Earnings Call: H1 2019

Aug 14, 2019

Good morning, ladies and gentlemen. Welcome to the investor presentation of Li Ning Company Limited. Li Ning has just announced its 2019 interim results this morning. We are happy to have the management to present the company's financial and operational updates, as well as the future plans. 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 help you walk through the financial figures first. Good morning. Thank you and welcome everyone. During the first half of 2019, we have had one-off non-operating income in the amount of 234 million RMB, mainly attributable to our share of gain on real estate sale from our associate, Double Happiness, partially offset by provision of goodwill impairment. All discussions in this presentation exclude the net effect on the above. Financially, we start to capitalize on the improvement we made to our brand, product, and channel. We successfully achieved substantial financial improvement as we saw a 33% revenue growth with net profit margin increased by 330 basis points to 9%. Such improvement was mainly driven by a one percentage point expansion in gross margin and almost four points in expense ratio reduction. We are able to continue our improvement in operating cash flow, which increased by 107% to reach 1.37 billion RMB. In addition, we continued to accomplish significant improvement in our working capital. Our gross working capital was down 16%, while revenues went up by 33%. Our cash conversion cycle further improved by 13 days to 32 days. Operationally, we achieved low 20s growth for total platform retail sales, including both online and offline channels for the LI-NING Core Brand. Our channel inventory continued to improve. Overall, same-store sales accelerated to mid-teens in the first half of 2019. Our new product performance continued to improve with new product sell-out rate improved by over two points as compared to the same period in 2018. In addition, discount rate improved by over one percentage point. As a result, we could see our improvement in retail capability. Now, let's take a look at revenues. During the first half of 2019, our revenues climbed 33%, driven by 33% growth in both footwear and apparel, reflecting that our balanced product initiative starts showing results. Our balanced channel strategy continued working well for LI-NING Core Brand as all three channels achieved double-digit growth. Electronic commerce channel continued its growing trend over the past few years with sale revenue rose 39%. Contribution from the e-commerce channel rose to 23% of the total from the previous 22%. The direct retail grew 12%, driven by high single digits same-store sales growth. Our wholesale rose 45%. During the first half of 2019, we have executed our channel realignment through moving certain fragmented markets from our direct retail to distributor, which we believe will allow us to further develop those markets more efficiently and effectively. Hence, the revenue mix contributed from the wholesale has increased from 44% to 48%. The key here again is the DTC. The direct-to-consumer segment accounted for over 50% of the LI-NING Core Brand revenues, giving us a balanced penetration between wholesale and DTC channel. On the right-hand side of that slide, you can see that our sales from new product category aged 6 months or less declined by 2 points. However, the discount improved on both new and old products, leading to over 100 basis point improvement in overall discounts. Both new and old products saw double-digit growth with higher increase from old products as we accelerated the inventory clearance on products of the first half of 2018 due to low sell-out rates experienced last year in the first half products, as discussed before. Coming to the same-store sales performance. Our overall same-store sales growth increased to mid-teens during the year. Our offline SSSG stood at low teens, driven by low teens growth in our wholesale and high single-digit growth in direct retail. Meanwhile, our online SSSG ran at a steady mid-30s for the period. As far as our channel strategy is concerned, the number of stores for total platform increased by 396 as compared to June 2018, of which 155 new stores were for the LI-NING Core Brand. Li-Ning Young store count has reached 872, adding 241 stores during the last 12 months. With our e-commerce expansion strategy driving the mid-30s growth, total online and offline sell-through grew by 22%, continue to break new high. Our offline channel recorded a growth of 20%, driven by a high single-digit increase in average selling price, as well as low teens growth in unit volume. Wholesales of Li Ning brand, excluding international and Li-Ning Young, saw a 45% increase with the number of store up 278 over the same period last year. Our store counts went up due to the launching of China Li Ning stores and 126 stores transferred from direct retail platform as discussed earlier. As you can see from the right-hand side of that slide, excluding the specialty wholesalers for badminton and soccer, our sell-in was up by low 40s, compared with a mid-20s increase in wholesaler retail sell-through. We saw most of our wholesale partners continue their improvements nicely with better gross margin. The higher increase in sell-in against increase in sell-through was contributed by 2 main reasons. First is the improved delivery discount in the sell-in to distributor, coupled with lower tax rates. Secondly, as the distributor are opening larger size stores and the China Li Ning stores, which have much higher store productivity, as well as taking over the direct retail market as discussed before. Initial fulfillment on the new stores also generate a much higher increase in sell-in versus retail sell-through. We will keep striving to maintain the balance between sell-in and sell-through to ensure channel inventory is in a healthy state. As far as trade fair order concern. Order for the first quarter of 2020, excluding Li-Ning Young and China Li Ning stores, reached a high teens growth, reflecting the continued improvement in business health and confidence of our distributors. Moving on to retail channel. The revenues of directly managed stores went up by 12%, with 123 stores less in ending store count compared with the first half of 2018. The sales growth was greatly attributable to the 300 new store open in 2018 and 2019, while the high single-digit growth in SSSG contributed a sales increase of 115 million renminbi. However, the sales growth was partially offset by negative sales impact from the closure of 349 stores in the same period. The transfer stores discussed before also impacted negatively on the direct retail revenues by 44 million renminbi. Due to high single-digit SSSG and improvement in new store productivity, our four-wall store contribution improved to high teens compared with mid-teens in the first half of 2018. We are encouraged with continued improvement in our retail operations as a result of all the investment and focus we made over the last few years. Still, we believe that there are still potentials for improvement in our store productivity and profitability. Turning to gross margin. Our gross margin improved 1 percentage point during the period, driven by improvement in wholesale gross margin that was attributable to the improvement in delivery discount for both new and old product sell-in, contributing 2 percentage points to the overall company gross margin. Improvement in product gross margin in direct retail, due primarily to discount improvement on both new and old product sell-through, contributing 0.4 percentage points. Dilution in channel mix due to higher increase in wholesale as well as additions of