Earnings Call: H1 2018

Aug 13, 2018

Okay. Good morning, ladies and gentlemen. Welcome to the investor presentation of Li Ning Company Limited. Li Ning has just announced its 2018 interim results this morning, and we are happy to have the management to present the company's financial and operational updates as well as their future plans with us. First, let me introduce the company's representatives on the panel today. Mr. Li Ning, Executive Chairman and Interim CEO. Mr. Terence Rink, CFO of the company. Now let me pass the time to Terence to walk you through the financial figures first. Good morning. Thank you and welcome everyone. Financially, we managed to achieve a reported net profit of CNY 269 million during the first half of 2018. Net margin rose from 4.7% to 5.7%. We saw a growth of 18% in our revenues with one percentage point improvement in our gross margin. We were able to maintain the expense ratio, notwithstanding our investment in new initiatives, among which includes buildup of new business units, as well as expanding the product and retail operations organization to better serve our customers and consumers. We perpetuated our positive cash flow with operating cash flow increased over 12% to CNY 660 million. We also continue to accomplish a significant improvement in our working capital. Our gross average working capital reduced by 8% while our revenues rose 18%. Our cash conversion cycle further improved by 11 days to 45 days. Operationally, we achieved mid-teens growth for total platform retail sell-through, including both online and offline channel for Li-Ning core brand. Our channel inventory turnover also continued to improve. Overall, same-store sales achieved high single-digit growth in the first half. Our new product performance continued to improve as well, with new product sell-through achieve mid-teens growth and new product sales mix to up three points. In addition, gross margin on our new products improved over last year due to higher average selling price. During the first half of 2018, our revenues rose 18% to CNY 4.7 billion, primarily driven by a 30% growth in apparel as part of our product initiatives started last year. Our footwear revenue has increased by 9%. As discussed before, we have eased up our open-to-buy strategy this year over last year's reduction initiative. This created a positive impact on our revenues growth and sell-through performance among different channels. However, as we are still in the process of optimizing on our buying and product merchandising, this opening up of the open-to-buy strategy currently resulted in negative impact on our sell-out rates performance compared to last year. Q1 products shows down four points and Q2 products down 2.6 points. Nonetheless, this performance still an improvement over 2016 sell-out rates. Our balanced channel strategy has continued working well for Li-Ning core brand. All three channels sales revenues from the electronic commerce channel continued to deliver the highest growth amongst others with a 34% increase. Contribution from the e-commerce channel rose to 22% of the total from the previous 19%. The point to highlight here is the direct-to-consumer segment accounts for 56% of total Li-Ning core brand business in the first half, giving us a much more balanced penetration in terms of business risk and a more controllable business model. On the right-hand side of the slide. On the right-hand side of the slide, you can see our sales from new products, aged six months or less, continued to improve. Contribution to overall sell-through from new product rose to 81% from 78%, with better gross margin. As just mentioned, due to a much higher increase in open-to-buy orders, the sell-out rates declined. More particularly, could be seen in the performance of Q1 products. Nonetheless, this increase in open-to-buy has driven a higher sell-through performance accordingly. Our new product sell-through increased by mid-teens over less number of stores during the first half of the year. As far as same-store sales growth is concerned, our overall SSSG achieved high single digit during the period. On the SSSG page. Our offline SSSG. Go back two pages before. Two more. Next page. Our offline SSSG stood at mid-single digit, driven by low teens growth in our direct retail channel. The healthy growth in our direct retail were mainly driven by easing of open-to-buy strategy, which allowed more products in stores, as well as improvement in retail operations as the team start moving up the learning curve. On the other hand, the online SSSG maintains at mid-30s for the period. Moving on to channel expansion, the number of stores for total platform increased by 463 since end of last year, primarily driven by the launch of Li Ning Run business. Our total number of stores for Li Ning core brand increased by five stores to 6,267. Li Ning Run store count has reached 631 since it launched in the second half of last year, including taking over of 361 stores from the prior licensees distributors. Compared to same period last year, our store count declined 62, reflecting channel optimization initiative during the last few years. The total online and offline sell-through grew by 14% with our electronic commerce expansion strategy. Our offline channel recorded a growth of 9%, mainly led by increase of new products ASP, as well as our continued expansion in our Terra business, which was a key initiative we rolled out 18 months ago. Total wholesale channel, excluding Li Ning Run, saw a 10% increase in revenues. Excluding specialty wholesalers for badminton and soccer, our distributors grew 4% in sell-in compared with a 6% increase in retail sell-through, which continued to drive improvements in inventory turn in the wholesale channel. We saw most of our wholesale partners continue their improvement significantly. The strategy of comparable lower in sell-in versus sell-through was by design to improve accounts receivable and channel inventory in our wholesale channel. We expect this momentum to continue as orders for the first quarter of 2019 registered a high single-digit growth, reflecting the improved business health and competence of our distributors. We will continue to strive to maintain the balance between sell-in and sell-through. Our direct managed stores saw sales went up by 17%, with 42 stores less in ending store count compared with the same period in 2017. The sales growth was largely attributable to the 300-plus new stores that opened up in 2017 and 2018. The low teens growth in SSSG contributed a sales increase of CNY 123 million. However, the sales growth was partially offset by over 400 stores that closed in the same period. With improvement in SSSG and new stores productivity, the store profit contribution margin improved to mid-teens compared with low teens in first half of 2017, due to better gross margin rates from new products as well as improved sales mix contributing from the new products. We are encouraged with the progress, and we believe that there's still certain potentials for improvement in terms of store productivity and profitability. Turning to gross margin. Our gross margin improved one percentage point during the period, driven by higher revenue mix from direct retail and electronic commerce contributing 0.3 percentage