Earnings Call: H2 2018

Mar 22, 2019

Sorry. Good morning, ladies and gentlemen. Welcome to the investor presentation of Li Ning Company Limited. Li Ning has just announced its 2018 full year result this morning, so we are very happy to have the management to present the company's financial and operational updates as well as the future plans with us. First, let me introduce the company representatives on the panel today. Mr. Li Ning, Executive Chairman and Interim CEO. Mr. Terence Tsang, CFO of the company. Now let me pass the time to Terence to walk you through the financial figures first. Good morning. Thank you, and welcome everyone. 2018 is a breakthrough year for Li Ning, as our revenues exceeded CNY 10 billion for the first time in our history. Financially, we managed to achieve a net profit of CNY 750 million during 2018. Net margin rose from 5.8% to 6.8%. We successfully attained an 18% revenue growth with our gross margin expanded by 1 percentage point. We were able to enhance operating leverages notwithstanding our investment in new initiatives and organization cost. Among which include building up new business units as well as expanding the product and retail organization to better serve our customers. We maintained a positive cash flow with operating cash flow increased by 44% to CNY 1.67 billion. In addition, we continued to accomplish significant improvement in our working capital. Our gross average working capital declined by 12%, while revenues were up by 18%. Our cash conversion cycle further improved by 9 days to 40 days this year. Operationally, we achieved mid-teens growth for total platform retail sales, including both online and offline channels for the Li Ning core brand. Our channel inventory turnover continued to improve. Overall same-store sales accelerated to low teens in 2018. Our new product performance continued to improve with the offline channel new product sell-through increased by mid-teens and the new product sales mix up 2 points. In addition, gross margin on our new products in our own stores improved by over 100 basis points due to higher average selling price. Now, let's take a look at the revenues. During 2018, our revenue rose 18% to CNY 10.5 billion, driven by double-digit growth in all product groups. In particular, apparel leads the way with a 27% growth, while footwear recorded an 11% growth. The solid performance reflected the strength of our Li Ning brand and improved product initiatives. Our balanced channel strategy has continued working well for Li Ning core brand as all channels achieve double-digit growth. Sales revenues from the electronic commerce channel continued to deliver the highest growth amongst others with a 33% increase. Contribution from the e-commerce channel rose to 22% of the total from the previous 19%. The direct retail grew 15% and the wholesales went up 11%. The point to highlight here is that our revenue mix for direct-to-consumer segment, or known as DTC, continued to increase, accounting for 53% of the total Li Ning domestic core brand business in 2018. Such improvement gave us a much more balanced penetration in terms of business risk and a more controllable brand presentation. On the right-hand side of the slide, you can see our sales from new products category aged 6 months or less, continued to improve. Contribution to overall sell-through from new product rose to 80% from 78% in 2017, and with better gross margin. This improvement was driven by mid-teens growth in our new product sell-through. As far as our same-store sales growth is concerned, our overall SSSG recorded low teens digit growth in 2018, accelerating from high single digit in the first half of the year. Our offline SSSGs stood at high single digit, driven by high single-digit growth in our direct retail and mid single-digit growth in wholesale. On the other hand, our online SSSG climbed to low 40s for the period with a strong performance in Q4 2018. Coming to channel expansion. The number of stores of total platform increased by 702 over the previous year, mainly driven by the launch of the Li Ning Young business. In 2018, our total number of stores for Li Ning core brand increased by 82 stores to 6,344. Li Ning Young store count has reached 793 since its launch in the second half of 2017, including taking over 361 stores from the prior licensee distributors. The total online and offline sell-through grew by 15%, the highest growth seen in the past several years. Our offline channel recorded a growth of 11%, mainly led by increase in average selling price of both new and old products, as well as our continued expansion in apparel business. The wholesale channel saw an 11% increase in revenues. Excluding specialty wholesalers for the badminton and soccer, our selling was up by 6% compared with a 10% increase in retail sell-through, which continued to drive improvements in inventory turn in the wholesale channel. We saw most of our wholesale partners continue their improvements nicely with better gross margin. We continue using sell-through to control sell-in in order to ensure healthy channel inventory and accounts receivables. We expect the momentum to continue as orders for the third quarter of 2019 reach a low teens growth, reflecting the continued improvement in business health and confidence of our distributors. We will keep striving to maintain the balance between sell-in and sell-through. Moving on to retail channel. Our directly managed store sales went up by 15%, or CNY 406 million, with 35 store less in ending store count compared with 2017. The sales growth was largely attributable to the 470 new stores that opened in 2017 and 2018. While high single-digit growth in SSSG contributed a sales increase of CNY 195 million. These increases were partially offset by negative sales impact from the closure of 579 stores in the same period. With improved gross margin and expenses leveraged through better store productivity, the store profit margin improved to low teens in 2018 compared to high single digit in 2017. We are encouraged with the progress of moving up the learning curve in our retail operations, and we believe there are still certain potentials for improvements in terms of store productivity and profitability. Turning to gross margin. Our gross margin improved one percentage point during the year, driven by improvements in both new and old product gross margin in direct retail, contributing 0.6 percentage point. Lower rebates ratio for wholesale distributors contributing 0.5 percentage point. Higher revenue mix from direct retail and e-commerce, which has a higher gross margin, partially offset by Li Ning Young business, which is operated in wholesale channel, a net of 0.3 percentage point. Increased R&D cost to support our product initiatives and lower write-back in inventory provision, deducting 