LN reported a low single-digit YoY growth for its overall sell-through in 1Q25, and we see this in line with market expectations. This shows LN is still under the process of fine-tuning its operations, and its figures would be less shiny than most peers. While we share the view of its mgmt. that the impact of China-US tariff war is likely limited in the short run, the industry’s competitive landscape could remain intense in 2025. Against this backdrop, we expect LN will spend more on advertising and promotion to solidify its brand image. Hence, the full year guidance of “flattish revenue with high single digit NPM” could be subject to more interpretations: “how much NP decline is tolerated?” We maintain HOLD as we see the turnaround of LN is not yet imminent.
　　Key Factors for Rating
　　1Q25 performance in line as LN slowly recovered. LN’s 1Q25 overall sell- through recorded a LSD YoY growth. While wholesale (+LSD) and e-commerce (low-teens) were improving, directly operated retail declined by LSD YoY. This is mostly related to the decline of stores in 1Q25 (a net closure of 6 stores versus 4Q24), but same-store sales of this channel actually improved by c.5-6% YoY. Operating metrics in 1Q25, such as retail discount, also slightly improved YoY, suggesting LN was slowly recovering and is in line with market expectations.
　　Some deterioration since Mar 2025, partly due to weather. Despite such figures, mgmt. commented that sell-through in March was below their expectations, and such trend extended in April. This is partly attributed to the unfavourable weather, as April was cooler than usual and this could weigh on the sales of spring/summer items. While mgmt. also observed some weakening of sales in high-tier cities (down LSD YoY), sales in low-tier cities were actually improving (up HSD) and they also commented that the impact of China-US tariff war is yet to be seen.
　　More downside on profitability than upside in 2025, Reiterate HOLD. Mgmt. also shared that it is finalising the details of the sponsorship campaign of Chinese Olympic Committee, and will soon roll out the products and ads. The expenses involved are slightly above what they planned. They expect advertising and promotion expenses (A&P) would account for low-teens of revenue in 2025, and reiterate the full year guidance of “flattish revenue with high single digit NPM”. We believe this implies A&P would see more pressure as LN is still in the stage of brand investment, and we expect this would mean the downside of NP will be higher, leaving more uncertainty on this year’s earnings. For instance. an 8% 2025E NPM is still in line with their guidance, but it will be much worse than the 9.4% consensus 2025E NPM as of 28 Apr 2025, given operating deleverage. This alone will be an overhang on valuation, in our view.
　　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
　　Our TP to HK$16.4 is based on 13x adjusted 2025E EPS (unchanged).