +ve LSD +ve LSD 32.0% 6.0% 3.0% 2.0% 25% teens teens teens teens teens teens teens 25% +ve Mid- +ve Low- +ve Low- +ve Low- -ve 20%- Core brand +ve HSD +ve HSD +ve HSD +ve HSD -ve LSD -ve MSD -ve MSD teens teens teens teens 25% -ve 20%- +ve Low- -ve Low- Kids over 40% over 25% Over 25% Over 25% Over 20% 30% Over 25% 25% +ve MSD 25% teens teens +ve Mid- Online over 40% over 25% Over 20% Over 25% 25% 35% Over 40% +ve MSD Over 40% Over 50% Over 25% teens +ve 80%- +ve 90%- +ve 90%- +ve 80%- +ve 65%- +ve 55%- Non-Anta brands (FILA/ Desecente/ Kolon/ Sprandi/ King Kow) 85% 95% 95% 85% 70% 60% +ve Low- FILA brand's retail sales 50%-55% 50%-55% -ve MSD 20%-25% 25%-30% 45.0% 16.0% 12.0% 10.0% teens -ve 20%- Classic/ Core brand Over 40% +ve MSD +ve MSD +ve MSD 25% Kids Over 70% -ve LSD Over 30% Over 30% Over 20% Over Fusion +ve MSD Over 70% Over 50% Over 50% 100% Online Over 70% 160% Over 80% Over 90% 70%-80%

Other brands 30%-35% 25%-30% -ve HSD 25%-30% 50%-55% 55%-60% Over Over +ve Mid- Descente Over 90% 50% 50% Over 60% 90% Over 80% 100% 100% teens -ve High- Kolon 15% 20% 20% +ve LSD 20%-25% 30%-40% teens +ve Low- +ve Low- +ve Mid- +ve Mid- +ve Mid- +ve High- +ve Low- Li Ning group's SSSG +ve HSD n/a -ve MSD +ve LSD teens teens teens teens teens teens twenties +ve Low- +ve Low- +ve Low- +ve High- -ve High- Direct retail +ve HSD +ve HSD +ve MSD +ve HSD n/a -ve MSD teens teens teens teens teens +ve Low- +ve Low- +ve Low- +ve Mid- -ve Low- Wholesales +ve MSD +ve LSD +ve HSD +ve MSD n/a -ve MSD teens teens teens teens teens +ve High +ve Mid- +ve High +ve Mid +ve High +ve Mid +ve Mid +ve Low +ve Low- +ve Mid +ve High E- Commerce 30% 30% 30% 50% 30% 30% 50% 40% teens 20% 30% +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 MSD +ve MSD 11.0% 34.0% 12.0% 10.0% 8.0% 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 Flat 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 -ve LSD 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 High +ve Low E- Commerce 30% 30% 30% 50% 40% 20% 50% 40% teens 20% 40% +ve Low- +ve Mid- +ve Mid- +ve Mid- +ve Low- +ve Low- +ve Low- Xtep's SSSG 10% teens teens teens teens teens teens teens -ve 20%- Xtep's retail sales Over 20% Over 20% 20% Over 20% -ve LSD +ve MSD +ve HSD 31.0% 4.0% 2.0% 0.0% 25% 361 Degrees' SSSG +ve HSD +ve HSD +ve MSD Flat +ve LSD +ve LSD +ve LSD +ve LSD -ve 20%- -ve Low- 361 Degree's retail sales -ve HSD +ve LSD 25% teens Pou Sheng's SSSG 10.1% 2.2% 8.9% 8.7% 8.4% 4.2% 6.0% 1.9% -32.5% -17.8% Pou Sheng's sales 17.7% 17.7% 24.4% 22.0% 19.9% 18.9% 21.9% 19.1% -25.1% 0.3% -0.3% 1.0% 29.0% 2.0% 0.0% -3.0% +ve Mid -ve Mid +ve Mid +ve Mid -ve Low- -ve Mid +ve Low- Dong Xiang's SSSG +ve MSD +ve LSD -ve LSD +ve MSD to High to High to High to High Mid SD SD Mid SD +ve Low- +ve Low- -ve Low to -ve Low- Direct retail +ve HSD Flat +ve HSD Flat +ve LSD +ve HSD -ve LSD teens teens Mid-teens Mid SD +ve 35%- +ve 30%- +ve 55%- +ve 40%- -ve Low- +ve 30%- +ve 30%- E- Commerce 45% 35% 60% 45% teens 35% 35% Source: Company data, CMBIS estimates

