FY24 results were inline with market expectation while 4Q24 operating numbers were slightly better than expected. Going forward, on one hand, the Company is outlining conservative FY25E guidance and the plan to invest more for the future, and on the other hand, the numbers in 1Q25E are already trending better. Therefore, we tend to think the worst should have already gone and maintain BUY, even though the valuation is relatively high at the moment.
　　Li Ning has outlined conservative FY25E guidance. Management is now guiding a flattish sales growth and a HSD net profit margin in FY25E (should also include all the potential impairment losses for investment properties and store closures). However, we believe investors should all have certain expectations and these targets should be largely inline with consensus. In terms of categories, running/ basketball/ training/ lifestyle sales growth was at 25%/ -21%/ 6%/ -6% in FY24. For FY25E, management is aiming to maintain the development in running and basketball while actively improving the lifestyle segment. In terms of ASP and volume, management is foreseeing stable and flattish growth in FY25E.
　　For GP margin, management is targeting flattish margins or mild improvement in FY25E, and we believe the drivers shall be: 1) potential improvements in retail discounts (likely in offline channel) and 2) channel mix improvements (online sales should remain faster). For OP margin, we believe it is likely to fall, mostly due to the increased efforts on A&P (may account for 10%+ of total sales in FY25E), R&D and talent acquisitions. Other positive factors like: 1) further closures of those underperforming stores, 2) better channel mix (online sales has a higher OP margin and faster sales growth), and 3) gradual reduction in store closure-related impairments, may be offset by other negative factors like potential impairment related to the investment properties (Li Ning still has properties in Hong Kong, Shenzhen and Shanghai, which have a total book value of more than HK$ 30.0bn).
　　Maintain BUY with a new TP of HK$ 19.81, based on 18x FY25E P/E (up from 13x). We are revising down our net profit forecast in FY25E/ 26E by 23%/ 20%, in order to factor in the slower retail sales growth, higher A&P expenses and impairment losses. The stock is trading at 16x FY25 P/E, which is not too cheap in our view. However, since most of the negative news should have been priced in and the trend in 1Q25E is already improving (and hopefully turning around), we maintain our positive view on Li Ning.
　　4Q24 numbers were better than expected. Retail sales growth rebounded to HSD in 4Q24, improved massively vs the MSD drop in 3Q24 and also better than our estimate of a 3% increase. Inventory to sales ratio was at about 4 months in 4Q24, very similar to the 3.9 months back in 2Q24, given the warm winter and early CNY in 2025, but we believe this level is actually quite decent. However, the retail discounts worsened by LSD YoY for the offline channel while that was quite stable for e-commerce.
　　Performance in Jan-Mar 2025 is trending better. According to management, retail sales growth so far in 1Q25 is still positive, across all channels (but the trend has weakened in Mar 2025, due to the unfavorable weather). While the inventory to sales ratio remains rather healthy, retail discounts should have improved both YoY and QoQ. Even though management has provided rather conservative guidance for FY25E, we do think the trend in 1Q25 is constructive.
　　FY24 results inline, net profit dropped but the drag was mostly non-core. Li Ning’s sales increased by 4% YoY to RMB 28.7bn, while net profit fell by 5% YoY to RMB 3.0bn (with a net profit margin of 10.5%) in FY24, both roughly inline with BBG est. as well as the Company’s previous guidance. However, if we take into account the RMB 333mn impairment losses of investment properties, the adjusted net profit could have increased by 5% (and the adjusted net profit margin would have been at 11.7%).