0.4 percentage point. Now, let me walk you through the profitability analysis. The improvement of net profit margin was driven by high teens top-line growth coupled with improved gross margin rate, adding CNY 876 million in gross profit. As far as expenses are concerned, we carry out disciplined cost control and variable cost to ensure better leverages. As you can see from the slide, the total sales-related variable cost, such as commissions, direct store expenses, logistics, as well as new business build-up expenses, increased a total of CNY 339 million, representing 20.6% of incremental revenues, which is much lower than the 27.5% recorded in 2017. We have rationalized our fixed cost structure in order to fund the investment in our retail operations and product organization. For example, our A&P increased CNY 110 million. But from percentage of revenue standpoint, it reduced from 11.1% of revenues in 2017 to 10.4% in 2018. This has offset the increase in our staff cost expenses ratio. As a result, our operating margin improved from 5% in 2017 to 7.4% in 2018. Our effective tax rate increased from 4.2% in 2017 to 15.9% in 2018, which is still below the normalized level of 25% due to the utilization of carry-forward of tax losses. Consequently, our net profit increased CNY 200 million, or 39%, to CNY 715 million. Net margin increased one point to 6.8% during the year. Moving on to channel inventory. Our channel inventory increased low single digit with 15% increase in retail sales. Our inventory turnover cycle exhibited continuous improvement and shortened to 4.9 months. Counting on pure store inventory only, the inventory turnover months improved to 4.2 months. This result validated the positive impact of the continued improvement in our inventory management and sales executions throughout the year. The proportion of inventory aged over six months stayed relatively flat at 29%. At the company level, our gross inventory was up 10.6%, which is much lower than the 18% revenues growth. With that, we saw a continued improvement in inventory days on hand. The proportion of inventory aged over 12 months further improved to a healthy 13% level. The seven to 12-month category, which represented the first half 2018 products, increased nine percentage points to 20% due to lower sell-out rates experienced in the first half product, as discussed during 2018 interim result announcement. First half product amounted to CNY 272 million, which is expected to be digested by our own factory outlet and discount stores, as well as normal clearance channel based on their normal sell-through mix. As far as trade receivables were concerned, our gross trade receivable were down by 21% on the back of the 18% revenues increase, leading to significant improvement in days sales outstanding. The proportion of receivable aged below 90 days improved by 4 percentage points to 74%. We are pleased to see that most distributor experienced continued improvements with better sell-through and gross margin. As far as working capital efficiency is concerned, our working capital has further improved to a very healthy level. Gross average working capital decreased by 12% to support 18% growth in revenues. As a result, the working capital as a percentage of our revenues declined by 5 percentage points to 15%. With such healthy level, we can now be more aggressive using our working capital to drive our business growth prudently. We substantially improve our balance sheet and cash flow. Our operating cash flow increased 44% to CNY 1.67 billion, and our cash conversion cycle improved by 9 days to 40 days. In addition, we saw our net cash improve by CNY 1.14 billion to reach CNY 3.67 billion. As we want to be very prudent with a sustainable dividend policy, we recommended initiate cash dividend with a low payout ratio of 30% as a start. This amounted to CNY 215 million or CNY 0.0878 per ordinary share subject to shareholders' approval. We are planning to use the remaining cash to invest in business expansion, new business units that just launched, and continue brand building. We believe there is still plenty of upside to capitalize on our brand equity. Looking back on 2018, we are pleased with our solid performance. We achieved a healthy top-line growth driven by solid same-store sales growth in all channels. Higher ASP of new and old products, which validate the improvement in our brand, contributed to growth. We achieved our operation expectation with improved gross margin and disciplined cost control, even with significant investment in expanding our product and merchandising organization as planned. Throughout the year, we grew LI-NING YOUNG Business as planned and managed to achieve profitability during the first full year of operations, laying the foundation for continuous revenue and profit growth for the company in the near future. We also recorded significant improvement in our working capital and cash flow for supporting continued investment in brand and healthy business growth. Looking ahead to 2019, we target high teens growth, top-line growth driven by mid-single-digit same-store sales growth in offline channel. Meanwhile, we will continue boosting our direct new stores productivity and expanding e-commerce scale, as well as the continued penetration of LI-NING YOUNG business. In 2019, we target a net margin at 7.5%-8%, backed by an improvement of 150-200 basis points from operating margin, as we are being prudently conservative due to macro uncertainties as well as leaving room for any execution risk. Chairman will walk you through the details of our business operations and plans. Thank you. Thank you, Terence. Good morning to you. I will go through a review of our 2018 operations. In fact, you have been concerned about our work in the past few years, our operation, and our restructuring and reorganization, and I am sure you are familiar with all that work. Now, according to the China market, our company's DNA, we have decided in the past year that we will have a single brand name, multiple products, and multiple channels development strategy. We optimize our retail business model, and also deepen the experience of the Li Ning brand value. Also, we provide an interactive, flexible experience for our consumers so that they are able to satisfy their need and their understanding of sports and sportswear. This seems rather theoretical, but on the other hand, it is very real in the sense that we will provide a different experience for sports for our consumers through the delivery of our brand name, which is one brand name, multiple products, and multiple channels. That would be the core competency of our company. In the past one year, we have around products, channels, retail operation, supply chain, we have been reorganizing all of those. We have been building up our efficiency