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Valuation

Figure 12: 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 62.82 53.10 18% 132,173 Dec-19 71.8 51.0 13.9 11.3 21.0 2.9 0.4 Anta Sports 2020 HK BUY 150.98 147.10 3% 397,660 Dec-19 64.0 42.8 13.7 11.1 23.0 2.6 0.5 Xtep Intl 1368 HK BUY 5.09 3.64 40% 9,271 Dec-19 16.5 11.3 1.1 1.0 7.4 3.7 3.6 361 Degrees 1361 HK NR n/a 1.36 n/a 2,812 Dec-19 5.8 5.3 0.4 0.3 5.8 1.1 6.1 Topsports 6110 HK NR n/a 12.94 n/a 80,244 Feb-20 26.6 21.3 6.4 5.5 28.8 1.7 5.0 Pou Sheng 3813 HK NR n/a 1.74 n/a 9,321 Dec-19 19.9 7.0 1.0 0.9 5.6 1.0 0.6 China DX 3818 HK NR n/a 0.91 n/a 5,356 Mar-20 5.2 4.9 0.4 0.4 11.8 0.3 10.6 Avg. 30.0 20.5 5.3 4.3 14.8 1.9 3.8 Med. 19.9 11.3 1.1 1.0 11.8 1.7 3.6 International Sportswear Nike Inc NKE US NR n/a 141.71 n/a 1,731,965 May-20 46.8 36.4 21.7 19.0 28.3 1.2 0.7 Adidas ADS GY NR n/a 292.60 n/a 548,643 Dec-19 130.8 35.0 8.1 7.2 6.6 30.5 0.6 Puma PUM GY NR n/a 85.72 n/a 120,959 Dec-19 151.2 49.4 6.6 6.1 3.8 9.6 0.2 Under Armour UAA US NR n/a 22.40 n/a 71,663 Dec-20 119.8 64.7 5.7 5.2 (28.7) (0.7) 0.0 Lululemon LULU US NR n/a 339.85 n/a 343,404 Feb-20 74.1 50.5 18.4 15.3 29.2 4.2 0.0 Skechers SKX US NR n/a 36.43 n/a 44,385 Dec-20 18.6 14.5 1.9 1.7 4.1 0.3 0.3 Vf Corp VFC US NR n/a 80.88 n/a 245,616 Mar-21 62.8 26.9 16.0 14.0 (4.3) 2.3 2.4 Columbia COLM US NR n/a 100.60 n/a 51,639 Dec-20 25.2 20.9 3.3 2.9 5.9 0.4 1.1 Wolverine WWW US NR n/a 33.09 n/a 21,054 Dec-19 36.8 16.1 3.3 3.0 4.2 2.4 1.2 Mizuno Corp 8022 JP NR n/a 2254.00 n/a 4,382 Mar-20 n/a 17.3 0.6 0.6 3.4 0.0 2.2 Asics Corp 7936 JP NR n/a 1828.00 n/a 25,390 Dec-20 45.5 27.7 2.4 2.3 (11.6) (0.2) 1.5 Avg. 71.2 32.7 8.0 7.0 3.7 4.6 0.9 Med. 54.8 27.7 5.7 5.2 4.1 1.2 0.7 Source: Bloomberg, CMBIS estimates

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Assumption

Figure 13: Major assumptions Major assumptions FY18A FY19A FY20E FY21E FY22E Sales by segment (RMB mn) Shoes 4,601 6,085 6,559 8,098 9,429 Clothes 5,316 7,110 7,679 9,598 11,326 Equipment 594 674 708 814 912 Others 0 0 0 0 0 Total 10,511 13,870 14,946 18,510 21,667

Sales by segment growth (%) Shoes 11.0% 32.3% 7.8% 23.5% 16.4% Clothes 27.4% 33.7% 8.0% 25.0% 18.0% 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% 7.8% 23.8% 17.1%

Sales by channel growth (%) Franchises 15.7% 39.9% 6.6% 20.0% 13.0% Self-owned 15.0% 15.6% -4.0% 20.0% 16.0% E-commerce 32.9% 40.7% 26.9% 35.0% 25.0% International 5.3% 4.5% -27.7% 10.0% 5.0% Total 18.4% 32.0% 7.8% 23.8% 17.1%

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 Sub-total 6,344 6,449 6,049 6,129 6,209 LN Young 793 1,101 1,101 1,251 1,351 Total 7,137 7,550 7,150 7,380 7,560

GP margins 48.1% 49.1% 49.7% 50.7% 51.1%

Opex breakdown A & P/ sales 10.4% 9.6% 9.5% 9.5% 9.7% Labour/ sales 10.8% 10.9% 10.5% 11.0% 10.9% Rental/ sales 8.5% 7.1% 6.4% 5.8% 5.3% D & A/ sales 3.9% 3.3% 3.6% 3.3% 3.3% 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% 30.3% 29.9% Admin expenses / sales 6.3% 6.9% 6.0% 6.4% 6.3%

