Behind Lining's Net Profit Surge: 196%: Next Opportunity

In August 14th, Lining (HK02331) released its interim results in 2019 and held a performance briefing in Hongkong. Lining surrendered the most beautiful half year report card in the past 10 years - -6 months in January 2019, revenue grew by 32.7%, reaching 6 billion 255 million yuan, net profit of shareholders rose 196% to 795 million, net interest rate increased from 5.7% to 12.7%, gross margin increased 1 percentage points to 49.7%, and cash flow increased by 107% to 1 billion 366 million. The basic earnings per share were 32.88 points, but Lining did not pay dividends this time.

Of all the major financial data, the biggest concern for the market is the sharp rise in net profit and net interest rate. Among them, the net profit rose nearly 200% of the reason is that the group has a 270 million yuan investment income. After deducting disposable profits and losses which are not related to business, Lining's net profit increased by 109% to 561 million yuan, and the net interest rate was 9%. Compared with the past few years, this is still an eye-catching achievement.

Although earnings beforehand have been announced ahead of time, this report card is still beyond the expectations of the capital market. After the release of the earnings report, Lining's stock price rose significantly, which rose to 13.78% as early as 14. The intraday hit the highest HK $21.05 share price since 2011, and then dropped slightly. As of today's closing, Lining reported HK $19.86, up 7.32%. From the beginning of the 8.09 Hong Kong dollar, Lining's share price climbed all the way up to 140% so far this year. At present, Lining has a market value of 45 billion 800 million Hong Kong dollars. In the same period last year, the market value was only about 18 billion Hong Kong dollars. As of 14 p.m. Beijing time six p.m., Lining's market value has exceeded the main sports shoes of American company Cage (market capitalization 5 billion 176 million US dollars).

Judging from the first seven months of this year, the biggest increase in Lining's stock price was in June, an increase of 42.88% in the month. The biggest positive sign was the sharp rise in revenue and operating profit in the first half of the year, which led to a rise of more than 18% in Lining's share price in one day. We can see that the strong performance in the first half of this year is a powerful boost to Lining's share price.

　 Lining and basketball in China

In terms of business performance, the biggest source of motivation is sports and basketball. Among them, sports and fashion retail sales including China Lining series increased by 54% and basketball categories increased by 44%. In the proportion of retail running water, sports fashion has exceeded basketball to become the first category of Lining, accounting for 29% and basketball accounted for 28%.

Among them, in the first half of the year, the total sales volume of sports fashion clothing series exceeded 4 million 200 thousand, and the sales rate of new products exceeded 60% in six months, and the sales rate of new products sold in three months was about 50%. The total sales volume of shoes series exceeds 40 thousand pairs in the first half of the year, and 48% and 55% sales of new products in three months and six months respectively.

When accepting the question of lazy bear sports, Ceng Huafeng, chief financial officer of Lining, said that at present, China's Lining products account for about 10% of the sports and fashion categories. Despite its development for only a year and a half, the series has become Lining's most "signboard" product. At the press conference, as in the past two conferences, the "Lining China" was written prominently on the kanban. At the press conference, the Chinese Lining series was an important part of the shoe and clothing display.

As for sports fashion, Lining, chairman and acting CEO Lining of the board of directors, said: "this series has maintained a high degree of market concern and reputation. It is also a highlight of our first half performance. We explore the possibility of combining young genes with the trend group with an open attitude and a young perspective. At the same time, high attention and good word-of-mouth will be turned into excellent performance.

China's Lining series launched in February 2018 was a start last year. After all, after last year it became the "representative of the national tide", the products and time available for sale were relatively limited, and this year is really a time for Chinese Lining to expand and harvest. By the end of June 30th, China Lining already had 70 stores, mainly concentrated in the core shopping centers of cities in second tier cities. It is expected to reach 100-120 throughout the year. Ceng Huafeng revealed that as a whole, the performance of Chinese Lining fashion shop is much higher than that of a large store. In the case of Shanghai Raffles and Chengdu IFS, the average monthly store efficiency in the first half of the year is over 1 million yuan, and the Nanjing De Ji square store opened in March exceeded 1 million 100 thousand yuan.

In addition to the growth of sales, the sports fashion series represented by China Lining has greatly promoted the promotion of Lining's brand image and the promotion of brand marketing.