and our vitality, especially in our retail sales model, and we have been promoting digitalization strategy. In all areas, we have been consolidating and enhancing the Li Ning experience value. Product is in our core. In 2018, we have put in more emphasis on products, including in a number of areas, including new technology, new materials, and also to build these into the product so that our products are more competitive, more suitable for our users and sportsmen. Also, we have been able to lengthen the life cycle management and optimize our product mix so that we will be able to expand into a wider market. Also, on regional differentiation, we have also made some distinction. In the past, the southern region, we have been very weak, I would say, and the northern region, we have been relatively stronger. In the past one year, we have been looking into how we can raise the operation overall. That is in the southern region, we can also find more opportunities for development and growth. Also for the low efficiency of stores or the less efficient stores, we have done our best to enhance them significantly. As we make our attempts, that is in bringing in new and smart retail concepts, we utilize big data so that offline and online, we have better integration so that our business can be continuously, this year, next year, and going forward, be stable and growing. We have been focusing on the demand for our products and business. In the last year, we have continually improved our suppliers' relationship upstream so that we are able to maximize our R&D and also our supply chain management to extricate all the value out of it. Next, before I talk about our products, I would like to give you a view of a video so that you will know in terms of products, what have we done in the past one year. This is a video. Thank you. After watching the short video, you can see our products and marketing for each categories. As I said at the beginning, in 2018, we decided on the single brand, multi-categories and diversified channel strategy. Let me explain. We have seen the business opportunities in the Chinese market and our own DNA. To our company, our strategy is very important. What are we going to do in the future? Our core competitiveness can be built with our capacity, and it will enable our long-term sustainable development. In market competition, we will be able to get our target market share. As a single brand, leading brand, it is important to have a single brand, multi-categories and diversified channel strategy. This is most suitable for our future developments based on lessons learned in the past. With this strategy of core categories, we would like to drive business growth. On top of leading core brand, we will operate different sports categories. In each market niche and segment, we will communicate with target customers and participate in market competition and offer very special products. In terms of sports fashion, basketball, badminton, table tennis, cross-training, and running areas. If you look at our organizational structure, market investment, R&D of product, use of technology, integration between sports culture and also the products, we have built our capabilities. In the past year, if you look at the retail sell-through, you can see our share. If you look at running, cross-training and basketball categories, we have achieved quite good results. In fact, sports fashion is even more outstanding because it is very compatible with our nature. Our sell-through is up 40%, basketball up almost 30%. Basketball is very important. It is for a young group of people in their teens and also all the way to around 30 years old. Even when people have children, they will still play basketball. Of course, the degree of participation may be smaller. Many people in their teens all the way to their 20s and 30s will play basketball. This gives a good foundation for our Li Ning brand. Today, we have achieved so much breakthrough. That is because we have young customers, and as a result, we can have a big leap forward. That's my explanation of our single brand, multi-categories, and diversified products strategy. Now, if you look at our basketball products, our young customers are very personalized with strong character. We enhance the use of technology. Based on core functions of basketball products, we have built our basketball line. Customers are younger, and there is the resource integration between high-end and elementary-level basketball resources. There are also NBA stars promoting our products, giving different experience to different types of customers. In the professional area, there is promotion by KOL, and we are also featured in the Fashion Week. Together with our product R&D and also its integration with the sports experience and culture, then we are able to enjoy sales and more consumption. In 2018, we have two main functional basketball shoes series, Yinsu and Yushuai. Their accumulative sales volume exceeded 340,000. For new product sell-through in 6 months, it is almost 70%. I think these are very hot series. There has been a lot of communication. Concerning the functions, technology, and culture, there has been a lot of communication, and as a result, in relation to product R&D and interaction, a lot of room has been brought to us. Here you can see also the Way of Wade series. Based on Wade's personality, we have strengthened the integration between his basketball and also the market. The Way of Wade series is being well-liked by many young basketball fans. Of course, there is also street basketball series, which is well-received in the market in the past year through channel marketing. Our BADFIVE series has given rise to a big group of young people who would like to get others' recognition. This BADFIVE culture is being liked by these people. Total sales volume in the year exceeded 4.4 million and 5.6 million, respectively. If you look from this point of view, our strategy is really very good. It is being organically integrated with these consumer segments. For running, we continue to invest in our products. We would like to deliver a very professional image in the area of running. We hope to have longer term development because running is a sports category for the mass. It is very diversified. There are young, old, male, female, professional and amateur runners. We need to find ways. We need to find our own positioning. In the past year, for example, for our Ultralight series and for example, Jueying and so on, these are for professional runners and also high-end runners. We have done a lot of promotion, giving them a new life so there can be integration with their lives and also with professional running. As a result, Li Ning brand can identify a position. If you look at the growth in 2018, based on the figures, the sell-through of our running