OP margins 7.4% 11.1% 14.3% 15.3% 16.0%

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

Net profit margins 6.8% 10.8% 11.1% 12.7% 13.6% Net profit att. growth (%) 38.8% 109.6% 11.1% 40.7% 25.7% 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 14,946 18,510 21,667 EBIT 777 1,543 2,132 2,824 3,467 Franchises 4,909 6,865 7,317 8,781 9,922 D & A 411 461 535 619 708 Self-owned 3,132 3,620 3,477 4,172 4,840 Change in working capital 448 1,176 77 253 223 E-commerce 2,218 3,121 3,961 5,348 6,685 Income tax paid (9) (144) (357) (512) (586) International 252 264 191 210 220 Others 45 467 - - - Cost of goods sold (5,458) (7,064) (7,517) (9,120) (10,603) Net cash from operating 1,672 3,503 2,386 3,184 3,812 Gross profit 5,053 6,805 7,428 9,391 11,064 Other income 95 139 239 222 260 Capex & investments (431) (636) (685) (849) (993) Associated companies (44) (50) - - - Operating expenses (4,370) (5,401) (5,536) (6,789) (7,857) Interest received 51 15 8 12 17 D & A (411) (461) (535) (619) (520) Others (59) 97 40 49 62 Staff costs (1,139) (1,519) (1,574) (2,030) (2,355) Net cash from investing (483) (573) (638) (787) (914) S & D costs (ex-staff, D&A) (2,708) (3,252) (3,396) (3,999) (4,619) Admin exp. (ex-staff, D&A) (112) (170) (30) (141) (362) Equity raised 51 56 - - - Other operating expenses - - - - - Net change in bank loans - - - - - EBIT 777 1,543 2,132 2,824 3,467 Dividend paid - (215) (380) (406) (572) Others (117) (490) (54) (36) (23) Finance costs, net 10 (30) (14) 13 40 Net cash from financing (66) (649) (434) (442) (594) JVs & associates 64 343 60 93 130 Exceptional - - - - - Net change in cash 1,123 2,282 1,315 1,954 2,304 Pre-tax profit 850 1,857 2,177 2,930 3,637 Beginning cash balance 2,529 3,672 5,961 7,276 9,231 Exchange difference 19 8 - - - Income tax (135) (357) (512) (586) (691) Cash at the end of the year 3,672 5,961 7,276 9,231 11,534 Less: Minority interests 0 0 0 0 0 Net profit 715 1,499 1,666 2,344 2,946

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 4,210 4,520 4,919 Sales mix (%) Fixed asset 830 1,039 1,230 1,504 1,820 Franchises 46.7 49.5 49.0 47.4 45.8 Intangible assets & goodwill 308 265 224 180 150 Self-owned 29.8 26.1 23.3 22.5 22.3 Prepaid lease payments 103 115 115 115 115 E-commerce 21.1 22.5 26.5 28.9 30.9 Interest in joint ventures - - 52 132 245 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 10,035 12,610 15,475 P&L ratios (%) Cash and cash equivalents 3,672 5,961 7,276 9,231 11,534 Gross margin 48.1 49.1 49.7 50.7 51.1 Inventories 1,240 1,407 1,498 1,817 2,112 Operating margin 7.4 11.1 14.3 15.3 16.0 Trade and other receivables 929 687 740 916 1,073 Pre-tax margin 8.1 13.4 14.6 15.8 16.8 Prepayments 546 483 520 644 754 Net margin 6.8 10.8 11.1 12.7 13.6 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 5,129 6,075 6,965 Balance sheet ratios Bank loans - - - - - Current ratio (x) 2.3 1.8 2.0 2.1 2.2 Trade payables 1,133 1,348 1,435 1,740 2,024 Quick ratio (x) 1.9 1.5 1.7 1.8 1.9 Accruals & other payables 1,412 2,205 2,376 2,943 3,445 Cash ratio (x) 1.3 1.3 1.4 1.5 1.7 Tax payables 134 531 685 759 864 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 (%) 0 0 0 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 19.8 22.7 23.2 Others 77 653 653 653 653 ROA 8.2 11.9 11.7 13.7 14.4 Per share Minority Interest - - - - - EPS (RMB) 0.29 0.60 0.66 0.93 1.17 Total net assets 5,820 7,124 8,410 10,348 12,722 DPS (RMB) 0.09 0.15 0.17 0.23 0.29 Shareholders' equity 5,820 7,124 8,410 10,348 12,722 BVPS (RMB) 2.41 2.90 3.42 4.21 5.18 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 9 18 Feb 2021

Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

Disclosure CMBIS or its affiliate(s) have investment banking relationship with the issuers covered in this report in preceding 12 months.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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