Earnings Call: H1 2016

Aug 11, 2016

Good morning, ladies and gentlemen. Welcome to the investor presentation of Li Ning Company Limited. Li Ning Company Limited has just announced its 2016 interim results, and the management is very happy to be here today to present to you the interim results. Let me introduce the company management on the panel today. Mr. Li Ning, Executive Chairman and Interim CEO, and Mr. Terence Chen, Chief Financial Officer. Now let me pass the time to Terence to walk you through the details of the interim results. Good morning, and welcome everyone. I want to start with some highlights of our first half results. Financially, we managed to achieve a profit of CNY 113 million during the first half of 2016 versus the CNY 29 million losses in the first half of 2015. We saw a 13% growth in our revenue with a 1.5 percentage point improvement in our gross margin. We have improved and rationalized our cost structure, particularly when excluding the bad debt impact provisions. We better our net cash position with more than double in operating cash flow. Our working capital efficiency improved with gross working capital down by 8%, while our revenue rose 13%. Our cash conversion cycle improved to 75 days from 90 days a year ago. Operationally, our offline channels achieved high single-digit growth in sell-through on an improving trend. When performance from our online channel was included, we achieved a low teens growth for our total channels sell-through during the first half. We accomplished solid improvements at the retail front, marked by mid-single-digit growth in SSSG, almost two percentage points improvement in sell-out rates of our new product, and the notable in excess of two percentage points improvement in our discount rates due to a much better new and old product mix, particularly in our direct managed retail platform. Now, let's take a look at the revenues. During the first half, our revenue rose by 13% or CNY 409 million to CNY 3.6 billion, primarily driven by the 14% growth in the Li-Ning brand, reflecting our core brand continued gaining momentum. We execute a more balanced channel strategy and initiated improvement in new product that drives recovery of the Li-Ning brand. Our balanced channel strategy has been working well. All three channels achieved persistent growth. The revenues from the electronic commerce channel more than doubled, accounted for 13% of the total from the previous 7%. With that, the relative proportion of contributions from the three channels has moved closer to our target mix. Meanwhile, our direct retail registered 2% growth in revenues during the period, attributable to a 23% increase in new product sales, largely offset by 38% decline in sales of old products year-on-year as our inventory aging has improved from last year. From the sell-through mix standpoint, our sales of new products aged six months or less continue to improve. Contribution to overall sales from new product rose to 76% from 69% in the comparable period. This improvement helped drive our overall discount performance, particularly in our direct retail channel. As we mentioned in March, our focus this year will be on productive expansion, hence expecting a smaller number of net store additions versus last year. Consequently, during the first half, we achieved a net increase of only 36 stores. We closed more than 400 stores, the performance of which have failed to meet our benchmarks. That said, we still maintain our target of adding a net of 300 to 500 stores to our network for the year intact. With our expansion strategy in the electronic commerce, we achieved a 13% growth in total online and offline retail sell-through. It is worth noting that we achieved an 8% increase in our offline sell-through. This is a solid testimony that our brand is gaining market share. Where our same-store sales growth is concerned, our SSSG accelerated from low single digits in the first quarter to high single digits in the second quarter. That drove up our overall SSSG for the first half to mid-single digits. All our three channels reported positive SSSG. Meanwhile, our offline SSSG has accelerated from flat to mid-single digits in the second quarter. Nonetheless, the improvement in our direct retail, as I have just outlined in the previous slide, was impacted negatively by lower sales of old products via our discount and factory stores. Yet, this helped maintain SSSG of our full price store at mid-single digits. Our wholesale channel saw a 9% increase in revenues, a bit lower than the low teens growth in sell-through volume. We saw most of our wholesale partners continue their improvements as this channel continued to recover. We saw expansion of our wholesale network continue in a stable, controlled manner, indicating better confidence among our wholesale partners and the Health & Network in general. We expect this momentum to continue as we have already seen orders for the first quarter of 2017 register a high single-digit growth, which is consistent with the trend foster in the fourth quarter of 2016, reflecting our tightened open-to-buy philosophy. Our directly managed stores saw sales went up by only 2% with 206 additional stores versus the first half of 2015. This was attributed to a significant decline in sell-through of all products, as I said earlier, as well as our efforts in closing unproductive stores. These are the results of our productive expansion initiatives with optimizing inventory structure and closing more than 200 stores since January 2015. As you can see on the right-hand side of the slide, the CNY 177 million increase in revenues from the new stores was pretty much offset by the closed stores during the last 18 months, as well as the decline in special clearance sales, leaving the low single digit SSSG as the only growth driver. That being said, our total store profit margin improved to mid-teens during the first half. From low teens last year, we started from improved gross margin. We expect negative impact to top line will be lessened in the future, while the new stores impact should be increasing once these new stores ramp up the normal growth curve in sales productivity. Hence, the growth momentum is healthy. Turning from revenue to gross margin. Despite the lower rollback in provisions resulting from lesser inventory clearance this year due to our improved inventory aging, which created a negative impact of one percentage point to the gross margin rate versus last year. Our gross margin improved 1.5 percentage points overall during the period, driven by the improvement in the new old product mix of sell-through via our direct retail channel, contributing 0.8 percentage points. Improvement in our cost margin contributing 0.7 percentage point. Improvement in wholesale selling mix between full and off-price products contributing another 0.6 percentage point. Higher revenue mix from direct retail and electronic commerce contributing 0.4 percentage points. All in all, we have returned to profits. Driven by the healthy organic growth of our top line, coupled with the incremental, yet solid improvement in our gross margin rates, adding CNY 236 million in gross profits. Our bad debt position remained stable during the first half, hence we did not have the favorable provision rollback amounts that we saw a year ago. As far as overheads are concerned, as we implemented disciplined control on variable costs, the total sales-related variable costs, such as commission, direct store expenses and logistics, et cetera, increased a total of CNY 119 million, which amounted to 29% of the incremental revenues. We have rationalized our fixed cost structure, which basically allow us to keep our platform costs flat, ensuring a better leverage. Excluding the impact from bad debt provisions, our total expenses as a percentage of revenues declined 2.3 percentage points. We also picked up more other income due mainly to better performance from Double Happiness. As we have officially returned to profits, our tax rate is normalized, hence providing a favorable impact versus last