2012 Annual Results Corporate Presentation - Li Ning

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2012 Annual Results Corporate Presentation - Li Ning

2012財 政 年 度 業 績ANNUAL RESULTSMarch2013 年20133 月

DisclaimerThis presentation incorporates information contained in the annual resultsannouncement (the “Results Announcement”) for the period ended 31 December2012 of Li Ning Company Limited (the “Company”). This presentation should beread in conjunction with the Results Announcement and is qualified in its entiretyby the more detailed information and financial information contained in theResults Announcement.Other than the information contained in the Results Announcement, you shall notreproduce or distribute this presentation, in whole or in part, and you shall notdisclose any of the contents of this presentation or use any information herein forany purpose without the Company’s prior written consent. You hereby agree tothe foregoing by accepting delivery of this presentation.The contents of this presentation have not been reviewed or approved by anyregulatory authority in Hong Kong or elsewhere. The contents of this presentationare not investment, legal or tax advice. You are advised to exercise caution inperusing the contents of this presentation. If you are in any doubt about any of thecontents of this presentation, you should obtain independent professional advice.1

AGENDA• Review of Strategies• Financial Highlights• Business Review• Future Outlook• Open Forum

INDUSTRY CHALLENGES AND GROWTH DRIVERSNear Term ChallengesCAGR: Low to mid teens percentageCompetition, over-expansion,excess channel inventory, costpressure and wholesale model2011E 2012E 2013E 2014E 2015ELong-term driversUrbanizationPurchasefrequencyTrade upUrbanization continues to move 1~2% rural population to urban area annuallyConsumers continue to purchase more and participate in more sports as disposable income andsophistication increase (different category for different sports/occasion)Trade up across brands (to premium) and within brands (to better design/technology/ function)will benefit players with stronger brand and product in the long runLong term industry potential4

IMPACT ON LI NINGWholesale-oriented ModelStore CountSell In > Sell Through7,915 8,2556,434Current Challenges2010 2011 2012ExcesschannelinventoryHigher mix ofold productsleading toheavydiscountingDecliningretailperformanceLowerdistributorand subdistributorprofitabilityand cashflowsAverage Trade Receivable Days9776522010 2011 2012Current challenges within the channelsresulting from the wholesale practicebegan to spill over into the company in2011…… leading to store closures andworking capital issues forLi Ning Company5

YEAR OF 2012 IN REVIEWJanuary – Introduction of Strategic InvestorKey strategic investor TPG was brought in for operational value addJuly - Transformation planEnhanced board composition and management execution capabilitiesPioneers a new sports market-driven and retail-oriented business modelAugust – October: Key Sponsorship ProgramsKey sponsorships and events – Olympics, CBA, Dwayne WadeDecember - Channel Revival PlanKey component of Transformation Plan6

THREE STRATEGIC FOCUSESThree core focusesRetail-oriented business modelChina MarketCore BrandManagementand ExecutionCapabilitiesSports culture3 core focuses (China market, core brand and sports culture ) +adopting a retail oriented, sports marketing-driven business model7

LI NING IS LEADING AN INDUSTRYTRANSFORMATIONInitiatives to transform from the traditional wholesale practice to aretail-oriented and sports marketing driven business model haveinspired meaningful discussions and debates in the industry8

2012 LONDON OLYMPIC GAMESChina’s five gold medal teamsOther DelegationsSwedish DelegationSpanish/ArgentinaBasketball TeamAmerican Diving TeamOthers•Sponsored spiked running shoes and accessoriesfor 4 international athletes•Package for Eritrean Track & Field Team: 22 pieces40 medals in total, including 22gold medals, over ½ of total goldmedals won by Chinese teamSwedish delegation: 1 gold, 4 silver, 3 bronzeAmerican diving team: 1 gold, 1 silver, 2 bronze9Triple Jump athlete – Taylor: 1 gold