Li-Ning Young, which is also a wholesale business, deducting 0.8 percentage point. Additions in inventory provision and increased investment in R&D, deducting 0.6 percentage point. Now, let me walk you through the profitability analysis. We could see an improvement in net profit margin driven by 33% top-line growth, coupled with improved gross margin rates, adding 814 million renminbi in gross profit. As far as expenses are concerned, we carry out disciplined cost control and variable cost to ensure better leverage, which is the main thing in the first half of this year. As you can see from that slide, the total sales-related variable costs, such as commissions, direct store expenses, logistics, as well as new business build-up expenses, increased a total of 219 million renminbi, representing 14.2% of incremental revenues, which is way lower than the 29.8% for the same period in 2018. This efficiency is contributed by solid increase in our DTC's same-store sales growth as well as the larger increase in wholesale revenues, which carry a much lower variable cost than the DTC. We have rationalized our fixed cost structure in order to fund the investment in our retail operations and product organization. As you can see, our other platform expenses increased 145 million renminbi, driven by staff cost increase. This increase was resulted from accrual of additional bonuses due to over-target performance, as well as increased headcount in sales, product, and supply chain organization that we have planned. Our advertising and promotion expense increased 64 million renminbi or 13%, but from a percentage of revenue standpoint, it reduced from 10.5% of revenues in 2018 to 8.9% in 2019. As a result, our operating margin improved from 6.2% in 2018 to 11.4% in 2019, after adjusted for the one-off non-operating goodwill provision we talked about earlier. The negative impact on this accounting change has added 20 million renminbi in the interest expenses, causing our net interest a negative 8 million renminbi. Now, I just want to point out on this slide, this 20 million renminbi is included in the sales-related variable cost as part of the store expenses for analytical purposes. Consequently, our net margin improved by 3.3 percentage points to 9% from 5.7% a year ago. Moving on to channel inventory. Our channel inventory increased low single digit to support a low 20s increase in retail sell-through. Our inventory turnover cycle exhibited continuous improvement and further shortened to 4.8 months, compared with 5.6 months in the first half of 2018. Counting on pure store inventory only, the inventory turnover months stood at 3.7 months. This result validated the positive impact of the improved inventory management and sales executions. The proportion of inventory aged over 6 months improved to 26% from 28% in the same period last year. At the company level, our gross inventory rose 14%, which is much lower than the 33% revenues growth. The proportion of inventory aged over 6 months improved 3 percentage points to 28% from 31% a year ago. With that, we digested majority of the negative impact due to low sell-out rate of product in the first half of 2018, validating the success of our inventory control. The over 12-month mix increased 3 points, is mainly a result of our strategy having our direct retail division handle most of the inventory clearance of all products through our own outlet and factory discount stores. This is why you see a healthy mix under this category in the channel inventory slide before. We maintain a good balance between current inventory level and aging structure in supporting a healthy business growth. As far as trade receivables are concerned, our gross trade receivables dropped by 28% on the back of a 33% increase in revenue, leading to a significant improvement in day sales outstanding. Our current mix stabilized at 31%, and we are very pleased with our receivables management. With continuous improvement in sell-through with better discounts, we believe that our channel is very healthy and the majority of our distributors are profitable. As far as working capital efficiency is concerned, our working capital has further improved to a very healthy level. Gross average working capital was down by 16% to support a 33% growth in revenue. The working capital as a percentage of our revenue declined by another 6 points to 11%, giving us plenty of room to further support our business expansion. We substantially improved our balance sheet and cash flow. Our operating cash flow increased 107% to 1.37 billion renminbi. Even excluding this accounting change impact, it was still up 87% at 1.23 billion renminbi. Consequently, our net cash improved by CNY 1.67 billion to CNY 4.7 billion. We are planning to use this cash for investing in our business expansion with channel and categories as well as Li-Ning Young. In addition, we will make further appropriate investment in our brand elevation and operations to support a consistent, sustainable, healthy business growth. Looking back on the first half of 2019, we're pleased with our solid performance. We deliver a very healthy top-line growth, driven by solid same-store sales growth in all categories. We achieve in our operations expectation with improved gross margin and disciplined cost control, even with significant investment in expanding our product and sales merchandising organization as planned. Throughout the period, we grew the Li-Ning Young business as planned and built the foundation for sustainable revenues and profit growth in the next few years. Also, we greatly improved our working capital and cash flow for a healthy business growth, particularly in our inventory month-to-sales ratio and receivable day sales outstanding. In addition to a solid cash position, allowing us to invest in brand and business expansion. For the full year of 2019, we revised up our target with top line growth at low to mid-20s, with net profit margin at 8.5%-9%. Now, Chairman will walk you through the details of our business operations and plans. Thank you. Thank you, Terence. Good morning to you. This year, because of the sports industry trend and also with the country's policy, which had been very positive and encouraging for the sector. Therefore, this sector had been growing significantly. At the same time, there had been some new models of operation, including the electronic gaming entry into the market so that the industry had been growing. We expect by 2020, for electronic gaming in China, the market may be as high as CNY 37.5 billion in terms of market size. This is a new trend among the young people, and this will contribute to the way that our sector will be operating. We continue with our policy and strategy of one single brand and multiple categories, diversified channels. We would be continuously promoting and expanding on our Li-Ning experience and also promoting our brand name to achieve even better competitiveness. In this period, product, channel, and retail operation as well as supply chain are the main points of our business. Around these three pillars, we continue to work deeply and increase our competitive edge. At the same time, we will be closely following the young people's consumer trends and also trends in the wider social cultural developments so as to optimize our channel structure and also achieve online, offline synergistic achievement so as to increase our productivity as well as our sales. At the same time, we have invested into technology and product R&D as well as promotion and marketing so as to enhance our competitiveness in our products and also in our brand name. In terms of numbers in the first half of the year, we had increased 22% in terms of our core