year. In a nutshell, even with a modest increase in revenues, we were able to pick up a favorable CNY 190 million impact in net profits if taking out the bad debt provision impact. This is what we set out to do in the beginning of the year. Our channel inventory. The channel inventory increased by 11% to support the 424 additional store count and the 13% increase in retail sell-through. Our inventory turnover months have yet to reflect this improvement due to the lower performance in the second half of last year as we used the 12-month average method. In addition, as you can see from the bubble on the left-hand side of the slide, which is for demonstration purposes, the improvement in discount lower our tag sales increase from the actual sell-through improvement, therefore inflated our number of months due to the tag price method that we are using. The proportion of inventory, if you look at on the right-hand side, of the inventory aged over 12 months improved to 25% from 28%, of total in the comparable period, reflecting the slow but continued improvement process in this area. At the company level, our gross inventory was down 2% on the back of a 13% increase in revenues. Our net inventory rose 3% while lower provisions were required. The proportion of our inventory aged over a 12-month period improved by four percentage points, reflecting our persistent focus in inventory optimization. As far as trade receivables are concerned, our gross trade receivables were up by 4.3%, still way below the growth rate of our top line. The proportion of receivables aged more than 180 days improved by three percentage points. We have been pleased to see that most distributors experience improvements with better sell-through and discounts. While lower provisions require our net receivables, we were up 12.1%, which was in line with our top-line growth. Overall, we saw our receivables much stabilized. Yet, there are still a few accounts that have yet to be profitable, and we have to be both persistent and patient in helping these accounts turn around. As far as working capital efficiency is concerned, our working capital has improved to a level that can sustain our healthy growth. Average gross working capital as a percentage of our revenue declined 8 percentage points to 29%. Considering we were at 43% at the first half of 2014, we came a long way in the past two years. We are on track to reach our target of having this percentage trickle down to below 25% in the next 12 months. We have substantially improved our balance sheet and cash flow. We saw our net cash improve by 342 million CNY to 1.34 billion CNY, with our gearing ratio improved to below 30%. In addition, we improved our cash conversion cycle by 15 days to 75 days. While the reported operating cash flow figures included the Double Happiness, reflected increase of 112%, excluding the Double Happiness showed an even more favorable picture. We more than tripled our operating cash flow to 307 million CNY during the first half. In conclusion, we are encouraged with our performance for the first half. We achieved an improvement of more than 3 percentage points in our net income margin. Though, we only have a low teens growth in the top line, the trend for ongoing improvement is compelling. We have improved our gross margin with a better mix of new products and channels, and we have been able to implement disciplined cost control. As importantly, we have a persisting focus on improving our working capital. Overall, we will maintain the same focus for our operations in the second half, and we are truly optimistic about continuing these improvements going forward. With that, I will hand over to our Chairman, Mr. Li Ning. Thank you. Good morning. I still feel a little bit dizzy because I just came back from Brazil. Sorry. Thank you all for coming to today's event. As the Chairman has introduced our financial performance, I would like to report to you the business development of the company. Since I started up this company up to now, 26 years have passed. Our target has been very clear, that is to use our professional sports knowledge to provide leading products with both the function and performance. We aim at helping the consumers to improve the performance of the sports activities and enjoy the pleasure of sports. To Li Ning Company, this is a concept of a sports plus. As a product equipment design and a production company, we hope that in the future we can use more technologies in product development. We can integrate the culture into our products. In today's world, we live in the era of mobile internet. We hope that our products can better bring the experience of sports activities to the consumers. We hope that the consumers can better enjoy our product in terms of function and performance. The sports plus, I advocate, emphasize that we advocate the sports activities themselves. Sports are not just competitions, but also are a mean towards an educated and a healthy lifestyle. As we look at the level of national policy in China, the government is encouraging, indeed actively, the participation of the Chinese people in various sports activities. Favorable policies have been launched by the government to that end. This will be beneficial to the development of the sports industry. For example, in June this year, the Chinese government announced the National Fitness Program. This is a 5-year program until 2020. According to this program, the Chinese people, around 700 million, will participate in sports training once or more times in a week. Some 475 million people will participate regularly in sports training. That is the initial goal in this program. It is estimated that sports-related consumption will reach CNY 1.5 trillion. So many people will participate in sports activities for whatever purpose, entertainment or social activities. Anyway, this is a huge business opportunity for our company. No matter which preference you have, when you play sports, the business opportunities will be created for our company. That is why we are very optimistic about the opportunities created by such national programs. As far as our company is concerned, we try to integrate the Li-Ning product into the everyday life of the Chinese people. We focus on improving the experience of the users, including the buying product experience, the sports experience, the shopping experience. We integrate those experiences into our channels, our products, and our retail capability. Those are the three major pillars for our strategy. I have talked to our investors earlier about those three pillars. For all of our focus, it is mostly about products, retail capability, and channels. In those three aspects, we hope to provide better experiences. For example, in the first quarter, we launched the Super Light, the fastest innovation running shoe. The design of the product is carefully made. We use several light technology elements. The concept of Super Light among the consumers of Li-Ning is widely recognized. After the launch of this new generation, the lightness, the weight of the shoes, it's really amazing. It is only 185 grams. We have successfully launched the latest version of the Super Light edition. This running shoe has offered an excellent product experience for the runners, and also in occasions of the China 10K Running League and other competitions of the runners. Through this product, runners are able to gain a very special experience. In terms of channel, we have the multiple channel promotional strategy to strengthen interactions with the runners. We have offline channels in stores through merchandising and through POP advertisement and other publicity materials. For online channels, we use the social media platform to host various interactive events. Through very interesting ways, we encourage consumers to share with each other their experience of wearing a running shoe. At the same time, we also work with the authorized third-party product testing platforms and those key opinion leaders. Through their influence, we try to extend the exposure of a product among the