CBA SPONSORSHIPPromote the recognition of Li Ning brand’s presence in basketball among young consumers Creating new consumer groupsActively promote the performance of the basketball business Eye-catching performance of new line of basketball products in 1Q13 Encouraging retail sell-through:increase in sales growth and sell out ratio year-on-year surpasses otherproducts, sales revenue closely ranks behind running productsLaunching new CBA series products to achieve sales growth Fast response retail model meets the rapid changes in consumer demandCBA PressConferenceCBA Outfield EventsCBA All-StarMatchGuangdongHongyuan 20 thAnniversaryNov 24, 2012Dec 18, 2012Mar 22 – Apr 5, 2013Nov 16, 2012Dec 7, 2012 Feb 23 – 24, 2013CBA OpeningSigning Eventat FranchisestoresFinalsEnhancing brand equity, creating business value,achieving a new level of competitive edge10

WADE SPONSORSHIPEnhance the overallreputation of the LI-NINGBrandGenerate interestamong youngconsumers andbasketball fansBoost the intentionto purchaseLI-NING products11

KEY FACTORS IMPACTING FINANCIAL RESULTSFix the BusinessResize theBusinessImpact on P&LReduce inventoryReduce nonperformingstoresImprove channelprofitability and cashflowsOptimization of coststructureSell in reductionSupport channels toimprove sales andcollectionsResize networkBusinessrestructuringRevenue and grossprofit reductionA/R & inventoryprovisionsRestructuring costsChannel Revival Planand TransformationPlan-related costsFocus on cash flows13

SUMMARY OF INCOME STATEMENT(RMB million)FY2012 FY2011 ChangeFor the 12 months ended 31 December 2012Revenue 6,738.9 8,928.5 -24.5%Gross Profit 2,549.9 4,042.1 -36.9%- Distribution costs * 2,635.4 2,909.9 -9.4%- Administrative expenses ** 1,675.6 644.6 159.9%- Other income and other gains – net 168.8 143.4 17.7%Operating Profit / (Loss) *** (1,592.3) 631.0 -352.4%Profit / (Loss) Attributable to Equity Holders (1,979.1) 385.8 -613.0%Basic Earnings per share (RMB cents) (187.96) 36.70 -612.1%Annual dividend (RMB cents) Nil 11.13 -100.0%* The decrease in distribution costs was due to the decline in channel expenditure in 2012** The increase in administrative expenses in FY2012 was mainly attributed by the provision for impairment charge of trade receivables, extraordinaryexpenses that included the impairment provision for Lotto brand’s license adjustment (around 128 million RMB), and expenses from organisationalrestructuring***The operating loss for 2012 was due to declines in revenues and gross profit margin, as well as provision for impairment charge of trade receivables14

PROFIT MARGINS AND EXPENSE RATIOSFY2012 FY2011 ChangeFor the 12 months ended 31 December 2012Gross Profit Margin 37.8% 45.3% -7.5p.p.Operating Profit Margin -23.6% 7.1% -30.7p.p.Margin of Profit / (Loss) Attributable toEquity Holders-29.4% 4.3% -33.7p.p.R&D Expenses (as % of revenue) 2.8% 2.6% 0.2p.p.A&P Expenses (as % of revenue) 19.7% 17.6% 2.1p.p.Staff Costs (as % of revenue) 10.9% 8.7% 2.2p.p.15

KEY OPERATIONAL INDICATORSFY2012 FY2011 ChangeFor the 12 months ended 31 December 2012Inventory Turnover (Days) 90 72 18Average Trade Receivables Turnover (Days) 97 76 21Average Trade Payables Turnover (Days) 112 93 19Cash Conversion Cycle (Days) 75 55 20Return on Equity (ROE) -77.8% 11.3% -89.1p.p.Return on Asset (ROA) -29.6% 5.9% -35.5p.p.CAPEX * (RMB million) 215.4 385.7 -44.2%*Excluding the acquisition expenditures16

SUMMARY OF BALANCE SHEET(RMB Million) million)2012-12-31 2011-12-31 ChangeCash and Cash Equivalents 1,248.6 1,196.5 4.4%Bank Borrowings 1,447.2 838.1 72.7%Convertible Bonds Liabilities 664.1 - -Net Cash / (Debt) * -862.7 358.4 -340.7%Current Liabilities 3,276.6 3,063.1 7.0%Current Ratio (times) 1.20 1.56Total Liabilities to Total Assets Ratio 70.0% 50.0% -20.0p.p.* Net Cash / (Debt) = Cash and Cash Equivalents – Bank Borrowings– Convertible Bonds Liabilities17

