Stock Investment Analysis of Li Ning (2331.HK)

Analysis of business and financial performance

Li Ning Company Limited is a manufacturer and distributor of sport-related footwear, apparel, equipment, and accessories and is headquartered in Beijing, China. It is also engaged in manufacturing, developing, marketing, distributing, and selling sports products under several other brands in table tennis, outdoor sports, and sports fashion. The company also provides information through its subsidiaries and technology services. It operates through franchised, self-operated retail outlets and online channels. The current business performance shows that the Company has become the fourth-largest sportswear brand in china, after Nike, Adidas, and Anta. Thus, the paper will present a financial and stock investment analysis of Li Ning Company Limited (2331.HK).

	Li Ning Co Ltd-Income Statement
Period Ending:	31-Dec-21	31-Dec-20	31-Dec-19	31-Dec-18
Total Revenue	22572.28	14456.97	13869.63	10510.9
Gross Profit	11969.1	7094.34	6805.46	5052.77
Operating Income	5136.38	2195.97	1543.21	777.18
Net Income	4010.88	1698.48	1499.14	715.26
Total Assets	30274.82	14593.86	12547.47	8727.31
Total Liabilities	9173.27	5907	5425.84	2910.26
Total Equity	21101.55	8686.86	7121.64	5817.04

 

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For the last decade, Li Ning has been affected by the tension between the government and the American government in the international markets. However, the financial analysis shows that the tension might have contributed to the improving demand for the products provided by Li Ning Company Limited over the past decade. The Company has managed to utilize the opportunity of showcasing its products to a wide range of customers in the local and international markets.

	Cash Flow Statement
Period Ending:	31-Dec-21	31-Dec-20	31-Dec-19	31-Dec-18
Cash From Operating Activities	6525.34	2763.34	3503.47	1671.87
Cash From Investing Activities	-6538.7	-991.55	-573.34	-482.94
Cash From Financing Activities	7596.15	-513.49	-648.62	-65.64
Net Change in Cash	7557.86	1225.59	2289.9	1142.32

 

Analysis on market and competitive landscape

Company Name	Price/Share	Sales	EBITDA	EV/EBITDA	P/E
Li Ning Co Ltd	62.1	5.49	21.57	27.67	34.89
ANTA Sports Products Ltd	96.5	4.26	15.14	21.85	32.63
Xtep International Holdings Ltd		1.79	12.04	14.45	21.02
Topsports International Holdings Ltd		1.12	6.51	11.34	14.27
Shenzhou International Group Holdings Ltd		3.61	20.27	29.96	29.84
Bosideng International Holdings Ltd		2.13	9.56	13.33	18.81
Pou Sheng International (Holdings) Ltd		0.32	22.91	23.96	N/A
Haidilao International Holding Ltd		2.87	25.11	5,297.02	N/A
Average		2.69875	16.63875	679.9475	25.24333
Median		2.5	17.705	22.905	25.43

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The current financial performance shows that the Company has made significant improvements based on its recent financial performances. For instance, the table below shows that the markets shares have been experiencing steady growth after the Company reported an increase in sales after recording CNY 12,408.67 million in the first six months of 2022 compared to CNY 10,196.58 million recorded in 2021. It also recorded an increase in Net income after reaching a total of CNY 2,189.31 million in the first six months of 2022 compared to CNY 1,962.22 million in the year ending. However, Li Ning recorded basic earnings per share of CNY 0.8377 from continuing operations after it had recorded a CNY 0.7904 in 2021. Diluted earnings per share from continuing operations was CNY 0.83 compared to CNY 0.7796 in the year ending in 2021.

Comparable Company analysis

WACC   =    E /(E + D) *Cost of Equity + D/ (E + D) *Cost of Debt   (1 - Tax Rate)

Weights:

Weight of equity = E / (E + D)

= 20732.678 / (20732.678 + 184.14076404245) = 0.9912

 Weight of debt = D / (E + D)

= 184.14076404245 / (20732.678 + 184.14076404245) = 0.0088

Cost of Equity:

The current risk-free rate is 3.53100000%.

