Li Ning still struggling half-way through transfomration

It's going through an investment phase.

As flagged by a company announcement in mid-July, Li Ning Co., Ltd. would record a widening net loss for 1H2014 (from a net loss of RMB184mn in 1H2013).

According to a research note from Barclays, Li Ning reported 1H14's net loss expanded to RMB586mn despite higher revenue (up 8% y/y to RMB3,137 mn) on higher retail sales of new products and rising gross margin of 44.6% (+1 ppt y/y) on improved supply chain and retail promotions.

However, the bigger net loss for the half-year was due to c.RMB300mn from one-time costs including bad debt provisions, and c.180mn from higher SG&A for company's expansion.

As management guided, the company is only half-way through its transformation.

Because it is still in its investment phase to further ramp up sales and margins as well as get rid of old inventory and bad debt, Barclays maintains its EW rating owing to the business turnaround uncertainty.

Here's more from Barclays:

A number of challenges remain: Although the transformation plan has brought about some positive changes such as a lower account receivables provision, normalized channel inventory and higher sell-out rate of new products, we believe a number of challenges still remain that point to further uncertainty for a business turnaround.

In particular, overhead cost pressure should continue to increase as the company turns retail-intensive; the new CEO appointment has been a work in progress since July 2012, which might affect transformation execution; the competitive landscape from both local and foreign sportswear brands as well as casual brands has intensified; and lastly c.10% of weak channel partners still carry a significant amount of old inventory, which slows the inventory clearance process.

New estimates: In light of the prolonged transformation and the company's ongoing process of expanding retail network and enhancing marketing resources, we have turned more conservative in our forecasts and delay its expected profitability from end-2014 to end-2016.

We now forecast a net loss of RMB797mn and RMB188mn in 2014 and 2015 and expect the company to turn profitable with net profit of RMB307mn by 2016 despite ongoing top-line growth and gross margin strength.

Valuation: Our new PT of HK$4.60 is based on our target P/B of 2.5x applied to 2014E book value.

We use P/B as valuation methodology as the company is turning profitable only in 2016. Our target multiple of 2.5x P/B is based on China retail companies' trading average.