point. Improvement in new product gross margin in our direct retail channel due mainly to higher ASP, contributing 0.3 percentage point. Improvement in direct retail new product sell-through mix contributing another 0.3 percentage point. Lower addition in inventory provision resulted from improved aging, contributing 0.1 percentage point. Now, let me walk you through the profitability analysis. The improvement of net profit margin was driven by high teens top-line growth, coupled with gross margin improvement, adding CNY 390 million in gross profits. As far as expenses are concerned, we have implemented disciplined control on variable cost. As you can see from the slide, the total sales-related variable cost, such as commissions, direct store expenses, logistics, as well as new business unit expenses increased a total of CNY 214 million, which amounted to 29.8% of the incremental revenues, which is lower than H1 2017's 31%. Though improved over last year, the higher-than-normal expenses ratio and variable cost were skewed by the new businesses, which by nature has a much higher expense ratio in the first few years of operations. We have rationalized our fixed cost structure in order to fund the investment in our retail operations and product organization, as well as the incentive program I mentioned back in March. For example, our advertising and promotion expenses only increased CNY 43 million to support an 18% increase in revenues, reducing our A&P expense ratio by 4.8 percentage point to 10.5% of revenues. The CNY 51 million increase in remaining platform cost consisted of CNY 55 million increase in staff cost and option expenses, which were planned in the budget. Consequently, our net profit increased CNY 80 million or 42% to CNY 269 million. Net margin increased from one point to 5.7% during the period, compared with 4.7% for the same period in 2017. Now, moving on to channel inventory. Our channel inventory decreased slightly with a 14% increase in retail sales. Our inventory turnover cycle exhibited continuous improvement and shortened to 5.6 months. Counting on pure store inventory only, the inventory months stood at just 4.2 months. The proportion of inventory aged over six months improved to 28% from 33%. This result validated the positive impact of the improved inventory management and sales executions. At the company level, our gross inventory was up 12%, which is lower than the 18% revenue growth. The proportion of inventory aged over six-month period improved by two percentage points to 31%. Compared to H1 of 2016, 48%, you can see we have made very well progress in our inventory control. We believe the current inventory level and aging structure are in good balance, which could support our business to grow healthily. As far as trade receivables were concerned, our gross trade receivables were down by 4% on the back of the 18% increase in revenues, leading to significant improvement in day sales outstanding. The proportion of receivable aged below 90 days improved seven points to 61%. We are pleased to see that most distributor experience continued improvements with better sell-through and gross margin. Overall, our receivables improved nicely. Yet there are still a few accounts that require special attention. As far as working capital efficiency is concerned, our working capital has further improved to a healthy level. Gross average working capital declined by eight percentage points to support an 18% increase in revenue. While the working capital as a percentage of our revenue declined by 5 percentage points to 17%, reaching our target much sooner than we planned at the end of 2014. We substantially improved our balance sheet and cash flow. Our operating cash flow increased over 12% to RMB660 million. We improved our cash conversion cycle by 11 days to 45 days. In addition, we saw net cash improved by RMB874 million to reach RMB3.05 billion. With that, we are planning to use this resource to invest in business expansion, new business unit that just launched, and seize right opportunities that come along. In conclusion, we are pleased with our progress in the first half. Driven by solid same-store sales growth in our direct-to-consumer segment, we recorded a healthy top-line growth. We also achieved our operations expectations with improved gross margin and disciplined cost control to fund the significant investment in expanding our products and sales operation organizations as planned. Besides, Li-Ning Long business has been developing as planned as it entered the first full year of operation, laying the foundation for continuous revenue and profit growth in the near future. We also recorded a significant improvement in our working capital and cash flow for a healthy business growth. In particular, we saw continued improvement in our inventory months to sales ratio and aging structure. We also maintained a solid cash position for investing in brand and business operations. Notwithstanding the above achievements, there is room for improvement. We strive to be more precise in product planning and buying, so we can achieve improvement in sell-through and sell our wares at the same time. We still maintain our full-year net profit margin at 6.5%-7% on a mid-teens top-line growth, as we have been prudently conservative due to uncertainties in the macro area, as well as giving time for our team to move up the learning curve on the product and merchandising side. Now, Sharon will walk you through the details of our business operations and plans. Thank you. Thank you, Terence. Now I am going to go through with you our business in the first half of 2018. Now, if you look at the macro picture and the state policy, the state supports the sportswear industry development, and the state is giving a lot of support to this industry. At the same time, consumption demand is getting more and more mature and refined. People are eager to buy high-quality and professional sportswear products. At the same time, e-commerce continues its rapid development trend. According to some figures, it is expected that in 2020, EC trade volume will reach CNY 43.8 trillion, average growth per annum will be 15%. However, for us, e-commerce already accounts for more than 20%. It is one of the drivers of our group's growth. In the past, it was just a channel for digesting inventory. Last year, we wanted to improve customer experience of Li-Ning, and actually, the brand value is being realized through both offline and online channels, and through this model, we would like to understand more about consumption patterns of consumers. We hope to meet their need and also their aspiration in relation to sport. For more mature and refined consumption demands, we continue to make use of product and channels and retail capability as our three pillars. This is the framework since some time ago, the three pillar model. We also implement the digitalization strategy so that offline-online sales efficiency can be enhanced. In relation to products, we emphasize very professional merchandise. At the same time, because consumer needs are also very holistic, we would like to integrate recreation, leisure, and sport in our products. There is also differentiation in terms of different regions and villages, and we optimize the channel structure. We believe