Li Ning Co Ltd

HKEX:2331

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Investor Presentation of Li Ning Company Limited. Li Ning has just announced its 2018 Interim Results this morning, and we're happy to have the management to present the company's financial and operational updates as well as the future plans' results.

So first, let me introduce the company's representatives on the panel today: Mr. Li Ning, Executive Chairman and Interim CEO; Mr. Terence Tsang, CFO of the company.

Now let me pass the time to Terence to walk you through the financial figures first.

[Wah-Fung Tsang, executive]

Good morning. Thank you, and welcome, everyone. Financially, we managed to achieve a reported net profit of CNY 269 million during the first half of 2018.

Net margin raised from 4.7% to 5.7%. We saw a growth of 18% in our revenues with 1 percentage point improvement in our gross margin. We were able to maintain the expense ratio, notwithstanding our investment in new initiatives, and none of which include buildup of new business units as well as expanding the product and retail operations organization to better serve our customers and consumers.

We perpetuated our positive cash flow with operating cash flow increased over 12% to CNY 660 million. We also continued to accomplish a significant improvement in our working capital. Our gross average working capital reduced by 8%, while our revenues rose 18%.

Our cash conversion cycle further improved by 11 days to 45 days. Operationally, we achieved mid-teens growth for total platform retail sell-through, including both online and off-line channel for Li Ning core brand.

Our channel inventory turnover also continued to improve.

Overall, same-store sales achieved high-single-digit growth in the first half. Our new product performance continued to improve as well. Our new product sell-through achieved mid-teens growth and new product sales mix to up 3 points.

[indiscernible]. Gross margin and now new product improved over last year due to higher average selling price.

During the first half of 2018, our revenues rose 18% to CNY 4.7 billion, primarily driven by a 30% growth in Apparel as part of our product initiatives followed last year.

Our footwear's revenue has increased by 9%. As discussed before, we have reset our open-to-buy strategy this year over last year's reduction initiative. This created a positive impact on our revenue, growth and sell-through performance among different channels.

However, as we are still in the process of optimizing on our buying and product merchandising, this opening up of the open-to-buy strategy, currently resulted in negative impact on our sellout rate performance compared to last year. With Q1 products show down 4 points and Q2 products down 2.6 points, nonetheless, this performance still an improvement over 2016 sellout rates.

Our balance channel strategy has continued working well for leading core brand. All 3 channels -- all 3 [indiscernible]. Sales revenues from the electronic-commerce channel continues to deliver the highest growth amongst others with a 34% increase.

Contribution from the e-commerce channel rose to 22% of the total from the previous 19%. The points to highlight here is the direct-to-consumer segment accounts for 56% of total Li Ning core brand business in the first half, giving us a much more balanced penetration in terms of business risk and a more controllable business model.

On the right-hand side of the slide, you can see our sales from new products aged 6 months or less continued to improve. Contribution to overall sell-through from new products rose to 81% from 78% with better margin. As just mentioned, due to a much higher increase in open-to-buy orders, the sellout rates declined, more particularly, it could be saw in the performance of Q1 products. Nonetheless, this increased new open-to-buy has driven a higher sell-through performance accordingly. Our new product sell-through increased by mid-teens over less number of stores during the first half of the year.

As far as same-store sales growth is concerned, our overall SSSG achieved high-single-digit during the period. So on the SSSG page. Our offline SSSG -- go back to 2 page before, before, 2 more. Next page. Yes. Sorry, guys. Our offline SSSG stood at mid-single-digit taken by low teens growth in our direct-retail channel. The healthy growth in our direct retail was nearly driven by reason of open-to-buy strategy, which arise more products in stores as well as improvements in retail operation as to keep staff moving up the learning curve.

On the other hand, the online SSSG maintains a steady mid-30s for the period.

Moving on to channel expansion. The number of stores for total platform increased by 463 since end of last year, primarily driven by the launch of new Li Ning business. Our total number of stores for Li Ning core brand increased by 5 stores to 6,267. Li Ning launched store count has reached 631 since it launched in the second half of last year, including taking over of 361 stores from the prior licensee distributors. Compared to same period last year, our store count declined 62, reflecting channel optimization initiative during the last few years.

The total online and offline sell-through grew by 14% with our electronic-commerce expansion strategy.

Our off-line channel reported a growth of 9%, mainly led by increase of new products ASP as well as our continued expansion in our apparel business due to key initiatives we rolled out 18 months ago.

Total wholesale channel, excluding Li Ning now saw a 3% increase in revenues. Excluding specialty wholesalers for badminton and soccer, our distributors grew 4% in sell-in compared with just 6% increase in retail sell-through, which continued to drive improvements in inventory turn in the wholesale channel. We saw most of our wholesale partners continue the improvements significantly. The strategy of comparable lower in sell-in versus sell-through was well defined to improve accounts receivable and channel inventory in our O2O channel.

