Earnings Call: H2 2015

Mar 17, 2016

Management on the panel today, Mr. Li Ning, Executive Chairman and Interim CEO of the company. Mr. Terence Tsang, CFO of the company. Now let me pass time to you, Terence, to walk us through the financial first. Thank you. Good morning and welcome, everyone. Financially, 2015 is a turnaround year for us as it marks the first time we have achieved a few key financial indicators since past four years ago. First off, we returned to profitability, which is a first since 2011. With the backdrop of a 17% revenue growth and stable GP margin rate, we have significantly improved and rationalized our cost structure. Secondly, we reported positive operating cash flow, which reversed the trend since 2011, as our working capital has been improved significantly. Thirdly, our inventory optimization initiatives allowed us to achieve the lowest inventory growth level since 2010, more than offsetting with the impact from adding over 900 direct retail stores during the past five years. Operationally, we achieved low teens growth in retail sell-through overall. With core categories, we reported double-digit sell-through growth. We resumed offline channel expansion in 2015 on both direct retail and wholesale fronts, which again is a first since 2011. With high single digits in same-store sales, we improved channel inventory turns while maintaining our discount at stable levels. Despite our aggressive inventory optimization initiatives, we achieved the highest sell-out rate for new products since 2011. Before going through the details, I would like to give you the update on Double Happiness transaction. Currently, steps are ticking towards completing the transaction and getting all relevant regulatory approvals. It is expected that the transaction can be completed within the first half of this year. Hence, Double Happiness was classified as held for sale and discontinued operation in our result announcement. While in this presentation, we will, all prior year comparison on balance sheet line items are performed without Double Happiness in order to show you apples-to-apples comparison. Due to the growing importance of e-commerce as a channel that contribute to our top line since 2015, I'm going to run comparison as if e-commerce has been around all three key channels in the past five years so that it can give you a better picture. In a nutshell, e-commerce is an important channel for us and is integrated with our offline channels. Now, let's take a look at the revenues, which like I said earlier, exclude Double Happiness impact. Building on the momentum of 16% growth in 2014, we continued double-digit revenue growth of 17% to CNY 70.9 billion revenue for the group, primarily driven by the 18% revenue growth for the Li Ning brand. We saw the Li Ning brand recover to levels above 2012 with a more balanced overall channel strategy and improvements in our new products. This slide gives you a better idea that our balanced channel strategy comprising retail, wholesale, and e-commerce worked well. We reported double-digit growth in each of the three channels. The contribution from e-commerce had almost doubled, increasing from 5% to 9% of total Li Ning brand. This had offset a slightly lower growth experienced in the direct retail channel caused by the slowdown in the fourth quarter. Taking the usual six-month horizon, we saw performance from our new products continue to improve with better discounts, increase from 67% to 69% of total platform. That was achieved despite our aggressive inventory optimization initiative. As I said earlier, we resumed our first offline channel expansion since 2011, growing our brick-and-mortar points of sales by 9% during the year to 6,133, and consequently, achieved sell-through growth for the first time since 2011 as well. Adding on the 7% offline channel sell-through growth with our expansion in e-commerce, we managed to grow our online and offline sell-through by 11% in total, demonstrating our brand is gaining momentum at retail. Turning now to same-store sales growth. As you can see, we managed to achieve positive overall platform SSSG for each of the four quarters and reaching a high single digit overall for the year. Specifically, all three channels reported positive SSSG for the year. Yet, in the fourth quarter, the SSSG slowed down to low single digits because of the warmer than usual weather and weaker macroeconomic environment. We reacted with deeper discounts on top of our continuing efforts on inventory optimization initiative, especially in our direct retail point of sales. We do not believe this is structural slowdown, as the situation has been improved in the first two months this year. Please note that SSSG is not a significant indicator for us compared with other brands, because we have gone through immense volatility in our offline channel development throughout the past two years. Our SSSG store base is less than 40% on an annual basis. With respect to our wholesale business, we achieved a 16% growth in revenue in 2015, which is in line with our trade fair order growth trends of the year. It indicated that most of the wholesale partners continue to improve nicely. Bear in mind, this growth was achieved on the back of our first network expansion move since 2012. This indicated better confidence among our wholesale partners, and that our network is much healthier. More importantly, we have witnessed this momentum continue into 2016 with a low-teens growth for our third-quarter trade fair order, which is quite consistent with the trend we had for the first half of 2016. As for our retail business, we achieved an 11% growth in revenue derived from our directly owned and managed stores. We had a better first half and a slower second half because of the weaker SSSG in the fourth quarter, as I mentioned earlier. We postponed many store openings in reaction to this. Of the net 313 directly managed stores we added throughout the year, 30% were opened in December. Again, we believe that the slowdown in the fourth quarter in 2015 was mainly the typical ups and downs of the retail volatility and not structural. We continue to improve our store efficiency. The sales per square meter up 6% for the year, driven by higher units per transaction and more transaction per square meter. Turning from revenue to gross margin. Despite an aggressive inventory optimization initiative, we were able to maintain our gross margin rates, ticking up 0.1 percentage points to 45%. The resilience came from the higher-margin revenue we derived from our retail and e-commerce channels, as well as improvements in our supply chain management. This combined 0.8 percentage points improvement was largely offset by impact of lower provision rollback for the year. As our reduction in inventory was mainly occurred in 2014, which did not require as much provision during end of 2014. Therefore, lower inventory had little impact on provision rollback during 2015. With the inventory levels significantly improved, we have started 2016 with a much better mix of new and old stocks in our direct retail channel, which we believe will continue throughout the year. This will become a major gross margin rate growth driver for us in 2016. This