LI-NING BRAND REVENUE BREAKDOWNBY PRODUCT CATEGORYLI-NING Brand Revenue Breakdownby Product CategoryRevenue from LI-NING Brandto the Group Total49.1% 44.5%51.7%41.8%88.0% 91.4%6.4% 6.5%12.0%8.6%LI-NING brand apparelLI-NING brand footwearLI-NING brand accessories / equipmentRevenue from LI-NING brandRevenue from other brandsFY2012 FY2011 FY2012 FY201118

LI-NING BRAND REVENUE BREAKDOWN BYGEOGRAPHYInternationalMarket2.4%Northern-28.0%40.1%DomesticMarket97.6%EasternWestern17.0% -21.3% 23.5%Southern19.4%-14.0%-39.1%The Group streamlined the regional distribution layout of its sales channels byconducting adjustment to the organization structure and geographical delineation ofits sales regions for LI-NING brand with a newly-added Western region, so as toenhance regional management, regional retail performance and customermanagement capability.% of TotalYoY Change19

TRANSFORMATION PLANBuilding capabilities for the futureNEAR TERMMEDIUM TO LONG TERM#1Management TeamManagementand ExecutionCapabilities#2DistributionChannel#3Products and Merchandising#4Branding and MarketingVision: Solidify LI-NINGas the leading brand inChinese sportswearindustry with worldclassbranding & retailcapabilities#5#6Cost StructureRetail Business Model21

OPERATIONAL INITIATIVES AND PROGRESS#1 Enhanced team and internal processChairman and Vice ChairmanFounder /ChairmanVice ChairmanIntroduce outstanding talents to build a strong management teamChief SupplyChainOfficerActing ChiefSales OfficerChief ProductOfficerChief DesignerChief MarketingOfficerDell Nike Adidas,NikeNike,UmbroGeneral Mills, P&G,Johnson & JohnsonEnhancement of the management’s execution capability22

OPERATIONAL INITIATIVES AND PROGRESS#2 Distribution ChannelChannel Revival PlanActionsCurrent StatusTarget Results Channel inventoryclearance and buyback Network rationalization Adjustments in channelpolicies Merchandising and productinitiatives Operational support A/R restructuring Currently in execution atdistributors representingover 2/3 of total business Retail operations supportgradually rolled out Inventory level improvingOperationalFinancial Inventory level and mix of newproducts back to healthy levels Stronger retail performanceStrengthened financial position ofdistributors Closer cooperation and alignmentwith distributors Inventory write down andbad debt provisioning andbased on current assessmentof ability to sell and collect Improved sales and collectionsmitigating Channel Revivalcosts23

OPERATIONAL INITIATIVES AND PROGRESS#2 Distribution Channel (Cont’d)2012 vs. 2011 LI-NING Branddistribution channel networkStore closure structural analysisClosed store breakdown8,255Self-owned andDistributorStoresSub-distributor6,434Store productivity (RMB / store)Closed StoresAll StoresProfitability of closed stores compared to allstores (% margin difference)31 Dec 2011 31 Dec 2012Gross MarginOperating Margin24

OPERATIONAL INITIATIVES AND PROGRESS#2 Distribution Channel (Cont’d)Channel Inventoryand Turnover MonthsInventory Volume (RMB)Inventory Turnover MonthsSell-Through Y-o-Y growth of pilotdistributor compared to all stores(% difference)~7.5 months~5-6 monthsDec-11 PEAK (2Q12) LATEST (Feb-13) TARGETBefore Pilot ProgramAfter Pilot ProgramChannel inventoryclearance on trackRetail operations supportboosting distributorperformance25

