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Li Ning Company Limited (SEHK: 2331) is one of the leading sports brand companies in China. The group designs, manufactures and distributes sporting goods including footwear, apparel, equipment and accessories for professional and leisure purposes primarily under the “Li Ning” brand.
The group has grown impressively over the years and also sells various products which are self-owned or licensed to the group, in areas such as table tennis (Double Happiness brand), outdoor sports (AIGLE brand) and badminton (Kason).
The group owns a mix of franchised and directly-operated retail stores, with 4,838 of the former and 1,506 of the latter. The remaining 793 stores belong to the “Li Ning Young” brand (specifically targeted at kids). Total point-of-sale stores increased by 10.9% year-on-year, a testament to the growth of the brand and company.
Impressively, Li Ning is now focusing more on sports research and new product design and development to drive sales. The group has also driven more sales through its e-commerce channel and achieved low teens same-store-sales growth. Here are three key things I like about Li Ning.
1. Impressive growth of net profit and operating margins
Li Ning reported an operating and net loss back in FY 2014 but has since turned around and seen its operating and net profit soar to new highs. From 2015 to 2018, its operating profit margin improved from 2.2% to 7.4%, while operating profit was up nearly five times. Net profit was somewhat more volatile but still managed to hit new five-year highs in FY 2018 with RMB 715.3 million (US$101.6 million).
For H1 2019, the growth continues with revenue up 32.7% year-on-year, while operating profit more than doubled from RMB 293.8 million to RMB 678 million. Net profit (excluding one-off items) doubled from RMB 268.5 million to RMB 561 million.
2. Increasing free cash flow generation
The second aspect I like about Li Ning is its free cash flow (FCF) generation ability. Note that the group had generated negative FCF in 2014 when it reported losses, but since then, it has managed to generate increasing positive FCF. The impressive part is the growth of operating cash flow from FY 2015 onwards, more than doubling from RMB 687 million to RMB 1.67 billion.
Capital expenditure, meanwhile, has stayed relatively constant at around +RMB 400 million, resulting in significantly higher FCF generation. For H1 2019, Li Ning reported a doubling of operating cash flow to RMB 1.37 billion, and I believe it should be on track for yet another record year of FCF generation.
3. Resumption of dividends
The group has declared an annual dividend of RMB 8.78 cents as a result of the improved results. Note that the last time Li Ning declared a dividend was way back in FY 2011 when it declared an annual dividend of RMB 11.07 cents.
The group then suffered three years of losses from FY 2012-2014 before it managed to turn its business around, and dividends were suspended because of this. The fact that the group has resumed paying dividends is a sign that financial performance is on the mend and the group is also generating enough cash to reward shareholders.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.