slide gives you a much better idea of the changes in the key P&L items. The net impact of which put us back to the black. As a good chunk of revenue growth is organic and coupled with a disciplined cost control, the increase in direct cost is more than offset by reductions in platform cost. Allowing the CNY 475 million increase in gross profit went straight to the bottom line. The bulk of platform cost improvements, you can see, came from our cost reduction initiatives in advertising and promotion, organization optimization, as well as consulting expenses. Specifically, in A&P, we cut away all variable expenses that did not justify return on investment. Consequently, we lower our expense ratio by 10 percentage points even before the bad debt provision and the one-off cost impact in 2014. In a nutshell, we have restored our profitability with a healthier cost structure and revenue growth momentum, even with relatively flat gross margin rates. Our channel inventory remained relatively flat from 2014, despite a bigger store platform in 2015 and achieved higher retail sales. That was already a 29% improvement from the levels seen in 2011. And our channel inventory for 2015 was equivalent to 7.1 turnover months, the lowest level seen in the past five years on an annual basis. Having said that, it is still far from where we need to be, and this will continue to be an area that we assign top priority to improve. As to the aging, we have lowered the proportion of inventory aged over six months to 39% from 43% in 2014. Another step to the right direction. The chart on inventory at the company level on this slide illustrate our success in implementing our inventory optimization strategy, which is the top priority for us in 2015. Despite having added more than 300 direct stores, our gross inventory was down 20% versus 2014. With less provision required, the net inventory was down 18%. At the company level, the proportion of inventory aged over 12 months edged up five percentage points, yet the absolute amount was actually lower. But our aggressive inventory optimization initiative was able to unwind the overboard situation in 2014. While this inventory level provides a healthy platform for our gross margin improvement in the coming years, we believe we still have opportunity in further optimization, specifically in our direct stores level, which is a key focus for us in 2016. Let's look now at our trade receivables. We grew our gross receivable only 3.7%, far below our 17% top-line growth. The proportion of receivables aged over 180 days declined 7 percentage points as most distributors experienced improvements in their business with better sell-through results and discount rates. This improved mix allowed us to lower provisions required, hence receivable on a net basis was up 13.9%. Despite these improvements, a small portion of our wholesale channels do struggle. We will endure a close focus on these accounts in 2016 by rendering further assistance to help them stay afloat, as well as staying very close to their businesses. As far as working capital efficiency is concerned, we have improved our average working capital as a percentage of revenue by 7 percentage points to 31% in 2015. This is a comfortable level for our specific business model that we believe can sustain our healthy growth. Of course, there's always room for continued improvement, and our target is to lower this further to below 25% in the next 12-24 months. To wrap up with balance sheet management, we have substantially de-risked our balance sheet and improved our working capital efficiency. We have improved our operating cash flow by RMB 1.1 billion, shortened our cash conversion cycle by 26 days. We have improved our net cash by RMB 1.4 billion and lowered our gearing ratio substantially by 38 percentage points to 40.5%. In conclusion, we're encouraged about accomplishments in improving our performance in 2015. We delivered results for the three major objectives set for the year. Return to the positive territory in profitability and operating cash flow, optimize our inventory, and improve our working capital. Yet, this is just the beginning. For 2016, we will continue to strive for a low- to mid-teens top-line growth, achieving gross margin improvement driven by better mix of new and old products and channels. We will continue to exercise very disciplined cost control, as well as continually improving our working capital structure and efficiency. With that, I will hand over to our chairman, Mr. Li Ning. Good morning. I would like to introduce our strategy, implementation, and operation over the past one year. Over the past one year, we started implementing a number of new marketing strategies. At present, mobile internet era has been there. In terms of product channels and operation capacity, we have been following the offline-online combination, and we sponsor a number of events and contests in order to continuously create the user experience and the brand value and build core competitiveness of the brand. We know that in today's era, it is not just that you have a good product that is enough for you to have good results of performance. In market, products are in excessive supply, and a lot of products all look similar to each other. That is why you must have a good brand, and also you must be able to provide a good user experience. Only in this way can you continue to attract the attention of the target consumers. Also, for this kind of a good user experience, it can guide your product design, your product R&D. On the basis of our business in 2015, we have also started re-optimizing and rebuilding the wholesale model of the company. Also in terms of product channel and store sales, as well as in terms of EC sales and product supply chain, we started building a professional retail operational platform at the company. We hope that in the next 2-3 years, we can establish a professional retail platform based on mobile internet. To be frank with you, after so many years of doing business, the Li Ning Company model and our strength was more about wholesale. In terms of product design, product planning and development, and channel distribution, more of our expertise was still about the wholesale model. However, eventually, as a retailer brand for the end consumers, between us and the end consumers, we still need to further shorten the distance. Also for product management and channel management, we still don't have sufficient capacity. Also our direct sale right now is close to 40%-50% of our business. To be frank with you, we still haven't established a mature and professional retail system to support our future growth. That is why, starting from last year, on the basis of our current business, we started to review our retail system. For different categories, we have been trying to improve consumer experiences. For example, we sponsor a number of entertainment and sports events, and also we have been sponsoring CBA. In unrelated matches, we try to further strengthen the sports experience based on the contact with players and teams and fans and the young people on campus. When we talk about the sports events, they are very specific events. For example, the training in basketball and