Li Ning (HK.2331)

I purchased Li-Ning (2331, current market cap of HK$67.9 billion) on 31 Oct at an average price of HK$24.40 and it closed at HK$27.55 on 3 Nov.  Spot on!

This year, the share price of Li-Ning has experienced a 59.9% decrease, making it the worst-performing constituent stock in the Hang Seng Index. In the same period, the Hang Seng Index decreased by 12.3%, while Anta Sports (2020, market cap of HK$249.7 billion) only saw a 12% decline.

Entering the market at the beginning of the year at a high price for Li-Ning meant a significant cost, equivalent to a P/E of 50 times and a P/B of 6 times. Li-Ning's current valuation has approached actuality, with this year's projected P/E about 30% lower than that of Anta Sports and a 60% lower P/B.

After the market close on 25 Oct, Li-Ning released its Q3 operational update, indicating a single-digit increase in retail year-on-year, but a single-digit decline in same-store sales. The market reacted strongly but negatively. On 26 Oct, the company spent HK$28.92 million to repurchase 1.19 million shares at an average price of HK$24.3. Then, on 27 Oct, they further spent HK$205 million to repurchase 8.32 million shares at an average price of HK$24.7.

According to the latest equity disclosure data from the Hong Kong Stock Exchange, also on 27 Oct, GIC Private Limited purchased an additional 8,095,500 shares of Li-Ning, amounting to approximately HK$198 million. Following this increase, GIC Private Limited's latest holding of Li-Ning now stands at 134,819,422 shares, increasing their ownership stake from 4.81% to 5.11%.

With ample resources at their disposal, Li-Ning is poised to continue increasing their holdings should the stock price deteriorate further. As of the end of June this year, the company held a substantial cash reserve of 19.22 billion yuan (HK$20.5 billion), equivalent to 30.2% of the company's market value.

In the first half of the 2023 fiscal year (ending in December), Li-Ning reported a revenue of 14.02 billion yuan, a 13% year-on-year increase, while the net profit was 2.121 billion yuan, down by 3% year-on-year. Prior to the interim results announced on 10 August, the stock price was HK$43.35. The following day, it briefly reached HK$46.35. The market response was not particularly positive, and the current price is almost halved from that time.

The second half of this year for Li-Ning is expected to yield lower profits than the first half, but a comparison with the lower base of the same period last year should not be too unfavourable. The full-year profit is forecast at 4 billion yuan (EPS of 1.52 yuan), a marginal 2% decline. The valuation has become more realistic compared to before. Over the past 6 years, the average P/E was 40.6 times, and the average P/B was 7.3 times.

Li-Ning, oversold and undergoing company buybacks, with increased holdings by Northbound funds (inflow of HK$923 million last week) and GIC Pte Ltd, should be able to reach my target price of HK$40.

Superphang
http://superphang.blogspot.sg