that there is still a lot of room for improvement in order to enhance efficiency. For our retail capability, we continue to transform our product operation model to effectively respond to market changes. We want to have a precise logistics support system. We strengthen retail operation standards and optimize uniform store image. We reinforce training of frontline sales persons. Now, I would like to go into greater detail of these points. First, let's look at our products. In the first half of 2018, you can see sales of various categories. Basically, retail sell-through rose 14%. It is quite a good uptrend. Training and basketball and running, saw good sell-through growth. Retail sell-through, mixed. Running, training, basketball, have a share more or less the same as last year. Sports casual, up 23%. Non-core category came down further. For our core categories, we are able to see improved performance. For running products, we want to meet actual runners' needs. Basically, we divide our products into three types, participants, core runners, and elite runners. We launch products, to meet these people's needs. We want to be able to satisfy differentiated running needs. Of course, we also do a lot of scientific innovation, and we have this Li Ning regional running, and also some KOL reputation and some apps, so that we can have more interaction with runners. Then for the elite runners, we also try to achieve breakthrough by means of, for example, marathon events, and also specially organized running races. The best of key styles include the Super Light series, Li Ning Arc series, and Lite series. They perform very well, and they are well-received by young customers. About 1.32 million pairs have been sold, and sell-out rate for 6 months, 70%, and sell-out rate of 3 months, 57%. While we have achieved improvement, it does not mean that we are already doing a good job. There is still a big room for improvement. However, I think for this series, we have done a lot to communicate with consumers. The sell-through rate of these core styles has improved. I think Super Light and also the Li Ning Arc series are actually based on technological advancements. We continue to come up with some new design ideas and principles. On this basis, we have also launched the Lite series with different functional protection. At the same time, we incorporate other elements so that our products are even more vital. For basketball, we emphasize the attitude, and also the kind of positioning is now even more precise, because for basketball, it really is the teenagers, even younger, in terms of our audience. Their characteristics, their attitude, and their personality is something that we focus on, and their attitude is something that we incorporate into the design of our products. At the same time, we continue to adjust the positioning of our products so as to bring out the characteristics of Li-Ning. Also to connect up, of course, to the NBA professionals' resources, and to create a professional basketball space. In terms of channel, we have also accessed all 5 channels and be very focused on our basketball sales. To bring on more sales, as we do that, only young consumers, we create a talking point for them, making it attractive for them. For our functional products, continuing on the basketball theme, we have 2 major functional basketball shoes series, the Sonic and also the Shadow Warper series. Also, we have utilized the Li-Ning Cloud technology with the shock absorption function. We want to, for the basketball series and also for the casual series in the design, we want to merge the design features of the 2 to make the shoes more comfortable. This is partly done through our Flyknit technology, and this is very well-received, confirming, once again, the Li-Ning brand. As for another function, that is in our training function, again, we have been focused on the needs of the consumers, and we have focused on different areas, looking at the training needs, for example, in terms of gym consumers, that is fitness training for the gym, and also for active training, as well as the basic functional essentials. We have come up with these different categories of products. In the first half of 2018, in terms of our training, we have been doing very well in the sales of these products. The top 20 SKUs under training apparel is from In the young sports casual space. For the year, our sales in this category have been good. For our sports casual series, it is part of our strategy to create trends and hot topics for the young audience. Also, we want to have a multicolor option, making it exciting for the consumers. We have over 3.5 million units, or pairs, sold in the first half of the year. For apparel series, that includes our Wade line. We have adopted a more playful, sport-chic, kind of stylish approach in the first half of the year that has been very well-received, with over 1 million units sold. Also, we have introduced the BadFive apparel series, which is very focused on the street basketball fashion. It has been very much welcomed by the young people because it is playful. It is also the basketball culture, and this is very well-received and identified with by the younger generation. In terms of sales, it has also showed that this is indeed a right direction. That is to say, focusing on playfulness and also chic and function. There has been over 1.92 million units sold. Further, in terms of channels, we have achieved online and offline integration so as to enhance our efficiency and also the experience. Our forecasting had improved based on our data analysis, and this further enhances our efficiency and experience. We continue to upgrade ourselves in this regard, so it is not just about inputting into a calculation model for making forecasts. Yes, we do have models, but at the same time, we have learning capacity within our team so that we improve on our efficiency, across the board. We continue to increase our integration online and offline to increase stickiness and also to be interactive with our consumers. Also, to enhance the consumer's experience so as to increase the loyalty and also continuously increase the online and offline interaction to seek business opportunities. At the same time, we strengthen our stores, including the high-efficiency stores or high-level market, and also the low-level market, and also our different positioning stores. We also focus on our experience stores and our large store with high productivity and also category theme stores. By so doing, we strengthen our retail and product operation, and we continue to be learning in this area. Specifically speaking, in terms of digitalization, we, through this, have achieved a channel optimization. Also, we improve on our membership marketing through digitalization so that we are able to stimulate overall sales through online and offline integration. By online marketing, we are able to expand the scope of our consumers and also to be able to have online and offline synchronization by expanding the experience of interaction for the members so that they can look at the products online and, at the same time, look at the products offline and then buy online. Our consumers, a lot of them have been adopting this new marketing model of ours, and for some of them, it has