Health Trends And E-Commerce Will Expand Premium Markets

Key Takeaways

• Strategic product mix upgrades and omnichannel online integration are transforming margins, accelerating growth, and strengthening Li Ning's pricing power across key segments.
  
• Expansion into high-tech, niche, and premium categories along with global collaborations and a strong financial position is driving brand equity and diversifying future revenue sources.
  
• Weak international expansion, slow ESG adoption, overreliance on domestic retail, and rising competition could threaten Li Ning's growth, margins, and adaptability to market shifts.

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.

• Analysts broadly agree that increased focus on high-margin professional and premium categories will lift pricing power and margins, but this view still understates Li Ning's product mix transformation: professional product revenue surged over 60 percent and core running categories like the Rouge Rabbit 8 Pro have already scaled to multi-million pair sales, signaling a likely step-change in both average selling price and net margin trajectory.
  
• Analyst consensus expects e-commerce growth to drive gradual margin improvement, yet Li Ning's rapid online content optimization and aggressive omnichannel integration-now driving high single-digit e-commerce sell-through growth-suggests faster than expected channel mix shift, with potential for a structural leap in gross margin and customer stickiness.
  
• The emergence of niche and high-tech categories such as badminton (up 38 percent year-over-year) and the rollout of technologically advanced running and athletic gear, riding the wave of surging sports participation and health awareness in China, could catalyze outsized revenue growth as these segments outpace traditional categories.
  
• Li Ning's robust cash reserves, healthy working capital position at 7 percent of sales, and strong operating cash flow provide the financial firepower to accelerate expansion into international and high-tier domestic markets, which could unlock new revenue streams and reduce future earnings volatility.
  
• Deep collaborations with global IP and cultural entities, alongside targeted expansion into women's and kids' performance segments, position Li Ning to capture premium pricing and recurring sales from large, rapidly growing consumer groups, boosting both revenue and long-term brand equity.

Li Ning Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Li Ning compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Li Ning's revenue will grow by 9.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.6% today to 10.3% in 3 years time.
• The bullish analysts expect earnings to reach CN¥3.9 billion (and earnings per share of CN¥1.52) by about August 2028, up 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 bullish analyst cohort, the company would need to trade at a PE ratio of 26.1x on those 2028 earnings, up 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

• The company's international expansion remains under-emphasized in the text and faces secular headwinds from intensifying geopolitical tensions and protectionism, which may hinder Li Ning's ability to grow non-domestic revenue streams and limit long-term revenue growth diversification.
  
• Slower adoption of global ESG standards and lack of clear discussion around environmental or ethical initiatives could result in market share erosion and increased compliance costs, impacting brand perception and potentially increasing operating costs, thus squeezing net profit margins over the longer term.
  
• The company's ongoing reliance on brick-and-mortar stores, highlighted by store closures and a declining direct retail revenue share, indicates a lag behind global digitization and direct-to-consumer trends, risking stagnant or slower sales growth and reducing future revenue and earnings growth potential.
  
• Li Ning's heavy dependence on the domestic Chinese market, alongside only modest revenue growth and a declining apparel segment, exposes the company to both macroeconomic volatility and cyclical downturns in Chinese consumer demand, which may negatively affect revenue stability and compress margins.
  
• Intensifying industry competition and rising marketing and R&D expenses, as evidenced by the company's increased spending on Olympic sponsorships and marketing, may exert ongoing pressure on net margins, especially as global giants continue to consolidate and raise the bar for brand differentiation and innovation spend.

Valuation

• The assumed bullish price target for Li Ning is HK$33.31, which represents two standard deviations above the consensus price target of HK$21.18. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be CN¥37.8 billion, earnings will come to CN¥3.9 billion, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of HK$19.0, the bullish analyst price target of HK$33.31 is 43.0% higher.
  
• 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.