products retail sell-through. Also you can see from the numbers that for sports casual and basketball, they have increased by 54% and 44% respectively in terms of sales. This is exactly the market trend. People's consumption and people's consumption demand are changing, and they are more going towards sports casual in their preference. In running products, we have continued to accumulate our experience, and we are transforming. In the first half of the year, for running products, our retail sell-through had been dropping as a result. Now let us look at the different categories and the results for this period. First of all, in terms of basketball, which had always been strong for us. We have been following even closer the young and the vibrant consumer groups. Because basketball, this is the idiosyncrasy of this particular sport. The people that have the demand for consumption in basketball products are relatively young. We focus on them and we focus on the current trends so that the products really speak to the consumers, in particular the young consumers. In terms of sales, our CBA league and also with our professional basketball matches, we have together come up with a 3+1 street basketball competition and also the Li Ning Basketball Academy. Through these efforts and others, we have been able to build up a word of mouth for the basketball products of our brand. At the same time, we have flexibly used online, offline integration and also diversified resources so as to serve our sales and also to create new product types for basketball. For our functional products, in the first half of the year, we have the Sonic and also two new shoe types, which had been very good in terms of performance. Altogether, the sales had been 160,000 pairs. In the 3 months, these new products, the sell-out rate had been over 45%, and that is very encouraging. For NBA stars, CJ, we have signed CJ as our spokesperson, and the theme would be to bring up a new wave of hot topic and trendy attention among the consumers. In terms of apparel, we have a number of apparel series, including our Wade and BADFIVE apparel series, and in the first half of the year, it had been very well-received. In particular, we have sold over 2.1 million pieces of apparel. In particular, it is an attitude thing for BADFIVE and Wade, and it had been widely accepted, in particular by the young. In the first half of the year for the city trend and also for under BADFIVE, we have come up with new products, in particular targeting the even younger ages and the teenagers. We continue to come up with new products corresponding to the new trends. BADFIVE, for the first half of the year, we had sold over 3.2 million pieces. Also in the 3 months, the new product sell-out rate had been very encouraging at 55%. As for running, in this category, we have come up with the mass market running consumption because we do see more people wanting to run. In this area, we have come up with new products, including the Super Light 16th generation running shoes. In the first half of the year, it had sold over 500,000 pairs. At the same time, we have come up with a V8 trendy running shoes, and this is very trendy in terms of design, and it had been exposed and promoted in various platforms. This is to increase our brand image of sports plus trendiness. At the same time, we focus on the core products for running and also the professional running products. We have to accumulate experience, and the team will have to continually explore and research and develop so that we can come up with professional running products, running shoes. There will have to be certain breakthroughs in this area. Our team is continually doing so as to come up with the relevant products that are not only in keeping with our image, but also really speak to the consumer groups and also to open up a new window for our business. Starting from last year or even earlier, we have been accumulating technology and know-how in this area in R&D. At present, we look into the real actual needs of the runners, and we have been continually testing and accumulating experience. As I have mentioned earlier, there is the LI-NING Boom technology platform, which is a very important platform for us, and it comes with certain very encouraging results. In the first half of the year, this had been one of the major areas of our efforts. For LI-NING Boom development and exploration, we have in the first half of the year come up with a platform which is the LI-NING Boom light and bouncy technology platform. This technology is used in professional running. In the first half of the year, through 11 marathon races, we have continued to test and to improve the technology and the products, and we have accumulated very good experience. The LI-NING Boom running shoes had attracted a lot of attention among the professional running circles. In the Qingdao Marathon in May of this year, we have come up with a Bang-Go and the fast runners will win kind of theme, so as to shine a spotlight on our products. It has become a very hot topic among the runners in the Qingdao Marathon. I want to say that we will continue to come up with new products under LI-NING Core Brand, and we will continue to tap into this market. Would you please pay more attention to it? As I have mentioned, we adopt a strategy of single brand, multi-categories and diversified channels. This also goes for our training products as well. We very finely separate the market into fitness training, active training, essentials, and refined women fitness training needs. In the first half of the year, in Beijing, Shanghai, Guangzhou, Xi'an and Hangzhou, we had simultaneously launched the 45 seamless, no boundaries fitness challenge competitions in these five major cities to create a professional reputation for our products. So we focus on these functional sports. Would you please take a look at the video? For this series, our activities participation had been over 2,000. Also, we have been promoting among the media so as to create hot topics and also attention, high level of attention for our series. At the same time, for training apparel, our performance had been good. For the sales for new products in the first half, it had been 4.4 million units for sales volume, and the sell rate had been 54% for new products. This is rather encouraging in terms of performance. As for sports casual category, we have been continuing with very good word of mouth, as well as attention in the market. In the first half of the year, this had been one of our highlights. In terms of the products launched, we have been focusing on young and also trendy. We have been following very closely the trendy elements. The team had been very closely looking at the elite sports and also the young sports and trendy feel. This would include a number of brand crossover and also in digital marketing, so as to increase our competitiveness in sports casual. in the first half of the year, for sports casual, our apparel series sold 5.2 million units. Also we came up with two new products, and that is Sports DNA and Li-Ning Culture. These products in the first half of the year, for these new products, the sellout had been encouraging. We have sold 40,000 pairs of these shoes in the first half. We will continue to develop our new products. This is the mega trend in the market. We will proactively look into brand crossover, cooperation, and different marketing channels, including entertainment marketing, so as to reach our consumption groups and also to reach our sectors and raise our core brand and products within these sectors of the consumers. Just now we talked about crossover series. This is something that we have been focused on in the past 2 