category, growth was not that satisfactory. Growth was only 8%. For this segment, we have not really done very well. There is still a lot of room to develop. This shows that we still have not really identified a point at which we can exert more strength. In the past months, we have been making various attempts and investments in, for example, the use of technology, use of materials, design of products, and also structure, innovation, and development. We also did research on the functions of running. This year and next year, we hope that this category can become more competitive. Just now I talked about the use of technology. In the past one to two years, we have been doing R&D, and now we have found a new material. This is PEBAX material. The main characteristic is that it is highly flexible. It is very elastic, and it can resist low temperature. Because in the process of doing sports, there will be damage because of all the shocks and vibrations. That is why we want more advanced material. Now by doing R&D, we have discovered this material. By means of the new technology, we are able to achieve a physical stability and sustainability. At the beginning, some materials may be highly elastic, but later on, the elasticity will worsen. We have used this material successfully in badminton and basketball series. Wade has been enjoying the use of this new material. His performance has greatly benefited. In the future, we hope that this material can be used in the running category. For the running category, we will come up with an even more advanced design in terms of its function, elasticity, and weight. It should be world-class. Now we are still doing R&D and some tests. We hope that very soon it can be launched. We call this new technology, Beng, comprising four Chinese characters, Lei. It is difficult to write this Chinese character. By means of this material and also technology, we hope that our products can become more professional. We can help athletes, high-end athletes, to enjoy higher-end, higher quality sport experience. My team is now accelerating their work, and we hope that in the area of badminton and basketball, and also running, this Li Ning Beng can be materialized. Cross-training. For example, we focus on gym training and also different types of training with different environmental requirements. We consider all these in planning our products. Many people do need this kind of products a lot. These people are scattered around everywhere. In this category, we need to find where our customers are, and what their needs are, and how our products should be like. Also our shopping experience, our sports experience, and product experience. In the past year, we saw very good improvements and enhancements. For the first 20% of the styles, the sell-through exceeded 16.7 million units. For new products, the sell-through rate within six months reached 75%. The room is huge. In fact, in each market segment, the room is very huge. That is why we want to be a single brand and multi categories. We hope that each category can be a big enough battlefield so that we can offer products to users. We can seize a bigger consumer group. Of course, we will continue to explore more KOL resources. In terms of our communication product, R&D, and sales, we can see better integration. If you look at sports fashion, there are quite a lot of talking points. We have injected fashion elements into our brand, and we have really done a good job. In the past year, in the Fashion Week in New York and Paris, we took the lead to make attempts in Chinese sports fashion, and there has been very good response. China Li-Ning has been well-recognized, and young people, young customers, like more and more our brand. We continue to reinforce the integration between sports and fashion. For example, we incorporate the entertainment and music elements into basketball and badminton. We hope this concept can be converted into business very quickly. In this series of sports fashion, total sales volume exceeded 5.5 million units. We have just started this work, and it's not easy to expand very rapidly. This number shows that the market has already given us very good feedback and recognition. If you look at butterfly shoes, Ji Guang shoes, and so on and so forth, these are more expensive products with more special or unique design. Their sales volume exceeded 50,000 units within a short period of time. It is now March 2019, and we are still doing well. In terms of marketing, we are more concerned about the young consumers. Even though mature people also have health needs, they have strong purchasing power. However, they tend to be more and more rational, apart from healthcare wellbeing products. For sports products, we actually face young people more. We focus more on young consumers. Together with Disney, Star Wars, and so on, we have cooperation with all these IPs. For example, we have introduced some street culture and also graffiti, so as to be in line with young people's taste and preference. We hope more young people are interested in our products so that our brand image and value can be enhanced. For example, through the Fashion Week event and also sale of some of our products and also design principles, cross-disciplinary cooperation, we hope to enhance our brand value. This time, during the Fashion Week, we use mobility as a theme for China Li-Ning, and then all these are combined with urban lifestyle and also the trend of doing sports. Then we make use of our products to communicate with our customers. We have got very good feedback. Last week, I went to Shanghai to announce the 2019 fall winter products, and we have got very good feedback. Many fashionable, trendy people had checked into our launch, and many buyers gathered there. Response was good. We kept on enhancing our design. Our brand value retail price can better be integrated with our marketing efforts. Sports fashion is a rapidly rising category among all our different categories. This means that there will be business and profit from this category coming up. Then online, offline channels. We continue to integrate channels to further enhance our efficiency and experience. In the past 3 years, we have been doing this integration. We analyze data, and we use precise product planning, sales forecast to understand customers' needs. This is very important to us. No matter how we market our brand, at the end of the day, we sell products. In the past, we were weaker in the area of retail and also supply chain. In the past years, we have been transforming ourselves. In the past, I already said to you that supply chain and channels are important. Now, if you look at channel and marketing efficiency, if I'm not able to enhance efficiency, then it is difficult to convert concepts into business. This is something that we have been