Earnings Call: H1 2015

Aug 13, 2015

早上好. Welcome to Li Ning Company. Good morning and welcome to 2015 Li Ning Company interim results presentation. We have Mr. Li Ning, the Chairman and the Interim CEO of Li Ning. Mr. Li and also several of our chairman. After the presentation, we can sit down and discuss the first half results. Terry? Thank you and good morning, everyone. Turning first to some financial and operation highlights. We are pleased to report that building on the momentum of the second half of last year, revenue has continued to rebound with growth of 16% to CNY 3.64 billion. EBITDA has changed from a loss of CNY 351 million to profit of CNY 260 million. In addition, operating cash flow has improved to CNY 165 million from loss of CNY 390 million during same period last year. SSSG further expanded to high single-digit growth, accelerating in both retail and wholesale channels. At the same time, our working capital continues to improve, with both gross inventory and receivable down high single digits despite revenues up in the mid-teens. From an operational perspective, we have seen a net increase in the number of point of sales for the first time since the end of 2011, particularly in the under-penetrated southern China region. We have continued double-digit sell-through growth in our focus five core categories, and our focus on channel inventory is paying off with an improvement of 6.9 turns. We are also excited about the launch of our first smart shoes under our Internet Plus strategy, which you will hear more from the Chairman later in the presentation. I will now take you through a more detailed review of our first half financial performance. The total company revenues were up 16%, driven mainly by the 17% growth of the Li Ning brand, and 10% in Double Happiness sales growth. As we set out in the full-year results in March, we are focused on building a more balanced channel strategy and have continued the momentum of the second half of 2014. The Li Ning brand growth was driven by the expansion of our direct retail platform, our e-commerce expansion, as well as the strong performance from our new products. Turning to the next slide. You will see that direct retail expansion continues to be a key driver of our growth, accounting for 41% of Li Ning brand revenue. E-commerce, driven by our Internet Plus strategy, increased to 7% of Li Ning brand revenue, up from 4% a year ago. This will be a key future growth driver for us. We believe with this more balanced revenue contribution, it mitigates the risk associated with a single-focused business model. New product, that is, product with a 6-month cycle, continued to perform well, increasing from 66% to 71% of total platform in the comparable period. This improved product mix allowed us to be more aggressive in clearance on old and slow-moving products while maintaining a better discount performance than last year. As the Chairman said out in March, our point of sale expansion strategy is focused first on the low-penetrated southern region, and we can see that strategy coming through, as the South accounts for 42% of the new added point of sales. Encouragingly, sell-through in the region also turned positive, although it does still trail total country, so there is room for improvement here. Turning now to look at our same-store sales growth. Our three-pillar strategy continues to drive our SSSG improvements, improving over Q1 to reach double digits during the second quarter for the whole platform. Our direct retail SSSG outperformed wholesale as we are able to better control the retail operations and make quick day-to-day decisions in responding to the dynamic nature of the retail environment. Looking now at our wholesale business. As you can see, revenue was up 8% with 2% lower ending store count compared to the first half of 2014. We achieved first store additions since the first half of 2011, reflecting the fact that the majority of our store rationalization initiative is completed, and our store network is now in a healthier state, ready for sustainable and long-term growth. Driven by a more balanced strategy, a category-focused product offering, and the store expansion plan, our wholesale trade fair order continued to improve. Our recent Q1 2016 trade fair results reflect a mid-teen increase over last year. Looking now at our direct retail operations. Direct retail grew 21%, driven by low teens SSSG increase and a 15% increase in point of sales count. The average increase per store was held back by the number of new stores, both in numbers of months of revenue contribution as well as sales productivity, as new stores take time to reach the efficiency and need to go through a ramp-up period. In addition, the new stores we opened in 2015 are mainly shops in shops, which are smaller size on average, hence the selling area only increased high single digits. The sales per square meter was up 12%, reflecting our improved productivity. This is of course directional, as it is not a weighted calculation. As discussed during the March presentation, the increase in cost from our suppliers also affected our first half gross margin by 1.8 percentage points. This was more than offset by lower provision due to lower inventory resulting from our inventory optimization initiative, as well as higher retail and EC mix in revenue contribution, which of course they have a higher gross margin, and new product mix in our direct retail stores. Consequently, our net gross margin up 0.3 percentage points in the comparable period. Turning now to our profitability. Walking through the slide, as you can see, without the bad debt provision impact, as last year first half we were adding provision CNY 92 million, and this year first half we were reversing CNY 51, roll back CNY 51 million. So without that impact and the one-time cost that happened from last year, our comparable loss from last year would be CNY 333 million loss. As a big chunk of our revenue growth is organic and coupled with a disciplined cost initiative, the increase in direct costs is more than offset by reduction in platform costs, giving a more reasonable and sustainable cost structure. The 334 million CNY increase in gross profit coming from the revenue growth is able to go straight to bottom line. This is achieved even with our gross margin rate only increased 0.3 percentage