young people so that our product can become a focus of talks among the young people. In this way, we are able to gain a greater space to communicate with our potential consumers. Today, when we talk about the experience, it is no longer a one-way communication of information. It has become a two-way interactive communication through technology, through various activities, through various online events. We are able to make the product more integrated into the life of the runners. Nowadays, everybody has got a mobile phone, a smart mobile phone. Whenever they turn on their mobile phone, they are able to get access to the information about our products on various platforms. They can communicate with each other among the runners, and also in our store, they are able to try the products. In the process of business expansion, we have been focusing every half a day on transforming the product experience, the sports experience, and the shopping experience. Through those three pillars, we are making innovations of our channels and the distribution model. We have improved the retail operation management, and we drive brand value through product experience. In this way, we hope that we can improve our core competence. More importantly, we hope to turn the core competence of the company into our profitability. Those are three elements will lay down a solid foundation for our future business development. This will provide a consistent driving force for our future profitability. On this slide, you can see the sales of our product in the first half of this year. You can see that they are the percentages of the sales of the core categories, including basketball, running, training, and sports alliance. On the right side, you can see the main focus on the sports activities, including basketball, running, and fitness training, the retail sales. Those are our core markets. We believe we are able to gain greater business opportunities in those sectors, especially running. Running is a very promising segment for us. At the same time, for sports alliance, the LNG and the spring logo, the two brands are still in the process of being tested and cultivated. Of course, it is not that everything is good enough. For example, badminton, it is a good market, but we are still under pressure because badminton is still being sold as a professional channel, specialty channel. The selling has dropped a little bit. But the reason is that in this channel, it is only about wholesale. Sometimes the pace and the interest of this market are driven by the market conditions or the financial conditions of individual wholesalers. In the first half of this year, it is not very excellent. But in the long term, I am confident because in the market, Li-Ning is the most competitive brand or one of the most competitive brands for the badminton market. Just now, I introduced the product experience offered by Li-Ning. We are dedicated to conducting R&D and studying different smart sports products in order to make our brands more embraced by the young people. We believe the internet is the space where young people communicate and share with each other. That is why we add smart functions with our products to collect the sports data of the users so that they can share those data on the internet. We also sell smart products online. This is an effective way to attract the young consumers. Our smart running shoes, including Rouge Rabbit, Furious Rider, Cloudust 3, and Li-Ning BOOM, since they are launched as of the end of July this year, we have sold more than 800,000 pairs. There is a concept in Li-Ning. There is a trial that the running shoes have in the market compared to the number of shoes that sell, and we believe that Li-Ning consumers are very interested in our products. Like our concept, the process that supports it, there is a lot we need to do. There is research and process. If you look at the Rouge Rabbit, if you look at the sales of this intelligent product, so far there is no rivalry of that in the market. That means that it is not just a concept. We are going to use this platform to use our intelligence concept in our other products, like basketball or badminton products, or apparel products, et cetera. In the past two years, we have made great efforts in the intelligence area, and now we are seeing the payoff now. If you look at the intelligent running shoes, we have online channels. We have online interactions. We have our online interactions related to Rouge Rabbit and Furious Rider, and a lot of consumers like our high-tech products like Li-Ning BOOM and also Cloudust 3. We have used smart chips in those products. The application of high tech in our products is amazing. We use high tech to make sure that our soles are very supportive and very elastic. That means it is quite a new experience for our consumers and users. The combination of technology and the resources are very much acclaimed by our users and consumers. There is about our Rio Olympics, is that we have also launched our smart watches, in the hope that we can really reflect the combination of high technology with the smart concepts and those new concepts. I believe, more consumers will like our products more. This is about smart products. While talking about non-smart products are still also quite good. In the past, we used some high tech, but, in doing so, we perhaps didn't pay enough attention to the look of the shoes or to the shape of the shoes. In the past, perhaps the technology was our strength, but I think that we didn't do a good job in attracting the consumers to buy our products. In this aspect, in this year, we have launched a new product, where we have made a lot of improvements in terms of the look and also the shape of the product, be it the competition use product, or running shoes. We have brought a new experience to the users. Lots of users and the consumers have given very good comments, very positive comments on our non-smart new products. While talking about channels, we have also kept improving the performance of our stores. I mean, brick stores. Of course, the online commerce is a huge impact on the stores, but still, in the execution, our physical stores are still very important and crucial to us. We have paid a lot of attention to the strategy for physical stores. We keep focusing on the transition from wholesale-based business model to a direct sales retail focused business model. So far, we have got 6,169 outlets. By the comparable with the end of 2015, the addition is 36 stores. We have newly opened 441 stores while closing 405 stores. This last year, we have made a lot of adjustments. We want to open more productive stores while closing unproductive stores. In this way, we are in hope of improving the efficiency and productivity of our stores and our operations. Of course, we are testing for LNG and the spring logos. Talking about the targets of increasing the number of stores, for the whole year, our net target is 300 to 500 outlets. Of course, we will continue to reinforce the cooperation with the channel partners. In the strategic, we want to penetrate into areas with a lot of potential and low competition rate now. We hope that we want to open more category-based professional stores as we want to provide a very important platform to interact with the sports fans. Talking about e-commerce, in the first half of this year, we have maintained very good, positive momentum. Year on year, the revenue has more than doubled, while its proportion in the total top line is 13%. While the development of e-commerce is in line with our expectation, previously, as I mentioned, our overall objective, we hope that in the following two to three years, we hope that the e-commerce will take part in, will take up about 30% of our total business. In the first half of this year, we have continued to promote the development of our whole channel. We will work on it. We hope that through the integration of the whole group, we want to minimize the movements related to product defects to increase the efficiency of inventory and also the efficiency of business. But