OPERATIONAL INITIATIVES AND PROGRESS#3Products & MerchandisingRetail pricing of current seasonproducts (as % tag price)Sell out rates of currentseason products (%)1Q-3Q 12 4Q12 1Q13 1Q-3Q 12 4Q12 1Q13SKU rationalization starting in 4Q12 leading to improvedperformance of current season products26

OPERATIONAL INITIATIVES AND PROGRESS#3Products & Merchandising (Cont’d)Trade FairSellingPeriod1.PrescriptiveOrder100%+Retail2. Quick Replenishment3. FastResponseRetail-oriented ordering model characterized by“prescriptive orders + replenishment of best-selling SKUs +fast response products”27

OPERATIONAL INITIATIVES AND PROGRESS#3Products & Merchandising (Cont’d)“Combat 1” SeriesSell Out Rates (%)Pilot Rollout Overall Footwear 5 successful pilots completed and being commercialized Monthly calendar for commercializing quick strike products28

OPERATIONAL INITIATIVES AND PROGRESS#4Branding & MarketingNATIONAL TEAMSCORE SPORTSFive gold medal teams,representing over 1/2of gold medals thatChina won at the lastOlympicsBasketball Track & Field/Running BadmintonCBA:– Mainprofessionalbasketball leaguein China– Largest and mostpopular sportsleague in ChinaDwayne Wade:– One of the topNBA playersA key driving force ofChina’s running culturethrough sponsorship oflarge-scale marathons andgrassroots eventsIndustry leader withtechnologically advancedfunctional products (e.g.LI-NING Ultralight, LI-NING Arc, LI-NING Bow)Leading sponsorshipsincluding national teamand players (e.g. LinDan) in ChinaIntegrated promotionsvia multi-brand, multichanneland multiplatformstrategyLeading sportswear brand and closest associationwith Chinese sports29

OPERATIONAL INITIATIVES AND PROGRESS#5Cost Structure OptimizationOverseas procurementOptimize / CentralizepurchasingNew suppliers forhealthy competitionMore effective use ofchannel supportCustomerLi Ning CompanySupplierOptimize marketing, operationaland organizational costsImprove product cost throughDTV, material consolidation andhigher R&D efficiency30

OPERATIONAL INITIATIVES AND PROGRESS#6Retail Business ModelReplenishmentTimeManufacturingplantWarehouseStoresPastFutureRetailRegular SKULogisticsSpecial SKUProductionStaged productionFast replenishmentRapid development andproduction of newproductsProductIndividual store allocationOptimize logistics networklayoutIntegrated inventorymanagementFlexible deployment ofgoods across regions31

OPERATIONAL INITIATIVES AND PROGRESS#6Retail Business Model (Cont’d)Sell Through YoY Growth (%)during Pilot PeriodNew Products as % of TotalSell ThroughPilot StoresNewproductsOther RetailNewproductsPilot StoresOther Retail StoresPilot Stores outperform other retail stores 32

OTHER BRANDSProvided unique on-site equipment in the London 2012 Olympic Gamesfor both table tennis and badminton eventsReinforce its competitive edge in Table Tennis and maintaincollaborative relationships with top-notch table tennis athletes andclubsStrengthen product research and developmentBusiness remained stable with on-going growth in retail salesAchieved higher brand reputation and recognition amongconsumersContinue to comprehensively enhance Kason’s brand positioning,product structure, research and development and sales channelGrew rapidly in product salesReadjusting market strategyAmended the license agreement to lower the finance cost33

FUTURE OUTLOOKShort-termLong-termChallenging near term industryoutlook poses uncertaintyFurther operationaltransformation, and reducingreliance on the wholesalemodelTransformation plan will taketime to have positive impact onfinancial performanceContinuing optimization ofcash flow and channelinventoryPositive long-term on China’ssportswear industryRapid pace of urbanisationIncreasing disposable incomeIncreasing participation in sportsConsumer needs for better brandand productsReturn to long-term,sustainable profitabilityStrengthen position as theleading sportswear brand inChinaFund raising in support oftransformation35

OPEN FORUMinvestor@li-ning.com.cnLNCIR@brunswickgroup.comhttp://www.lining.comhttp://www.li-ning.com.cn

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