points. As indicated by the 29 million CNY loss in the first half, we are on track on what we have laid out for this year, with mid-teen top-line growth, positive SSSG, and a more rationalized and healthy cost structure. Turning now to our channel inventory. With our store count stabilized, positive SSSG and improved sell out in our new product, our channel inventory has become healthier. Our turnover improved to below seven times for the first time since first half of 2013. While not yet at our target of six, it is still moving in the right direction. Our mix in the comparable period has been stable down, but we still need further improvement to get to the 20% level for our over 12-month category. As to the company inventory, we have made good progress in our inventory optimization initiative set out in the beginning of the year. Gross inventory is down for the first time since the first half of 2013, while our direct retail store count has more than doubled during this period. Inventory levels declined 9%, while revenue grew over 16%. Comparable to end of last year, gross inventory declined more than 12%, leading to a lower provision required. Consequently, net inventory increased 3%. As I have said before, inventory optimization is a key focus for us in 2015, and we believe our execution in this area has significantly improved, and we are confident that this trend will continue. Now let us look at our trade receivables. I am pleased to report that our gross trade receivables continued to decline, down 7%, even with 16% top-line growth. The trade receivable mix also improved, particularly in the over 180-day category, which declined from 33% to 27% during the comparable period. Hence, our bad debt provision decreased and our net receivables are flat. While it is improving, but with 16% of our gross receivable is due over 90 days, we know that part of that channel, in the wholesale channel, remain fragile. We are putting special focus on these accounts now that many of our bigger accounts are healthy. The company's working capital, which basically comprised of the gross receivables, inventory, and payables, is another area of key focus for us this year. On an annualized basis, it improved to 33% of annualized revenue versus 39% of last year. While it is still not at our target yet, but definitely moving in the right direction. Looking at our balance sheet and cash position, the operating cash flow on the comparable first half period improved to positive for the first time since 2011, at 165 million CNY. This more than cover our capital expenditures of 142 million CNY, hence proceeds from our earlier financing remain intact, increasing our net cash by 1.2 billion CNY from year end, providing sufficient capital for our growth initiatives in the future. Our gearing ratio also improved from 55% to 40% versus the first half of last year. We have substantially de-risked our balance sheet and have more efficient working capital. With more balanced revenue contribution, tighter cost control, and rationalized cost structure, we believe we are on track to return to profitability. I will now hand over to Chairman Li. This March, we already point out based on the products channel and retail operation capability, that the three pillars strategy, and have this sustainable platform to support the five core categories in development. Those five core categories actually have a big growth potential in Chinese market. We have the running, badminton, basketball, training, and Sports Life. First half this year, our company's revenue grows by 10%. The growth driver is coming from those five core category products. We will concentrate on our resources in these five core categories. There is the strategy adjustment. You can see the number. These five core categories, the revenue has grown by double digits, especially for the basketball and running. That has a very good performance. You see the basketball, the retail revenue grows by 43%. New products and also for the last season grows by 61%. That is in a way, we have the very good adjustment about our strategy. We concentrate on our resources in this core business. We also accordingly reduced some other businesses, like tennis, football. We will do some readjustment based on our strategy. We also will look at the market trend. We want to invest more and see how we can give a full play for those core categories, especially in Chinese market, and to acquire a reasonable share in the market. In that manner, we can just give a full play for all the resources in our core business. General development, we had the communication with you before. We will take this digitalization as our driver to growth in future. In the matter of years, the smart lifestyle will be a big trend. Once we have this recognition about the direction, we have our R&D. That is why we are according to our plan to push our strategy and to participate in the smart life. That is actually, this is not just simply we put our products in some e-commerce channel, but also, we will, through the market information, acquire the data, then plus our understanding to sports and plus our design capability. We have the integration with our technology and design and creation. From the starting point, the whole production process, we have a redesign and reuse the digitalization as our model. It is not just a simple e-commerce channel. We all know that e-commerce is a big trend, but it is not the only channel. General business process, we identified we want to expand our business in the e-commerce channel, how we can maintain our profit or margin, and on the other hand, expanding our business in this manner. We have to fully utilize the digitalization technology, have the integration in-depth in this internet platform. That is really a comprehensive development. Right now, we launched the smart running shoes. That is only the starting point, starting stamp for us. Until yesterday, we are starting to sell all these smart shoes online. We are already selling the Furious Rider and the Rouge Rabbit. It is almost 40,000 units. That is selling by e-commerce system. Of course, we have the offline experience, too. We have the interaction with all customers. That is the whole integrated process. I think until the 18th this month, we will launch our basketball products as also targeted to younger mass market, the basic