it is a whole system, so we need time. We are working on it. But by the end of this year, we are going to complete our second phase development. We are on a very good momentum now. In terms of marketing, the expectation of the consumers is becoming a very important focus of our attention. We have to have more interactions with consumers. On July 2, we launched the smart move, the Rabbit 1016, and on the platform, we had a live broadcast. I was there, and during the live broadcast, we talked about the smart running shoes, and also I talked about my understanding of the healthy lifestyle and many coaches were there. We are not just displaying the shoes, but we want to have more interactions with the consumers. Our Rabbit 1016 has been widely acclaimed by a lot of consumers, and also in July, Wade came to China again, and also the live broadcast for him was also quite successful. You know, we are selling a Wade product. At the same time, we also want to display the charm of Wade the sport. Wherever Wade goes, he is widely loved by Chinese fans. In doing this, we want to have really deep interactions, and also this mutual confidence between us and the basketball fans. For us, e-commerce is a very important part of the income for us. It is a new platform for us. It can also generate a lot of new demand for other products and also a new business model. We are not just selling products, we also want to provide informational service to the consumers, and also we want to provide a very virtual experience and service to online and offline customers. In terms of channels, we have to look at the differentiated demands in different regions. We have opened the category professional stores. We want to focus on some specific spots, like running or basketball. We want to show our deep understanding of the sports. Also through the professional stores, we want to reinforce our interactions with the users. For example, in Shanghai, we are building a runners club so that we can interact with platform through this club. We have invited coaches to interact with the runners. They can talk about the running gears and professional testing. We are not just selling the running shoes. By doing so, we want to really display to the runners Li-Ning's understanding about running, and also we want to showcase Li-Ning's professionalism related to running sports. In a nutshell, our purpose is to build on the business for our current business, further a retail-focused business model. In the past, we just focused on the design of products or the design of channels. While in the past, we focused on the partnership with wholesalers to sell the products. In the past 20 years, we have accumulated a lot of experience in dealing with wholesalers. But now markets have changed. We want to focus on more the retail experience. Now we have realized that we really need to focus on our company's interactions with the- Retail consumers. While we cannot get any retailers' information, if we only focus on a wholesale-oriented business model. In the following 2 to 3 years, we will continue to transform the company. While in terms of merchandising, we are trying to build an integrated system for the whole inventory of all the channels. Now actually, we want to focus on the interactions with the consumers, and also we want to manage our inventory in a more efficient way. Also we want to further improve our sales rates to make sure that we are one of the best in the market. With that, though we have done a very good job in terms of the design of products and also design of business models, but I hope that what we have done can be reflected on the front line of retail sales. We're trying to build a retail-focused business model and also want to build a retail-focused mindset for business. From the design of products to merchandising, to the management of cash flows, we want to keep improving our retail-focused business model. Our retail model is a model in that we do retail ourselves. Whether it is a wholesaler or a distributor, the whole operation is based on the mentality of retail, the platform of retail. In this way, throughout the company, we're able to bring our business to a new level. We're able to be in a better position to meet the consumption needs in the future. Through these pictures, you can see that we have done a lot in the past, and the results are being shown gradually. As I said earlier, we just started. I hope that in the next 2 to 3 years, through our efforts, we can bring the company to a new level of operational capacity. We can bring the company to a new operational platform. As to the specific financial performance, Charlie has already introduced the financial results with you. It is not that we just work a little bit harder, it is enough. We need to make continuous improvements in order to achieve better financial performance. I don't want to go through those financial statements anymore. We still have a bit of room in the future. We will continue to work hard. Thank you. Now the floor is open to questions. Thank you, Mr. Chairman, for your introduction. Now the floor is open. You can ask questions in Mandarin or English. The gentleman in the front row. Thank you. I'm Ricky from Evercore. I have three questions. The first question is about the self-operated store revenue. It looks like in the first half, the growth was slow. Charlie just noted that it's mainly driven by the number of closed stores. Can I understand that in the second half, when this element is gone, the revenue will grow rapidly? If you look at it, the first item, the $22 million, that's the SSSG. That I cannot predict. But right now, we're running a mid-single. As soon as it's mid-single, it's going to be bigger. Because that's a low single-digit impact. For the first half, we are low single. The second piece, the new store expansion, there's going to be more as the new stores. Bear in mind, last year, second half, we opened 300 stores. Almost half of them is in December. Those stores didn't ramp up. If I look at the first half, the new store, the one that we opened in the first half of last year ramped up as expected. But the one that we opened in the second half did not ramp up. We expect those are going to ramp up in the second half. I am pretty sure the new block will be higher. The old block will be less. Why? Because last year, we closed a lot of stores. The number of stores we closed last year was actually 120 stores. That at best is going to stay the same. But I would think it will be less. The closed store impact should be less within the second half because the comparison will be a little bit truer. But even if it was flat, and on the special clearance, we have less clearance last year, second half than first half. That impact is going to be the negative impact, it is also going to be less. So you have to get the math. I am sorry? It is not a last season. Bear in mind, last year, if you remember, our SSSG actually started deteriorating in the second half. The whole retail sale too will actually get worse in the second half. Last year, it is not only us. Everybody is trying to explain what happened in the fourth quarter. This year, even with being very conservative, thinking, okay, maybe dip a little bit, but we still should be better than last year. The SSSG, I do not think it is going to get any worse than low single digits, right? Because right now, it ended mid-single. Yeah. Second question is on the channel inventory. Can you walk us through, very briefly, on why the months are up, but actually trends are better? But can you just give us a bit more detail? Because I did not really understand. Okay. If you look at that bubble, and this is one thing I always try to explain on this, because the way it is being calculated, number one, we use 12 months, right? So we use the inventory balance divided by the average sales. Right? The first point I make is we use 12-month average. But take a look at second half last year. It was clearly, as I said earlier, the retail sales is lower. So your average is— some people use this year six