badminton and running. We think that only by taking very specific measures concerned in different categories, can we really establish interactions with the fans and the target consumers of Li-Ning. In fact, last year during CBA, we made some very innovative interactions. For example, we produced a number of CBA champion T-shirts with the slogan of Bullish. We know that these T-shirts have been well-received by the fans last year. At the same time, we also launched the Li-Ning Wave Global Design Contest, which has also been received by the market across the world. These activities are able to further boost the sales of our products. As to badminton, we are also implementing the activities of promoting the expertise of our product in this special sector. We are also providing very specific and professional services in order to enhance the recognition of badminton fans of Li-Ning brand. As to running, there was no way for us to do it just like badminton or basketball. We were not able to sponsor professional teams unlike basketball, badminton. However, running in China nowadays is a very popular mass sport event. For example, in many cities, they have marathon contests. Sometimes it's even difficult for you just to sign up for it. It's so popular. That is why, at Li-Ning, we are also trying to reach out to those clubs of runners across different cities. Even the marathons, which are not hosted by Li-Ning, we also try to reach out to the runners there in order to establish connections with them and have interactions with them. We hope that we can provide a very professional running experience for the runners by our products. Through such activities, we are able to make our running products to be known and recognized more and more by runners in China. Through O2O, we are able to bring professional experience to the sports fans. For example, we work with Huawei and Xiaomi. Especially, we work with Huawei to develop two smart running shoes. For example, our product, Furious Rider, for offline sales for one month, it might not be able to sell a lot just by relying on offline selling. However, thanks to such communications with the runners through the smart platform, right now, so far, we have sold more than 50,000 pairs of Furious Rider. Those who buy such products are basically runners. They use such products repeatedly, and also they feedback to us their need and their experience of using the running shoes. Such feedback can be very valuable for us to improve our product R&D and design. So these smart running shoes, it is a very bold try for us. To us, it is not just about the price, it is more about to use the mobile internet to develop the integrated ecological system of Li-Ning so that we can become more integrated into the everyday life of runners. As to buying experience, we are also trying to implement a number of initiatives. For example, to set up a running corner in our flagship stores. Also, we are trying some initiatives, such as the Li-Ning iRun clubs, as well as to open some running category-specific stores of Li-Ning. In addition to our products, we also offer services. For example, to make appointments for running together, and also to provide some platform of exchanges of running experiences and skills. We even invite experts to provide guidances on running trainings. We have been trying to combine the O2O business model and use our store as the smart interactive experience center. Customers can play offline or online games in the stores, and they can experience the Li-Ning shoes here, and also they can even make orders directly in those stores. In terms of products, we are still promoting the overall business growth, focusing on the development and the design of the products of the five core categories. All in all, no matter what we do, the bottom line for us is still to sell products. Products are the core of our business. The five categories. Except the non-core categories, the retail sales has all grown healthily. For example, for basketball, it increased by 34%, and for running, it increased by 17%. Running used to have a large base. According to such growth rates, we can see that our strategies over the past three years of transforming our resources at the organization towards such specific categories are generating positive results. As to continuously optimizing the sales channels, we are also carrying out continuous efforts. Actually, in China, the economic environment is not uniform across different parts of the country. Also, as I said earlier, for the retail system at Li-Ning, it is not mature yet. We still need to further improve the efficiency and the quality of our sales channel. That is why we have been carrying out consistent efforts to optimize our channels. Thanks to those efforts, our sales channels are able to turning towards a healthy status. Also, we are trying to build our professional retail sales system. By the end of 2015, the number of our point of sales was 6,133. Last year, there was a net increase of 507. For some low efficiency and point of sales which failed to meet our standard last year, therefore also closed down point of sales. At the end of the year, a net increase of our point of sales was 507. The performance of the trade fairs, for example, as of our third quarter of 2016, for nine quarters in a row, we've got increase. The inventory has also continuously improved, as I've mentioned, and as shown by the slides, by our CFO. I think you can see all those improved numbers. Most importantly, now we are trying not just to increase the number of our stores. We want to make sure that in terms of the operation, we really want to improve the profitability of the stores and also improve the retail performance of the stores. Talking about the SSSG, now we have achieved the high single-digit growth, while in terms of the wholesale, we have achieved a lower single-digit growth. In terms of wholesale, our target is to improve their performance, to help them achieve the same performance as those direct stores. Of course, last year, our e-commerce has achieved a great performance, while the whole year revenue has been doubled. During the Double 11, our overall transaction has exceeded tens of million RMB, while the whole year, the SSSG of the virtual stores of our e-commerce has grown by more than 80%. Here, I'm talking about through SSSG. So far, we haven't established a really perfect retail operation capability, but we are continuously improving our retail operating capability. We're trying to improve its efficiency in terms of the commercial operation. So we are focusing a lot on our financials, and also, we are integrating a lot of information related to the comprehensive operation. Also, we have partnered with JD.com, so that JD.com is providing actually the integrated logistic solutions for our products and stores so as to optimize our inventory operating efficiency. In terms of the sales operation, we are giving very clear price guidance to make sure that the retail price is in line with the needs of the market, so as to be more flexible in front of the competition. Well, in terms of the overall operation, I can say that now we have greatly improved our overall stability. Last year, talking about our new