years. Not only will this allow our brand to be younger in outlook and providing more room for our further development, as well as developing bigger consumption circles or sectors, and also to increase the productivity of our brand. In the first half of the year, we have come up with Li-Ning plus Disney, a crossover with Disney, providing a fun and vibrant feel to our brand and also our products. We also work together with characters of Disney, such as Mickey, et cetera. Also, we have worked with RNG and Newbee esports team. Esports is very trendy among our consumption or consumer groups. So we have Cheer for Chinese players, and we also assist in the Battle of Glory. These are some of the crossovers that we have done. Also in the movie industry, we have also been working with them. We have been working with X-girl and XLARGE of Japan, and also in L.A. People's Daily, we have worked with them as well, and we have come up with this new attitude image. Also with David Flores, we have worked with them as well. As for the products, we have been looking into special product designs so as to really be able to come up with different feels. For example, the reminiscence feel and also the young feel. On the one hand, we have been able to access our consumer sectors, and at the same time, we have been able to build that rapport with them. We have also added some new Sports DNA with trendy design with them, for example, fluorescent and other design features, which I would say would be attracting, and have been attracting eyeballs. Apart from crossover, we have been making breakthroughs continuously. We would like to capitalize on the product innovation to continue to lead the culture and trend. On June 22 this year, the 2020 Spring and Summer Paris Fashion Week ended successfully. You may be aware that we had exhibited two sets of apparel during the week. By means of this theme of reaching Paris, we are able to make use of table tennis in the apparel series as an entry point. In this way, we are showcasing the imagination and creativity of the Li-Ning brand. At the same time, there is also the element of paying tribute to the 32nd Summer Olympic Games. During the fashion week, there is the related China Li-Ning Weibo theme being read up to 270 million times. There was widespread coverage on media. To Li-Ning brand, the fashion week is an important platform for us to convey our brand, unique characteristics and value. If you look at all the details and the theme and so on, they represent the continuous attempt and ingenuous efforts of our team. We have attracted a lot of attention during the fashion week. Buyers from New York, London, Milan, Paris also like our products. They are coming to make procurements, and they want to cooperate with us as well. At present, the 2020 Spring-Summer show items are already online in our e-commerce platform. In the second half of this year, they will be sold in 25 overseas buyers' stores, online shopping platform, and two Hong Kong boutiques. In the past few years, we have been enhancing ourselves and transforming ourselves. In terms of channel retail operation, we have been working to diversify our channels and to achieve reform in terms of the way of selling and retail operation. We have been searching new channels in order to improve the efficiency of the channels. By means of building offline digital stores, we are able to better understand consumers' needs. Then we have been more accurate in relation to the display of merchandise and also in our understanding of consumers, in our investment in storefronts and so on. Big data gives support to precise marketing so that we are able to seize consumption needs, which is getting more and more diversified. Online-offline integration has given better consumer experience to get more recognition from consumers. Eventually, this will generate more business opportunities for us and enhance channel efficiency. For e-commerce business in the first half of the year, you can say that we have been working very hard. In terms of revenue and profitability, we perform well. In the first half of the year, in terms of product creation and innovation, we have put in a lot more efforts. For example, on e-commerce platform, we focused on creating an independent product line, Counterflow series. By crossover and very rich themes, we are showcasing our new products. Today, two very representative products are displayed here. Here you can see these products under the Counterflow series. At the same time, big data helps us see better user or customer group positioning. Then there are also many programs on WeChat and video live broadcast as well. I think now we should not stick to traditional means. We have to go for more diversified customers. We need to know where to find them and achieve a better connection between them and our products, so as to enhance our efficiency. In the future, on e-commerce, we will dig deeper into the demand in order to expand our business. During this period, we continue to focus more on high-performance stores and also specialty or professional sports stores and so on, and experience stores. There are also factory stores for the purpose of clearing inventory. On different channels, we make use of very diversified methods to improve channel efficiency. We focus a lot on shopping malls and outlet channels. We improved channel structure and strengthened the strong points, and we improved coverage of the weaker markets. At the same time, we look at merchandise plan for more channel differentiation in order to enhance our visual image. By means of digitalization, we want to improve our way of contact with customers in order to upgrade consumption experience. In the first half of this year, for stores with high productivity, this strategy is being expedited in the whole country. I would like to illustrate with a few examples of stores with high productivity. If you look at the average monthly sell-through or same-store sales growth, they perform very well. This shows that our channel strategy is very effective, and it is in line with our brand development strategy. Store with high productivity delivers excellent consumer experience and also good products and services. At the same time, by means of diversified theme display, we are able to better showcase Li-Ning's products so consumers can better feel the fashion trends. There is very experienced interaction within the stores. As a result, consumers can have more understanding and recognition of Li-Ning brand culture. During this stage, for sports casual, including China Li-Ning, it is our important growth driver of our results. Here you can see some representative China Li-Ning stores. In terms of the number of stores, it is at a satisfactory level. For these stores, they are in the core business circle in Tier 1 cities in China. On average, the monthly productivity is above 1 million CNY. As of the end of June this year, there are altogether 70 China Li-Ning stores. At the end of this year, we hope that it will increase to 100 to 120 stores so that there will be better market layout for China Li-Ning stores. We want to achieve a business model with retail mentality as the foundation. From merchandise planning, development, sales mix, store retail, inventory handling, cash flow management and so on, all these have to be further perfected. The goal is that by enhancing the efficiency of one single element, the next elements can also be further enhanced. With this cycle, we are able to improve our overall retail operation efficiency. If you refer to data on this slide, you can see the gradual realization of our improvement. Some data had already been mentioned in our financial presentation part, so