months, but we use 12 months. So the average is being understated, right? But that is okay. It is a number. We are consistently using 12 months. I think that is a fair way to do it. But I just want to, at least let people know, right? Because the last six months of last year, retail sales average is lower. Right? So that is one point. But the bubble, what I'm trying to really get out there is now, in my older days, we always use actual inventory balance divided by the cost, right? No. Using the sales. The actual method is using inventory divided by sales. Okay? But here, we've been doing that, so I want to stay consistent, but I think people know that. We're taking the tag price on the inventory, right, as the numerator, divided by the sales at tag. So take a look at that calculation, right? Our tag sales only go up by 8.3%, but the actual sell-through is actually up 13%, but because we do better on discount. So the 13% is only 8.3%, right? So the numerator got understated. That means your months got overstated. That's just the calculation. I'm not trying to say good, bad, or indifferent. This is an area that takes longer, right? Because, again, but I want everybody to understand the numbers. It's academic in many ways, right? The way I always look at where you do better, I mean, the one easy way is if your retail sales increase is better than your inventory increase, you should be better. That's the fundamental way to look at. But of course, we have to use this because there are a lot of data we need to calculate the actual number. That's all. The final question is on CBA. Media says every year, CNY 400 million is used on CBA. So in 2018, we should lapse that. Is it fair to assume that the earnings base will increase by a similar amount from whatever it is in 2017? Well, let me first talk about the number and then I'll let the Chairman to talk about the detail. Number one, the CBA expiring in the last quarter of 2017, right? So of course, in 2018, assuming what we do, but I'm sure Chairman has a big plan on the promotion on the CBA situation. Basketball is a very important category to us. We will continue to work in basketball. We will continue to create a better basketball product experience. We will also create a new basketball experience. We will continue to make investments. But whether we will continue to work with the CBA, the time is not there yet. We will look at the attitude of Chinese Basketball Association. Chinese Basketball Association is also planning on this. We have not come up with a finalized plan yet. Thank you. In the back. Thank you, management. I have four questions. The first question is about the business. To Mr. Li. Just now, we have seen that among the five major categories, for the non-core category, it has dropped a lot. So Mr. Li, have you ever considered that you will make some readjustment of the categories? For example, some brands have expanded to skiing. Have you ever considered to add more non-core categories? The last three questions are about finance. So Terry. Could you give us some color on the GP margin for the three channels, i.e., the e-commerce, wholesale, and retail? Is that possible? Give us some color on the EBIT margin for the three channels as well. Then number 2 is, we are seeing that the new store openings, you only opened 36 stores now on that basis in the first half, but you still maintain your target is 300 to 500. So is that reasonable to expect that as the second half, the growth rate going to be accelerated versus the first half growth number? The last one is a little bit technical. If you look at your announcement on page 5, so you present your net profit on two columns. One is a continuous operation, the other is discontinued operation. So you disclose that the discontinued operation, I think that it is Double Happiness for CNY 45 million. My understanding, that is attributable to 57% of the Double Happiness. However, you are only disposing of 10% of that. So if we make a calculation with a pro forma calculation, assuming that the 10% disposal had happened as of January this year, so the pro forma net profit on a recurring basis should be still more than CNY 100 million. My calculation shows CNY 105 million in the first half, including 47% remaining stake of Double Happiness. Is that calculation right? Let me address this one before I forget. A little bit technical, as you said. The number you see on the announcement represents the gross value. It is 100%, right? The minority interest is in the other area. That just basically talks about the Double Happiness performance. It is not the net, right? But your assumption is still correct. I mean, Double Happiness usually they contribute to that kind of amount of profit. The majority of $5 million will be transferred to the associate income when you close the deal. Exactly. Because we are still in process of selling it. Once it is completed, it is just like ADOC. It is an equity method, so you only see the net incremental contribution, right? But right now, we still have to break it out, what is the growth, and then take out the minority interest. Okay. Thank you. That is clear. Okay, the other two financial questions. The first one is talking about, from a gross margin standpoint, our wholesale as a whole, with the off-price drop and everything, we are running only at mid-30s in terms of gross margin. But it is not really fair to look at their contribution at general profit because they do not have a lot of direct expense. I will leave it at the gross margin standpoint. Our direct retail is actually improved. As I said, we have so much less clearance sales, so it is actually improved from the high 50s last year to low 60 this year. That is the gross profit margin in our direct retail. As I said in my script, the operating margin, the overall contribution, the store profitability, also improved from low teens last year to mid-teens this year. That is basically, yeah, right. I think a lot of people are concerned about a 2% increase, and that is why I want to really talk through why and where. But at the same time, you see the profitability tick up, right? I mean, in the gross margin bridge, you look at the first factor, positive factor is 0.8% due to that direct retail mix. You see our direct retail business accounts for one third of total. That basically shows you the gross margin improved by 2.5%. That is a pretty big number considering it is pure that factor alone. It is just the mix itself, right? But this is what we planned. I mean, as people remember, during March, we talked about this year, the major driver is the new and old part of the mix, right? You see also do pretty well. I mean, you see always the gross margin run around high 40s to low 50s. In the first half, we are running around just a little bit over 50. It is still a very good number considering you double your sales, right? You also have a little increase in gross margin. The channel contribution is almost 30%. That is a very nice business. Having said that, nobody can really have a good estimate how much of that has come from the off-line channel, right? I mean, I will be lying to you if there is no cannibalization, right? But it is hard to measure. I think there is some article out there, in average it is like 60%, right? For every CNY 100 million you get up there, probably 60 comes from off-line. I think it is a pretty fair number, right? That is why we always want to talk at the three channels. It is not fair to look at only one channel. Okay? EBIT? EBIT margin. EBIT margin is almost 30. The other question is about the store opening. The store opening. That's a great question. Look at last year. Last year, we net addition of about 507 stores. First half is only 119, second half, almost 390. Based on that range, it's okay. This year first half, bear in mind, in the first quarter, our direct retail trend was not the most promising, right? I mean, we have a flat SSSG off-line. Whenever we see that, we always hold it. I mean, that's how we, making sure we don't have big financial impact by opening stores at the wrong