products, our weighted average sell-through, sell-at rate for 3 months, the year-on-year growth is 3%, while 6-year growth is 4%. This is not to my full satisfaction, but we can see the great improvements of our operation capability. If we can continue at this momentum, I believe that we will see further improvements of our retail capability. In the past 1 year, we have been in the middle of furthering our development strategy. Also, we have focused on the efficiency of our operation. We have a history of 25 years. Starting from this year, I think we are thinking in a new way, and we are on the start of the second 25-year journey. Then we can say that in terms of commodity channel and operation, we still have room for improvements. But based upon the efforts we've made in the past 1 year, we are recovered about 2016. Here, I'd like to share with you what we are going to do in 2016. What we are going to do in terms of our operation. Since we have established our production for development, we will further focus on our key products. We want to make the professional product more professional. We want to make the lifestyle products more attractive and fit. You can see on the left, you can see those are professional products. We are going to make more investments into the R&D. We want to focus on the innovation. We want to focus on the application and the marketing for the professional products. While on the right, you can find those lifestyle products. We want to see to it that those sports lifestyle products can be It has a unique segment so that they can be more in line with the changing market, to be more appealing to the lifestyle of people. LNG. You can see this is the LNG. We are targeting here at the changing people in Chinese cities. We want to focus on the sports lifestyle. The design team is from Korea. I mean, South Korea. I hope that those products will be sold in the urban commercial circles with stronger buying power. At the bottom right, we want to use this logo to build our fast fashion brand. Even though some people need professional products, while other people will need the sports leisure products. They're not so professional, but those lifestyle products also need the endorsement of a professional sports brand to focus on the aesthetic products. You can see, we have a very big market in terms of these lifestyle products. We are also going to increase our investments into the lifestyles products in 2016. We actually have developed 30 pilot projects. We hope that in 2016, we are going to roll out to more than 100 points of sales. We want to build it as an independent business model. In terms of the positioning of those lifestyle products is unique, and also in terms of the planning to the setup of the stores, all the way to the logistics, and also the cash flow. We're also trying to develop a very new model. We hope that we want to use this new model to change our old way of business. We want to build a model that is more in line with the trend in the future, hope that we can attract more people to our lifestyle products. In 2016, in terms of the channel, our target is to increase 300 to 500 points of sales, where about half of which is direct business. Of course, we will continue to reinforce our partnership with some channel partners. Strategically, we're also entering some low penetration rate, but high growth potential areas. Because in the previous years, we could not really build a really integrated channel model. I think in the following years, we're also going to develop our strategy regarding the channel development. Now we're in the era of internet. You know that people now are well-educated about the internet business. Internet is going to influence our products and channel development. We're going to integrate digitalization into our overall business model. We have built our insight about the consumers. We're going to have more detailed analysis about their consumption behaviors and habits, so as to make our products more appealing to the lifestyle of the consumers. We're going to increase the percentage of revenue from O2O. In following 2 to 3 years, the revenue from e-commerce will be improved by 20%. Last year, yes, the e-commerce takes up about 8%, but in the Li-Ning brand, e-commerce takes up 9% of our business. I think we are building up our capabilities. We are accumulating our thickness in the channel. We're also accumulating people's patterns about our products. I believe that in the following years, we're going to get more business from e-commerce. Talking about e-commerce, perhaps what I'm thinking is different from you. Perhaps you always talk about, okay, how much I have sold, but I focus more on how much money we can make from what we have sold. In terms of e-commerce, last year, profitability was quite good. On the other hand, I hope that by doing so, I want to, yes, build this relation between us and those online buyers who have bought our products. Now we are partnering with Xiaomi. This is also for this purpose. Of course, here we have built some experience, and also we have learned some lessons. But still, everything we have learned is just quite basic. In the following 3 years, I hope that my company will continue to integrate digitalization into our overall business. Whatever strategies, what we have developed, we are in the business of consumer goods after all. Here, the basics are the products and channel and operation. Those are the fundamentals of our business. These are the foundation for any business or any brands you want to develop. We will continue to make investments into all these fundamentals. The internet-based Li-Ning professional retail system. We want to reinforce our retail operation, and also we want to establish a closed loop. We hope that In terms of stores, in terms of the merchandising system, we can overall enhance our comprehensive operating capabilities and efficiency. While we're looking back to 2015, just now, James has shared with us a lot of statistics, numbers. You can see, we have made great efforts in investment. Also now, the investment has paid off and laying solid foundations for our future. From a brand perspective, as mentioned that, yes, we need to focus on the branding and also the brand experience. As sports experience, the product experience, the buying experience, and the product experience, we really hope that we can create better experiences in all of those regards, so that we can further increase the operation and the profitability of the company eventually. I believe that over the past year, we were able to turn around. To a large extent, we attribute this to our efforts of improving operation and management and cutting cost. In the next 3 years, in order to have sustainable increase of our business, we should focus on the growth of our business, the competitiveness of our business. That is my hope for the future. With that, I would like to conclude my speech. Next, we can have Q&A session. Thank you. Thank you. Thank you, Mr. Li. Now the floor is open. You can ask your questions in both Chinese or English. Please tell us who you are and when you ask your question. Please ask at most 2 questions per person. Good morning, Mr. Li. I'm from HuiLi Fund. I'm