strengthening. Digital and also marketing or channel planning and segmentation are areas in which we have been investing all the time. Digitalizing the channels is a way to integrate online and offline, and our members on various platforms are very active and their purchase frequency is very good. We keep on investing more into this area. Our final goal is to enhance the efficiency of our sales. Online sale. We have our own unique characteristics. On this chart, you can see how we did marketing and sale at different times. For example, during Double Eleven on Tmall and so on. How did we achieve better sale and how did we expand the customer base? By doing work online and offline, we hope our brand can be better enhanced and our planning and marketing can become more precise. We are still in the area or in the stage of working hard concerning diversified channel. Our strategy is single brand, that is Li Ning brand, and multi-categories and diversified channels. We hope that there will be diversified development of offline channels. We will continue to expand and build our high-efficiency stores. For different channels, different regions, different categories, we will categorize our storefront channels. Sports experience, product experience, brand experience will be incorporated. There is also digital integration. China Li-Ning will cover mega and also tier 2 areas. Based on our single brand, multi-categories strategy, we will continue to optimize and transform our channels. Here you can see some of our high-efficiency stores. On the left, you can see our flagship store. At the end of last year, we opened the one in Tianjin Binjiang Dao. Two months after opening, the retail sell-through on average reached 2 million CNY. This was unprecedented. In Chengdu, there is the Chunxi store. It has been opened for many years. In 2018, same-store sales growth was 85%. On the right, you can see our full category store. In Xi'an, there is a Xiaozhai He store, which did very well last year. Sale grew 36% in Guangzhou. The Zhengjia Plaza store was opened in Q2 2018. Sell-through exceeded 6 million CNY. As said in the past, I would transform the categories so that they are more in line with our brand developments today. Our strategies have been well-proven. They can help us enhance our sales efficiency and operating efficiency. On this page, you can see as at the end of 2018, there are 23 China Li-Ning brand stores in mega cities and also tier 2 cities. We hope that they can be highly efficient. In these stores, the core Li Ning brand high-end products are carried, and there are other, for example, Way of Wade, LNG, BADFIVE, and so on. The opening of these stores is very satisfactory. For example, if you look at the Nanshan Wanxiang Tiandi store in 2018, on average, monthly sale exceeded 1 million CNY. This was beyond our expectation. Of course, there are many market factors. This is a very effective model in which we can very effectively replicate. In early 2019, our goal is to have 50 such stores, and at the end of 2019, 100. Based on our expansion model and also my judgment, China Li-Ning brand stores with multi-channels will become a very strong player with strong profitability in our multi-category strategy. Of course, the development in 2020 is a very important point, so China Li-Ning brand stores will help a lot. As I said at the beginning, when we operate a brand, at the end of the day, we have to do sales. How can we enhance efficiency? As said in the past, in this closed loop, if we can achieve improvement in products, sale, supply chain, order, and then, cash recovery, then, I think every year we need to continue to create experience, to try to innovate, and to learn. There is only one goal, and that is to enhance our operating efficiency, and capability of our retail work. Then in terms of supply chain, we invested a lot in the past year. My request is that supply chain should be business need oriented. There may be some very strong R&D elements, and there are also strong retail needs. So in the back office, how can we make sure that the effective management of supply chain can tie in with business needs? We will invest here, and in the future, we hope that this division can tie in with our overall company's development. We are doing something with the upstream, so product R&D, management expertise and so on, are some important focuses. New categories will see good development. For example, LI-NING YOUNG in 2018, we started to develop this category. As of the end of last year, there were altogether 793 stores, and this year we expect to have altogether 1,100 to 1,200 stores. We hope that Li-Ning can have a position, a place in the kids market in China. We are confident that in the coming three years, kidswear can see very good expansion and development. Now for adults products, sometimes, that can be common conversation with kidswear. That's the reason why we have launched these products. So far, market response has been good. Thank you very much for your interest and support in the past year. In the coming two to three years, our single brand, multi-category and diversified channels strategy will be our strategy to create our core competitiveness. Product channels, retail, supply chain will be areas in which we can enhance our efficiency. In 2019, we will be business-oriented to continue to create value of Li-Ning brand so that Li-Ning will be the most competitive sportswear brand in China. We will continue to work hard. Now it's time for Q&A. I'm happy to take your questions. Thank you. Thank you, Chairman. The Q&A session. Before a question, please provide your name and your firm's name. For investors who join this time through the online webcast, please press the button question to raise your concern. First question, this gentleman on the second row, please. I'm Wei Xiao Paul from Citi. Three questions. The first question is for the Chairman. Thank you, Chairman, for your hard work last year and this year, in injecting new vitality into the brand. Cash flow has improved, and this is the first time we resumed dividend payments. Other brands are fast in internationalization. Concerning internationalization and multi-brand development, how do you strike a balance between these two? Then I have two questions about financials for Terence. That is disclosure about channel inventories. As a sell-side analyst, I really appreciate this slide because your competitor is bigger than my big cap and never have such great detail on that. Yeah. I have to get advantage of it to have more question. If you look at the blue bar, representing the channel inventory, age 7-12 months, that a little spike up, as you mentioned, that is because your sell-out ratio in the middle of year was a little bit weak. If you look at your disclosed retail performance in 4Q, we are seeing