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2013 INTERIM RESULTS
2013 INTERIM RESULTS
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AGENDA
• Vision & Strategy
• Transformation Plan Update
• Financial Highlights
• Open Forum
DISCLAIMER
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• This presentation incorporates information contained in the interim results announcement (the “Results Announcement”) for the period ended 30 June 2013 of Li Ning Company Limited (the “Company”). This presentation should be read in conjunction with the Results Announcement and is qualified in its entirety by the more detailed information and financial information contained in the Results Announcement.
• Other than the information contained in the Results Announcement, you shall not reproduce or distribute this presentation, in whole or in part, and you shall not disclose any of the contents of this presentation or use any information herein for any purpose without the Company’s prior written consent. You hereby agree to the foregoing by accepting delivery of this presentation.
• The contents of this presentation have not been reviewed or approved by any regulatory authority in Hong Kong or elsewhere. The contents of this presentation are not investment, legal or tax advice. You are advised to exercise caution in perusing the contents of this presentation. If you are in any doubt about any of the contents of this presentation, you should obtain independent professional advice.
DISCLAIMER
Our Vision and Strategic Focuses
BUILDING BRAND DIFFERENTIATION Through Key Sponsorships
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Basketball
Running
Digital
Badminton
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BUILDING BRAND DIFFERENTIATION Takes the Stages in Notable Events
Footwear
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PRODUCT DIFFERENTIATION Enhanced Research & Development Capabilities
Apparel
Coffee Charcoal Fabric
AT Dry
Highest sell-out rate among all running shoes since 2011
LI-NING Bow
2x sell-out rate vs. average
LI-NING Arc
Highest sell-out rate for basketball shoes
Super-light Basketball Shoes
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EXCITING NEW PRODUCTS
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SHOWCASING – The 3rd Generation LI-NING Arc
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1H 2013 KEY HIGHLIGHTS
• Industry challenges present opportunity for transformation first mover with knowhow.
• First phase of the comprehensive Transformation Plan has achieved favourable results. The worst is behind us.
• Performance of H1 2013 - financial results show improvement in some areas but will take time to fully reflect the benefits from the investments we’ve made.
• Determined to continue and deepen transformation in the next phase to unleash full potential. Value from investments will unfold.
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• Industry hangover from over-expansion
• Competition from casualwear
• Over supply of local brand products, undifferentiated
• Changing consumer taste towards more differentiated products
Industry Challenges
INDUSTRY REVIEW
Winning brand needs bold differentiated strategy
To take Li Ning's unique sport heritage, performance DNA and the essence of Chinese athletics and to build a brand champion in
China’s sportswear industry
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COMPANY VISION
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THE COMPRESHENSIVE TRANSFORMATION
LI-NING is the only company with a combination of unique sports performance brand DNA and world- class management expertise to undertake comprehensive transformation of the of the company, including building an innovative retail and merchandising business model
Management and Execution Capabilities
Transformation Plan Update
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Management and Execution Capabilities
• Competitive cost structure in product and operations
• Effective marketing and channel spending
• Cash flow management
• Improve store unit economics
• Rationalize network coverage through retail profiling
• Strengthen outlets and direct stores
• Improve capabilities of retail and channel partners
• More retail-oriented and consumer-oriented
• Improve supply chain and ordering model to lower cost and time-to-market
• Increase A+ and quick response products