time and when the trend are not really up yet. If you look at those two factors, I think we're still intact from the 300 to 500. We don't want to open store for opening store, for sure. Talking about France. Football is really popular now, but if we want to turn that category into a business field, it depends on the opportunities and the consumptions and also the capacities of our company in terms of football. We are making it a very important business of us. We are targeting more at the students, non-professionals. The mass, we are targeting at the mass markets, quite rudimentary markets. Also we have just started on children's apparel. In following years, children's apparel will also be a very good opportunity. We are talking about winter products. Will that be an opportunity we are still studying it? We are talking about winter, even though we have got Beijing Winter Olympics, that is a very important driver. While it will be a very important opportunity, but in terms of gears, whether that will be a very good opportunity, we are still studying on it. Thank you. As a reminder, please press 01 for questions and 02 to cancel. How about the next year for Double Happiness? If we look at the international brands, talking about their performance in China, in the past two quarters, their growth has been 20%-30%. What do you think of this trend? The international brands are gaining more market share. Is that a trend of long-term or that just for the temporary, perhaps the year after next, we are going to see more market share from the domestic brands. Want to talk about Double Happiness. Indeed, it is suffering from pressures. Its main product is focusing on ping pong, table tennis. While the balls, the boards, table tennis are the main business in the past years, especially the past one year. The government agencies and SOEs are tightening up their own consumption. That is a kind of negative impact on Double Happiness. We are talking about table tennis. Lots of Chinese people love table tennis. We hope that it will have very good opportunity of developing on campus. Well, talking about the international brands, that is a sharp contrast. More urban population are really more deeply engaged in sports, and then they are in pursuit of professional products. Not just some apparels, for example, related to running, or apparels or gears, equipment related to basketball. Also, people are really increasing their demand for professional sports equipment. If we look at the domestic companies, they are not really strong in terms of professionalism. In past, I have talked about this, why we want to reform, because we are facing a very serious homogeneity in the market. I mean, the homogeneity of commodities. I really hope that Li-Ning will focus on sports, the professionalism of sports. Li-Ning will focus on the technology in sports. Also, Li-Ning should also focus on the design of the products, to focus on some specific sports. In this way, Li-Ning can really grasp the upcoming opportunities. There are a lot of opportunities. Of course, a lot of pressure. The consumers do not just want to buy international brands. They do not want to brag about it, because what they want is really something that is really suitable for them. It is the opportunity for domestic brands. In terms of professionalism, there is still a gap between you and the international brands. Talking about this gap, how big is this gap? How soon do you think you can catch up with the professionalism of the international brands? Double Happiness, what is the reason for its rapid growth of profitability in the first half of this year? Because of the control on the expense. You can see because of the pressure from the revenue, actually, they have lowered the variable cost. Talking about that gap, yes, we are catching up, but still there is the gap. We have our features, for example, our rackets for badminton, we are the leaders in the market. In terms of badminton, we are the leaders. Why not catch up? We are the leaders. We are leaders. In terms of basketball or fitness gears, how can we become a leader? Yes, I think there are lots of opportunities for us. We need to build our capability. In terms of the application of running shoes or basketball shoes, we have to offer very good products that have been widely acclaimed by consumers. That is just on some specific products, but not on a very general way. I believe that this is a very good opportunity for us to improve ourselves. In the past years, we have committed to our understanding of our sports, and also we have really reinforced our R&D capabilities, which is a very important driver for long-term development. Okay, Roman, in the back. Thank you, dear management. I am from Please separate it. First question is for Terry. Going back on page 15 regarding the channel inventory. Currently, using your calculation, it is 6.8 months, and you also show the mix rate. Can you give us an indication, how do you see the healthy level it should be? How much more room we can improve, in terms of months and also the mix of this free time horizon. If we are able to improve the mix, are we more thinking about the improvement mainly on the retail GP margin, whereas the wholesale GP margin and the e-commerce GP margin should be more or less in line with the current level? This is my first question. Currently our cash flow is quite healthy. If we choose to, yes, pay a dividend. Let us talk about financial first. It is boring stuff. Anyway, on the channel inventory. Again, we expect the improvement is going to come in. However, as I said last time, our calculation includes everything. Unlike, I think, when some other people talk about four turns, I think maybe they are looking pure at the stores. If we are looking at the stores, we are close to four turns, a little bit higher than four turns. If you ask me, based on our calculation, and I only intend to keep it consistent rather than changing all the time. Our target is going to be six. From 6.8 to six, it is going to take a little bit of time. But the reason why I said it take longer, bear in mind, in the channel inventory, as I said, we still have a few accounts that are not making money, the wholesale accounts. And those are the only ones that we are working on. However, it's not financial risk to us because they sit on quite a bit of old inventory. That's why they're still having problem. But it's already in the form of bad debt provision. So financial, there's no risk to us. So the way to take care of it, either they turn around, become better, or we take them over and burn the inventory. That number looks very good. Basically, that's how it works. So that's channel inventory. And the mix standpoint, normally a better, healthy retailer should run about 15% for over 12 months. I think for us, I'll be happy with 20. Let's get one step at a time. Unless we can take over those troubled distributors and burn their inventory. Then it will be a lot nicer. Then we can get to 15. So somewhere between 15%-20% is what our target is. As to the gross margin. Now, if you remember on the gross margin bridge, the wholesale mix also improved. It also improved about 0.6%. The wholesale new product mix, that's on the sell-in. So because bear in mind, our wholesale business have off-price as well. So with the continued mix in our inventory, it will also generate that gross profit expansion. So I think in our wholesale business, it also have a good opportunity to continue to improve. Of course, talking about our cash, it's quite positive if we continue to make money. If it got enough cash, of course, we will pay a dividend. We want to keep it, but still, we have a lot to do, to work on. In a company like Li-Ning, such professionalism, we want to make improvements. So we want to have a lot of R&Ds. R&Ds of materials that have longer-term investments. For basketball shoes, for Wade product, we have a very special edition that the highest price in whole world. Actually, the secondhand price is the highest in the whole world. We didn't set the price. So it's very good. What