Among the reasons for the sharp rise in revenues, Lining said, "by effectively integrating Chinese elements with their own" sports genes ", the recognition of the brand of Lining has increased significantly, and the revenues of all channels have recorded a higher growth.

In addition to sports fashion, basketball category in the first half of 2019 also increased rapidly to 44%, "basketball is still very good from the results." Lining himself said, "our professional basketball products have been recognized by the market, and this year is the year of Wade's retirement. Therefore, Wade's related products, including shoes, clothing and BADFIVE clothing, have grown very well."

Running running down 8% is the rare negative in this earnings report. Lining himself said that this is mainly because "running is strategically adjusted and needs to be accumulated, precipitated and absorbed in the transformation period of experience."

At the press conference, "product strength and brand power" are the words Lining repeatedly mentioned.

One thing that is different from the past is that all the shoes displayed at the scene are all marked with tag price, including 439 yuan for 001 departure, 899 yuan for arc ACE, 1299 yuan for chase wind and 1299 yuan for ACE1.5. They seem to want to show investors and media to the distribution and upgrading of the brand's product price.

Lining stressed, "we do brand management. We hope that more value-added products will be created. This added value includes functions, designs, materials, and so on, making products more attractive and valuable. Because it is more valuable, the unit price of the whole sale will be improved. "

From the creation of Li Ning Co, Lining himself hopes to develop in the direction of Brand Company. The sports fashion and basketball category represented by the Chinese Lining and Wade road series not only promote the performance greatly, but also enhance the brand power.

Lining said that in the second half of the year, their focus is still on enhancing product strength and brand power.

　 Operational efficiency improvement

The promotion of brand strength will help improve dealer recognition of brand, enhance brand attractiveness to dealers, and increase brand initiative. Lining said in the earnings report that the gross profit margin increased by 1 percentage points to 49.7% in the first half of the year. The reason is: with the improvement of brand recognition, the discount offered by the group to the franchisee has been improved, and the sales discount of the old and new products in the self operated channel has been improved.

After deducting one-time gains and losses, Lining's net profit increased by 109% to 561 million yuan in the first half of 2019, and the net interest rate increased from 5.7% to 9%. Ceng Huafeng said that the growth of net interest rate was mainly due to the improvement of gross margins, the improvement of wholesale discounts, the improvement of new product discounts, and the proper cost control.

The improvement of gross margin and net interest rate is an important manifestation of operational efficiency. However, Zeng Hua Feng and Lining have repeatedly stressed that Lining's net profit margin still has much room for growth. "Li Ning Co's net profit margin is still at a lower level in this industry. As long as we can find room for improvement in operational efficiency, products and supply chain, profits will naturally keep up with industry standards, and we can expand our profitability and profitability. Lining said.

Li Ning Co closed the retail operation closed loop into six parts: Commodity planning, product development, goods sales combination, storefront operation, tail cargo handling and cash remittance. In every respect, Lining showed progress.

Among them, the average inventory turnover period increased from 85 days to 74 days, the average turnover period of trading volume was 24 days, which also decreased by 18 days compared with that of the previous year. The average daily turnover of gross profit payable decreased by 16 days for 66 days. These data have been improved to the leading level in the industry.

At the press conference, the sales of new products and the growth of same store sales are very important data of management. Because they are the test of many links in operation and operation, the improvement of these two data means the improvement of overall retail capability.

In the first half of 2019, Lining's overall sales growth in the same store was double digits, of which the number of Direct stores increased by a single digit, while the wholesale business grew at a low double-digit level, and the electricity supplier grew by 30%-40% in the middle.

In the global campaign shoes and clothing brands are vigorously developing the direct DTC market, Lining's wholesale business has shown a stronger growth trend - this has some anti trend significance. In the first six months of 2019, Lining's retail business contributed 1 billion 743 million yuan, an increase of 12% over the same period last year, while the contribution of wholesale business grew by 45% to 2 billion 898 million yuan. This is a huge push in the first half of Lining's growth in terms of channel level. As of June 30th, the contribution of Lining dealer contributed 48.6%, up 4.2 percentage points from the same period last year, and the proportion of direct sales decreased by 5.1 percentage points to 28.1%.