an analyst. I have 2 questions. First, during we conducted on the phase of the channels, we feel that at present, Li-Ning has a major problem. That is the profit of the channels is not very good. For the first-line wholesaler, it is okay. But for lower lines of wholesaler, it is not very high. The major reason is our price is a little bit higher compared with the other companies, and this might be because of higher production cost of our company. I would like to ask you, what is your possible solution to address the profit issue of the channels in the future? That is the first question. Secondly, we have also seen other sports brand companies in Q4 last year and Q1 this year, all of them have all shown the pace, the sign of a slowdown. Of course, sports is still a very good sector. In 2016, what is your expectation of the growth trend for this sector? Also what is your forecast for the SSSG of your company? Thank you. I will answer first, and my colleague can add to my answer later. As to profit, that is a headache issue. If you have many levels of wholesale structure, the profit margin would be very limited. In the past, we focused on halfway wholesale. If we want to expand my business, I have to talk to my first-tier wholesaler, and they will have their resellers all the way down. In the past, when the product was not in oversupply, it's okay, but today it's getting more and more difficult, so we must change this situation. If we can have a direct end-to-end transactions, the profit space would be bigger. Of course, we cannot have 100% of this model. Anyway, in the next 2 to 3 years, we hope that we can modify our existing model. Actually, a lot of modifications are already happening. Many of those who are not able to make money have already given up. Also, even for the new sales channel, they are opened by the wholesalers themselves. As to the production cost issue, Li-Ning Company's production cost is higher than that of other companies. In the past, I think to have this issue, it was explainable, but nowadays, everything's open. The production, the sources for every company are basically the same, so there won't be major differences of cost anymore. However, Li-Ning Company's product is differentiated from others products. By other products, I mainly refer to domestic brands. Because I want to pursue the spirit of a sport. I focus on functionalities of my products. That is why I have requirements on certain materials and the structure of my products. Even consumers, when they buy, they basket about shoes or running shoes. They don't attend professional competition. Still, I hope the products they buy are up to champion standard of quality. So if you want to produce more professional functional products, of course, the cost won't be that low. Of course, probably you don't agree with me. Still, I think my idea can help Li-Ning Company to create more value or make more money in the future. Increase the growth of the sector as a whole. How to say it? I am pretty optimistic. However, the Chinese economy as a whole, and the world economy is not that good. That is why I'm turning a little bit conservative. I would like to speak Mandarin and to make some comments. To the issue of cost, when we talk about gross margin, 2015, we had improvement. So if you look at the cost of the supply chain, it has improved somewhat. Another thing is the structure. You are correct. Because economic and economic trend in the past many, many years of the 2 or 3 discount was low 40s and high 40s, but now it is dropping to mid-40s. So in 2015, we had a decrease. We make improvement on the supply chain cost. Thank you. The guy over there. Good morning, Mr. Li. Terence, good morning. I am from Goldman Sachs. My name is Richie. I have two questions. The first one is related to gross margin. If you look at the gross margin in 2015, actually in the latter half of that year, the gross margin was lower than that in the first half of the year. I would like to ask Terence why. Is it because the distributor discount dropped or other reasons? What is your forecast of the future trend? Will it continue to drop, or it will recover? The second one is related to the operational profitability. In 2015, if we take out inventory and that, after the operational margins, that maybe is similar to the different, but now we have had a better understanding of the cost base. Because they have a visibility, they look at the operational profitability this year and the next year, how much it will recover, whether we can catch up with our competitors. Can you give us a more specific forecast? Thank you. Can accomplish. If you looked at the gross margin, first of all, first half and second half, we actual quite consistent. Because what you see during the midterm, mid-year presentation is with Hong Shangxi. Without Hong Shangxi, our gross margin actually are pretty much flat first half and second half. The big factor on gross margin in 2015 is, as I said, in that bridge, right? Because it is the inventory rollback. As you said, we roll back about 80 million during 2015 and about 120 million in 2014. The reason being that, again, and I said it many times, in 2014, we were a little bit too aggressive, and that is a fact, right? There are a lot of more ending 2014 inventory at the end of 2014, which does not create a lot of provision, right? Think about it. When we were very aggressive to clear those 2014 inventory last year, it hit our gross margin, right? There is no other ways to it, but we control it. We do not go in and do a huge amount and just blindly liquidation. But it is a very in-season type of clearance to do it. The margin is still good, but definitely compared to a new product. That is why our new and old product mix is still at the 69% level, and in direct retail at 66%. As a net sell-through basis, that is really, really low, right? But we offset that. They did not hit our margins because of supply chain management improvement. That is where the gross margin is, and that is not structural. We know going into 2016, we do not have as much provision to roll back anyway, but that we are going back into a more normal situation. The reason why this inventory provision was such a mess so many years was because they go back to 2012 when we did a big provision, right? In a normal, stable business, which is where we are now, you don't see the big factor changing. I would say 2016, that's not a big negative. It won't be a 0.7 percentage point hit in margin. Going into 2016, as I said, why I keep talking about inventory. With direct retail, just look at direct retail. Our mix is 66, right? A normal retailer on a net sell-through basis should be at 85. The normal retailer, I'm not talking about the top of the class, and we're not there. Our goal is improve it by about 10 points to get to 75-77. That's 10 points, and the gross margin difference between new product and old product is 20 points at least. That's a big number. Why we have to. You look at 2015, yeah, your point is true. If you take out the provision, operating income would be flat. But that's a preparation. If you don't get the inventory, not only just inventory itself, but it's really the gross profit margin driver. In 2016, that's