Li Ning's First-half Profit Beats Estimates Amid Shift To Online Sales But Warns Of 'continued Uncertainty' As Covid-19 Lingers

Li Ning's first-half profit decreased 14 per cent to 683.3 million yuan (US$98 million), beating consensus estimates of a 28 per cent decline Shares rose as much as 10 per cent, reaching an all-time high of HK$32.30
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Li Ning's First-half Profit Beats Estimates Amid Shift To Online Sales But Warns Of 'continued Uncertainty' As Covid-19 Lingers

Li Ning Company Limited, the eponymous sportswear brand by China's best-known Olympic gymnast, posted a smaller-than-expected drop in first-half net income, as its shift to online sales more than offset dwindling in-store sales during the country's lockdown to combat the coronavirus outbreak.

Net income fell 14 per cent to 683.3 million yuan (US$98 million) in the first six months, outperforming the 28 per cent decline expected in Bloomberg's analyst poll. Sales fell 1.2 per cent to 6.18 billion yuan, performing better than the 5 per cent drop expected by analysts.

Li Ning's strong performance was due to "a very strong gross margin (flat year-on-year) and expense controls," wrote Jefferies' analyst John Chou, who maintained a "buy" recommendation on the stock. "Financial impact from the intensified markdown activities in 1H20 proved to be well under control. This suggests the sharp disappointment in offline retail in June didn't have much impact on Li Ning's channel health."

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Li Ning tweaked its sales strategy to eke out small gains amid the across-the-board slump in consumer activity during the coronavirus outbreak, as consumers were homebound or constrained by social distancing from visiting stores. Revenue from online sales of its athletic wear and footwear via its e-commerce channel rose 23 per cent during the period, said chief financial officer Terence Tsang Wah-fung during an earnings teleconference.

Li Ning, founder and executive chairman of Li Ning Company Limited, during a visit to his company's store in Wan Chai on 13 August 2018. Photo Winson Wong

Li Ning, founder and executive chairman of Li Ning Company Limited, during a visit to his company's store in Wan Chai on 13 August 2018. Photo Winson Wong

Li Ning's shares rose as much as 10 per cent in Hong Kong to an all-time high of HK$32.30 after the announcement on Friday. The shares eventually closed 8.4 per cent higher at HK$31.55.

"The impact of the current epidemic persists in the market, and there remains a great deal of uncertainty" said Takeshi Kosaka, the former Uniqlo executive who is now joint-CEO at Li Ning along with the founder, during a conference call. "The company will continue to hold a very cautious attitude to make preparations for the future. Finding new income sources and controlling expenses to increase operating efficiency will be part of our focus for the second half of the year."

Li Ning's revenue from direct operation dropped 24 per cent, because of a drop in traffic at its offline retail stores, which were mostly situated in metro and high-tier cities, the company said.

For the whole of 2020, the company expects "flat to mid-single digit growth in top line, and a baseline net profit margin of 10.5 per cent, which represents at least a 140 basis point improvement over 2019," according to chief financial officer Terence Tsang Wah-fung.

"Due to the Covid-19 impact in the first half, we have accelerated store closings, and delayed store openings," said Tsang, adding that the total number of stores decreased by 311 compared to June 2019.

"The recovery has been slower than most people expected, and there are still lots of uncertainty because of the recent sporadic [coronavirus] outbreaks in various cities in China, as well as the rest of the world. Hence, we are taking a very cautious approach for the full year," said Tsang.

Thirty-two of the 36 analysts surveyed by Bloomberg rated Li Ning a "buy", with four recommending "hold".

Earlier in May, Viva China, a sports talent agency founded by Li Ning, said it would buy a 66.6 per cent stake in clothes retailer Bossini International Holdings founded by the late textile tycoon Law Ting-pong in 1987.

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