Ceng Huafeng said that there are two main reasons for the wholesale growth. One is the improvement of the discount offered by wholesalers. The two is that distributors are also opening larger stores, and their operation and sales efficiency are improved.

As of June 30, 2019, the total number of Lining sales points in China (excluding Lining YOUNG) totaled 6422, representing a net increase of 112 over the previous quarter and a net increase of 78 so far this year. In the net sales of 78 outlets, the retail business decreased by 127, and the wholesale business increased by 205. Since 2015, Lining's Direct stores have been reduced continuously. They shut down inefficient Direct stores, pay more attention to efficient shops, and store growth as an important indicator, hoping to improve operational efficiency and net interest rates.

Reducing direct stores means a reduction in costs. Once the wholesale business shows a dynamic growth, Lining will further scale up without needing to invest heavily.

　 Next opportunity

In May 22nd this year, since its establishment in 1990, Lining has built its own factory for the first time, and has entered the manufacturing link of the upper reaches of the sporting goods supply chain. The Guangxi supply base invested by Lining group has officially started. Lining hoped that the speed and flexibility of the supply chain reaction could be enhanced to enhance the capability of its own supply chain management and R & D knowledge application. Self built factories involve high cost of land, construction, equipment, labor and so on, but the cost can be diluted for a long time. The profit of production can be controlled in their own hands, and it is stable and controllable. With the gradual success of the retail transformation, we have more sufficient financial strength and management capability to sort out and layout the upstream industry chain. In the future, the Guangxi supply base, which is expected to produce five million pairs of sports shoes annually, will become an important booster for Lining's overall development.

Last year, Lining's clothing business grew much faster than the footwear business. In the first half of this year, the growth rate of Lining footwear business and clothing business was quite good, which was above 33%, the footwear business increased to 2 billion 922 million yuan, and the clothing business grew to 3 billion 60 million yuan, which accounted for 46.7% and 48.9% respectively.

Geographically speaking, in the Chinese market, the northern market grew by 24.1%, earning 3 billion 191 million. It is still the most concentrated area of Lining business, accounting for 51%. The growth rate in the South and Southern China was the strongest, with a growth rate of 43% and 44.3% respectively. An important reason behind such a growth rate is that "the market share in the south is larger than that in the north."

Next, children's clothing business Lining YOUNG will become an important growth point for Lining. As of June 30, 2019, Lining YOUNG business has covered 31 provinces, with a total of 872 shops. Lining himself said, "children's clothing business is advancing in an orderly way, and achieved some results. With the continuous accumulation of experience, we are confident that we will do better in Lining's children's clothing business. Children's clothing is a big market and will give us great room for development.

With the success of Anta's multi brand strategy represented by FILA, the domestic sports brand has launched the upsurge of multi brand acquisition and operation. At present, Anta, XTEP and 360 degrees have many brand businesses. Prior to that, Lining also bought Danskin's operation rights in China, but since last year, Li Ning Co has put forward the strategy of "single brand, multi category and multi-channel". "When a brand's core competence is not mature, it is more inefficient to disperse and copy other brands, and the possibility of losing is even greater, and it also disperses its resources and energy." The success rate is the highest on a single brand, to run the main brand. Such an attitude is also against the current market trend.

In the 2019 mid term earnings report and performance briefing, Li Ning Co has repeatedly emphasized the strategy of "single brand, multi category and multi-channel" and rarely mentioned many brands. But in the process of asking questions, the acquisition and development of multi brands is still one of the focuses of media and market.

Ceng Huafeng revealed that the group had previously established private equity funds with Lion Rock Capital, a private equity fund company, and hoped to invest in foreign appropriate consumer and sports brands through limited partnership. Details will be announced in the latter half of the year. "Our goal is not to make acquisitions directly, because the Lining brand itself has many opportunities and does not want to spend too much energy and money, so we choose to cooperate with specialized funds to make investment, but it will not be a big investment." Ceng Huafeng said.

According to the Hongkong economic news agency, Li Ning Co invested about $61 million in the private equity fund.

Zeng Hua Feng expects Lining's revenue growth in 2019 to be between 20%-25% and net interest rate of 8.5%-9.0%. At the end of his speech, Lining put forward the company and his personal goal: to build Li Ning Co into the most competitive Chinese sports brand enterprise in the sports market.