Source: Titanium Media Author: Chen Weina

Starting 2024,$LI NING (02331.HK)$The performance in the capital market has not yet ushered in a turning point: the stock price continued to slump due to the weakening of the Hang Seng Index, and the market value shrunk to the HK$50 billion range in three trading days. Compared with nearly 220 billion a year ago, it has evaporated more than HK$160 billion.

This situation not only made it difficult to cool down the popular search for “Li Ning's stock price fell 70% in a year” a month ago, but also reflected that the market capitalization crisis experienced this time was not trivial. The series of capital operations proposed by Li Ning at the end of 2023 also went silent.

After last year's three-quarter report, Li Ning carried out a number of major operations: buying a property for 2.2 billion dollars, buying back 3 billion shares, and following the Li Ning Family Fund's investment to acquire international outdoor brands... Apart from normal operating considerations, this rare “trifecta” meant injecting confidence into the market to save stock prices from falling.

However, at least up to now, the market's indifference in response has dragged Li Ning into embarrassment: the scale of the investment is enormous, and some initiatives (such as the mystery of buying a property) have caused controversy while also undermining the image. Faced with such embarrassment, the former “Brother Guochao” has indeed reached a time when it is necessary to carefully review strategic plans and development paths to effectively boost investment confidence.

The three-quarter report stalled

Over the past year, Li Ning continued to “pull back” in the capital market, and its stock price performance worsened even more after the release of its three-quarter report.

In the third quarter of 2023, Li Ning's sales growth rate declined from 10% to 20% in the middle of the second quarter to medium unit growth. Among them, retail (direct sales) channels achieved low growth of 20%-30%, but dealers declined from double-digit growth to low unit growth, while the online (e-commerce) business recorded a low number of units.

The day after the report was released (October 26), Li Ning's stock price experienced a major dive, falling directly by more than 20%, the biggest drop in history, and the lowest point in nearly three years. At the same time, the company's market value also shrunk from a peak of about HK$283 billion in 2021 to around HK$62 billion at that time, evaporating over HK$220 billion in two years.

Faced with both falling performance and stock prices, Li Ning had to take action to “fight” investors and brokerage institutions.

At a telephone conference held on November 2, management answered various questions such as the sharp drop in post-performance stock prices, lower than expected revenue growth, channel inventory, and random trade, and stated that the company has taken active measures to improve, and promised to return to a healthy inventory level by the end of 2023.

Although some investors' concerns about the company's fundamentals have been dispelled to a certain extent, the trend of the company's falling stock price has not improved, or because of this, Li Ning began frequently making big moves to operate capital over the next period. The intention behind it is obvious, and they are all understood by the outside world as some measures to stabilize confidence in stock prices.

Buying a property against the trend that you can't understand

The first astonishing move was that on December 10, Li Ning issued an announcement stating that its indirect wholly-owned subsidiary signed a sales agreement with Henderson Land Development Co., Ltd. to acquire the latter's main property investment company for HK$2,208 billion. Li Ning said that part of the property will be used as the group's Hong Kong headquarters in the future.

However, the target company's performance was not ideal. From 2021 to 2022, the target company's revenue was HK$35.1313 million and HK$495.496 million, respectively; losses after tax were HK$16.766 million and HK$80,3579 million, respectively.

In the current context where the Hong Kong property market continues to decline and housing prices continue to drop, Li Ning spent a huge amount of HK$2.2 billion to acquire loss-making assets and was not favored by the industry. As a result, the company's stock price once plummeted to HK$17.88, hitting a new low in 2023. More seriously, the move caused the company's market value to once shrink below HK$47 billion, a record low since March 2020.

Huang Licong, president of Huisheng International Capital, told the Titanium Media App, “Li Ning's purchase of real estate is a place the capital market doesn't like. I don't know why they bought the property. Their analysis is not a good reason. Now office leasing in Hong Kong is also much cheaper. By doing this, they are sending a signal to the market that the funds in the hands of this brand are not being used better, such as expanding new businesses, etc.”

