Broker: UOB Kay Hian
Date of Report: Monday, 25 August 2025

Li Ning Faces Mixed Prospects in 2025: Solid First-Half Results Offset by Headwinds and Fair Valuation

Overview: Li Ning’s 1H25 Performance Surpasses Guidance Amidst Looming 2H Challenges

Li Ning, a leading Chinese sportswear brand, delivered a better-than-expected performance in the first half of 2025. Despite this, the company faces mounting challenges in the second half of the year, with offline retail trends weakening and deepening discounts threatening margins. UOB Kay Hian has downgraded its rating on Li Ning from BUY to HOLD, maintaining a target price of HK\$18.90, given what it considers a fair valuation at current levels.

Stock Snapshot: Key Metrics and Shareholder Structure

– **Share Price:** HK\$19.70 – **Target Price:** HK\$18.90 (Downside: -4.1%) – **52-Week Range:** HK\$21.00 / HK\$12.56 – **Market Cap:** HK\$50,920.8m (US\$6,512.6m) – **Shares Issued:** 2,584.8 million – **Major Shareholders:** Viva China (10.4%), Brown Brothers Harriman (6.0%) – **FY25 NAV/Share:** RMB 10.65 – **FY25 Net Cash/Share:** RMB 7.36

1H25 Financial Performance: Revenue and Net Margin Surpass Expectations

Li Ning’s first half of 2025 results outperformed management’s guidance, with both revenue and net margin coming in ahead of expectations.

Key Highlights:
Revenue exceeded management’s flattish growth guidance.
Gross margin dipped slightly year-on-year due to pressure from direct retail and channel mix changes.
Net profit fell year-on-year but rebounded sharply from the previous half.
Interim dividend declared at RMB 0.3359 per share, maintaining a 50% payout ratio.

Stock Impact: Offline Headwinds and Persistent Discounting

Offline and Online Channel Trends

– Retail sell-through grew by a low single-digit percentage across the overall platform in 1H25. – Offline retail growth was modest, weighed down by a low single-digit decline in average daily footfall per store. – Online direct retail performed better, with high single-digit sell-through growth, underpinned by a low-teens increase in online traffic. – The improvement in offline footfall seen in early 1H25 weakened in 3Q25, prompting management to maintain a cautious outlook for the remainder of the year.

Discounting and Gross Margin Outlook

– Offline discounts deepened by less than 1ppt in 1H25, settling in the low-30% range. – Retail and wholesale discounts edged up by low single digits. – E-commerce discounts also increased slightly. – Discounting accelerated further in August 2025 and is expected to persist, pressuring gross margin, which is forecast to decline year-on-year from 49.4% in 2024.

Advertising & Promotion (A&P) Expense Trends

– A&P costs are set to rise in the second half due to increased marketing investments around the China Olympic Committee.

Financial Forecasts and Key Metrics

Channel Performance Trends: Sell-Through Growth Rates by Channel

Li Ning’s platform growth has been uneven across channels and quarters. Notable observations include:
From 1Q21 through 2Q25, the company saw periods of strong growth, especially in e-commerce.
Offline retail growth has generally lagged, with several quarters of decline or flat performance.
E-commerce consistently outperformed, showing resilience even as offline channels softened.

Earnings Revision and Risks

– 2025/26 revenue forecasts were raised by 1% respectively, reflecting stronger-than-expected 1H25 growth. – 2025/26 gross margin estimates were trimmed by 0.4ppt to account for heavier discounting. – SG&A expense ratio forecasts were reduced by 1.4ppt/1.3ppt. – The effective tax rate was raised to reflect accrued and withheld taxes in 1H25. – Combined, these changes led to a minor net earnings revision: 2025 forecast up by 0.4%, 2026 down by 0.2%.

Balance Sheet and Cash Flow Highlights

Li Ning remains in a robust financial position, with no debt and strong net cash.

Key Metrics: Profitability, Growth, and Leverage

– EBITDA margin projected at 21.1% for 2025, recovering to 22.6% by 2027. – Net margin expected to dip to 9.5% in 2025 before rebounding to 10.5% in 2027. – ROE forecast to soften from 11.9% in 2024 to 10.3% in 2025. – All debt ratios remain at zero; company is strongly net cash.

Valuation and Recommendation: HOLD at a Fair Price

– Target price maintained at HK\$18.90, based on DCF, implying 16.6x 2025F PE and 15.0x 2026F PE. – The stock trades at 17.0x 2025F PE and 15.4x 2026F PE, which is viewed as fair. – Downgraded to HOLD due to limited upside at current valuation.

Conclusion: Navigating a Challenging 2H25

Li Ning’s 1H25 results outpaced expectations, but significant headwinds remain for the rest of the year. The company faces challenges with offline traffic, persistent discounting, and rising marketing costs. While online channels offer some support, overall revenue growth is likely to remain flat, with pressure on margins. The current valuation appears fair, and investors are advised to adopt a cautious stance until visibility improves.