become a kind of everyday experience for them. For some of the existing and also the potential members, we are able to interact with them, increase their loyalty or stickiness, and also to look for a direction through these members of ours to give us more information about their everyday life so as to inform us about our product design and our marketing strategy. In the first half of the year, this has been paying out. Online speaking, we continue to create content, and we have put in a lot more resources into this area. Not only in our e-commerce sales, we have put in more resources and development, but at the same time, our content as well. For example, in the New York Fashion Week, the Paris Fashion Week, we have been doing promotions, and also on the young people's platforms of Tmall, et cetera. We also have stories, content, and also programs to aim at building long-term customer recognition. These are online exclusives so as to make this a Li Ning Trace kind of effect. Because for a lot of the promotion, it is about interaction. It is about an interactive relationship between the consumer and us so as to increase the potentiality of our customers in effecting a sale. I think there is a lot more room for this kind of activity, and we will be continuing with this. We want to be able to, through the Li Ning Trace series, to build a long-term relationship with our customers through this long-term recognition. So that the behavior habits and also building of community online becomes a very hard demand and to convert that into business turnover for us. In the first half of the year, we have sold 27,000 pairs of shoes on this, and we have been able to be successful by achieving 80% sell-through in this area. We are still looking further into how we can utilize this online platform so that we can be even more focused on this group of customers. In the future, we will continue to put in resources into content. Just now, I have talked about our channel in the stores. We are enhancing our experience stores and also our larger stores, building a brand name through this. In the pictures, you are able to see. In the first half of 2018, our experience stores have amounted to 27 stores, and the average size is about 445 sq m. There have been over 20,000 people participating in our sports experience. Our point is to bring this sports experience to increase the feeling for the Li Ning brand image. This is not just about exhibiting our products, but it is to promote sales, definitely. A platform for it to be able to attract more fans' attention in the different sports to find a point of interaction and experience. That is the purpose of our experience stores. This is the Viva Mall experience store in Shanghai, which was opened in 2017. In the first or second quarter of 2018, the same-store sales was about 50%. This is our Chengdu Chunxi South Road experience store, and the same-store sale for the first half was about approximately 70%, very successful. So for the fans of Li Ning, how we can, through certain formats, be able to create what we want in terms of the Li Ning brand experience. This is a point of our experience stores. For long-term sustained interaction with the consumers and also the brand name, our brand image creation, the experience store is important. As for our larger stores with high store productivity, this is another area where we will be generating a lot of sales. These are some of the pictures of our existing larger stores. For example, in Xi'an, the Saige store, it is one of the very important shopping areas in Xi'an, and it was opened in 2016. The same-store sales for the first half have been approximately 40%. There have been major renovation in this Beijing Wangfujing Dong'an store. The store size is over 350 sq m, and with the renovation completed in the second quarter of 2017, the same-store sales in the first half of this year have been approximately 50%, and that is very satisfactory. We will continue to do so because the consumer habits and the demand for merchandise, for brands, and also the way they do their shopping is all new. We already have a very good base for that. We will need to finely categorize and adjust our focus on the different categories in this channel. By more accurate calibrating our focus, we will be able to do so. We have these well-defined category stores to do so, including our Wade store. Some of the stores, the efficiency has been low in the sense that the display element has been stronger than the actual sales. But for this year, for example, in the Shanghai Longemont Shopping Mall, which opened in 2016, our same-store sales for the first half had been approximately 30%. In Shenzhen, our Raffles City store, which is a Wade category store, our same-store sales for the second quarter of the year have been approximately 190%. So we have to be getting close to our target audience so that it really translates into actual sales. Two days ago or three days ago, we opened in Zhuhai, the Huafa store, the China Li-Ning store. This is a high-end luxury kind of sports store, and this is a new attempt, and we want to be able to have a new image, and hopefully, it will bring on a new direction and space for future development. In the past 10 days or one week, in the Shenzhen Vanke Township shopping mall, we have a pop-up store. We sold just over CNY 2 million in terms of sales. That was just in the space of a week or so. The unit price was high for our sales. So you can see that the people that we attract in terms of consumers are very fitting. So they not only came to buy the products, but also they did selfies, and also it became a very good hot topic, further promoting our brand. This has given us a lot of inspiration for us. We will continue with this China Li-Ning concept so that we will be able to achieve even better development and results along this direction. For retail capability, we continue to optimize our operation platform in order to raise our overall retail capability from the store's point of view. We continue to improve the store image matrix so as to satisfy the consumption needs of the targeted consumer groups. As I've mentioned before, we have some omni-channel operation to increase our retail optimization. There is a lot of further room here. We have just started, and also internally, through the different regions, we will have to work together so as to raise the experience of our consumers in their purchase. Service is important. There is a lot of room for improvement in service. Training, there will be further training coverage through Li-Ning school training system. So that there will be further online and offline integration. In terms of operation, there will be more management of the stores, and we will upgrade our store management system, and we will strengthen our retail operation by single-store management. For store image, it is not a one-day effort, of course, it is not short-term, as I've mentioned. We go step by step in our structural change. As mentioned, this is about the channel as well as products, and also in retail capability. For retail operation platform, it is very important for us. We are treating this as our core area of work, that is, retail operation platform. We need more time, we need more experience accumulation, and we need more