The Hong Kong property market will continue to weaken in 2023, and it has long been a consensus that housing prices will continue to fall. According to the data, as of December 25, the United States Real Estate Price Index, which measures the sentiment of the Hong Kong market, had fallen to 138.8 points, and property prices fell more than 21% from the historical high in 2021.

Earlier, the Financial Secretary of the Hong Kong Special Administrative Region Government, Chan Mao-po, said that the Hong Kong property market atmosphere remained cautious. Residential property prices fell 4% in the first 10 months of 2023. The average number of monthly transactions from July to November was only about 2,800, 35% lower than in the first half of the year, and the volume was still low. Although the government adjusted demand management measures in the property market at the end of October, there was only a slight recovery in market transactions. Overall, it is still below the average for the first half of the year, and property prices continue to be weak.

According to Colliers International's disclosure, Hong Kong's bulk trading volume in the second quarter of 2023 was HK$2.66 billion, the lowest since 2019. Among them, office buildings accounted for 38%, retail transactions accounted for 32%, hotels and serviced apartments accounted for 18%, and industrial parks accounted for 12%.

Cheng Weixiong, a senior brand management expert and founder of Shanghai Liangqi Brand Management Co., Ltd., pointed out to the Titanium Media App: “Li Ning bought a property at a high price in Hong Kong, with the intention to cut the bottom from a commercial real estate perspective, but the relatively sluggish performance of the Li Ning brand in recent years, the Guochao series was not as strong as before, e-commerce performance continued to decline, and inventory turnover increased, which showed that the impact of buying a property on the company's stock price at this time was quite large.”

Zhan Junhao, founder of Fujian Huace Brand Positioning Consulting and PR partner of Fuzhou Gong Sun Tse, also said that Li Ning's acquisition of a commercial building in Hong Kong may, on the one hand, be to establish a Hong Kong headquarters to facilitate international operation and management. This move shows that Li Ning has long-term plans to expand the international market and enhance the brand image. On the other hand, there may also be other intentions, but the specific intention still requires observation of subsequent actions.

In fact, Li Ning's own idea of entering real estate has been around for a long time.

In April 2010, Li Ning and her brother purchased 80% of the shares and officially joined Extraordinary Lingyue (formerly known as “Extraordinary China”). At the time, Extraordinary China Community Development Co., Ltd. under Extraordinary Lingyue focused on building sports-oriented communities, and also owned land for real estate development in Shenyang. In August of the same year, Li Ning himself announced that he would inject all 31% of his shares in Li Ning Company into Extraordinary Leadership and also acquired the Shenyang Industrial Park and Eco-City projects. However, since the Hong Kong Stock Exchange ruled that Extraordinary China's acquisition of Li Ning's shares in Li Ning's company was a “reverse takeover,” Li Ning's desire to enter the real estate industry fell through.

In 2015, Extraordinary Lingyue signed the “Liuzhou Lining Sports Community” cooperation framework with Liuzhou City Investment Company to open up sports real estate business in Liuzhou. In 2019, Li Ning invested 1.5 billion yuan to acquire land use rights and build a supply chain base in Guangxi; in May 2023, the project's investment increased from 1.5 billion yuan to 3.3 billion yuan due to the construction of a high-end intelligent manufacturing and flexible supply chain base and a high-level R&D and experience center.

According to other sources, as early as 2006, Li Ning himself used 150 million yuan to buy bungalow 5, 33 Heung Dao Road, a luxury villa in the Southern District of Hong Kong, and settled here. This time, he is once again entering Hong Kong to buy a property. Although it is in the name of the company, Li Ning's own decisions cannot be ignored. If you look at investment in real estate in previous years, Li Ning also doesn't seem to be able to break out of the traditional style of “doing business is good, real estate or bank.”

3 billion buyback plan: the market reacts indifferently

Two days after the announcement of the “Buck the trend” plan (December 12, 2023), Li Ning immediately proposed a stock repurchase plan.

According to the announcement, Li Ning plans to repurchase no more than 264 million shares, accounting for about 10% of the total number of shares issued. At the same time, the board of directors decided that within six months from the announcement date, the company plans to use no more than HK$3 billion to repurchase shares in the open market from time to time in accordance with the repurchase authorization.