I will not repeat the details. In relation to supply chain, we continue to step up the speed of reaction and elasticity of our supply chain. We want to rationalize the resource allocation in a multidimensional way so that we can be more precise and fast in supply chain system. Besides, in building our own supply chain. While our shoes factory in Guangxi, Nanning, had already started production. In the future, we will continue to enhance our own core competency within our self-owned system. We want to improve our supply chain management and R&D technology and application. This is our long-term strategy, which is in line with our strategic goal. For LI-NING Young, in the first half of this year, in relation to product development, supply chain building, channel development, brand image building, all these have been developing in an orderly way, and we have achieved some achievements. As of June 30, there are altogether 872 LI-NING Young stores. We continue to accumulate experience, and we are confident that we can do a better job in kid's wear. The trend of development is quite good in relation to products and store efficiency, single-store efficiency. These are yet to further improve. Our team will continue to work hard to enhance our own capability in each business areas. That's all in our results presentation for the first half. Thank you very much for your continuous support for our company. We'll continue to adhere to our single brand, multiple categories, and multi-channel development strategy in order to build our long-term core competitiveness. We will continue to optimize our product, channel, and retail operation, and also supply chain, in order to further improve our efficiency. We'll continue to improve our product experience, shopping experience, and sports experience to deepen the experience value of Li-Ning brand. In the second half of this year, we will be oriented around our business needs. We'll focus on enhancing our product and brand capabilities. The goal is to make Li-Ning Company the most competitive sports enterprise in China. Thank you. Thank you very much, Chairman. Section. Please provide your name and your firm's name. For people who are watching through our live broadcast, please press the question button to raise your concerns. This gentleman on the first row, please. Citi, Wei Shaopo. A couple of detailed financial questions. First of all Congratulations on strong result and also high-quality result. Also, thank you again for providing detailed disclosure. Please keep it up. If we take a deep dive analysis on your page 13, there is a sales mix shift this year, so there is a lot of implication on the financials. If you look at the GP margin, the like-for-like wholesale GP margin. Sorry, the gross The GP margin analysis on our print. Yeah, exactly. For the like-for-like GP margin was amazingly strong, like 200 BPs year-on-year. Terence shared that is due to the improvement of the delivery rebate, et cetera. Will this continue or not? Shall we see that it will continue? Also, if we look at like-for-like direct retail GP margin was up of 40 BPs. In my analyst humble view, the VAT benefit reform should benefit you better than other company with a lot of wholesale because you guys are running 50% of sales of direct to consumer. Shall we expect better GP margin expansion in the direct retail looking forward? Also, in this slide, you are very, very good in explaining that negative impact of GP margin due to the mix. However, you understate the benefit of your operating cost because I still remember that if you franchise out your stores, you will save those rentals and staff and retail inventory provision, et cetera. Shall we say that the shift on a net basis on EBIT level should be benefit? Lastly, having covered Li Ning Company for more than 10 years, I still remember the bad years, the company taking back a lot of franchise store at direct retail. We are happy to see that you are franchising out more to wholesale stores. With the uptrend outside, shall we say this trend will continue with the wholesale outperform retail in term of sales on a core accounting basis? Thank you. You are absolutely right. First half, it is interesting because the numbers actually are much better, but I slept a lot less the past 2 weeks preparing this thing because the business do change. A lot of numbers you see there is a lot more complications that I really want to take time to explain. First of all, you are absolutely correct. The wholesale business, the distributor business, our gross margin is up over 400 basis points. That is why in the company standpoint, it is 200 basis points, and that is due to the delivery discount improvement over 200 basis points. I do not talk about rebate. Rebate also come down lower, but those that I talked to in the past 2 years, I always said, "This year, we are not going to isolate rebate by itself, because how we deal with the distributor is a package deal." There are three reasons going on. Number one, the rebate, we can lower it because we have been giving higher rebate, but now distributor are making more money for a few years. So that is not a problem. At the same time, we are driving out a different policy with the distributor. It is, okay, listen, we are not going to reduce your rebate as we already plan as much. But in return, increase the delivery discount. Because our brand is elevated. That is the main thing. The reason why I am so confident, even 2 years back, saying our wholesale gross margin is going to be the driver in the next 2, 3 years. Why? Because the tough part is done. The performance, the discount, the retail sell-through SSSG has been up. That is where the driver is. You look at our receivable. The wholesale receivable is really amazing, that part of it. That tells you the health, and also part of it, last year, the brand elevated. So all these things drive the ability for us to work with the distributor in terms of increasing delivery discount and also reduce a little bit depending on account by account. Because every one of them has a different dynamics. But at the same time, in the first half, there is another issue. A good thing, is the tax reduction. That 3 point. So literally, that helps our revenue. Distributor knows that too. Some of them ask for rebate. It's hard to say what is that 3% do to us. That's why I give you a compound package, is you have to look at the whole delivery discount as a net effect. That's 400 basis points in wholesale business itself, but to the company. Whether it's going to continue? As long as the wholesale business continue to be healthy. With that, I give you a little update through quarter to date, third quarter. In the first half, wholesale business is up, sell-through up in the mid-20s. As you see in one of the wholesale slide. So far, third quarter to date, they're telling that low 30s increase in retail sell-through. The wholesale page I talk about increasing the wholesale platform, which drive a little bit positive impact on the revenue, but that's wholesale dynamic. That's the healthy aspect of the wholesale dynamic, not the negative. There are a couple of negative aspect as you know. What I mostly is, people will say, you're driving more revenue than your sell-through. So your channel inventory. Three things I look at really hard. Number one, are the distributor paying on time? Actually, they're paying ahead of time. That's why our receivable can be improved so much. Second is the sell-through because of the expanded platform, drive improved sell-through. So far, everything right on with better discount. With that, I'm quite confident this can continue at least for the next six months. Again, retail is retail. You never