basketball products. That is based on the experience. There is the mobile internet platform, and also combine our CBA, the tournament, and across the border, the basketball tournament. That is our strategy. That is our initial initiative to build our basketball product based on the mobile internet platform. That is our strategy for company's investment plan. We already achieved some results. We will continue to expand. Regarding the channels, we will continue strength our cooperation with our distributors. Although we still have a big space growth in online business, we also pay attention to the offline, because the offline is our foundation for our business. For the last several years, during our adjustment of our business, we lost some capability for channels and also for some penetrations, the regions. This year, the second half this year, we will resume those penetration regions. This year, we have the growth since 2011. All these, the regions, there is. Show just the southern regions, which we are a little bit weak in the penetration in those regions. I think for this channel, we are just almost 100% in these channels, in these regions. I think that is our, the big direction. Online and offline. Online will account to 20%-30% of total business and to give this efficiency a full play. Of course, this growth is not easy. It is not only you just move the offline business growth to online. We have the foundation for the internet, for this digitalization, but we need work more on this channel. We are already starting doing this. We also will invest more to strengthen the integration for online and the offline, and for the products, and also for the cash, as well as for the inventory. I think for the next 2-3 years, we can achieve more results in this manner. Speaking of the retail capability, we achieve also made progress. I mentioned before how we can build this, the whole business process from the planning for the products and also for the development as well as this capability, this closed loop for the retail operation. How can we improve ourselves per season? I should say in this whole closed loop, from the data we achieve, from the business achievement we have, you see the second quarter, this is 3 months, the sales actually grows by 7% year-on-year. The second quarter only, we see the same, the store sales grows by low teens growth. It also have improvement regarding the inventory level and the cash flow. Of course, we will increase our total retail operation capability. We will work on the quarter by quarter. I think we still not reach our final goal for our improvement of the retail operation capability. We will work more on the more closed connection and for the each point. Which means how we can combine all the channels and also all products and also for the efficiency. That is our future goal, our second half this year or even next year. We should work on it. Overall, after this year, this first half operation, our company's operation, we already see the results. Our team made a huge progress. We are confident in the next 1 or 2 or 3 years. I think our dealers or distributors still have a big space to improve themselves. I want to take over this opportunity to brief you on second half this year our outlook. Second half this year, I hope our company can have a very even more clear strategy. Actually, it's two. All sports company are facing the professional products, the requirement. In the meantime, sports in China, more and more people are more fond of the sports. That is actually is another lifestyle for the mass markets. During the consumption, Sports Life is quite important, too. Sports, the professional and the Sports Life. Those two segmentations, actually, we want to make more clear for market strategy, for the distinguishment for these two categories. I believe these two segmentation market will drive our company's business going further and to maintain our growth. Right now, for our company, our existing Li-Ning logo, we will maintain this one. We will maintain this strong R&D, their capability, especially for our core business like basketball, badminton. That is our very clear growth direction. In future, gradually, we will drive the Li-Ning logo to a more professional direction. Then we're also working on the mass, the leisure market. It is on the lifestyle, the leisure, the sports, all the requirements and needs from the mass market. We will fulfill this market, communicate with the market, and also improve our stores image. Also, we have the spring logo, the white and blue spring logo, and then make the more distinguished from this professional and the lifestyle, that is more focused on the Sports Life. You see on the right, that is Beijing Wangfujing flagship shop. We redecorated this shop and reopened it. That is the image for the stores, the display. For these two categories, both professional, both lifestyle, we want to acquire more the setting experience. Currently in Wangfujing shop, we have this, the running, the experience area. In this area, actually, we provide individualized service, like testing your feet or testing your running behavior. Also we provide a kind of prescribed or rehabilitation service. We cooperate with some rehabilitation partners, so we can provide training, coaching service to consumers, or when they ask them to run together on a China street. I hope that with this kind of sports experience or sports-related interactive service, we can promote our image as a professional in sport. I know this is what people want in their Sports Life, and they may need such kind of footwears or clothes, and also they happen to be quite trendy. Sports functionality and Sports Life are our important strategies later on. Kicking back to the first half of 2015, yes, we have made great efforts and also we have seen a lot of progress in our performance parameters. Yes, we will continue to expand our sales network. We will continue to implement our brand strategies. Of course, we will continue our penetration rate in the several markets. We will continue to work on our operational cost control, and also we will continue to improve our operational efficiency. We will try to control our inventory at a satisfactory level and financial level will continue to reinforce our cash flow management capability, reducing the capital costs too. We are fully confident