Affected by this, Li Ning's stock price rebounded on the day of the announcement, rising more than 6% at the end of the session.

What is certain is that Li Ning's repurchase plan was not an “empty check”. On the second day after the announcement was issued (December 13, 2023), Li Ning made it easy for the Hong Kong Stock Exchange to repurchase the first batch of about 5.4965 million shares of the company, using capital of about HK$103 million.

From December 13 to December 22, Li Ning issued 8 share repurchase announcements. A total of 409.37,500 shares of the company were repurchased at a cost of about HK$779 million, which is enough to show the company's sincerity in releasing to the market.

This intensive buyback campaign did have an effect. Li Ning's stock price picked up slightly at the end of the year, but it remained around HK$20, and the boosting effect was not obvious.

After New Year's Day, Li Ning's stock price fell again. After falling for two days on January 2 and 3, although it rebounded slightly on the 4th, it still fell by about 8.67% compared to before the beginning. The company's stock price has not exceeded HK$20 so far. The degree of market apathy can be seen.

Bitter joke: Li Ning's brand “Archaeopteryx”

In the middle of Li Ning's massive repurchase, there was an acquisition that received a lot of attention.

On December 18, global private equity firm Ryan Capital announced that it had agreed to acquire 100% of the shares in the Nordic outdoor brand Haglöfs AB (match stick) from the sports footwear company Asics.

There are two reasons why this deal received a high level of attention. First, Match Stick is a well-known comprehensive outdoor sports brand in the Nordic region; second, the relationship between Ryan Capital and Li Ning, as the subscriber. The non-executive chairman of the former is the founder of the Li Ning brand, which in turn led to industry discussions: Should Li Ning follow Anta Sports and buy his own “ancestral bird”?

According to related announcements, the transaction was completed through a fund managed by Lion Capital. In 2019, Li Ning Company and Lion Capital jointly established a private equity fund. Li Ning invested 61 million US dollars in it to invest in suitable foreign consumer and sports brands through this fund.

In response to this transaction, Li Ning said, “Li Ning is a limited partner of a fund owned by Lion Capital. This investment is not an acquisition of Li Ning. Li Ning is a co-investor and does not participate in the management and operation of the acquired company.”

Although Li Ning was not directly led or involved in this acquisition, and few details were disclosed to the outside world, it is still regarded by the industry as an important investment by Li Ning and the group behind it to increase the middle and high-end outdoor tracks. At the same time, it can also be seen as part of Li Ning's “combo punch” in the capital market. Although participation was not high, it brought great expectations to the capital market. Many investors compared it to Anta Sports's acquisition of Archeopteryx.

Zhan Junhao told the Titanium Media App, “Li Ning's acquisition of international brands such as Match Stick may indeed have been inspired by Anta's acquisition of Amafen and the successful operation of Archaeopteryx in China. However, whether it is possible to replicate Archeopteryx's strong domestic growth still needs to take into account various factors such as brand positioning, market environment, and consumer demand. After the acquisition, Li Ning needed to conduct a strategic analysis of these brands and make corresponding adjustments to the consumption habits of Chinese consumers before finally being able to obtain the consumer's choice.”

Unfortunately, judging from the stock price performance, this acquisition did not have much positive effect, and the expectations that Li Ning injected into the capital market in the early stages seem to be slowly declining.

High-end transformation has failed: how many meters have been eroded?

After achieving a big leap in performance with the Guochao series “China's Li Ning,” Li Ning became “Guochao's brother” and successfully opened up the middle and high-end markets. However, Li Ning did not seize his hard-won good luck; instead, he was defeated on the way to entering the high-end market.

The Titanium Media App notes that Li Ning's high-end process is mainly reflected in the increase in directly-managed stores and “high-end prices.”

First, let's talk about the price aspect. Take running shoe products as an example. Every time Li Ning launches a new product, the price increases. Li Ning's Ultralight 15 Series, 16 Series, and 20 Series launched in 2018, 2019, and 2023. The new prices were 499 yuan, 539 yuan, and 599 yuan respectively; the Liejun 4 series launched in 2020 was 699 yuan, but it reached 1,099 yuan when the Liejun 7 PRO was launched in 2023, and the price nearly doubled in three years.