going to be the key for us to return to true profitability, right? But you have to have the inventories to support it, and the mix needs to be there. As I may follow up, what are the normalized gross profit margin levels? Well, I would say it should be in the high 40s, right? We were at 45% in 2015. If you think about it, just use that bridge as a guideline, right? The negative should gone away. The mix between new and old product, that should drive at least 150-250 basis points, right? On gross margin improvement. Then you have the channel mix, it's continuing to increase, right? The direct retail and e-commerce both have a higher gross margin than wholesale business. I let you do the math. If you walk through those couple things, just look at those couple main blocks. That's our business. It's not as complicated as some other companies. Sure. Thank you, chair. Thank you. A gentleman in the back with an actual balance. Thank you. Thank you. I'm from Zhongcha Group. I'm Charles. Thank you, Mr. Li, and the management team for your hard work over the past year. I haven't seen major change over the mean. Mr. Li has also come down to the surface in different parts of China. It's very hardworking attitude. Thank you very much. I've also heard about some good news. For example, de-layering and the return back of senior management. The cost is reducing significantly. I believe that in 2016, you will be able to bounce back. Of course, there are still many difficulties to be cleared out. I have two questions. One is on the product channel and operation issue, especially channel. Our direct retail point of sales is very good in Guangdong at the beginning of this year. It has a double-digit growth. But as to the distributors, what will be your major strategy for them this year to ask them into cost their stores or other solutions? Mr. Li said that our direct retail is 40%-50%. I wonder whether it includes e-commerce. Excluding e-commerce, our direct retail and our distributors business, what is the ratio? In the future, what will be the percentage of the direct sale? That is the first question. The second one is about products. We know that Xiaomi running shoes are a best seller online. I think it is two things. Firstly, our brand is still there, the consumers have a high recognition of the Li-Ning brand. Secondly, so long as your product is good enough, we will be able to sell it to the consumers. In addition to your cooperation with Xiaomi, I've also heard some news about your cooperation with QQ. Mr. Li, can you give us more details about your ideas of new product development in the future, or do you have any considerations to choose more partners in the future? Thank you. Certain that the number related to channel. Well, talking about direction of the channel developments, I hope that we can do half, and the other half is up to the partnership with our channel partners because the channel is big. But talking about this model of partnership, actually, we need to change our old way. We need to improve our partnership. We want to reduce the number of tiers. If some distributors are not performing well, then perhaps we may terminate their partnership. Well, to acquire them or to replace them, it depends. Yes, it's a decision made by our commercial team. We hope that in the following 3 years, our distributors should be those who are capable of helping us improve. Also, we hope that distributors should be those actually who have really good profitability from doing business with us. Okay. Now it's 60/40, between our distributor and our own source. Well, talking about e-commerce and distributor also in the future. I mean, even In terms of merchandise. Well, in the past, yes, we had an old way. For example, okay, I will make whatever you need. But now, actually, our mindset is, okay, this is our understanding of the badminton business or running business, running shoe business. Then actually, we need to market what we are making. I believe that because I used to be an athlete, as my dream, as my aspiration, okay, I want to just focus on a sports brand. I don't just want to focus on those commodity products. I hope that, yes, I can make good money from developing a real, authentic sports brand. Well, as China's economy grows, as penetration rate improves, as the younger generations grow up. They are not like their parents. You know, their parents actually can wear the sports shoes on all the occasions, but now the young people, they want to buy the sports shoes because they love sports. They love to play sports. The direction is that, okay, we want to get integrated with the sports in terms of our technology, our design, our understanding of fashion and the art. We want to get them integrated into our design of the products. Thank you. Next. Hello, Mr. Ting. I am an individual investor. I've been following the company for many years, since TPG came in, and also I've bought Li Ning shares, and I've just bought. I haven't sold my shares, so I'm quite happy. This performance of the Li Ning Company in terms of the cost control and the improvements of the cash flow, I think my bold prediction is that we can achieve, I mean, this year, a profit of about RMB 200 million to RMB 300 million. I want to hold your shares for many years. When are you going to pay dividends? After you have earned good profits. Thank you for trusting in my company. Talking about dividends. For us, we make money, we will pay dividends. After Li Ning Company got listed in the stock market, actually, we always paid a dividend. For us, we had negative money. The most important thing is to make money. If we can't make money, then maybe we can talk about payments of dividends. Well, talking about this year, how much profit we can make, it's hard for me to say. Well, perhaps you say it's not a dream, but for me, it could be a dream, because the competition is harsh in the market, and I cannot just make whatever money I can make, just in order to make money, because I still need to look at the trend of the future. I want to build Li Ning's capability. I hope that we can build Li Ning Company on the basis of the consumption trend in the future. We want to accumulate enough capabilities to make sure that we can enjoy continuous improvements of profitability in the future. We need to make some sacrifices. We need to give up some things. Actually, we would not have had so much loss if we didn't start the transformation since 2012. You know that, actually, if we wouldn't have started this kind of transformation, perhaps we could have enjoyed hundreds of millions of profits in the previous four years. But with that kind of short-term money, perhaps we will not go very far in the market. Unfortunately, in the previous three years, we could not successfully execute on the transformation plan within a short period of time. I know, we all know that it takes time. But I think looking into the future, I think we are on the right track. We won't just talk about whether we are making money or not. As long as we are moving in the direction, as long as we are accumulating the right capabilities, that will, yes, guarantee our continuous profitability in the many following years ahead. I think this is what matters. On