we want to really translate our investment in R&D into mass products. So, we need to further to communicate with the consumers. We also need to focus more on the investment, the R&D of technologies. Of course, we will continue to make investments. A lot it's for the sake of the longer-term development. Okay. So I'm going to go to Stan. Can continue after three questions. Related to what the speaker said that the effect of the access door, the lack of adjustment in terms of wholesalers. So talking about their quality, their HR. Are you happy with the distributors? And secondarily to finance, yes. The second question is actually on wholesaler gross margin. We touched upon the mix change, but can you also talk a little bit on the production cost side? How do you co-work with your contract manufacturers better? Last question from me is that, do you have a sort of order book target or procurement target for your distributor for 2017, please? Thank you. First of all, distributors. We have got good and bad distributors. While that is the way forward work, while we hope to have more partnerships with the better distributors, so that we may have a better prospect in future together. Talking about the not so underperforming distributors, perhaps someday in future, we are going to terminate our partnership with them. More important is the business model of this company. Our business model in the past was quite efficient. The wholesaling. We design products, we design a business, and through the partnerships with the distributors, sell the products to them. Now, this model does not work. They do not know how distributors have sold the product. Now we are seeing lots of inventories and also receivables. This is a kind of bomb, a time bomber for the. While we want to reform the company In the past, for the products for the design, but after we have got to the foundation, we will continue to work on that. On the other hand, in terms of the operation, we will develop for the new retail-oriented model. This transformation will not happen overnight. We need to make an accumulation. We need to go through the process step by step. It will take two to three years. In this process, we will continue to optimize our relations with the distributors. The gross margin for the wholesalers, and from a cost standpoint, as you can see on the bridge over there, the cost of sales, that actually improved about 0.7 point is because of the tag cost came down for almost 60 basis points. I think that is why it came down that way. Since Chairman came back, he made a couple of changes on the supply chain. I think the team is definitely performing better. That is an area, it is a constant grinding, because you know the suppliers are not going to give the money to you. Every season, you have to continue to grind. I think going forward, I think it is a pretty reasonable number that we are running right now at the cost margin. It is about 22%-23% somewhere. It is reasonable. On the OTB, we expect going forward, as Chairman just said, we have a much tighter OTB philosophy. We do not really expect. That is why trade fair order, we would rather stay a high single digit than low teens. In the old days, we always want to make sure, okay, they have enough goods, but now it is a little bit different philosophy. It is hold it tight, and if you really have really good sell-through on your SKUs, then you can replenish orders. From both ends, we are a lot more tighter, and that is why we always do not want to expect the wholesale business growing, because it is still sell-in, as Chairman is saying. It is not a really healthy model. As long as we monitor their sell-through. Their sell-through has always need to match up with the sell-in. That is basically the high single-digit philosophy is where we are looking at. Thank you. There was two questions. The gentleman in the back. From Morgan Stanley. I am Edward. I have several questions. The first one is to Chairman Li. Our R&D cost and our advertisement and sponsorship cost. Compared with two years ago, advertisement cost dropped by around 30%, and the other one, around 1.15%. What is your expectation on these two sides of the cost in the future? Are you planning to sign more celebrities? The second question is for Terry. According to my calculation, has dropped about 16% year-on-year. Just wondering if we are at risk of seeing any operating deleverage, whether our kind of OP margin has, what kind of change we are seeing from last year. Also, just to add one more question, how much was replenishment as a percentage of our sell-in last year, whether that was a significant amount or whether it was mostly through trade fairs? Thank you. Okay, so, financial first, right? On the direct retail store, if we do sales per store, it is a little bit dangerous because one of the big factor in first half was last year, we have a lot of special sales, which have no store. So you are inflated when you do sales per store. If you pure look at taking out the special event sales on a sales per store basis, actually, we are flat, which actually is better because the new store we are adding are in a smaller square footage. That is understandable because there are two factors going on. Number one, we have a lot less old products. So our discount store and factory store, SSSG, actually negative 1%. It is just our full price store is mid-single digits. So it offsets and become a low single digit. I do not think there is any productivity issue. As I said, now our gross margin improved, and it all goes down to our store contribution. Our store contribution also improved by 200 some basis points. I do not think there is any concern, and we also looking at the direct costs very tight and measure that profitability on pretty much every month. Okay. What is the second question? The replenishment as a percentage of- Oh, the replenishment. Last year, actually, we do not really have to queue out, queue in anymore. It is really looking at what is required. The replenishment ratio is about 10%-15%. The trade fair always has a pretty good indicator of where the business is. Having said that, now the replenishment is all based on the SKU sell-through. If the SKU perform well, then we allow them to do more replenishment. Actually, R&D or advertisement or marketing, I hope that in the future, the company can have more input. The R&D in technology, the marketing on a certain sport should be closely linked to our business target. Some of them are short-term plans, some are long-term plan. As to how much they are going to make up of our financial, it will be a dynamic process of readjustment. Thank you. The fellow in the back row. Good morning. I am from Shenzhen Intag. Joe. I have a question to Chairman Li. In the process of development Nike and Adidas are very powerful competitors. We had our problems when we competed with them. But talking about Anta or Xtep, their growth rate was not as lower than ours, and they made more money than us, and their cash flow was rather good. So their life was quite good. But as far as I personally am concerned, in terms of product design and brand power, Li-Ning is better than them. So I have this question. I do not want to offend you, but I want to ask why their life was rather good. Their cash flow is good. Their dividend payment is good. Why we, in the presence of a competition, are faced with so many difficulties? What is the major difference between us and those Chinese brands? The positioning difference or operational difference? Because as I said earlier, in terms of product and branding, I think we are better than them. But why compared with Anta, it looks like we have a tougher life than Anta. I just want to explore the reasons with you. Thank you. It is a rather complicated question. Of course, to do business, the purpose is to make money. But my company might be a little bit special because I myself am an athlete. I used to be an athlete. What I can do is to make my company to make contributions to the development of the sports industry in China in the future. So for me and for my