energy to be put into that. This is really about retail from the design of the products to sales and inventory, cash management. We continue to work in these areas in order to be able to raise the efficiency and effectiveness of our retail operation. From the figures, you are able to see that we have step by step been able to achieve this. From our financials reviews, you were able to see this in the first half of the presentation today. I do not need to be repeating that. We continue to do so, but this is not something that we can achieve in a week or in the short term. We will continue to increase and improve on our creativity, raise the core competitiveness, and also to allow our team to increase their capabilities so that it can be reflected in our operations. Perhaps you are all interested to know about our LI-NING YOUNG, LN Young. This is an area that we will be putting a lot of emphasis on. I think it was late last year that we have taken this over. Yes, it was late last year. We are planning and developing this step by step. At the end of June of this year, there were 631 stores opened for Young. The plan is 751 stores for the year. But of course, the opening of new stores will depend on the overall economic situation of the country, and also according to the DNA of Li-Ning, we will be designing and developing the Young products. We continue to increase our categories capabilities. There is still a lot more work to do in this regard. But as we do our fundamental basic work, at the same time, we are building our WeChat, Weibo, and Douyin, and other social media capabilities. Also, we are working with Disney and other international IP to launch products. We want to be working together with our sales channel. In terms of marketing, we will be expanding, and we'll be creative in our approach in order to promote and develop this business. As for Danskin, we are still in an exploratory stage, I would say. Because this is a women's, relatively high-end, fashionable, sports performance product category. For Danskin, even though it has some history, how can we link up with the potential consumer group and to create business out of that? We are still in an exploratory stage. Hopefully, we will be given more time in order to do this so that we will be able to really focus on the strategy. This year, we have opened just over 10 stores by the end of the first half of the year. In terms of products, we will continue to adjust. This is an opportunity. This is a space for future business development. In this process, if we are able to find the point and the space for future development, yes, we will continue to work on this, Danskin. Of course, we will also be building our brand name through multilevel, multidimensional marketing. As mentioned, we emphasize the core sports: basketball, gym, ping pong, football, and badminton. This does not affect us in terms of getting very close to the fashion trends, and we are integrated with the fashion trends. There are some new attempts. You would know that for China Li-Ning as a brand, through the New York Fashion Week, we have been able to get a lot of attention. This really enhances the popularity of this Li-Ning brand among the trendy youth groups. This is for Li-Ning brand. Next page. This is the New York Fashion Week and some of the Taobao hot search page, and also some social media, and the hot topics getting viral on certain media channels. We did not direct much of this. We just did one thing, and after that, everybody, because they liked it, because it is fun. It was the audience, the consumers, which actually continued to distribute and also to magnify what we had offered. This is about the Chinese element and also our brand name as well. Definitely, it has done a lot of help for our brand name. In June, we have, again, in another international fashion week, this time in Paris, we have made an impact again. We have worked on our traditional basis, but at the same time, we have also put in a lot of trendy elements so that for our brand name, we have been able to really project the Li-Ning brand name. Let us look at this video together from the Paris Fashion Week. Yes. After these efforts, a lot of the younger post-80s, post-90s, or even the millennials, post-00s, they became our main participants, and also they have been sharing on the Li-Ning brand. We have had over 40,000 communication briefings collected and 140 million in terms of reading volume on Weibo topic discussion. That is for Li-Ning China. That was for Paris Fashion Week, and in this week, we have three basic brands, the Furious Rider ACE, Aurora Skywalk, and 001R1. These are not high price point brands. Overall speaking, I would say that we approach more willing consumers and young consumers. We have attracted them to the Li-Ning brand, and we want to be able to show off our value, not the price or high price. In the past three years, why had Li-Ning brand done so much adjustment? It is because there is so much happening in the market. Everybody looks the same in the market. What is worse is that there is competitive pricing. That is our cut-throat pricing. We do not want to go into that area. We want our development into the future to be based on value, on value to create our brand. This is what we are focused on. This is our attempt, our focus, and the direction where our resources will be focused on. We want our products to be well-received by the market, but on the other hand, there is still a lot more work to do. Apart from the Fashion Week, we will go through other formats to promote our brand and also to create the brand value, especially for the professional series, professional image that we want to project. For example, the Wade and others. Apart from activities and events in China, we want to have more interactive events to get close to the consumers, especially for our professional brand. This is a China tour for the 2008 Wade and CJ tour. These are some of the pictures we took at the CJ tour and the Wade tour. You can see that they were completely overwhelmed. It was so crowded in the shopping malls. Actually, this was beyond our expectation. These participants are our consumers. They are not just onlookers who come to take a look at their stars. Because what they want is an experience from our brand and also the look from our brands. We provide this kind of sports and star and image for our brand. But at the same time, we want to deliver value, not just the experience. Only then we will be continually successful. This is the first half of the year, a review for you and also the direction of our focus. Next, we welcome questions and answers. According to the sports people, we are still far from our target, still far from the country's target, so we will continue to work hard. Thank you. Now we open the Q&A section. Please raise your hand and our colleague will bring the microphone to you. This gentleman on the first row, please. Thank you. Good morning. I am Wei Shang Pong from Citi. Three questions. One question is about strategy for Chairman Li, and then the other are about financials. Mr. Li, a few days ago in Zhuhai, you opened a fashion store. In the future, do you think this kind of attempt of business model will give you new sources of revenue, or are they just one-off for the purpose