Can Li Ning Become a Sportswear Heavyweight?
What’s interesting about Li Ning is that its net profit in 2021 rose by 136%
Highlights:
- Riding Chinese e-commerce wave to drive top-line growth
- Efficient inventory management results in margin expansion
- Strong cash flow is proof that investments are fruitful
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A surge in domestic rejection of Western brands
- Public pressure has been mounting on Western brands to stop sourcing cotton from China’s western region of Xinjiang due to concerns of forced labor
- H&M, Nike, and Adidas bowed to this pressure and stopped buying cotton from the region
- China fired back by removing Western brands from major e-commerce platforms and social media
- Also, Chinese consumers started to boycott those brands
Mass boycott of foreign brands constituted a catalyst for Li Ning
- With the start of the boycott of Western brands, the share price of Li Ning almost doubled
- Chinese people perceived the allegations as an offense
- The hashtag “I support Xinjiang cotton” has more than 1.8bn views on Chinese platform Weibo
The rise in share price was followed by a big drop
- Li Ning faced a couple of events that led to a quick drop in its share price
- (1) Chinese Zero COVID policy
- (2) Supply chain issues due to the outbreak of the Russian war
- (3) Foreign funds start to divest shares due to concerns of violations of human rights
A political war between West and China
Revenue breakdown 2021
Riding Chinese e-commerce wave to drive top-line growth
- Li Ning started selling their products online back in 2014 which at the time made up 5% of total revenue
- As of 2021, the contribution of e-commerce has risen to almost 30%
- China is expected to be the first country that generates more sales from online than in physical stores in 2022
- As a comparison, in the West, e-commerce accounts for only 10-20% of retail
Efficient inventory management results in margin expansion
- Li Ning has consistently improved its inventory management
- As a result, it has a higher turnover on its inventory with a lower share of older and outdated products
- This has led to a massive margin expansion over time
- Between 2017 and 2021, gross margin expanded by 6 percentage points
Strong cash flow is proof that investments are fruitful
- To lay the foundation fur future growth, CAPEX requirements are constantly rising
- However, at the same time, Li Ning is generating strong cash flows, that can easily cover investments and also growing dividends
Consensus is bullish
- All analysts are very bullish except one courageous analyst issuing a STRONG SELL
- Analysts predict revenue to continue seeing a strong rally and gross margin to stay high
Get financial statements and assumptions in the full report
P&L – Li Ning
- Gross profit growth is driven by strong revenue growth and efficient inventory management
Balance sheet – Li Ning
- To realize its growth potential, the company must continue allocating a high budget to CAPEX
- Li Ning has a low level of leverage and is net cash
Ratios – Li Ning
- The company has a negative cash conversion cycle as it has strong bargaining power over its suppliers
Stock Picking Checklist
Can this company be a ten bagger?
Free cash flow – Li Ning
- Expect strong cash flow generation despite rising CAPEX requirements
Value estimate – Li Ning
- Li Ning has strong revenue potential
- However, I think that consensus might be slightly too optimistic with regards to margins
- I value the company using FCFF with a terminal growth rate of 4%
Key risks is geopolitical conflict
- Geopolitical situation may hinder the company’s international expansions
- Sanctions by Western governments could prevent investors from investing in the company
- Failure to protect its own intellectual properties
Conclusions
- Chinese booming e-commerce to unlock double-digit growth
- Efficient inventory management drives margin expansion
- Strong cash generation supports a defensive balance sheet
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