Li Ning management expects substantial loss for FY2012

Learn why the firm's 'channel revival plan' may not work.

This morning, Li Ning hosted an analyst presentation with regards to the details of the company’s newly implemented “channel revival plan” and its expectation to record a substantial loss for FY12 (ending 31 Dec 2012). 

Here are the key points according to Barclays Capital:

The “channel revival plan”: The company estimates the cost of this namesake plan at RMB1.4-1.8bn (mostly non-cash and in the form of accounts receivables offsets) and expects it to restore profitability and the store productivity of channel partners. The plan includes:

1. Inventory clearance and buyback in the form of accounts receivables offset;

2. Construction of dedicated clearance channels;

3. Implementation of merchandizing initiatives which includes matching various consumer fashion tastes with different stores;

4. Network rationalization such as re-sizing, relocating, and closing down inefficient stores upon analysis; and

5. Restructuring accounts receivables to ensure appropriate leverage.

Current status: The plan was launched a few months ago and positive results were observed from its test pilots with selected distributors, both in terms of pricing (which reached 96% of prices tagged, versus c50% for its discounted products) and sales volume (which was about three to four times more than average products sold).

Target results: Through implementation of the plan, the company aims to achieve a healthy balance between inventory and mix of new products, strengthen working capital and cashflow of both the company and its distributors, cooperate closely with distributors and solidify the company’s leadership position in the China sportswear industry for sustainable growth.

FY12 profit warning: Along with the announcement of “channel revival plan” details, the company expects to record a substantial loss for FY12 (ending 31 Dec 2012). Management believes that such a loss is primarily attributable to the one-time non-operational costs (of RMB1.4-1.8bn) relating to the company’s transformation, which includes the “channel revival plan” highlighted above.

Barclay's view on the announcement:

While management believes that implementation of the “channel revival plan” marks a positive turning point for the company, we remain cautious, as we believe (i) the cost of the plan, at RMB1.4-1.8 bn (although mostly non-cash and in the form of accounts receivables offsets) is a sizable amount (compared to the company’s RMB2.5bn accounts receivables amount and RMB1.3bn cash and bank balances as of 1H12); (ii) there is no clear timeline for the plan although management reiterated “as soon as possible” as the goal and emphasized that the cost was non-operational; and (iii) the plan is complicated by a number of initiatives and involves a lot of parties such as various distributors (the company had 52 distributors as of 1H12), which implies a high degree of execution challenges and risks. Please refer to our 14 Nov note “LI NING CO., LTD.: Restructuring yet to be done; cutting earnings estimates further” for our latest discussion on company, including business updates and earnings forecast. Reiterate UW rating and PT of HK$2.70.