We expect this momentum to continue as orders for the first quarter of 2019 registered a high single-digit growth, reflecting the improved business health and competence of our distributors.

We will continue to strike to maintain the balance between sell-in and sell-through. Our direct managed stores subsales went up by 17% with 42 stores left in ending store counts compared with the same period in 2017. Most of this growth was largely attributable to the 300-plus new stores that opened up in 2017 and 2018. The low-teens growth in SSSG contributed a sales increase of CNY 123 million. However, the sales growth was partially offset by over 400 stores that closed in the same period. There's improvement in SSSG and new stores productivity. The store profit contribution margin improved to mid-teens, compared with low-teens in first half of 2017, due to better gross margin rates from new products as well as improved sales mix contributing from the new products. We are encouraged with the progress, and we believe that there's still some potentials for improvement in terms of store productivity and profitability.

Turning to gross margin. Our gross margin improved 1 percentage point during the period, driven by higher revenue mix from direct retail and electronic-commerce, contributing 0.3 percentage point. The improvement in new product gross margin in our direct retail channel due mainly to higher ASP, contributing 0.3 percentage point. Improvement in direct retail new product sell-through mix, contributing another 0.3 percentage points. Lower addition in inventory progression resulted from improved aging contributing 0.1 percentage points.

Now let me walk you through the profitability analysis. The improvement of net profit margin was driven by a high-teens top line growth coupled with gross margin improvement, adding CNY 390 million in gross profits. As far as expenses are concerned, we have implemented disciplined control on variable cost. As you can see from the slide, the total sales related to variable costs, such as commissions, direct store expenses, logistics as well as new business direct expenses increased a total of CNY 214 million, which amounted to 29.8%, up at incremental revenues, which is lower than first half 2017's 31%. Though improved over last year, the higher-than-normal expenses ratio and variable cost was skewed by the new businesses, which by nature, has a much higher expense ratio in the first few years of operations.

We have rationalized our fixed cost structure in order to fund the investment in our retail operations and product organization as well as the incentive program I mentioned back in March.

For example, our advertising and promotion expenses only increased CNY 43 million to support an 18% increase in revenues reducing our A&P expense ratio by 0.8 percentage point to 10.5% of revenues.

The CNY 51 million increased in remaining cash and cost consisted of CNY 55 million increase in staff cost and optioned expenses, which were planned in the budget. Consequently, our net profit increased CNY 80 million or 0.2% to CNY 269 million.

Net margin increased 1 point to 5.7% during the period compared with 4.7% for the same period in 2017.

Now moving on to channel inventory. Our channel inventory decreased slightly with a 40% increase in retail sales. Our inventory turnover cycle exhibited continuous improvement and shortened to 5.6 months. Counting on pure store inventory only, the inventory months stood at just 4.2 months. The proportion of inventory aged over 6 months improved to 28% from 33%. This result validated a positive impact of the improved inventory management and sales executions. At the company level, our growth inventory was up 12%, which is lower than the 18% revenue growth. The proportion of inventory aged over 6-month period improved by 2 percentage points to 31%.

Compared to first half of 2016, 48%, you can see, we have made very well progress in our inventory control. We believe the current inventory level and aging structure are in good balance, which could support our business to grow healthily.

As far as trade receivables were concerned, our gross trade receivables were down by 4% on the back of the 18% increase in revenues, leading to significant improvement in day sales outstanding.

The proportion of receivable aged below 90 days improved 7 points to 61%. We are pleased to see that most distributor experienced continued improvements with better sell-through and growth margin.

Overall, our receivables improved nicely. Yet, there are still a few accounts that require special attention.

As far as working capital efficiency is concerned, our working capital has further improved to a healthy level. Gross working -- average working capital declined by 8 percentage points to support an 18% increase in revenue. While the working capital as a percentage of our revenue declined by 5 percentage point to 17%, reaching our targets much sooner than we planned at the end of 2014.

We substantially improved our balance sheet and cash flow. Our operating cash flow increased over 12% to CNY 660 million. We improved our cash conversion cycle by 11 days to 45 days. In addition, we saw net cash improve by CNY 874 million to reach CNY 3.05 billion.

With that we're planning to use less resource to invest in business expansion, new business unit that just launched and cease right opportunities that come along.

In conclusion, we are pleased with our profit in the first half. Driven by solid same-store sales growth in our Direct-to-Consumer segment, we recorded a healthy top line growth. We also achieved our operations' expectations with improved gross margin and disciplined cost control to fund a significant investment in expanding our products and sales operation organizations as planned.