the right track. Our families at the bank, and we have a couple of questions. Talking about SSSG, it is appreciating. In the first 2 months in this year, could you share with us, talking about LNG and the Spring logo? Could you talk about our distributors? Are they the same distributors, or you are using the new distributors for the new logo? Could you talk about the GP margin? You mentioned that the GP margin of e-commerce is very good. This is follow-up of what Tiffany has mentioned. The normalized GP margin. What is our GP margin? I want to talk in English. Gross margin, we are going to end. No, gross margin. SSSG, we are going to announce in April, but I can tell you the trend improved compared to November and December, and in a decent way. Again, I keep have to mention that. I give you one data point. Our direct retail platform, we have about 1,500 store ending, right? Just the past 24 months, we opened over 550 stores. Right? You are adding the close. That is why I keep saying the store base that are in the SSSG level on an annual basis is less than 40%. It is a little bit different to other company that has a much more stable store base, which usually run about 80%. The SSSG, not that is not important for us. We will look at it, but it is not as critical as an indicator. That is why I want to make sure, and it does not matter, it is good or bad, I am still going to say that. It is a fact. That is that. In terms of the EC. Our EC gross margin, honestly, I think you hit a very good point. The key thing is the EC operating margin. The way we look at it is running at high 40s to low 50. That is the margin. The gross profit margin, not operating margin. That is a reasonable margin because, again, you have to grow that business. You cannot just focus on getting high gross margin and forget about it. It is a balance, but so far they have been able to hit that gross margin mark and the growth margin. I think high 50, high 40 is a reasonable number. That get us to a pretty good return on the channel profit margin. All right? On the normalized wholesale gross margin, we should be running closer to mid-40s. Okay? Right now we are not, because again, we were still doing changes on the channel. It is getting better, but we still have, using the. It is part of that for some of the old product clearance. But a normalized basis, we expect in next 2 years, we should return back to the mid-40s level in the gross margin. About the distributors, as I mentioned, we are trying to optimize our distributors channel and also our distributors margin. Talking about the LNG and the Spring logo, talking about those segmented markets, we will use brand-new unique models. Because the old model is a wholesaling model. We will use a new model. If all the distributors have indeed this kind of capabilities, it is also possible that they become our partners for the LNG or the Spring logo, but they have to follow our new criteria. They have to follow our new model. We are going to figure out those old distributors and old distribution model. Yes, you could own both store. You could also own LNG store. It does not matter so long as you follow our rules of game. It will be a brand-new model. Should we see that forward driver for the GP margin on blended basis will be number one, like-for-like improvement because your inventory structure is much better, and your old inventory already been cleared out, and that means the wholesale discount will be reduced, meaning that the wholesale ASP will go up. So on like-for-like, wholesale GP margin could go up. On the other side, you have the more direct retail business running good, and if your same-store sales is doing good in the rest of the year, your retail discount for the retail store is going to be improving. So for like-for-like, direct retail GP margin will also improving. So blended the two factor together, your GP margin will go up if the same-store sales going well. Is that the right understanding? It is very fair comment. I am quite confident on the new old product mix. I mean, we already seen in January and February. So I think that is why inventory is the most important thing in this industry. Okay. Next question. This lady. Thank you. Thank you very much. Thank you, Mr. Li. Just now you mentioned about the GP margin. I want to know, so internally you have this kind of indicator, so could you please give us some guidance, how do you look at the platform costs? When we are looking at 2016, perhaps you are going to open hundreds stores. Does it include the Spring logo or LNG, or included the OP operating cost or your expectation, or within what range? That is my first question. I was wondering if, what is your e-commerce OP margin? That is my second question. Also you mentioned, just want to clarify, you said 40% of your store base is older than one year. Is that correct? Okay. Let's get that one first, right? Yeah. In order to be an SSSG store base, you have to open 24 months, both 2014 and/or 2015. That's where the point is. The data I just give out, just on direct retail, over one-third of the store opened during those two years. They are already excluded from the store base. Then you have closed stores. You have store closed down for remodeling. That's why the store base that open both 24 months is only 40%, actually less than 40%. On an annual comp basis. Now, of course, on a quarterly, it may be higher. Because quarterly comp is different to annual comp. We have to be careful looking at that data. That's it. Operating cost. I give you two data points. Our A&P cost dropped from 20% last year, 2014, to 14% this year. Now, we take away a lot of the low-hanging fruit, that's for sure. Remaining, I don't think we see that kind of drop, but our goal is always making sure on invariable cost, we want to definitely keep it running at half of our top-line growth. That's our operating cost management philosophy. We will get the leverage. Fixed cost is fixed cost. The key for us is the leverage. That's really the structure of the P&L for 2016, right? We talk about gross margin improvement. The expense, we will put up a little bit more on the A&P, with the Olympic, but it's not going to be a lot. A&P, we run at about CNY 1 billion in 2015, and maybe you go up by CNY 20 million-CNY 30 million. That's really what we are holding it. Within 5% of the growth is where we own. Top line running at low teens, then that's where you get the leverage. I think that's very important. Because if you look in 2015- I would also like to discuss with Mr. Li. Just now we talked about the LNG and Spring logo at the end. Not just the end, we have also realized that the Spring logo is welcomed. There will be some distributors who want to participate in this scheme. However, as to the new model, I do not know whether you can share with us more specific information of this new model. It is more similar to Fast Retailing or something else? The new model, as I said earlier, we are still exploring the new model. Because we want to make sure the new model can work out. If we want to do it quickly, I use my old model, I can have 1,000 stores ready within one day. However, the old model will bring the same, possibly, the difficult problems to us. We are not