China Slowdown And Price Wars Will Erode Profitability

Key Takeaways

• Heavy dependence on the Chinese market and mounting competitive pressures expose Li Ning to unpredictable earnings and increased vulnerability to domestic shifts.
  
• Ongoing margin compression due to rising discounting, elevated expenses, and volatile costs threatens profitability and sustainable long-term growth.
  
• Strong core product growth, innovation investment, digital expansion, and prudent financial management position Li Ning for sustained profitability and resilience against industry challenges.

Catalysts

A sports brand company, engages in the research and development, design, manufacture, marketing, distribution, and retail of sporting goods in the People’s Republic of China.

• The persistent slowdown in China's economic growth and ongoing fluctuations in consumer confidence are likely to keep constraining overall discretionary spending, which points to the risk of stagnant or even negative revenue growth for Li Ning over the medium to long term.
  
• Intensifying pricing competition in both offline and online channels is driving more aggressive discounting, causing persistent compression in gross margins and undermining the sustainability of profitability improvements even if sales volumes stabilize or rise modestly.
  
• Heavy reliance on China for both sales and store footprint leaves Li Ning highly vulnerable to domestic market downturns or sudden regulatory changes, making future earnings and revenue streams increasingly unpredictable and concentrated.
  
• The company's ongoing need to significantly ramp up marketing, sponsorship, and e-commerce expenses just to maintain current growth levels is eroding net margins, with the situation set to worsen as Olympic sponsorship and related expense ratios are forecasted to rise meaningfully in the coming quarters.
  
• Heightened competitive pressures from both global giants and nimble domestic peers, combined with the need for significant digital infrastructure investment and ongoing volatility in raw material and supply chain costs, are likely to lead to further margin compression and jeopardize long-term earnings growth and operational returns.

Li Ning Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Li Ning compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Li Ning's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.6% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥2.7 billion (and earnings per share of CN¥1.04) by about August 2028, down from CN¥2.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 16.1x today. This future PE is greater than the current PE for the HK Luxury industry at 10.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Li Ning Future Earnings Per Share Growth

Risks

• Continued growth in core product categories-such as professional running shoes which achieved over 14 million pairs sold and high recognition among consumers-alongside strong badminton and kids segments, suggests Li Ning remains well-positioned to drive long-term revenue growth through category expansion and product innovation.
  
• Significant investments in technological innovation, including Super BOOM midsole technology and advanced textile applications, are enhancing brand differentiation and allowing for premiumization, which could support improved gross margins and strengthen long-term competitiveness.
  
• The company's healthy working capital position, abundant net operating cash flow of RMB 2.411 billion, and increasing net cash reserves provide financial flexibility for ongoing investment in growth initiatives, risk management, and sustaining shareholder returns, supporting overall earnings stability.
  
• The continuous digitalization and omnichannel expansion, including improved e-commerce performance (now 31% of revenues) and integration of online and offline channels, are increasing Li Ning's reach, retail efficiency, and margin potential as consumer purchasing continues to shift online.
  
• Effective inventory and channel management, evidenced by stable turnover rates, healthy inventory levels, and optimization of store networks, positions the company to avoid margin compression common in the industry and maintain profitability despite potential headwinds.

Valuation

• The assumed bearish price target for Li Ning is HK$11.98, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Li Ning's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$47.84, and the most bearish reporting a price target of just HK$11.98.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥30.6 billion, earnings will come to CN¥2.7 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of HK$19.0, the bearish analyst price target of HK$11.98 is 58.5% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.