that, yes, for the whole year, the performance will come back to a track of profitability. I know that many shareholders and investors are very concerned about our progress in recruiting new executive teammates. So far, yes, the board is still in the middle of looking for the right person. For addition, this person will, yes, continue to lead the growth of Li Ning brand, Li Ning Company. But before we have found this person, I will continue to lead the company back to a track of profitability to lay a solid foundation for the further growth of the company. I think generally speaking, in China, economically, we're going to see some turbulence. But if you look at the urbanization rate of China, I think we're on a very good momentum. I think with the organization rates improving, people will continue to have quite a strong demand for healthy Sports Life. I think, yes, sport is the most active platform, is the biggest platform. I think the market of Sports Life or sports functionality will continue to be very promising. Yes, Li Ning Company, yes, we will continue to play a very active role in Chinese people's Sports Life. We know that we're going to see more competition in this market. But Li Ning Company is a very special company in that we're not a factory. We didn't have a factory background. We're not just focusing on some specific products. Yes, even though when we are trying to sell some products, we still have our dreams. We have our passion. We have our passion for sports. We have our passion for active Sports Life. It's not just from me. I think it's from everybody in Li Ning Company. I think this is also the aspiration of the consumers of Li Ning Company. So, Anything is Possible. We want to get this slogan back to the company. Basic slogan is based upon my previous sports experience. So I used to be an athlete. Later on, I wanted to establish the brand. I wish that that brand is based upon a gene of an athlete. So the gene of an athlete is that we can inspire ourselves. We can inspire ourselves to be innovative, to be imaginative, to look for anything better. So it's not just a slogan, but the aspiration and the dream of everybody in the company. I am confident, and my team is also fully confident about the business of this company. We will become a top-class athletic brand or sports brand. We are confident that we are going to make our business to, yes, very competitive business in the whole world. Thank you. Thank you, Chairman. Now time for Q&A. Before you ask questions, let us know first, yes, the company, your firm, and your name for the question. Here from the first row. Mr. Spencer, thank you. A couple of questions first about the platform cost. The first half platform cost, yes, we can assume the situation in the second half of the year and also in year 2016. This is a question. From the first half of this year's performance, we can see the efforts of the management of the company in the previous years. Thank you for your efforts. If you want to be picky, I want to ask perhaps not so satisfactory is the growth of the revenue in the first half of this year. What do you think of the second half of this year? What do you think of the revenue growth in the following 3 years? A lot of companies are cooperating with Huawei. Are those companies making money? Deal with the easy questions, right? But it is subjective whether it is easy or not. If we can pull out the P&L, our platform costs, as you see, taking all the direct costs, the platform costs in the first half, the savings. The A&P is always a big piece. But I would say going forward, the A&P, what we can squeeze out, we squeeze out. In the A&P, two-thirds of them are fixed. The remaining one-third, we squeeze out most of them. The reason you see the CNY 87 million, a lot of them was the last piece of the TV commercial we did last year, first half. We actually cut it down by the Q4. I would say, going forward, the A&P savings will be minimal. Because the other part of it is we are also opening stores. We are expanding stores and things, and part of those A&P costs is also the store opening expense. I would say, going forward, that should be constant. In our A&P this year, we think we are going to spend about CNY 1.2 billion. Last year, CNY 1.3 billion. In turn, funding the store expansion with everything we can cut on the direct, the media type of thing. Honestly, I believe the Chairman is the media, is the brand. So it is much better than putting TV commercial. I think you can see lately, he has been on the road every day, whether it is charity or anything sports related. I think that is a right strategy. We need to put the money where it should be, is to expand our channel. On the other expense, the CNY 78 million, the majority of that. Now bear in mind, in March, we talked about the structure organization optimization. We talked about this year, the savings is only the second half. We talked about CNY 60 million savings for this year. Out of that number, CNY 20 million of that was the headcount savings. The remaining will be in the second half, with all the severance everything out. For next year, going forward, it is at least CNY 135 million annualized savings. We can see that part of it is going to go up more and more, offsetting the lower amounts in A&P. The other savings is consultancy. It looks like we save about CNY 25 million in just the first half out of that other expense. T&E and all the other things is about another CNY 20 million. That will continue because frankly, as we work with the team in the three-years plan, if this is going to cost you CNY 100 million to run this function, use that CNY 100 million for the next three years. If you want to get better people, you want to spend more money, find other ways to cut it. Not popular, but I am not here for popularity. It is just the way to go. I think platform cost, more of the spending will be on the direct store related. Right now, because our productivity, and Chairman Li Ning mentioned that, our retail capability, while it is improving, it is far from where we need to be. A true retailer deliver 20% forward contribution easily. We improved. Last year, we were low single digits. We are right now in low teens, and there is still ways to go. Part of the reason that low teens is because of the new store, you need to ramp up that productivity. If you look at just regular store with Big T, it is about 5 point away. Frankly, I think we can get there, and it is just part of evolution in retail capability. In taking that away, I think our platform cost percentage can continue to decline. The A&P aspect, some of them are fixed, we cannot do anything with. Eventually, that need to get below the 20% of our revenue, and that is where you have a reasonable, good operating margin. But looking at this slide, why I always like to do this slide, not to explain anything good or not good. Reality is, look at last year, our cost structure is so, well, I do not want to use the word screw up, but it is quite convoluted that what are you going to do? How are we going to make money? But reality, you take a look at it. Here, we do not even have gross margin improvement. 