able to get the profit. We will do it step by step. Firstly, I want to make sure that we will make sure the distributors will also have input in it. They will not just sell. Secondly, the seasonal products, they will not order them one time because those products are not functional. They are more fashion items. They are closely linked to weather conditions and fashion and season. That is why there will be a rolling out approach. For a single store, there will not be a big pressure of fund. That is why we pursue more the efficiency of turnaround of a product and cash. We will not simply say that you give me money and in this way will kill my partners. We will also not just have our products unable to sell and I will die. As to the specific model, we still are at the exploration stage, but I think our direction is clear. Thank you. In the interest of time, we will accept the last two questions. The lady in the back. Can you clarify the basis for your quarterly same-store sales growth, and why it is negative? Is it just seasonal? What we are expecting going forward. Thank you. I'm sorry, what's the first part of the question? Oh, because you mentioned earlier that the annual versus quarterly same-store sales growth, the basis is different. For annual, it's 24 months for stores to be considered same store. For quarterly, because- Yeah, quarterly, if they open, for example- Yes for Q1, if they open all first three months in 2015 and all first three months in 2014, then they are quarterly count. Right? So quarterly count doesn't necessarily tie to annual count. I mean, that's- Year-on-year quarter for that quarter. Yeah. All right. Yeah. On page 10, for example, in Q4 2015, it was negative mid-single digit and low single digit for the brick-and-mortar operation. Can we understand why it's been sliding since Q2? Yeah. Year-on-year number, right? Not a Q-on-Q number. Exactly. Okay. Q4, now, you can see it's worse in our direct retail. I kind of mentioned that in my script, right? There are a couple of big factors. The weather, as much as I don't want to use weather, but it is reality. Right? That's why everybody's talking about January, February is better because January get colder. All your outerwear, everybody blow it up. That's just unfortunate. It's part of nature of our industry, right? No question about it, December fourth quarter is a warmer than usual winter. That's one thing. I think the macro has something to do with it, too, right? But I think those are the environmental thing, the macro issue. But for us, because again, bear in mind, 2015, we from day one, we're very focused on inventory optimization. We use mainly our own direct store platform. That's why every time I go to visit the districts, they all yell at me. Because, "Wow, you guys keep putting discount. It's a big thing." Well, to me, it's the lesser of two evil. I don't want to do discount too, but I think inventory, it's a very important part for us to get ourselves ready while we take all the low-hanging fruit down. As the chairman is talking about, while we continue to move into this direction of fixing the whole business model, we have to take care of the defense. As I always say, we are playing defense in 2015, get the inventory in place, and that has a direct impact in our 2016 margin driver. Right? I think in our direct store, it gets worse in Q4 because after a long period of continued discount, it does get pretty tiring. Maybe, I'm not sure you have the data, but given that there's been a cold snap again in March, how is that impacting your inventory situation? Because if in Q4 you have winter clothes and people are buying autumn clothes because it's warm, and in Q1 you've got spring clothes, but people are buying winter clothes because it's too cold, does that mean that your franchisees have to continue discounting and how does that- Very good question. affect your margins? Yeah. I think, at the end, there's one thing I want to stress in my speech, maybe I didn't do as good a job. Even with such aggressive inventory optimization, our new products are still doing better. Our new product mix is still doing better. I think that's a very important factor we got to see, right? As much as you're focusing on clearing the 2014 inventory, the 2015 current year inventory continue to perform better. It's just not in the way that we want it to go, which in 2016, we are a lot more confident. Right? To answer your question, in Q1, it's kind of both going. I think the big impact we put in is January. A lot of the Q4 inventory already depleted. March, yeah, a little bit cold, but Q1 still have a good mix of cold long sleeve and spring products. It's not an issue in terms of inventory shortage. I don't think that's a factor at all. We will take the last question. The gentleman in the front. Good morning. I am Juji Yong. I have two questions. One is about your channel inventory. According to your presentation, the end-of-quarter inventory was 7.1. Last year it was around 6.9. How can we understand this figure? Secondly, the question is about the positioning of the running shoes product. It looks like in 2015, for some entry-level running shoes, the price was readjusted for middle and high-end products, like the smart running shoes. In the future for the sales and for the competition of running shoes, what is your expectation? Thank you. Product direction. Running. In fact, we do have consumers who want functional professional shoes, but there are other consumers who want affordable prices. We will consider these two factors both. For example, Li-Ning Cloud or Super Light, or if there is a Furious Rider or Huarache, etcetera. If we are able to launch functional products and there is a market, we will pursue that direction in our R&D efforts. But for the mass consumers, they do not run that frequently. But anyway, whenever they run, they also need a pair of running shoes, but they are very sensitive to price. For this mass market, we will continue to maintain part of this business. These two parts will be balanced basically. But in the past, for the mass product, Li-Ning did not do well. I discussed with my team about the demand of this market segment. My team was more enthusiastic about designing their creative products, and they just talked to those niche consumers. However, the mass market is much bigger than this, and our team just overlooked it or was not able to see it. That is why I required them to readjust our strategy. We have our concept products. We launch them, we highlight them. But at the same time, we should also see the potential opportunities in the mass market. We need to have an appropriate mix of products to serve this mass market. Now we have started focusing more on them. In the past, we just took down some concept products for this market segment. But the cost was still high, and the concept was not clear. But nowadays, we have figured this out and made adjustments. Turned the months, right? Because there's seasonality. When you compare to mid-year, it is not exactly the apples comparison. Always we compare in the same point of time. That's why we're looking at 7.1 versus 7.6. Thank you. I think that with that, our time for Q&A is up. Thank you once again for coming.