Li Ning Co's beta is 0.48.

 c) (Expected Return of the Market - Risk-Free Rate of Return).

Cost of Equity = 3.53100000% + 0.48 * 6% = 6.411%

Cost of Debt:

 Li Ning Co's interest expense =$10.118694362018 Milion

The total Book Value of Debt (D) is $184.14076404245 Mil.

 Cost of Debt = 10.118694362018 / 184.14076404245 = 5.4951%.

Multiply by one minus the Average Tax Rate:

 The latest Two-year Average Tax Rate is 24.58%.

Li Ning Co's Weighted Average Cost Of Capital (WACC) for Today is calculated as follows:

 

WACC	=	E / (E + D)	*	Cost of Equity	+	D / (E + D)	*	Cost of Debt	*	(1 - Tax Rate)
	=	0.9912	*	6.411%	+	0.0088	*	5.4951%	*	(1 - 24.58%)
	=	6.39%

 

Stock investment suggestion and reasoning

The stock investment analysis shows that the company is the company stock is priced imperfectly. The key indicators of undervalue in stock include the stock value for other related companies. For instance, even though ANTA Sports Products Limited is ranked close to Li Ning Company Limited (2331. HK), its price range at $90 while the stock HKSE is valued at $60.Thus, it is clear that the market is wrong, and so there is a chance to gain significantly by longing the stock for Li Ning Company Limited

Catalysts

The ongoing rivalry between the Chinese government and the US is a key event that will result in realizing the stock pricing imperfection in the next 6-12 months. The changes presented by the pandemic period can also contribute to the catalyst that will cause the market to realize the stock pricing imperfection, resulting in a price correction and the potential to make money.

Li Ning Co's Weighted Average Cost Of Capital (WACC) for Today is calculated as follows:

Valuation

WACC	=	E / (E + D)	*	Cost of Equity	+	D / (E + D)	*	Cost of Debt	*	(1 - Tax Rate)
	=	0.9912	*	6.411%	+	0.0088	*	5.4951%	*	(1 - 24.58%)
	=	6.39%

 

Currently, Li Ning Co's weighted average cost of capital is 6.39%. Li Ning Co's ROIC % is 24.18% (calculated using TTM income statement data). Li Ning Co generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Risk analysis

Since 2018, Li Ning has paid roughly 30% of its earnings as dividends. Based on the insights presented in graph 1 above, the company's market volumes have been experiencing steady growth. The analysis shows that the company's share volumes are expected to continue to rise and return cash to shareholders, with the payout ratio gradually increasing to 50% in the next five years. Moreover, Investors are expected to flock towards safer and more stable investments, given the possibility of rising interest rates and inflation.

Li Ning appeals to social identity, personal belief, and national pride to win over consumers compared to other sportswear brands that market social status. Based on the research, the ongoing geopolitical tensions allow Li Ning to increase its market share and product pricing. Li Ning Company Limited is a manufacturer and distributor of sport-related footwear, apparel, equipment, and accessories headquartered in Beijing, China. The current business performance shows that the company has become the fourth-largest sportswear brand in china, after Nike, Adidas, and Anta. The Company has managed to utilize the opportunity of showcasing its products to a wide range of customers in the local and international markets. The current financial performance shows that the Company has made significant improvements based on its recent financial performances. For instance, the financial analysis presented by the paper has demonstrated that Li Ning's market shares and volumes have been experiencing steady growth in the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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References

Li Ning(02331) financial reports - data and analysis. Moomoo. (n.d.). Retrieved December 6, 2022, from https://www.moomoo.com/stock/02331-HK/financial-statement?from=futunn

Yahoo! (2022, December 6). Li Ning Company Limited (2331.HK) stock historical prices & data. Yahoo! Finance. Retrieved December 6, 2022, from https://finance.yahoo.com/quote/2331.HK/history?period1=1512518400&period2=1670284800&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true