23% is not an improvement. We talk about it. In March, we talk about first half, the TAC cost is going to affect us. It is the cost of sale. You see in there, 1.8% margin. Going forward, we won't have it. We actually start getting benefits because of the TAC cost increase come in such a short period notice, we have no time to adjust. Now, going to second half, we actually start making some adjustment in our assets, not just increasing selling price. Everybody can do that. But the reality is the product I can come in, take away some of the bling bling, might be look good, but it doesn't sell. It doesn't have the selling proposition. So why put it in there? We're not here to satisfy the designers. I think that would, if you take away that 1.8 percentage point, the other couple area, inventory provision, maybe here and there. So those two can be net off. But even without that, you see we're going to have a net lift off. The other two factors is going to continue. In fact, we continue more. With the EC expansion, EC also has a higher margin than our wholesale business at the gross margin level. So that piece is going to continue. The last piece on the new driver mix, and frankly, our direct retail platform in the first half, we're focusing more on the inventory optimization. So that impact, that's why it's so small. And we only put up direct retail. Why? Because in the wholesale platform, it doesn't come to the financial immediately. It might help in future time in the reordering and everything else. But to the financial, we only look at direct retail. And first half, we were focusing on clearing more inventory. I think that will continue and expand. So if you look at that, our next focus in the whole profitability structure is going to be improving gross margin. And cost will continue to take out whatever we can take out, like I talk about. And direct cost, you can see with our SSSG increase in the low-teens area in our direct store, the variable cost didn't increase much. Because I think now in that area, we start getting that operating ability. It's too high. Our store expense is 45% of sales, right? And this is why we need to get to the 20% forward contribution. Your margin needs to continue to grow up, and that's the direct retail mix. I think that will get us to the low 60. Then with the SSSG growth, your store expense will drop to about 40. That's where you get the forward contribution. And there's no science. There's math, there's no art, no interpretation. 1 plus 1 is always equal to 2, right? I think that's where we go. So that's the easy question. I want to talk about the Li Ning. Li Ning, for competitive reason, we don't want to talk about the actual number, but I'll tell you, the margin is good. And because it's one of those things, it's one of the special product we do on e-commerce, right? So on the margin, we're doing better than our company's gross margin. Let's leave it that way, right? Now, one thing, though, expense is very small. In e-commerce, you pay a relative commission. But the contribution margin, net margin, is still a credit to the company. And with Chairman Li, as I mentioned, in 2 and a half weeks, we sold more over 30,000 pairs. And that number-wise is CNY 50 million in our sales. But on the daily basis, one of the things that will kick in, and it is a good, a humbling experience in a way, because in the O2O, we always talk about the O2O, and we got really focused on this, and you can see that we saw in the beginning with the sales guy, what they all, every night they send an email in a message, "Wow, great." And we looked at that. I told Chairman Li, "That O2O, my grandma could have done it," right? But to be fair, you can see that percentage of sales generated through the O2O mechanism is increasing. So I think that actually is very good for us, for the team, and Chairman Li every night, because he is open, Anything is Possible. So he always said, "Anything is Possible." And this took me off, and it really helped. It is not just a logo, but because he demonstrated what Anything is Possible. So the team believe in that. And I think, so in a way now, it stabilized, but on a daily basis, we are also talking about $1 million, in the top line between the two styles. So I think that on the Li Ning, is that profitable? It is profitable. It is a credit, by the way. It is a credit to our contribution operating margin. So in terms of the revenue growth, Chairman Li, you want to go through? Yes, please. So I think you answered all the questions. Take so long. Easy question need more time. So talk about the driver for the growth. Actually, this is really a hard question for us. There are so many reasons behind of that. But for us, we want to sell more products that generate growth. But speaking of the growth, actually, is the selling growth and the profit growth. I think biggest opportunity for us today will take this mobile internet, the environment. The whole China, the Sports Life is changing. How can we combine these two, the segmentation market, professional and Sports Life? We want to make more efforts on those two, and how we can do professional life and make our life more beautiful. For our own conduct, for the last two to three years, we are changing our business model is from our product mix to the whole operations. We are working based on the channel and the products. For example, how we can improve our operational efficiency, and then how we can improve this. I mentioned, by the end of this year, we will start it from our own, the territory. First, we can control, we can