know. It can change overnight. So far with all the trend that's going on, I'm still quite positive with what's going on in the wholesale. Yeah, possibly it can continue at least for six to nine months. The other part of it, talk about the retail aspect. Retail right now is already running at mid-60 on gross margin. Again, that number, you have to look beyond the business strategy behind it. As I said earlier, our direct retail is moving into bipolar. On the top end, all the flagship store, all the high-level store, we're going to open mainly by direct retail. Of course, the wholesaler, they want to do that, they could. Those are big store, 300-meter plus. On the other extreme is the outlet stores. We're expanding the outlet division. Gross margin, that can depend on the mix. I can't really answer, but I think mid-60, based on where we are now, is a pretty reasonable number. Our four-wall contribution, up almost 300 some basis points. Even with that shift. I would say that's reasonable. Whether it will improve depending on the mix and the bipolar. The last part about the franchisee, and I do want to talk about it because I expect that's going to be a question, because I asked the question myself, too. You got to think about a couple of years ago, we can't find distributors. The distributor are suffering. So we have to do it ourself. Also at that time, we want to develop, expand the retail platform so we can at least have a balance. I always say it's a balance. I never said we want to go 100% in direct retail. It's too difficult in China. China's too fragmented. I think this direction is good, but it's also because the wholesaler are having a lot more confidence. We can get better wholesalers to do this. Now, if that trend continue, it's going to be market by market. We're not going to do it for the sake of doing it. Because the financial benefit is not what I concern. I look at the channel more than the P&L. Hope I answered your questions. This gentleman, please. Thank you. I'm from CLSA. Congratulations on your very good results, especially about cash flow. I want to ask Terence three questions, and then after that, one question for chairman. Revenue guidance. Your revenue guidance implies some kind of slowdown in second half, but I presume there's a little bit of conservatism in it. Just by channel, if there were to be any slowdown, which channel would you expect to have a little bit of risk in the second half? In particular, wanted to understand your wholesale channel growth to be better, because there was indeed a gap between sell-through and sell-in. I estimate majority of that was related to initial fulfillment for the stores. In the second half, how many wholesale stores do you expect to open? How much impact do you think initial fulfillment will be? Just to double-check, that's not in the trade fair order? This is the first question. Second question is on your admin expenses. The first half, we have seen very strong leverage on selling and distribution side, but then admin continued to deleverage because you invested essentially in people. Could you please elaborate a bit more in terms of what kind of experts you've been hiring, in what kind of areas, and what kind of incentives and bonuses you provided to them? Assuming revenue grows at sort of 20% rate, would you expect to see any leverage on admin side anytime soon, or this is going to be an area you continue to invest? Thirdly, just in terms of working capital and cash flow, still very strong. But would you potentially worried about driving too much efficiency from working capital and underfunding your growth? Would you consider funding more growth with working capital in the second half? In other words, would investors or should investors expect your cash flow to converge a bit more towards your earnings? I personally think it is entirely reasonable, but just wanted to get your thoughts around that. Finally, a question for the chairman about channels, that is retail versus wholesale. On one hand, 160 stores have been transferred to wholesale and franchisees. If we are talking about 44 million, then they are smaller stores. I want to know the backgrounds of this transfer. In the future, which regions, which stores will you consider to hand over to distributors for better development? As Mr. Terence Tsang just said, the store profit margin is quite high and quite good profits are being made. You are more focused on wholesale for mid to long term. What do you think of the new stores? Are they mainly wholesale or retail in nature? How will management make such a decision? Thank you. First, let's see. The guidance, I would say, as Shuai, prudently conservative, right? There are so many risks and uncertainties in the macro level that I have to. Otherwise, I will be irresponsible. But you are right. Based on the guidance, you can tell second half, between the low plan and high plan, it is going to be mid-teens growth and high-teens growth for second half. One of the reasons though, and you touch a point on wholesale, because first half, not majority of the factor, the half of the factor is because of the initial fulfillment. I did not plan that in because, in fact, I want to reverse that trend a little bit. It all depends on what wholesale is driving on retail sell-through. But I definitely do not want to continue having higher sell-in than sell-through, even though it is the right thing. I would try to maybe maintain a little bit, cut down on the OTB a little bit. But so far, the quarter to date is still running so strong, so it is hard to say. I will admit, the wholesale is quite conservative. But then again, it has to look at the sell-through. In terms of the store opening, I think second half, the trend will continue. The Zhongguo Li Ning, we are still going to open. In the first half, the wholesale opened about 47. Second half, they are planning another 50, which actually locations selected. Zhongguo Li Ning is still doing very well. But still, that, as chairman talked about, is a lot of fashion behind it. So we look at it like a hawk. If we see a major downslide in the productivity, then we will cut it off. Even though right now the plan is there, the location is selected, we still have to be careful. The trend will continue, but not as much on the big store. The big store, I think the first half we opened quite a bit. The transfer we always talk about is market by market. Right now, it's not that many in the second half that we have. I would say the trend will not be as heavy as first half. But even with that, I'll give you data. The first half, when I talk about the store fulfillment, that impact the revenue by about CNY 150 million. It's not the big factor. It's half of the factor why that gap between sell-through and sell-in. The other half is pure price variance. That has nothing to do with unit. It goes straight to the channel, but it's a price variance. That continued. The tax rate difference continued there, delivery discount continued there. Okay. The staff thing. You're absolutely right. But again, as I said, the reason why the staff cost increased so much there, another big reason was because, first half, we so exceeded the bottom line. So we put all the excess bonus accrual into it. Just to be very safe. That's responsible. The other half, and you're right, we also increased about 200 people on the platform side. Where are the people? We have at least 40 designers and pure on the product side, because we're expanding in categories and channel. As the chairman talked about, all these crossover, all these things, that's why we've been able to generate these topics. And that's important. On the sales side, we increased almost 100 people between the