In addition, Li Ning also launched “LI-NING 1990,” a sub-brand positioning high-end sports fashion, in 2021 to seize the high-end market lost by Nike and Adidas in China, and opened 24 direct-run stores in the core business districts of first-tier and new-tier cities such as Hang Lung Plaza, Vientiane City, and SKP. At LI-NING's 1990 Tmall flagship store, the price range for this product line was 88 yuan to 7,632 yuan.

On social media, many netizens complained that the customer unit price of LI-NING 1990 was too high, such as “Looking at a baseball uniform in the store today is 2,999 yuan. How dare Li Ning?” , “LI-NING 1990 is just too outrageous. A shirt costs more than 1,600 yuan, isn't it still Li Ning even if it's high-end?” etc.

In terms of store expansion, in 2021 and 2022, the number of Li Ning stores in China (including Li Ning YOUNG) was 7,137 and 7,603, respectively, with a net increase of 204 and 466 stores respectively. Among them, 265 of the new stores opened in 2022 are directly-managed stores.

Unfortunately, the number of stores that continued to expand did not help Li Ning capture more consumers; on the one hand, it increased the company's operating pressure. On the one hand, inventory remained high, and on the other hand, operating costs increased dramatically. According to financial data, in the first half of 2023, Li Ning's sales and distribution expenses were about 3,948 million yuan, up 16.7% year on year; administrative expenses were about 591 million yuan, up 14% year on year.

Against the backdrop of the company's continued decline in business conditions and rising operating costs, Li Ning began to gradually shut down stores that did not meet expectations. As of the first half of 2023, the number of Li Ning stores in China (including Li Ning YOUNG) had been reduced to 7,448, a net decrease of 155 stores.

Furthermore, Li Ning has also taken the initiative to launch a “price reduction model”, introducing discounts such as “40% off” and “more than 30% off” to consumers from time to time, and stated that “the Group has increased discounts on online channels and retail terminals to promote consumption; at the same time, the high gross margin has had an adverse impact on gross margin due to the slight decline in consumer channel revenue share over the same period last year.”

Cheng Weixiong told the Titanium Media App that the high-end transformation of the Li Ning brand is not going well. The cultivation and layout of the high-end requires a certain period of time. It is not a plan with a high-end layout that can become a high-end category; it can be accepted by high-end users.

Furthermore, the lack of core competitiveness of the product is also one of the reasons why Li Ning's high-end process has stalled.

According to financial data, from 2020 to 2022, Li Ning's R&D expenses were 323 million yuan, 425 million yuan, and 534 million yuan respectively, accounting for 2.2%, 1.8%, and 2.1% of revenue respectively, far lower than Nike and Adidas's nearly 10% ratio. Also, according to data disclosed by the Forward-looking Industry Research Institute, as of February 2022, the number of patents in the field of Anta sneakers was 590, which is about 3.5 times the number of Li Ning's patents.

Entering 2023, Li Ning increased investment in research and development. According to the interim report, as of the end of June, Li Ning's R&D expenses were about 291 million yuan, an increase of 21.76% over the previous year, accounting for about 2.1% of revenue. Although this is an increase compared to the past, it is still lower than Anta's 2.3%, TEP International's 2.7%, and 361 degree 3.2%.

When the high-end strategy failed, Li Ning was also involved in “quality doors” and “fake national trends” one after another, gradually fading the brand effect established in the minds of consumers in the early years. The Titanium Media App found that between 2019 and 2021, many national badminton players experienced varying degrees of “injury” while wearing Li Ning sneakers, including torn ligaments, extensive foot wear, and toe scratches.

Interestingly, at a conference call held earlier, Li Ning's management revealed that “in 2024, we will seize the share of the lower market in the short to medium term by broadening the price band of products to the lower tier market and by introducing differentiated products in the sinking market.”

It can be seen that the high-end strategy that Li Ning has insisted on in the past few years has not progressed as expected, and the company is already seeking new breakthroughs.