integrate our inventory, we can connect our online, offline business, and we can integrate the logistic areas. So we are working on the existing, the areas, divisions. Most important is the products. How we can adjust our products per season, make them more, go for the consumer's needs. I think that is the very important thing we need to do. Right now, we have the, we call it the Xiaoqiang, this product. We are about to launch. We have a LI-NING Cloud and the LI-NING Arc. All these categories, the running shoes selling, and also our basketball shoes. All these categories with a very promising perspective for us. We see next year, the ordering for those new products, and I am fully confident that will drive our more growth. However, in the past, I have to say, Li Ning in the Sports Life, we are not doing very good in this area. But speaking of the Sports Life, that is account of 50% our business. It is very large account, the whole industry, not only for Li Ning brand. I believe the other brand, they even account more Sports Life share, even up to 80%. Most of people, they like to incorporate the leisure in the sports product. It is not like foreigners. They want to be beyond themselves. Actually, it is different. It is Chinese, these people, they just want to maintain themselves to survive. That is all the philosophies. Li Ning in the past, we reserved all our resources, our markets, or our marketing concentrate on our channels. Actually, I think Sports Life is not that need the channels. We should have some restrictions for the elements. We have the color elements. We got the trend elements. Besides that, we need to concentrate on our resources. So second half this year, also for the next year, Sports Life will generate all growth for our company. As long as we are doing well in these two segmentations markets, I believe our business or follow the track will be on the growth track. Thanks, Chairman. Second question? Thanks. I am Raymond from Merrill Lynch. I have a few questions. First of all, for the management team, you are satisfied what we achieved right now. You see your capabilities right now. So, I think in future, you saw your future growth points. I would like to ask, in future, what is the most difficult points? What is the most uncertainties for your future growth? Second question is for the e-commerce number. You see in future, you account 20%-30% of your total business. So how many are the units for your e-commerce? What is the range, the reasonable range for your e-commerce expanding? We see there is 119 shops. I want to see what is the reason behind of that. Is it your own directly operated stores, or what is your strategy for that? Certainly. For your wholesale business, because Li Ning's wholesale business have the smallest number in the local brands. So compared to the Anta, I see many shops, the distributors, you just see this is lower number than the others brands. So in future, will you give more shares, more margin to the wholesale distributors? I will from the reverse order for your question to answer your question. First of all, wholesalers, there is quite a batch, those wholesalers, the distributors, they make a fortune from Li Ning brand. We see discount ratio, actually, the wholesale ratio got a reason, I stay that level. In the past, all is normally is like a first tier wholesale, then go to second tier wholesales. In the middle, this process, the cost is adding and adding. Until to the terminal, the end, the distributors, that cost is higher. Right now, we are doing the adjusting or doing the adjust. We want to shut down some the low efficiency shops who want to give the real, the tangible, the profit for those distributors. I think in future, the distributors will benefit from that. We had a big market in China right now. We still need our channel distributors. We need their resources to help us to expand our business. But we will keep exploring how we can reduce the middle, the procedures, the discounting, re-wholesale this process. We are communicating with our partners and to find the better way to cooperate with them. That is for the wholesale relate to your question. Second, for the scale, the size for the e-commerce shop, it is not just like 8,000 or 5,000 shops. I think that is really depends on our business expanding. If we really need this business grow to expand, we need more the shoppers. Many people, actually, not everyone shop online. Many people, they need the break. The real tangible shops. We are adding some experiencing, the point in our physical shops. That is necessary, actually. I think for the next 3 to 5 years, we will increase our physical shops to 20% to 30%. Especially for the southern regions market, we want to regain the penetration rate in southern regions. Like I just mentioned, sports. Sports need more experience. The Sports Life, we need to redevelop and to open more shops based on our business requirements. I think Li-Ning eventually will be back to 8,000 points of sale. That actually very much depends on business spending. It is not about the cost, it is the business opportunities to call us. I think for the uncertainties, I will not talk about externals. I just only talk about ourselves. We have the development for strategies or executions. Can we really make the execution capability strong? Like I mentioned about the retail operation closed loop, or our products planning, or channels, how we can combine with our channels to increase our efficiency, to meet the purchasing experience, to realize the interaction with our consumers. That is a big challenge for us. But I believe we have this capability. We move forward season by season, quarter by quarter. I think that is the question for us, how we can progress, how we can integrate our core business with our channels. Sales, the direct operating the shops, versus the wholesale, that is really need to align with our strategies. I think that is quite dynamic and relatively balanced, their planning. If we need to expand, of course, right now I see people invest in the stock market. That is easy money, actually. I think we are not doing that thing. We are doing the tangible business. Lots of distributors, they recognize our philosophy or business, your proposition. They want to take money to join us. Yeah. No matter whether we do it or the distributors are doing, the important