• Focus on core brand sportswear in China
• Strategic investments in brand (e.g., CBA and Wade)
• Make competitive products with exciting designs and technologies, in shorter development cycles to stay current with market demands
TRANSFORMATION PLAN As Launched in July 2012
Retail Business Model
Products and Merchandising
Branding and Marketing
Management and Execution
Capabilities
Operating Capabilities
Channel Efficiency
• Strengthen organization and execution capabilities
• Focus on sell through and clearance of channel inventory
• Improve channel productivity, profitability, and performance
• Improve supply chain, go-to-market, and merchandising model
• Provide more exciting products and consumer experience to solidify leading brand position in China sportswear market
• Senior management fully onboard
• Improving management systems, processes and incentives
• 90% + distributors in Channel Revival Plan
• Channel inventory down < 7 months
• Improving channel profitability
• Stabilizing store network
• Consolidated leadership in national teams and core sports sponsorships
• Improved brand positioning and marketing strategies • Fully leveraging digital marketing
• Innovative merchandising model (prescriptive trade fair orders + quick replenishment + fast response)
• Enhanced product innovation and marketing
• Higher sell out rates and pricing for new products
• Improved pricing architecture for new product lines
• Invest in brand and improve marketing effectiveness
• Focus on core products and domestic market
• Improve cost structure in product and operations
• Business model transformation to achieve: 1) better profit structure for Li Ning and channels; 2) close to market demand in terms of product and consumers’ brand experience; 3) Virtuous cycles of higher retail productivity and return on cash and investment
• Building merchandising, retail management, fast response capability and IT systems to support transition to retail-oriented business model
• Significant cost savings achieved
• Improved operating cash flows
• Completed capital raising and improved capital structure
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Fixing the Business
Building Industry Leading Platform
TRANSFORMATION PLAN Status Update
Focus Initiatives of Transformation Plan Blueprint (7/2012)
Status (7/2013)
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BEFORE THE TRANSFORMATION PLAN Building up to the 2012 Challenges
7,249
7,915
8,255
2009 2010 2011
Store Count
2009 2010 2011
~6 ~8
~9
1,307 991
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2009 2010 2011
47 52
76
2009 2010 2011
Channel Inventory Months
A/R Turnover Days
Operating Cash Flow
- RMB million -
Network expansion continued despite deteriorating fundamentals
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Management and Execution Capabilities
TRANSFORMATION PLAN Near Term Focus: Fixing the Business
Fixing the Business
1. Resize the business
2. Revive channels (inventory, network, profitability & cash flow)
3. Improve operating cash flow and capital structure
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Channel Revival Plan Actions
DISTRIBUTION CHANNEL Channel Revival Plan
• Signed up distributors representing over 90% of total business
• Significant cash flow and inventory improvement and increase in channel profitability
• Restructured the weakest channel partners
Channel Revival Plan is focused on improving cash flow and easing profit pressures in the channels
• Channel inventory clearance and buyback
• Network rationalization
• Adjustments in channel policies
• Merchandising and product initiatives
• Operational support
• A/R restructuring
Actions
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DISTRIBUTION CHANNEL Inventory Levels Coming Down
Channel inventory on path to normal levels and mix is also improving
Reducing sell-in to ease channel inventory pressure
Current and next Q products
Previous quarters products Increasing new products to drive
sales productivity as inventory approaches healthy level
* Note: Healthy level based on pre-2010 level
~ 9 months ~ 8 months
< 8 months < 7 months
Dec-11 Jun-12 Dec-12 Jun-13 Healthy Level
Inventory Inventory Turnover Months
6 months
*
Channel Inventory and Turnover Months Absolute inventory
decreased ~30% YoY by Jun-13
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DISTRIBUTION CHANNEL Sales Network Rationalized