accelerating sell-through. Shall we say that in 1Q 2019, that ratio in that blue bar, it is going down versus 17%? Uh- Yeah. Also, it's great to see you have the disclosure of your channel inventory with warehouse inventory versus that without. But we can see that the yellow line going down a lot, representing your efficiency in logistic. Shall we say that a 4.9, it is a normalized number, or you can improve that ratio looking forward? Third question, which is very simple. We're glad to see that you have the first dividend after your tough negotiation with the board, which I appreciate. If we see the payout ratio at 30% this year, shall we assume that will be the magic number looking forward as a regular payout? Thank you. All right. Well, let's handle the simple questions first. I mean, the difficult, so actually, I am glad you asked about that chart. Because both of them, you got to look at both channel inventory and then the next line, the company inventory. The company side is really outstanding, the point you are making between the second category, which is 7 to 12 months, is really the Q1, Q2 product last year, 2018. Again, in August, I talk about it. It is not because we are selling not good. It is because once we opened the Open to Buy, because remember, in 2017, we closed the Open to Buy. So 2018, when we opened up, we opened a little bit too much. We admit that. But the sell-through is still improving, right? The new product, everything else. So what it does is, of course, we want to clear it. I mean, it does help us because, as I said, our new, old product gross margin actually both improved. Right? Because with more old product to feed into our outlet factory discount store, by the way, our own, these category stores were 400. If you look at the next slide, it is actually, can you go to the next slide? Because that is where the challenge is. I mean, of course, it reflected in channel inventory, not as big. But if you look at company inventory, the 20 points, right, it is a bigger potential. As I said in my speech, it amounts to about CNY 270 million inventory. When I look at those 400 stores that we own, the outlet factory and discount store, based on their new/old product mix, the normal digestion can digest it, so I am not worried about it. But because, again, when you have that kind of concentration in all that, sometimes with certain old inventory, it is actually good for the other store, and it is very profitable for us, right? So I am not concerned, but again, I am always full disclosure, right? I mean, good or bad, like I said in August, I do not need to talk about sell-out, but I do expect it is going to become a little bit number during the transition. To answer your question, when I look at the February end, this ratio is already back into a comparable ratio. So I am not worried about that. I still want to talk about it, right? Otherwise, nothing to talk about. Right? So that is the first question. The 4.9 you talk about, definitely, I think there is still room for improvement. Now, why the 4.2? The store level only, you did not see as big as an improvement because our store productivity really started picking up last year. In fact, I will go as far as that, because a lot of the improvement you see in the channel for us actually has not fully reflected in financial yet. Because most of them come from the second half, particularly in the wholesale channel, right? I mean, that is why I am positive is because the wholesale channel, what happened in the wholesale channel usually take about 6 to 9 months to reflect on the financial. Right? So I think 4.9 is actually very optimal. Now, I know a lot competitor talk about 4 to 4.5 months, but again, they were talking about the below line, right? The 4.2. I think 4.9 is quite efficient, but as chairman's talk about, our focus now is going to supply chain, which is really the last big piece. We work on the store, the channel, everything else. Now, supply chain is the big part. I think when supply chain improving, that still has opportunity, right? But again, that's a balance. You don't want to hold so tight that you're going to lose sales, right? I mean, so that balance between how much more inventory, how fast you get to the store and versus what it do to your sell-through, right? We're looking at that very carefully, but I think we still have opportunity. Your second question on the payout ratio. A lot of them must depend on the board of directors and chairman here, of course, has the last say. 30%, yes, we admit it's low. But if you look at this company, even back in those days, there are only one or two years that we are paying more than 30%. And then one of the years also special dividend. I think we have to evaluate. I mean, I won't say for sure it's going to go up. But we want to use the cash wisely. We talk about our brand strength is so much that we haven't fully capitalized it, right? You look at Li Ning, we just basically scratch the surface of what this brand can do. Not a commitment, but we admit it's low. It's lower than 30%? No. I mean, that's why we pay 30%. You know? You wouldn't want next year come back and say, "Oh, let's do 25%." That's not acceptable. Right? Okay. Chairman. I said just now, single core, multi-categories and diversified channels is our important strategy. Concluding from the past few years, the efficiency of our multi-brand, multi-categories is very low. That had thinned out our resources. Our resources had not been fully materialized, and we cannot really replicate to a second brand. Multi-brand is not a good choice for us. In the past 3 years, historically speaking, is still leading brand that can bring benefits and return to us. If we can do a good job with leading brand, then we will be good. In 2018, sales revenue exceeded CNY 10 billion. Of course, profit still sees a lot of room for improvement. Our effort concentrated on leading brand. 