of branding? You took part in the New York and Paris Fashion Week. In the coming years, are you going to take part in this event? Are they for brand building purpose or for launch of new products? The next question is for Terence. Also, on the PPT, that is a sell-out ratio. Actually, the new products were down year-on-year. Interestingly, if you look at the presentation, page 8, for your sell-through mix, actually, new products mix is up year-on-year, which is positive. The two figures seem to be contradictory to each other. I am thinking, is that because you accelerate the shipment of the new products through the channel, or is any other reason for the year-on-year decline in the sell-out rate? The first question. The second question is, if you look at the numbers, the sales momentum of apparel was very strong, like 31% year-on-year. Is there any particular reason due to the mix, due to the Fashion Week impact, or LI-NING YOUNG, whatever reason you want to share with us? Thank you. Okay. Let me get through the financial questions. On the sell-out rate. Okay, so sell-out rate is measured between how much we buy and how much we are being sell out, sell through. So improvement in the actual sell-through is percentage of new products. For example, last year, we sell CNY 100 million on the new products. This year, it grew to CNY 114 million. So that is where the sell-through comes. The sell-out rate decline, there are two parts you always have to look at. Number one, is that the buyer? Is that the input, or is that the output? The fact that I give out the sell-through actually improved in the mid-teens with better gross margin. That proves the point that it is not the sell-through issue. The new product continued to do well with better gross margin and increase in double digits. The issue is we move more on site in, but not feeding the channel. It is more in our direct stores. Remember, I have been saying that for the past 18 months. Last year, we shrank. We contract the open-to-buy. We cut out how much we want to put in the store because the main thing is we want to control the channel inventory. We want to work on the distributor on the accounts receivable, which the result achieved. But at the same time, it created a top-line challenge for us last year. Remember, I have been saying that for 18 months. This year, we actually open that up, and actually from last year to fourth quarter, and during March, I talk about that. So when you compare an 2018 open up, the open-to-buy with a really control open-to-buy in 2017, that is a hard comparison. That caused the decline. The other part I look at, why I am not that concerned, but again, I will only carry the good news. It is what it is. There are things that we still need to work on. But the other part I look at, and I told a lot in my speech, is if you look at 2016, both the Q1 and Q2 products still improve over the 2016 figures. Basically, what I am just explaining, what happened in 2017 when we contract the open-to-buy, that is the main reason. Having said that, does not mean that that is not an issue. It is still an issue we need to work on, and that is why we invest so much in our product and sales organization, because clearly, our product architecture, and by that I mean the SKU efficiency, is not the best. This is why we have to go in and really invest so much in the product organization. Then the front end on the product architecture can make more sense. Then the buyers, which we also need to account, pick up, combine more precisely. That is the area that we think we have not been there, and that is particularly what Chairman Li is talking about, why it takes so long. So that is where the sell-out and the sell-through, but honestly, I am not less concerned why, because if you look at sell-out rates low, there are two issues, right? First, you have to look at whether it is a sell-through problem. Second, is, well, does it create an inventory problem? But if you look at where we are in the ending inventory, we are still in very good shape. However, the second half, we are going to make sure that term, that clearance, has to continue to execute the way it is, the pace on my past three years execution, I am not concerned. So, answer that question, because that I want to bring it up because it does not affect the financially first half, but still, it is a key data. The second question, on the apparel, the reason is, as you know, before the Chairman Li come back, we actually have lack of on the apparel side of the business. So the mix actually was only 44%, which in all essence, apparel need to be at least 50% or even more than footwear. Why? Because apparel is where you drive the lifestyle part of the business. Since Chairman Li come back about 18 months ago, we said, "Well, guys, let us start focusing on apparel." And that is where we increased. I think going forward, apparel still will increase slightly in the faster rate, because at the end of the day, we want apparel to be in the mix of 55%-58% of the business. So it is a product strategy, an initiative that we roll out a couple of years ago. It is not something we do it I think the New York Fashion Week and Paris Fashion Week does not really drive the apparel per se. So it is more our product initiative. Okay? Concerning the company strategy, actually, our goal is about revenue. We want to have a source of revenue, not only for the sake of promotion. However, looking at brand promotion and communication, that is the first entry point, because it may attract not the traditional Li-Ning users. Perhaps we will attract children of the traditional Li-Ning users. It may also be some of the very active young people. We want these segments to have awareness and recognition of us. We will actually introduce some fashionable products, items that are consistent with the Li-Ning DNA, and it is a source of revenue. We hope that it will become a product with rigid demand, so when people buy, they will get this experience. Concerning the way of launch, we will see whether we want to do it by means of New York and Paris Fashion Week. It all depends on the communication platform environment suitable for this group. On the second row. Thank you. Greetings, I am Zhou Jian. I have two questions. The first question, Mr. Li, please. I would like to follow up on a question. First of all, in China, for the 001 new products, I would like to know from your present point of view, how would you want to develop this in terms of product or channel? Which one will you be investing in first? In the next three years for Li-Ning, how much do you think would be the sales proportion coming from Li-Ning? The second part for Terence. On margins for your business in the first half, please. Thank you. On the margin for our direct retail, our gross margin actually up almost 2 mid-60s. The footwear contribution is at low mid-teens, and it is also up almost at 3 points. So that is a pretty good progress on the direct retail. On wholesale, our gross margin actually remained the same at about the 40% level, and that is where we stand. Then on e-commerce, the gross margin is at the low 50s, basically flat to last year. But the operating margin for the e-commerce is the high 20s. Now, it is a little bit lower than last year first half, but for the whole