Resizing store base to reverse prior over-expansion
8,255
7,303
6,434 6,024
Dec-11 Dec-12 Jun-13 Jun-12
LI-NING Brand Distribution Channel Network is Right Sizing
27% decline
Closed Stores by Ownership
Subdistributors Distributors Self-owned
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DISTRIBUTION CHANNEL Sales Network Rationalized
0
1
2
Total Subdistributors Distributors Self-owned
Closed Stores Existing Stores
Channel Structure Becoming Healthier (1H2013)
SSSG: +9% ~31% of Li Ning Brand Revenue
-RMB ‘000/sqm-
• Network restructuring and differentiated growth rates have shifted mix to better stores • Self-owned stores, through better control over retail operations, have outperformed • Indirect stores will take longer to recover, based on progress in revival initiatives
Subdistributors Distributors Self-owned
Closed Stores by Ownership
33%
40%
Q3 Q4 Q1 Q2
2011 2012 2013
22
~85%
~85%
~88% ~88%
1H
20
10
2H
20
10
1H
20
11
2H
20
11
1H
20
12
2H
20
12
1H
20
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Health
y Level *
* Note: Healthy level calculated based on the average of 1H 2010-1H 2011 discounts
31%
PRODUCTS AND MERCHANDISING Strong Performance for New Products
Merchandising initiatives improved overall performance of current season products
Retail Pricing of Current Season Products
(average over 3 months in the season, as % tag price)
Sell Out Rates of Current Season Products
(end of the season, %)
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- 505
1H12 Total Expenses
1,611
1H13 Total Expense
- RMB million -
1,367
-157M
Cost reduction
+261M
-128M
- 220M
+ 261
Bad debt provision net
change
Lotto impairment
Basketball-focus marketing resources
and others
Reduction
COST STRUCTURE AND CASH FLOWS Effective Cost Control
Cost savings achieved in operating expenses covered most of new investments in brand & platform building
Investment in Transformation
109
98 88
1H2012 FY2012 1H2013
304
-1,682
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1H2012 2H2012 1H2013
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-602 -243
1H2012 Improvedcollection
Reduced sell in andopex savings
1H 2013 PF Investments inTransformation
AP rationalization 1H 2013
COST STRUCTURE AND CASH FLOWS Improvements in Operating Cash Flows
Progress in transformation plan leads to improvements in operating cash flow
A/R Turnover Days EBITDA
Operating Cash Flow
- RMB million -
- RMB million -
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Management Team Management and Execution Capabilities
TRANSFORMATION PLAN Medium Term Goal: Building Industry Leading Platform
Building Industry Leading Platform
Chief Supply Chain
Officer
Acting Chief Sales Officer
Chief Product Officer
Chief Designer Chief
Marketing Officer
Dell Nike Adidas, Nike Nike, Umbro General Mills, P&G, Johnson
& Johnson
Chief Finance Officer
Guess, Ashworth, Levi
NEW
Improved management systems and processes
Chief Human Resources
Officer
Henkel
NEW
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MANAGEMENT TEAM New Additions Fully On Board
Enhanced management capabilities paves way for execution of transformation plan
Introduce outstanding talents to build a strong management team
Founder / Chairman Vice Chairman
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Expand Domestic Market Through Extensive Local Media Coverage
Strengthen Brand Stickiness Among Core Consumers
Building Professionalism and Reputation of the Brand
BRANDING AND MARKETING Consolidating Leadership in Core Sports (Example: Basketball)
Consolidating leadership position in core sports such as basketball
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Selling Period Trade Fair
1.Prescriptive Order
3. Fast Response
(QS)
2. Quick Replenishment (QR)
* Fast response product includes only styles that have 13 weeks of sell through
31%
(% of Sell In )
40%
(Sell Out Rates %)
A+/ QR/ QS Product Non A+/ QR/ QS Product
~40%
~45%
~30% ~35%
1Q13 2Q13
0%
Prescriptive orders + fast response (QS & QR) driving 1H2013 revenue
A+ / QR/QS Product Contribution
A+ / QR/QS* Product Performance
Top quartile QS projects having 100% better sell out rates vs. average
1Q13 2Q13 4Q12
PRODUCTS AND MERCHANDISING Innovative Merchandising Model
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1H12 1H13 1H12 1H13
+10%
2H12 1H13
+50%
- 15%
2H12 1H13
- 20%
PRODUCTS AND MERCHANDISING Improved SKU efficiency