platform with a lot VI, the distributor sales representative. Because as your sales are expanding the platform wholesale, you got to have representatives to stay on top of the business. And on the regional side, we have- Talk about continue that direction in district manager. Also, we adding another 15 district manager. And then in the district, we also have product sales people that we are adding. The platform is a lot, but we are gaining for much higher expansion in sales. I would say second half, while we will continue to hire people, but I don't think it's going to be another 250. I mean, the 50 is on the new business too. So between the kids, the Li-Ning Young and also new channel that we expand into. I'll say we'll be adding another 100 in the platform side. That trend will continue, but that's one third of the staff cost increase. I think the leverage we'll continue to see, and if wholesale continue driving a higher revenue increase, then that's just the dynamic. We got hurt in the gross margin because of that, but we get the leverage. And first half is a very clear indication, the result of that direction. Also cash flow. Oh, cash flow. Yes, just because receivable is so healthy. That part, I think plan we can really get to where it is. But in terms of supporting the business, I mean, we supporting business. It depends who you talk to. You talk to a sales guy, yes, they do not. But our inventory up 14%. I mean, it is not a small number. Yes, sales drive up a lot, but I think in terms of inventory level, I do not think we are beating everybody. We are just right there. And honestly, we still have room. I mean, in some of the new business that we are in, I am not happy with the inventory level, to be honest. But I also need to be giving them time to adjust to that discipline. The other part why, actually, on the payables, we are actually decreasing the days. Because we do not really need, so we are trying to get better relationship with the suppliers and paying them more timely, but using that to drive better cost. So that is the direction we will be moving next. Using that working capital structure. We will continue to support the new business. But I think where we are now is actually very healthy. I mean, as I always said, a 15% of the revenue on working capital is a pretty healthy number. So we will monitor that. But it is a nice problem to have. Shuai. Regarding wholesale and retail, this channel strategy, our view is that there should be a balance. Because we are not a retail company, we are a brand company. So in terms of self-operation, we will continue to enhance our retail support and operation capability. Wholesale distributors are our important channel as well. Which channels are suitable for self-operation? Which channels are suitable for wholesale? We have to go according to which tier of city and also the actual circumstances in the cities in making the selection. The goal is to enhance efficiency. I think efficiency is the most important. This gentleman, please. Congratulations on the excellent performance in the first half year. HSBC. This is the first time I am coming to your presentation, and I am very happy to see my idol here. I have two questions. This is very honest. It is true. You have been my idol for the longest time. In terms of sales, we see two major overseas brands, and we see there is a lowering of the sales trend. I would like to know what are some of the reasons behind, and how is it because of the domestic China market and the response to these brands. Another question about finance, and I will be asking this question to Mr. Terence Tsang. That is the operating profit mar- It seems, I think, expect your previous guidance or expectation. How do you think it is going to trend, obviously, in the near term future? Can you also share a little bit about the magnitude? What is driving this? Gross profit margin, scale effect, any other things to look at? Thank you very much. For sales, every company will look at its own strategy and market situation to make adjustments. I feel for ourselves, we have not slowed down in the China market. It is because we have been improving our operating capabilities, and this would also include improving our products, which have driven our competitiveness and our revenue. How long will it last for? We have to be prudent about the market. We have to be rational to look at our own capabilities as well. We, of course, want ourselves to be improving steadily, enhancing, and growing steadily. At the same time, we cannot say that the market does not affect us. Overall speaking, I would say I am still confident about the market. Each company with their strategies, and their strategies at a particular phase of development, of course, will be unique to that company. Again, I think second half, I do plan a little bit more conservative, because first half, because with wholesale revenue up 40-some percent, and they do not have much variable cost. That is why on that slide, I really put a lot of time into it. The next slide. I mean, because a normal, the next one. You see the variable cost? Because a normal, healthy retailer, if you are driving a healthy DTC SSSG, your variable cost should be increasing. That is not the black and white number, but it is pretty much in the direction. Should be at about 15%-20%. 15% is really healthy. But first half, our DTC is very healthy, right? SSSG, the e-commerce is mid 30, and direct retail is high single. Combined, they are running at high teens, low 20s. So with that kind of SSSG, you are very healthy, right? I cannot expect, even though so far it run that way, I have to be conservative during the second half. I cannot continue assume that is the SSSG number. Also in second half, as I said earlier, I really want to see that gap between wholesale, sell-through, and revenue continue in this trend. Either way, maybe I will do a little manipulation to just push it back. But all depends on the channel. If the channel is continue to be healthy, then I can. I can cut down on the inventory supply, right? So it all depends on the macro. But you are right. I do plan a little bit more tighter operating margin improvement. But still, if you look at the low and high plan, low plan is 100 basis point, which is really low improvement in the operating margin in the second half. But the high plan is still 300, right? So, as you said, I always said 200 basis point improvement in operating margin is where our longer term planning per year, right? That has been going on the past couple of years. It is just first half, there is a little shift in business dynamic and a couple of things that allow us to increase almost 500 basis point, right? But normally, I will run the financial plan with 200-300 at most. Concerning sales growth, I would like to supplement. Efficiency is most important. On the other hand, if we can effectively control our inventory and also increase our sales, this kind of growth, I think, would be reliable and healthy. If we cannot sustain this kind of sales growth, then it would not be sustainable. That is to say, in operation, we have to really put in the efforts to control the inventory, increase the efficiency. This is core to us. That gentleman. I am Dustin from Morgan Stanley. Thank you. To Terence on financials. Just to verify the guidance that 8.5%-9% net margin, that is on a recurring basis, excluding the one-off gain. In terms of sales growth guidance, is that excluding Li-Ning Young and the China Li Ning, similar to the methodology that company guided before? You talk about this year, the OP margin expansion is way far than 200 basis points. Is that, looking into 2020 or 2021, would you still expect sort of the 200 basis