99% is leading brand. Single brand is our route. We won't consider multi-brand because that will destroy us. Internationalization is a must. That refers to international use of resources and to sell in international market. Of course, we have to slow down that a bit because we still focus on the Chinese market, which is growing. Now the global economy is not certain. If we develop international market, we will see a lot of pressure. Now, basketball and badminton are our strong categories. In terms of sports in China, overseas, and Southeast Asia, we will consider some development, but it won't be our very important focus. Thank you, management, and congratulations on your good results. I'm Dilla from CLSA. I have two questions. For Chairman and one for Terence. First, Chairman, China Li-Ning is really very popular, so many people are wearing it. On this channel, how do you operate it? There was a press release, and you had some more new distributors because of China Li-Ning. Is there a separate department to manage this channel in terms of choice of distributors? Will you allow existing distributors to come in as well? What about your self-operated stores and existing mega stores and so on? Will they also carry China Li-Ning? Can you share with us your strategy? China Li-Ning category is a very strong category with very strong profitability potential. In 2019, we are going to have 100 stores. Now for single store sales, efficiency is very high. Profit is high too. Apart from opening our stores, we will work with distributors. But we have a new system to manage these products because this category is different from traditional sportswear. It is sensitive to market changes. It is sensitive to products. Management needs to be more refined. In our organizational structure, we have a team for this category. For channels, there is a team to be responsible for it, and then there is a team responsible for suppliers. Single brand, multi-categories. Each category is already a separate battlefield. In terms of our organizational structure, each category will have its own structure. Okay. Thank you. Can you refer to page 13 about GP margin? Last year, wholesale GP margin rose. It's because of increase in rebates. In managing GP margin, what is now the trend? Will you continue to increase rebates? How much room is there? For other types of discount, will you do anything? Thank you. Right. Terence will give you detailed figures. Let me comment first. I hope all distributors and also self-operated stores should go for efficiency. They need to be profitable and they need to be able to identify opportunities and space in the market in investment. This is a very dynamic management process. We hope our gross profit can be competitive and reasonable, but we will also leave enough space for our working partners to make money. That is my strategy. My teams will operate each market, each distributor and product. Can I speak in English? The rebate we've been talking about for about two years, right? One of the thing why I'm so confident is because in the past, because of the channel, it's been pretty tough, right? So we've been giving a lot more rebate than the normalized level. So last year, the rebate dropped about 3 points, right? Back to a more normalized level, but still high. Because you can't just close it out in one time, right? So I think there's still opportunity in 2019. However, having said that, we might use the rebate to net up with the delivery discount. So net-net, I think wholesale, last year ended with from high 30s in 2017 to low 40s in 2018 in the wholesale gross margin. We actually think we can get up to almost mid-40s, right? So I think there's still room, definitely room to do. Again, we are leveraging a lot of what's going on because, honestly, since last year Q4, our wholesale channel has been doing very well. I mean, it's even exceeding our direct retail channel. So I think that actually is a very positive factor for us. So we think we might have opportunity to push it up, the gross margin to mid-40s. Mid-40s in 2019? Yep. Okay. Cool. I got two more questions for Terence. Number one is around page 38 of the presentation. You disclosed that your sell-through was low teens, but then your sales volume increased by low single digits. Just wanted to double-check. Page 38, does that imply your ASP- 38? Page 38. Oh, B1. 38. Does that imply that your average selling prices were increasing in the high single digits to 10 points- Yeah in the year? Great point. Great point. But I remember first half was around between the low single to the mid single. Does that imply second half is more than 10? Yeah. Well, no. Our ASP for new product is up about mid-single digit. Okay? But the change in second half is the old product even increasing. ASP for old product actually improving in the mid to high single digit. That's the point that I actually find very interesting, because those products, a year ago when they were new, didn't have that kind of price demand. What that's saying, it's meaning our brand is elevated. That's a very interesting trend. It's very well-positioned. And honestly, I'm seeing the same trend going into Q1. Okay. That is really interesting. Just one last question for Terence. Your retail store margin improved from high single to low teens last year, but then you still expect mid-single digits offline same-store sales growth this year. Where would your expectation be for your this year retail store margin? Well, definitely mid-teens you can. You know me, I've been talking about it. A normal retailer should be 20%, right? Now, 20% take a lot. I'm not going to commit to 20%, but I always say a high teens should be where we should be in one to two years. I'm not going to commit to high teens in one year from low teens, but I think mid-teens, I just don't see it doesn't happen. Because the whole retail operation is just from front to back, and we've been working on it for two, three years. So quite confident. Mid-teens is a number that we definitely should deliver this year. This lady on the first row, please. Congratulations on your good results. I'm Christine from UBS. Mr. Li. Mr. Li, just now you were so excited about Boom technology. For the new material, I have just done a search. It is not a brand-new technology in the sports area. Other international brands like Nike, Adidas, Mizuno have used this material in their shoes. If you compare Li Ning and your competitors, what are your advantages in relation to this technology? What do you think about commercialization? You said that you will build a plant in Nanning, so is that connected to the use of this technology? If you look at the categories, shoe revenue growth was lower. So that's my first question for you. Second question is for Terence. Your revenue growth that you put on page 9. The e-commerce revenue growth, especially if I calculate second half, do a simple math, it could be 40%. Now I look at page 8, the e-commerce revenue contribution was 22%, which is the same as the first half. How can I explain the discrepancy? Because theoretically, this percentage should increase given the acceleration in new e-commerce revenue growth in the second half. I think related question is that, can you explain to us the reasons behind this fast acceleration of the revenue growth in e-commerce in the second half? What have been the drivers? How the e-commerce has been driving the profitability improvement of the whole company in 2018? What's your expectation in 2019? Thank you. Okay, so the first question is you're talking about why the SSSG improvement didn't pick up as the total sales, right? Because of the wholesale portion of the e-commerce. Because in the e-commerce, other than the direct online