thing is that the stores, and we can really talk about our merchandising efforts and also our operation efforts. Actually, the important thing is that we enhance our level of profitability than our- You mentioned, we opened about 90. Out of the 118 stores we had added, almost 90 was directly drove. But in that 90, there is about 30, we take over from the sub-distributors. It goes back to the point, we want to fix some of the issue with the not-so-performing distributor, and this is part of the thing. Because some of the sub-distributors they have, they might not be able to manage them as well. We pick up some of those stores. It is not all 90 that we opened directly. Hello. From, I am with. My question is for Mr. Li. You mentioned that, yes, we are quite inspired by this slogan, where Anything is Possible, but now the competition is really fierce. Could you talk more about your branding efforts? How do you differentiate from your competitors? Now this slogan is Anything is Possible. This is the slogan for the company, or this is the advertising for the client, facing the clients. Well, I think to me that to the consumers, something is not very clear to consumers. I want to understand how you differentiate yourself from the competitors. The competitive landscape has changed a lot. You mentioned the Sports Life. But we know that Anta, has also said that they also want to focus on Sports Life. It seems that you are quite similar. You are working on CBA and they are working on NBA, so how do you really differentiate yourself from the competitors? I interpret it in this way. We cannot put it just black or white. This is the reality. In the market, we cannot just have one player and all the other players have died. That is impossible. There are a lot of people that are selling basketball shoes. They have how many brands? We have more than 10,000 brands in China. As far as you know, or you do not know. There are so many competitors in market. We will not just talk about positioning. Why we do not just make money from positioning? The important thing is that, yes, how to meet the demand of the market and also your operational capability. I think, yes, our slogan is one thing, but we do not live on slogans. We live on our products. We live on our sales capabilities. The important thing is product channels and the retail capability, how to make sure that we are, yes, looking in line with the demand of market, how we can grasp the opportunity of sales in the market. While Li-Ning is a Chinese brand, we are not living on our factories. At the beginning, we had a small factory, but mostly, actually, we have, yes, outsourced the production to the other factories. We have focused on marketing, design, and also merchandising. And also the management of the sales. I think this is the capability Li-Ning is supposed to have. But in reality, yes, I have talked about the two segmented markets. Anything, anybody can see the opportunity in the two markets. That depends on your retail capability, depends on your products, and your channels. Depends on whether you can give very good experience to your consumers, and this could, yes, win you the repetitive buyers and the fans. I think talking about other Chinese brands, other competitors' brands, I think they have done a very good job. We need to learn from them. But we cannot say that, okay, I am not good just because they are good. Because, yes, what you can spend today is actually what Li-Ning actually has done in the past, like to partner with NBA. Actually, Li-Ning was the first brand that has partnered with NBA. So all the retail model of the sales. So 10, 5 years ago, Li Ning established a kind of store model for sports shoes. From the first store to the 5,000 store to the 8,000 store. So definitely that is that simple. One or two years ago, I said that we had to make some adjustments because homogeneity actually is going to kill everybody of us. So I think Li Ning was supposed to be credible for your unique competitiveness. So with this competitiveness, Li Ning can find the cake, the specific cake, the specific share of cake. We cannot kill others. We know that actually, I just need to grab a bigger share of the cake. We don't want to kill others. So the competition is fierce, but I'm not going to decide what we're going to do just based upon the competitive landscape. Like I said, that's not shoes that we're making and the Internet Plus strategy or the mobile Internet strategy. We won't just talk about the Internet. We'll talk about mobile Internet. So the digital business we're trying to develop. They're all part of our competitiveness. So the important thing, at the end of the day, you want others to buy products, keep buying your products. If you've got a new concept, if you've got products that are very well accepted by the consumers, then this is part of Li Ning. So we have talked about the two recent major markets. Sports functionality and Sports Life. So I think sports functionality is more important. Like badminton or running, basketball, football, those are our core markets. So how do we approach those markets? We all have our unique skills. I don't need to elaborate on those. Next question. Thank you. I'm Ding Tong from Shin Tai. I've got two questions. One question is to Mr. Li Ning and James. The first question regarding the first quarter, we're talking about the retail SSSG and the chief store. Do you have any visibility for them, given that for June, so it's in the interest of the channel in this period. I think that actually the old stuffs that are coming up. I think it's going to be a kind of impact on the third and fourth quarter as they look at the momentum of the second quarter is very good. Second question is, talking about the following three years. We're talking about retail, talking about Anta and Li Ning and also the other competitors' products. So talk about your retail price. How are you going to reposition yourself, like compared with Anta? What is your price level if you talk about the similar products, and what's your price level compared with tier 2 or tier 3 brands? Two questions. The trade day in the second half, when we talk about we're worrying about the mid-tier growth, right? Regarding the mix in the channel, we can see we actually have improved that, right? It is slightly improved, but as I said earlier, this is not