points improvement as usual? Or you think some of the margin expansion kind of front-end loaded? Maybe we should sort of look at a slightly slower operating margin expansion, but in total it is sort of similar. You mentioned that the wholesale sell-through will be the key to decide the high point or low point of your sales guidance. Could you share some of colors for e-commerce and the retail for the second half? I think that sort of is more company's target or control. Is that possible to quantify the factors that drive the 45% wholesale growth for the first half? You mentioned various drivers. There is a tax VAT, there is a delivery discount, and there is ASP. I guess the ASP increased at the retail product. Is that possible to quantify the gap between low 20% and the 45%? If we look back the past 2 years in the market, people said that Li Ning products are more trendy and a lot better. Concerning this change, is this a top-down management decision, or is it because you have hired more young designers and they have driven this change? Is it a top-down or bottom-up approach? Looking at the bulk products or other more functional products, how are you going to achieve this change as well? In March, Viva China had done a rights issue. Is it because of your own personal wealth planning or other reasons behind? Based on public information, you have been holding around 18% shareholding of the company. Is this a reasonable level, or do you have other thoughts regarding the new CEO? On different occasions, the chairman said that you would like to find an official CEO. What is the progress now? After recruiting the new CEO, how can he be integrated with the existing team? What will be the division of labor? Thank you. Yes. It is mainly driven by wholesaling between whether the low plan or high plan. Again, in the Li-Ning Young, we are really conservative. Our focus this year on Li-Ning Young is just let them work on the channel, get the sell-through up, get the product and every adaptation right. Because we do not really need that to drive the revenue. We have been very conservative. First half, from a revenue standpoint, they are up about 50-something percent, which is really low, right? The business actually has all the ability with the channel expansion we put in. But again, we do not need it. Do not force it. Let them have a clear, healthy channel build-up, rather than trying to squeeze a couple hundred million for revenue, and then you dampen the channel. Yes, in the second half, we are not planning any particular major increase on top of the original plan. Right? Second half, we were just using the original budget. In many way, it is conservative, I admit. The China Li Ning, we did not really plan all the 50 additional stores that they opened in. Again, China Li Ning, fashion risk. We have to look at what happened in China before we factor in. But there is positive upside, for sure. If you talk about the easy, because second half is the major driver, is Double Eleven. That can change any time, right? We are using basically mid-30s that we are running in our plan. So, who knows whether it is aggressive or conservative. Direct retail, we are budgeting high single digits. Now, it is lower than what ran in the first half, but remember, last year, second half is when direct retail actually shoot up. Right? All the brands taking off and everything start building up. We've been a little bit more conservative on that. Okay? That relate to operating margin, your second question. Again, we always think 200 basis points is very reasonable for us because, again, we're still the lowest in net margin. We have upside. There are things that we haven't done right. Chairman always remind me, "Don't be too positive." I say, "No, with the salary we're experiencing, we have no right to be positive." We improve a lot of things on the back end, but those are low-hanging fruit. The key thing is that will put us to, not world-class, but at least to the upper end of the management. But we haven't achieved that. But 200 basis points is just getting the low-hanging fruit. We got a lot of them, but we still have the right thing. The first half is because the wholesale just driving a little bit too much. But even without the wholesale, the direct retail improvement is still ready to be there. There are still things that we're just getting more efficient. Chairman always mention, we have to get efficient. Don't worry about top line as much. Be efficient. That's what we're doing. With the working capital cash flow, I think we can use that to really get us to be the 200 basis point. I really don't think it's a big problem. There's another big factor, as Chairman touch upon, is we're going into a supply chain development. First half, we have our own shoe factory. Of course, there's a loss. First half, we lost about, total, is about RMB 18 million, which is in the financial in the first half. But we planned for that. There's no reason you can break even the first six months, because we all start opening in late February. There's definitely an inefficiency. But if that start working, we have better control. That's where we can get the other big piece. The 200 basis point doesn't even include that. I'm still confident with 200 basis point, at least for the next three years on an annual basis. Then your third question is on the wholesale gap. We talk about mid-20s sell-through, and then the low 40s increase. The difference is about high teens, right? It's about 17, 18 point. The price variance, that account for almost 10%. The store fulfillment actually account for, like I say, it's about RMB 150 million on revenue. So that's about 7%, 8%. So those are the two factors. Concerning the trend, a few years ago, we started to make this adjustment. At that time, I said that our company develops a brand in terms of product positioning and development. We hope that there can be better integration between sports and fashion trends. For our products, functions and fashion trends and design elements, use of materials should be more closely connected. When we produce China Li Ning products, or if you look at basketball, running series, there are elements from them in creating the China Li Ning products. So they are not from outside. They are from our bulk products. So we will go back to our bulk core products, R&D and design. That's our company strategy. Each of our designers and each of our product developers, product managers has enough room. I said that we have to allow each designer and product development team enough room to realize their imagination so that they can be better connected with the market. A lot of our products are created by our designers. In terms of product management, our product development head is himself an athlete, and he himself has a lot of experience and aspiration concerning the design elements and fashion trends. Our products can have a better manifestation. This is not only about top-down or bottom-up approach. It is a common goal among ourselves. That is our understanding of our brand. Concerning Viva, well, they have their own considerations. But I would like to say that we will give full support to Li Ning's development. That is my dream. I hope that it will become a top-notch Chinese sports brand to realize the capability of China manufacturing. Even though Viva has its own business development strategy and goals, it will also give full support to Li Ning. That is the top goal of Viva. Now, for CEO, definitely we have to find a CEO, and this is under progress. We will follow the stock exchange rules to make announcement in due course. Our result announcement is concluded in here. Thank you all for your participation. Thank you management.