company, we need to make accumulation. We need to learn, and we need to make enhancements of our capacity. Capacity should be reflected in our products and our business, and eventually, should reflect in the returns on investment. It will take time, and it might be a painful process. If whatever sells are good, it is a target, and to sell whatever as long as it is making money for you, is it to do it? That is not what I want. When they design the product and when they do marketing, I will have to make more inputs. And when our capacity is not there yet, there will be an imbalance of input and output. It might be a painful process. But I believe that as Chinese people prefer more functional products, and as we accumulate capacity better quickly, and as the Chinese people in the future have more recognition of the national brands, our business opportunities will be greater. Of course, Anta or other businesses in Jinjiang, they are also very excellent from a business perspective. We should learn from them about how to make more money. Thank you. The friend in the back. And the two questions over there. Terry, Good morning, Terry and Mr. Li. I am Martin from Dongxing Securities. I have three questions. The first one is about inventory provision. The second one is about retail discount. The third one is about same-store sales in July this year. The first question is that I have noticed that on page 13 of your PPT, there is one, "EBIT margin change is driven by inventory provisions." If I understand it clearly, it includes inventory provision last year and this year. So I just wonder why this year. Product mix actually, the product mix. New product and old product mix, the new product and old product mix and the overall inventory have been improved. Why this year still there is inventory provision this year? And also, inventory trend. It is going up or going down? Thank you. I will talk about inventory provision. Last year, first half, we wrote back 25. Because again, you think about this. Inventory provision is a result of the beginning balance to the ending balance. Last year, as we said, we do so much special clearance. So during last year, from January 1st to June 30th, the inventory balance declined, right? This year, as our sales continue to go up and we don't have as much old inventory to clear, so we also do provision based on the new product as well. In a lower percentage, but just to be safe, we also do a little provision. So our total inventory balance go up a little bit from January 1st to June 30th. That is why there is a little increase in provision, right? As to the second half, we believe usually it is the timing. Always the second half, we always lower our inventory. We expect a positive provision in the second half. Now, if you look at last year second half, we also have a positive provision of 58 million. Positive provision. We think this year will be a little bit less, but still will be positive in second half. Thank you. The second question is that I've noticed that your retail discount from the first half of last year is 70%, and then 43% improvement. If you look at Q1 and Q2 separately, what is the level respectively if we are in Q2 this year actually compared with the Q1, if there is an improvement? For the second quarter, the same-store sales improvement, what is the reason for that, in addition to the factor of good weather? I don't know where you get the 70. 70 is on the new product. New product, we actually stay as last year. It's the overall mix. Overall mix, we actually come from about mid-60 to high 60. That's total discount. Now, the reason why second quarter is better, first quarter because of the CNY. So the discount is a little bit deeper. So you don't see the same kind of mixed improvements as the second quarter going forward. We start running a very healthy mix improvement starting from March, because January, February is still the CNY. We always try to clear as much old inventory as possible. But we expect the same trend to continue, because so far, we have been seeing the same trend for the past five months. In Q2, the same-store growth sales is mainly driven by what? In the second quarter- The new product increase is always offset by the old product decline. I do not think that has a lot to drive the SSSG improvement. I think basically, it is just the business become more healthier. Bear in mind, our new products continue to be improving. Since chairman come back, we make a lot of changes. Bear in mind, those changes are 15 months in the event. Q1 product, we do not think it is as good. I think Q2 product is definitely a better performing product. The way we gauge that, you have to look at the discount on the new product, but also the sell-out rate. If both factors are improving, then you can see this is really products doing better. I have to say from a retail standpoint, we are more on top of it. Making sure the operations are staying more intact. I think those are the couple factors that driving the second quarter SSSG. So far, July is running at the same rate. We do not even want to talk about it, except for the numbers then. It is pretty much a stable rate. Time is limited, so we are going to take the last question, and then we will look at the telephone questions. Thank you, management from Li-Ning. E-commerce is more important now. Regarding the e-commerce, looking at the first quarter, the e-commerce growth is at 60%, second quarter, 70%. Since that base is increasing while the growth rate for e-commerce is still growing, what are the drivers for the increasing growth rate for e-commerce for the next half of the year? Well, that positively impacts on the gross margin. But in the interim report, it said that, yes, the variable cost is also increasing as e-commerce is growing. So it is harder to divide the cost. But I want to know its impact on the margin. So perhaps Li Ning is taking up a very big share in the e-commerce. So Terry will talk about the finance. I will talk about the business. E-commerce is quite interesting. It is not just about growth. We are making money from e-commerce. So my strategy is that I do not want to be too aggressive on e-commerce. I also hope that in the future, there will not be any concept about e-commerce. That in future, be it online or offline, it is all about your experience of purchase. It is all about your interaction experience. Because of internet, e-commerce is more interactive. But still now, a lot of our new products and the new concepts, when we are launching them, actually, we are doing it on both online and offline, and some products are only for online. So now, gradually, when we are launching the new products, actually, we are launching them both online and offline. So we want to train online as a very important driver of our growth of business. Of course, e-commerce will not be slowing down, but I do not want to be over-aggressive on e-commerce. I do not want to sell everything online. Now there is still price war online. So if you are selling more, but if you are selling quite cheap, you do not make money. So we want to work in a strategic way related to e-commerce. We want to make sure it is a stable source of our revenue. First half, it almost doubled. But bear in mind, the revenue mix is one-third in first half, two-third in second half. So second half is a bigger base. So we always plan for about a 50%-60% increase in second half. But again, we planned the same thing in the first half, but it ended double. So we welcome the positive surprise. The other piece I missed. What was the other question on the gross margin or something? It is about Maybe you can comment a little bit on your category. To talk about category, our running shoes is the big share. We are talking about demand for products. It is still diversified. So actually, regarding the diversified demand, we also need to plan for the diversity. So I think it requires skills. Thank you. Maybe because of time, it seems that there are no questions left on the telephone side. This is the conclusion of this interim results report. Thank you.