year, last year was the low 20s. No, high 20s. So we actually are slightly higher than the full year last year margin. For our product lines for Li-Ning, we are still trying out. We have T-shirts introduced and also sports suits and also leisure shoes, et cetera. We find that different consumer groups like different products. For example, those joggings like the jogging shoes. Those like shoes are like the shoes. Basically, we do not know at this point what are the main product lines, but we want to be able to identify the sustainable ones, and in the future, it will become. At present, we are not able to project which product line will become our major contributor of revenue. There will be development potentials. To what extent we will be able to grow this, that depends on our next stage of market development. Thanks very much for the presentation. First I would say, congratulations on the good results, especially the strong top-line performance. I just have 6 questions for Terence around top line. Firstly, could you please let us know how much approximately was kids contribution in the first half, and where do you expect kids to go in the second half? Secondly, just in terms of trade fair order, I think the business feels pretty strong, but sequentially slowing down a little bit. How much of that do you think you are wanting to control open-to-buy a little bit next year? Or how much of that is you wanting to do more replenishment next year? Finally, in terms of your retail sell-through trends, how is that trending in July and August? Thanks very much. Okay. On the LI-NING YOUNG, we do not really break out the number, but I give you a little favor. It is worth almost 2%-3% of our top line. That is selling. This is where we plan. Again, Sherman always did that. I always say, "Let us get higher." They could. If we want to redraw more business, we could. But Sherman wants us to keep it down. He wants to be healthy to grow the business. We are happy. I will tell you, it was on plan, even though I want it to be above plan. I think for the full year it will be, and then if the business is actually doing so well. I think that the growing pain that we expect is there, but not as much as we expect. I will say this is a fair, it is a pretty encouraging trend. By the way, it is already making money. It is pretty hard, right? For a new business going into the first full year of operation, already profitable. On the trade fair, actually, you hit it both. I mean, it is both the same thing. As I always said, on the wholesale side, we want the sell-through to control the selling. From my background, I never like selling to go through, even though that is the important part of the KPIs. You are looking at, for example, first half our wholesale, the distributor sell through up 6%. Our selling is at 4%, and therefore we can actually replenish more. Some of the distributors want more, but say no, we want to control channel inventory. I think at this point, our channel inventory is more healthy. Going forward, I don't mind opening that up to be at least similar to selling and sell-through, but we're not going to have selling more than sell-through. That has been a trend that destroyed this whole business for the past 10 years, right? Replenishment definitely is also another factor, because as we've been working on the supply chain, we believe now we're getting it. We're doing it more logically. The QRS, QR, those kind of thing is 20% of our business already. Now we have the mechanism to do it right. We feel like that's an area we want to do. But without the front end, without the buying, the product planning doing better, we don't want to open too much up on that. Okay? What's the last question? For July and August, actually it's continued the same trend in the first half, except the wholesale actually do better than first half. So we're happy. Honestly, I think third quarter, that trend will continue for sure. Fourth quarter will be a little tough. Why? Because last year, fourth quarter, that's where the jumps go up, with the higher base, and then the macro, I believe, the trade war thing, who knows, right? Then back to trade fair. The trade war. So who knows? In the fourth quarter, that's why we're going to be very prudent. Let's make all the money in third quarter and keep the fourth quarter updated. Right? This gentleman. Congratulations on the results. What we see in the first half because of the brand investment, we're seeing a basically stable SG&A ratio, and GP margin improvement. Terence, I just want to know, looking at the trend of the kids, can you give, is there any change on the previous guidance on 2018? More importantly, on Li Ning this, we are more looking forward for next year. Do you give any guidance of what's your plan? Is there any change on something brand investment, company investment, given that there is some. Kids seems to be doing pretty well. So I want to see if there's any margin or sales comments that you can give for next year. Thank you. Okay. The first question you asked about the guidance for this year? On P&L or on. Okay. In the first half, we talk about the investment on the headcount. Last year, I do not know whether you guys remember, in March, we talked about last year we add almost 140, 50 people between the new business and the sales and organization. First half, we add another 80 some people. The point is, because last year, the people we added are more in the second half, so that is why the first half we did not get any leverage on the expense, even though with an almost 18% top-line growth. In the second half, though, you are going to see that because the increase in headcount was still there, but not as much. Now, for the LI-NING YOUNG, we do not want to put that into a new factor yet. We are still young. It is doing well, but then again, let us see when the trajectory really up there before we factor and change the plan. So this year we maintain 200 basis point improvement in the operating margin, one from the gross margin, one from the expense leverage. So we maintain that, but because of the tax rate difference for the full year, the 200 basis points become only 100 basis point kind of thing. That is why we guided 6.5 to 7 from last year, 5.7, 5.8. That is the logic. Next year, it is pretty much the same thing. Again, I always said, I have been saying that for four years, I feel pretty confident about 100 basis point improvement in gross margin. You can see that we have been achieving that every year. So that is not a, I will not say that is a tough challenge with all the factors we are putting in. Except the top line, whether it is going to be mid or high teens, depending on the LI-NING YOUNG fixing. If you look at first half, to be honest, without the new business, which mainly are LI-NING YOUNG, we are only mid teens. So, that can move the dial a couple points at this point, and next year when the trajectory are way up there, then I think it will change the whole P&L. But until I see that, we do not want to change any guidance or some direction or timeline. Okay? Next gentleman over there. Hi. Congratulations on the decent results. This is Walter from China Merchants Bank. I have three questions for you guys. The first one is about the ASP growth. We can tell that you guys are