Li Ning’s Disappointing Guidance Reinforces Our Bearish View on Its Stock

Li Ning’s 02331 share price fell 8% after management issued soft revenue and profitability outlook for 2023. Although guidance is below Refinitiv consensus estimates, they are in line with our estimates. We have long had a bearish view on the valuation of the stock because we believe the market valuation baked in unsustainable growth and profitability assumptions. We expect positive sentiment around the stock to deflate, as nationalism-driven sales growth fails to materialize over the next few quarters. Despite today’s sharp selloff, we still believe Li Ning’s valuation is too high. We maintain our fair value estimate of HKD 44 fair value estimate—which implies valuation of 21 times forward earnings multiple. Among our China sportswear coverage, our prefer picks are Shenzhen International and Anta Sports, both trading at significant discounts to our fair value estimates.

In the second half of 2022, Li Ning’s total revenue grew 8% year over year. Gross profit margin declined 380 basis points to 46.9% due to a more competitive sales environment and higher raw material costs. Due to higher advertising and other sales-related variable costs, Li Ning’s operating margin declined to 16.7% in the second half of 2022, down 330 basis points from the 21% margin in the same period last year.

We think that weak financial performance in the second half was widely expected by the market, but the soft guidance wasn’t. For the full-year 2023, management guided just a midteens percentage of revenue growth and a midteens level of net margin. For comparison, Li Ning delivered 14% of revenue growth and 16% of net margin in 2022, a year that was marred by zero-COVID challenges. The fact that Li Ning management doesn’t expect its performance in 2023 to be materially better than 2022 suggests its core brand is facing more specific headwinds, such as the fading of nationalism-driven buying patterns.