something you can just squeeze out. We have to be very careful managing. But what we do is, we also focus on the clean aspect of the business. So it has to be a balance. But back in the first half, the mix and the new product and old product from the particular clean the channel, we should be pretty good about it. One thing we do have to admit, I think 2014 inventory is a little bit too much. So this is why we've been putting inventory optimization as important as making money. So far, first half, we get to where we need to be. I would say second half, the whole team know this is a daily subject that we have to get to. So I think we're managing it. It's all about how you balance between the mix and the margin. But I think, as I said earlier, the mix able give us the flexibility to go deeper discount without affecting the overall discount. Our overall discount is better than last year. Well, coming back to the growth in the following three years, compared with the competitors. Back to the positioning of ourselves. As I've mentioned, the positioning is not that decisive, but it's very important indeed. My understanding is that, China is still a big factory. There are a lot of offerings of products, I think in the following 10 years, not going to see a big change about that. We are talking about retail or some basic items, essential items. I think all those items will be focused on Li-Ning first price. You know that the mass Chinese are quite sensitive about price. As a Chinese brand, Li-Ning is not a luxury brand, but it's a mass brand. It's a long-term brand together with the mass Chinese, its price will be accepted or accepted by the mass Chinese. Also experience is also crucial. So in following three years, my company will make great efforts to create experience, including buying experience, use experience and brand experience and sports experience. The creation of experience perhaps is derived from a material asset or from a physical interaction, or a physical buying or wearing experience. So I think experience is what we're trying to work on. The third is also efficiency, like, in your business model, all kind of efficiency you can bring back. So, can you achieve this kind of efficiency or efficient? I think this is very important for the process, your retail. I think these are the three aspects. These are the focus of Li-Ning Company. In the interest of time, this is the last question. Two questions. In terms of the question is that talking about headcount or employees, headcount decreases quite increases 10%. Which department has been downsized? Is it, yes, a kind of layoffs or they leave on their own? The second question, talking about Sports Life, the positioning of your Sports Life and also strategy for opening the stores. Could you talk about the number of stores for Sports Life? Talk about headcount adjustment. It's respond the principal. To summarize, we hope that in terms of efficient management or organizational structure, we wanted to be well governed. In the past, a lot of enterprises worked on experience. In the past, I didn't want to come to the front of the stage. I wanted to develop a team. I hope to develop a kind of modern structure of modern enterprise. It's not because that I didn't want to do it, or it's not because I couldn't do it. I hope that Li Ning Company can assure that they work with such a kind of platform. We have so many talented managers like Zhang Qiuhong or Zhang Qiuying. Because of them, we have come to today, we have laid the solid foundation for this modern enterprise. Chinese enterprises have a unique characteristic. I decided to participate the business operations. We did some adjustment. We try to make this based on the institutional functional perspective. We have to, based on business demand, optimize our organizations. We have such a business, so we should build this according to the organizations accordingly. Some positions being created. During this optimization about our business positions, we have today's organizations. It's not naturally squeezed out, it's our initiative, the plan, initiative, the decision to make. Speaking of Sports Life, it's not a restart. It's our existing business. It's also based on me and my team. We assume that this Sports Life is a kind of a cause. We lost this big share of this cake in the past. Such 10,000 brands without so enormously plants, factories, how can we stand out? Do they have their own positioning so they can make money? If they can, which means Sports Life market is huge. Of course, in the 10 years, that market is even bigger. We see a little bit saturated. It's because of more industries, more close to the next products coming in this market. Speaking of Li Ning, as a sports brand, we are based on mass market. We have to position ourself to face the mass market. We cannot only positioning as a professional design and to position our Sports Life in this segmentation market. However, in the past, we did this. Based on this, we will redesign, replan this Sports Life category. Actually, I forgot who asked this question just now. Anta, the pricing compared to Li Ning, who is more expensive, who is cheaper? Actually, you are all expert in this area. You can see there's no big differences from the two. Why people assume that Li Ning is more expensive than the others? I think we should do some research. We found that because we will not have a clear strategy in this segmentation market. Our products is quite mixed, not quite distinguished from one to the other. We should working on it. That has confused our consumers. People will confuse the two, professional and the Sports Life. Actually, the fact is not. You can go to the shop, you take a look, you do the comparison between these two. I think we're not doing a good job, so we're going to make amendment. We will readjustment this area. I think the second half this year, we have several dozen stores will, as you know, are being built. I hope next year we will several hundred stores focused on Sports Life. We'll not necessarily build brand-new shops. We may just, based on the existing shops, do some optimizations in the shopping malls. That, of course, is absolutely under our control, like some shopping malls, I think that is our categories. Thanks, Chairman Li. Thanks, Ms. Jiang. I think we just conclude this presentation. Thank you for your patient.