store, they also distributed doing online business. Now, we want to shrink that business. It's running from like 20-some percent of the total revenue of our e-commerce in 2017 to drop down to high teens. That's the reason why the trend doesn't line up. The mix in the wholesale business declined. So basically, wholesale business declined on the distributors, on the e-commerce side. Because that's not an area, because it's very difficult to control the distributor, frankly. You never know what they did. We have pretty tight policy, but then again, you can penalize them if they didn't follow certain pricing. They can do it the next day. It's a very tough channel. But it's still a good business, so we want to be very careful, slowly control it, to slow it down. So it dropped quite a bit. It dropped like 20% in 2018. Okay? So that's the first question. Now, on e-commerce, talk about the profitability and why second half is accelerating. Now, back in the beginning of last year, we actually have set up a new supply chain department for e-commerce in our kids business. That really helped. Frankly, the guy we bring in is a different caliber, okay? Wouldn't want to talk too much about the guy, it's not about him. But trust me, he is different caliber, and really help us because 2017 in the Double Eleven, we actually got a little affected by the supply chain because it's a very fast turn in e-commerce. With the new supply chain, we really support what the business should be. The business team is always very good. It was the supply chain that gave them a little bottleneck in 2017. Last year, their profitability remained in high 20s. Stayed relatively flat. With that kind of growth and deliver that kind of profitability, we cannot complain. Now, looking out in 2019, we still maintain their profitability in high 20s, which is really high. From a growth standpoint, of course, we let them scale down. Right now the plan is in low 20s in the top-line growth. How about in first 2 months? What is your observation? First 2 months? Actually, past that. What is split between your self-controlled and distributor-run portion in e-commerce revenue? Sorry, I missed it. I am just wondering what is the split between your self-managed and distributor-operated portion of the e-commerce revenue? From the top-line standpoint. From top-line standpoint. 2018 dropped down to about just below 20% from a revenue standpoint. It is still a big number, right? Because during a period of time we actually dropped that. But then again, it is a business. It is pretty lucrative, but you just have to control it. A couple of years ago, we tried to lower it, but you really cannot because there is so much opportunity there. Then we centralized it because it used to be controlled by the distributor business unit. A couple of years ago, we centralized it back under e-commerce, so it jumped back up. But then after two years, it is like this is just not the right area. If we can grow online, very profitable, and it is very normal and very visible, transparent business, why stick with wholesale? But we still look at it. It is still 20%, it is not a small number. We just want to control it better. The direction is to maybe lower somewhere between 10%-15%. That is the goal. For your second question, you are right. For a sportswear company, we are not a technology company. For this industry in the whole world, the focus is on application technology. Application. For certain material, in terms of technology, there may be the need for transformation and then the material can be used in sports. This is what various brands need to do. This PEBAX material, well, it depends on what kind of experience that we would like to design. I think there will still be room for development. Concerning the plants, we hope that R&D technology, management of supply and so on, all the knowledge can be accumulated internally. The shoes are a bit special. There are new materials, new technologies, and design and application. We need to be able to control R&D. That is one consideration. Not necessarily. For upstream, we are not doing everything. Of course, we cannot do everything. We have to look at which line is capable of producing which product. For basketball and badminton, it is already used. For running, we are in the testing phase. We hope that we can launch faster, should be in recent years. Do the last question, this gentleman on the first row, please. I am from Deutsche Bank. I have two questions. First, in South China, the restructuring has already been done in the past in four provinces. You have done a lot, but you have not been very effective. In the future, in Southern China, what are some opportunities that you have seen, and what are your strategies to expand this market? Breakdown of your profitability in 2018 by channel, please. In 2018, we talk about the direct retail. Let's talk about direct retail. Gross margin increased to about mid-60s. That's why consequently, their store profit margin increased from high single to low teens. E-commerce, we just talked about, it was staying relatively flat in terms of their gross margin and profitability. The profitability is at high 20s. Wholesale, the gross margin is at high 30s to low 40s. That's basically where they are. In Southern China, all along in the past 20 to 30 years, our performance had not been exciting. Because of that, in transforming our company, I hope that we are able to really enter this market. Our product planning, product design, channel effectiveness, communication, language, and so on, all these should be enabling us to enter the region. In Southern China, we have built an operation team. For product planning, product design channels, all these are combined. The cultural environment, consumption environment, and sports environment can see some room for development. In the future, every year, we hope Southern China can deliver a better return to us. In the past years of transformation, I can share with you one point. First, we need to set a goal. We need to see the space and room. Secondly, our brand and our company can match or must match with that space that you are looking at. Your organization structure, operation model must be right, and it should be business-oriented. You cannot be too anxious. You have to go step by step. We have achieved some progress. That is because in the past, in each category, each segment, we achieved little improvement bit by bit. In the future, we will see good growth. Net profit margin is only 6.8% this year. There is still much room for improvement. We do realize our own inadequacies, and we are putting in place effective measures to improve. In 2019, 2020, and 2021, we will be in the process of enhancing our own capabilities and efficiency. Is concluded here. Thank you all for your participation. Thank you very much.