Li Ning’s 2024 reported net profit of RMB3,013m (-5% YoY) may seem underwhelming but it is actually a beat if we exclude the RMB333m impairment loss related to investment properties. While 2024 earnings reflected some stabilisation of its business, the company has turned more aggressive on brand investment, as suggested by its new sponsorship of Chinese Olympic Committee (COC) in 2025. As such, Li Ning targeted to maintain flattish revenue growth and a NPM of high single-digit level in 2025. We believe this will be deemed as a very vague target for 2025, and we expect this will be at least a double-digit decline in NP for 2025. We expect Li Ning to be ready to take market share in the long run after its recent success of reforms, and could see strong earnings growth after 2025 or 2026. Still, we maintain HOLD given the heightened earnings uncertainty in the short term.
　　Key Factors for Rating
　　2024 net profit a slight beat if excluding impairments. LN’s 2024 net profit was down 5% YoY to RMB3,013m, implying flattish 2H NP of RMB1,061m, which may look weak. However, if excluding impairments of RMB611m in 2024 (2023: RMB335m), adj. NP is actually up 3% YoY in 2024, which is a slight beat. After all, the results reflected that LN was still under stress in 2H24 and 4Q24, as its directly-operated retail stores suffered from both declining store traffic and shrinking store counts, despite recovering wholesale and e-commerce business.
　　Vague 2025 guidance implies some kitchen sinking. The not-so-strong 4Q24 retail sell-through (HSD YoY despite low base) suggests offline stores were still under the challenge of cannibalisation from e-commerce. Also, LN has ramped up its brand investment since early 2025, such as a new sponsorship deal with COC. Hence, mgmt. provided a 2025 guidance of: (i) revenue to be flattish, and (ii) NPM of high single digit level (2024: 10.5%). We view this a very vague guidance, but would mean some considerable pressure on NP in 2025. We now expect a 2025 NPM of 9.3%, and this will translate into a 9%/16% YoY decline of reported/core net profit in 2025. Aside from higher expenses related to advertising, we also expect there will be impairments in its retail stores, as it is still closing stores in China, and we expect the impact in 2025 will be around RMB232m, or a 0.8% NPM drag.
　　Weakness from basketball and athleisure. By sell-through, basketball and athleisure declined by 21%/6% in 2024. While the decline of sales from basketball is partly intentional, we see this an alarming sign for LN as peers are taking market share from it. We expect LN will then try to regain market share through higher advertising and promotion in 2025, hence the profit pressure.
　　Still some positive signs from the recent reform. Despite the softness of basketball and athleisure products, LN has been successful in its running shoes products (+25% YoY), achieving a sales volume of 10.6m pairs for the 3 core product series, a record high and exceeding mgmt expectations. We see this a good sign of LN’s R&D outcome, such as the application of Li-Ning Boom (a lightweight midsole material). LN has also reaped some success in new product lines such as Li Ning Soft, a product series of comfortable footwear. We expect such products may help offsetting the weakness of other products, especially basketball when the market is still shrinking.
　　We turn more cautious in the near term, but more positive in the long run. Given the vague 2025 guidance and the dedication on higher brand investments, we expect short term earnings will be under heavy pressure, especially 2025. We expect the visibility will only turn better after its interim earnings in Aug 2025 so the market would have a better understanding on the target of “high single digit NPM”. If 1H25 NPM is below 9%, we see this could be a rather strong downside risk to 2025 earnings, as 2H GPM will usually be even lower. However, we also turn more positive on LN’s overall development after 2025, as we see LN is having more success on its recent innovations, while its overall inventory level (now at 4 months equivalent) and receivables have been improving since 2023. We expect its sponsorship on COC will strengthen its brand image and hence translate into strong sales, but we view it a rather gradual process, and only can be proven at later quarterly operating data releases.
　　Key Risks for Rating
　　Downside risks: (i) weaker-than-expected retail discounts offered; (ii) deteriorated retail sell-through; (iii) unexpected spike in promotional spending and other expenses, and (iv) higher store closure and hence higher impairments.
　　Upside risks: Stronger-than-expected performance and margins after investments on new events and sponsorship deals.
　　Valuation
　　We cut our reported net profit estimates for FY25-26 by 20%/19% to reflect the bearish 2025 guidance. Our core net profit revision is less than reported profit due to non-operational items such as impairments on investment properties in 2024 and ongoing impairments of ROUA (related to closure of retail stores) in 2024-26.
　　We lower our TP to HK$16.4, based on 13x adjusted EPS (previous: 11x). We adopt a higher target multiple as we see: (i) market is turning more positive on consumption in China, and (ii) the brand investment efforts in 2025 may translate into higher earnings potential in 2026 and onwards. We view LN will turn into a more sensitive sportswear play with higher beta.
　　Despite our long term bullishness, we maintain HOLD as we believe the short term earnings visibility will be very low, and we expect higher risk of negative earnings surprise in the next 12 months.