selling more fashionable products, which has a quite a decent price premium. We were just wondering, what was the ASP growth in the recent quarter in terms of same store sales? Do you think that is perhaps sustainable in the future? The second question is about the performance by category. We can tell that the basketball and sports casual, as well as the badminton, has done quite well in the first half. Can you elaborate more about the reason behind? It was quite impressive for badminton, its growth. It rose about 51% year on year, so if that's sustainable. The third one is about the other brands investments and expenses. You mentioned that one of the reasons for the higher-than-expected OPEX was due to the other brands investment. Do you think it's a one-off event, or we are expecting more, and are we revising our target for breakeven for those other brands in the next year? Thank you. Okay. The first question, ASP. ASP, actually, for the first half, we're up about 5%. That's not so much about elevation of the product architecture. It's more about we increased about 5%-8% on the MSRP of some of the products, starting from last year, third quarter. Right? Remember, in March, I talk about it. That's why I said don't-- the discount, you have to look at the discount rate with tier, because looking at number to number, that doesn't tell you the story. By increasing your MSRP, the benefit come in the pack cost. So that's why you have to look at new product gross margin. The reason I switch it and talk about gross margin, new product, that's the main reason. I think the trend will continue a little bit because we're still looking at, now we are analyzing more, we are finding the right areas where we think we can add another CNY 20, CNY 30 on the items. So without changing the price value of the product, but those are with selectively, not the whole line. Right? So far you can see it. That's the right strategy. We're just getting the money, what we should. I think going forward, you'll see a little bit more in the third quarter, but being the fact that the major increase come in last year, third quarter, so I think it's going to come back down a little bit. I don't think the increase in ASP is going to continue to be a five point. But I think you'll see that for the rest of the year, maybe 2%-3%. Okay? That is the first question. The second question, on basketball, sports casual, that is just what Chairman Li talked about. We continue investing in the branding. I think basketball a lot is about the consumer. It is a young generation, and the fact that we have done a lot of things to bring the young generation to come back in relevance to our brand. That is the main thing. Sports casual is because we put a small focus on the apparel. Apparel, again, it is very important from a sports casual category. I think that trend will continue. Badminton, again, badminton, I want to make sure. The 50% is a sell-in. As you guys remember, badminton has been on a downturn for 3 years. If you look at that pace for the past 3 years, it has been down. So we have been working that channel down, basically, back to a pretty more steady level. Why that big jump? I do not expect that to continue in that rate. It will start growing. It is different to the past 3 years. On the new business, what I mean on new business is the investment in Danskin and LI-NING YOUNG. Because the first year of full operation, their expense ratio is definitely higher than your organic business. That is the reason. I do not think we will be investing in much, as you know, as the trajectory start kicking in. LI-NING YOUNG is already making money. It offsets the loss on the fencing, which we knew. We planned that. So I think this year, we still stay with the breakeven. This year, not next year. I think next year we definitely will be in the profit level for the two new brands. Okay. Let me, this is maybe the last question. This gentleman, please. Morgan Stanley, Dustin. I have a question for Mr. Li. Terence mentioned just now that for the third quarter, the sales will be good, and there may be some uncertainties in Q4. For the macro consumer situation comes July, do you think in the third quarter, do you see any major changes? How would this impact your industry or any consumer industry because of trade war or because of reforms in the third to fourth tier cities or et cetera? How do you see it? That is the first question. Second question, concerning your same-store sales. We are also trying out new things in the stores. Do you have an idea to share with us, how many stores will you be reforming in what period of time, and also the number of stores? Because with the new initiatives, you may want to expand on some of your existing stores. Can you give us more color, please? Concerning the stores, our present stores were built in the past 20 years or so. They follow that model. There are efficiencies in that model. There are inefficiencies in that model as well. In the past few years, we have been adjusting that strategy in optimizing our channel. As we optimize our channel, if we make the channels more modern. This is not really just about refurbishing our shops, because the cost from the shops, for example, the rentals, this is the environment of those shops, are all changing a lot. People going to the shops as a function event is also changing. So I'm not chasing number of stores anymore, but rather the quality of the stores. The stores, if they're able to give me 100 in terms of revenue, then I will be chasing the 100, rather than to say that I'll open 10 stores in order to achieve 100, let's say, in revenue. If three stores is able to achieve 100 in revenue, then I will cut the other seven stores. This is the direction I'm going. On the other hand, we have to be creative in our channeling, not just about the stores, but we have to be clear as to what kind of consumer groups we want to attract. In the past, we have not been doing that very well. In the second half of 2016 and 2017, we have been making adjustments, and this year as well, and it seems that we have been able to be more creative in our channel. Also our integrated stores, what kind of opportunities will they bring? These are some of the things that we will continue to optimize, and we will be going steadfast according to our mission. For your second question, everybody feels the pressure, that is, the trade war between China and the U.S. There is a lot of instability in that trade friction. At present, I think the system or the structure in China and the financial system as well of China is not really in step with international still. So that actually gives us some space for China for certain of our own operation. For example, in leisure-seeking of the Chinese people, in the emphasis on children, and the demand and need for sportswear. That will not change, I think. That will still be true of the domestic market in China. In that sense, the impact on us is not all that strong. We will continue to monitor the trade friction and make adjustments when necessary. Thank you very much. Thank you very much for the questions. Thank you. So far, and it says for Q3 '18, it was up in the day. It was slightly lower Q4, QCS, but even through right now. Two things. The sales were 10 more. We only have data on the-