SKU reduction increased productivity, simplicity and profitability
No. of SKU Sales per SKU per store
~
~
~
~
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RETAIL BUSINESS MODEL (RBM) Building Capabilities for Future Business
Quick Replenishment for Products in Store
• Increase product sales • Avoid inventory backlog • Provide reference point for
new season fast response products
Fast Response for New Product Launch
• Identify market opportunity • Shortened go-to-market cycle • Enhance sales turnover
RBM Sales Program
• Enhance store efficiency • Practice retail business model
RBM IT System
• Increased data accuracy • Online retail system • Improved operating efficiency
Enhance Supply Chain Capability
• Shorten production lead time • Direct distribution • Enhance logistics infrastructure
Self-owned - RBM Distributors Project -RBM
difference in SSSG vs. non-RBM
Self-owned - RBM Distributor Project - RBM
Before After
+24ppt
+4ppt
+6ppt
+8ppt
Transition to retail business model currently rolled out at pilot stores
1H2013 Same Store Sales Growth Rate
Change in SSSG before/after Implementation
Financial Highlights
(RMB million)
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(RMB million) 1H2013
1H2012 (Restated*) YoY Change
For the 6 months ended 30 June
Revenue 2,905.9 3,855.4 -24.6%
Gross Profit 1,266.5 1,666.0 -24.0%
Distribution costs -1,209.5 -1,144.4 5.7%
Administrative expenses -157.4 -466.8 -66.3%
Other income and other gains – net 61.9 125.0 -50.5%
Operating (Loss) /Profit -38.6 179.9 N/A
EBITDA 57.6 304.4 -81.1%
(Loss)/Profit Attributable to Equity Holders -184.2 44.3 N/A
Basic Losses/ Earnings per share (RMB cents) -15.19 3.86 N/A
Interim dividend (RMB cents) - - -
* Note: Under IFRS 11, proportional consolidation of joint ventures is no longer allowed. The Group accounted for its investment in Li-Ning Aigle Ventures using equity method of accounting at the beginning of the earliest period presented.
SUMMARY OF INCOME STATEMENT
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1H2013 1H2012
(Restated) YoY Change
For the 6 months ended 30 June
Gross Profit Margin 43.6% 43.2% 0.4p.p.
Operating Profit Margin -1.3% 4.7% -6.0p.p.
EBITDA Margin 2.0% 7.9% -5.9p.p.
Margin of (Loss) /Profit Attributable to
Equity Holders -6.3% 1.1% -7.4p.p.
R&D Expenses (as % of revenue) 2.3% 2.4% -0.1p.p.
A&P Expenses (as % of revenue) 20.6% 12.9% 7.7p.p.
Staff Costs (as % of revenue) 10.9% 9.5% 1.4p.p.
PROFIT MARGINS AND EXPENSE RATIOS
*Excluding the acquisition expenditures
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1H2013 1H2012
(Restated) YoY Change
For the 6 months ended 30 June
Average Inventory Turnover (Days) 96 93 3
Average Trade Receivables Turnover (Days) 88 109 -21
Average Trade Payables Turnover (Days) 91 111 -20
Cash Conversion Cycle (Days) 93 91 2
Return on Equity (ROE) (Half-yearly) -8.2% 1.2% -9.4p.p.
Return on Asset (ROA) (Half-yearly) -3.0% 0.6% -3.6p.p.
CAPEX* (RMB million) 91.3 124.8 -26.8%
KEY OPERATIONAL INDICATORS
(RMB million)
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*Net Cash = Cash and Cash Equivalents – Bank Borrowings – Convertible Bonds Liabilities
(RMB Million) 2013-06-30 2012-12-31
(restated) Change
Cash and Cash Equivalents 1,617.5 1,241.3 30.3%
Bank Borrowings 793.0 1,447.2 -45.2%
Convertible Bonds Liabilities 644.1 664.1 -3.0%
Net Cash* 180.4 -870.0 N/A
Current Liabilities 2,244.9 3,264.1 -31.2%
Current Ratio (times) 1.88x 1.20x 0.68x
Total Liabilities to Total Assets Ratio 50.4% 69.9% -19.5 p.p.
SUMMARY OF BALANCE SHEET
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• Readjusting market strategy.
• Amended the license agreement to lower finance costs.
• Continued to adopt "sponsorship of sports stars and sports events" as its core marketing and promotion strategy.
• Over 80% of China National Table Tennis team members opted for the Double Happiness branded covering.
• Launched an "e" series, specifically for e-commerce channels in the second quarter of 2013.
• Stable progress was achieved, including increased sales in existing stores and positive business momentum for newly opened stores.
• Remain one of the leading brands in outdoor and leisure sectors in major malls.
• Newly developed apparel and shoes maintained market competitiveness in product design and pricing.
• Continued to strengthen its classic brand positioning.
Other Brands
OUR OTHER BRANDS
