Here’s why Li Ning Co Ltd (SEHK: 2331) has seen a revival in its fortunes and why investors might want to take a look at its shares. –

The China sportswear industry is experiencing a revival after a dreadful first quarter in 2020.

Given the Covid-19 pandemic, the internet has strengthened the penetration of retail sportswear sales and the industry is expected to recover with more business opportunities via e-commerce channels.

Leading sportswear brand Li Ning Co Ltd (SEHK: 2331) has been keeping its upward business momentum as a market leader in China, in which it adheres to its strategy of “Single Brand, Multi-categories, Diversified Channels”.

With an increase in operating profit to RMB 898 million (US$129.6 million) – up 32.4% year on year – but a disappointing drop in the basic earnings per share to 27.98 RMB cents (-14.9% year on year), let’s examine whether the rebranding in 2015 still works or not in the post-Covid-19 era.

The fall and rise of Li Ning

Li Ning has been able to ride on the rapid development of the Chinese domestic market in the 1990s, with the increase in consumer spending power. This aided its aggressive growth in wholesale sales for 20 years.

Li Ning has, however, entered an adjustment period under fierce competition from international brands and a lack of a strategic plan after the Beijing Olympics in 2008, with a record loss for three consecutive years up until TPG’s help.

It aimed to reposition Li Ning as a retailer targeting the Gen Y and Z groups of consumers.

Since 2015, business performance has turned positive with revenue of RMB 6.2 billion as of June 2020 (+510% from 2015), reflecting a long-term growth story for the sportswear brand.

New business and policy tailwinds

Looking at its new strategic re-orientation, Li Ning has opened up new territory via the children’s casual sportswear and become a popular sports fashion, with an ambition to open up 100-120 stores in the coming year.

Notwithstanding that Covid-19 has hit retail sales in first-tier cities, Li Ning did well in cost control by simplifying its distribution channels. With such a strategy, the sportswear company has been able to mitigate gross margin erosion.

Foolish conclusion

Li Ning, as the second-largest local sports shoes and apparel company, has done well to turn around the business since 2015.

With its bold market entry into the teen adults’ market, the company enjoyed handsome net profits compared to its peers.

Referring to Li Ning’s high price earnings ratio of 45x price-to-earnings (PE), the high growth story does not sound convincing to me at this post-Covid-19 era.

With a view of weak consumption, I do not see a significant growth story for this sportswear company in the short run.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.

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