Besides, LI-NING YOUNG business has been developing as planned, as it entered the first full year of operation, laying the foundation for continuous revenue and profit growth in the near future.

We also reported a significant improvement in our working capital and cash flow for a healthy business growth. In particular, we saw continued improvement in our inventory month to sales ratio in aging structure. We've also maintained a solid cash position for investing in brand and fitness operations.

Notwithstanding the above achievements, there's room for improvement. We strive to be more precise in product planning and buying, so we can achieve improvement in sell-through and sellout rates at the same time. We still maintain our full year net profit margin at 6.5% to 7% on a mid-teens top line growth. As we have been proven conservative due to uncertainties in the macro area as well as giving time for our team to move up the learning curve on the product and merchandising side.

And now Chairman will walk you through the details of our business operations and plans. Thank you.

[Ning Li, executive]

Thank you, Terence. Now I'm going to go through with you our business in the first half of 2018. Now if you look at the macro picture and the state's policies, the state supports the software industry development. And the state is giving a lot of support to this industry. At the same time, consumption demand is getting more and more mature and refined.

People are eager to buy high-quality and professional sportswear products. At the same time, e-commerce continues its rapid development trend.

So according to some figures, it is expected that in 2020, you see trade volume will reach RMB 43.8 trillion, average growth per annum will be at 15%. However, for us, e-commerce already accounts for more than 20%. It is one of the drivers of our group's growth. In the past, it was [indiscernible] for digesting inventory.

Last year, we wanted to improve customer experience of Li Ning. And naturally, the brand value that is being realized through both offline and online channels. And through this model, we would like to understand more about consumption patterns of consumers. And we hope to meet their needs and also their aspiration in relation to sport. For more mature and refined consumption demand, we continue to make use of products and channels and retail capability as our 3 pillars. So this is the framework that's some time ago, the 3-pillar model. And then we also implemented the digitalization strategy, so that off-line, online sales efficiency can be enhanced.

In relation to products, we emphasized typical fashionable merchandise. At the same time, because consumer needs are also very realistic, we would like to integrate recreation measure and sports in our products. And then there is also differentiation in terms of different regions and religions, and we optimize the channel structure.

[Technical Difficulty] a lot of room for improvement [Technical Difficulty] in order to enhance the efficiency. For retail capability, we continue to transform our product operation model to effectively respond to market changes, so we want to have a precise plus risk logistic support system. We strengthened retail operation standards and optimized uniform store image, and moving for training of frontline salesperson.

Now I would like to go into greater detail of these points.

First, let's look at our product. In the first half of 2018, we can see sales of areas categories. Basically, retail sale-through rose 14%, and it's quite a great uptrend. Training and basketball and running saw good sell-through growth. Retail sell-through mix, running, training, basketball have a share more or less the same as last year. Sports casual up 23%. Non-core category came down further. So for our core capital raise, we're able to see improved performance. For running products, we want to meet actual runners' needs. So basically, we designed our products into 3 types: participants; core runners and elite runners. And we launched products to meet these people's need.

We want to be able to certify differentially purged running needs. Of course, we also do a lot of scientific innovation. And we have this Li Ning regional running and also some KOL reputation and some apps, so that we can have more interaction with runners.

Then for the elite runners, we're also trying to achieve breakthrough by means of -- for simple marathon events, and also especially, organized running races. So that 1.32 million pairs have been sold, and sellout rate for 6 months, 70%. And sellout range of 3 months, 57%. Well, we have achieved improvement, but it doesn't mean that we are already doing a good job. There's still a big room for improvement.

However, I think, for these series, we have done a lot to communicate with consumers. And so the central rates of these core styles have improved.

So I think, Super Light and also the Arc series are actually based on technological advancements. So we continue to come up with some new design ideas and principles.

And then on this basis, we have also launched the Light Series with different functional protection. At the same time, we incorporate other elements, so that our products are even more vital.

And for basketball, we emphasize and the -- the attitude and also the kind of positioning is now even more precise. Because for basketball, it really is the teenagers, even younger in terms of our audience. The characteristics, their attitude and their personality is something that we focus on, and their attitude is something that we incorporate into the design of our products. And at the same time, we continue to adjust the positioning of our products.

So as to bring up the characteristics of Li Ning, and also to connect up, of course, to the NBA professionals resources and to create a professional basketball space.

In terms of channel, we have also accessed all 5 channels and be very focused on our basketball sales.

Building on more sales. As we do that, in the young consumer, we create a talking point for them, making it attractive for them. And also for our functional products, continuing on the basketball theme.

We have 2 major functional basketball shoes series: The Sonic and also the Shadow Walker series, and also we have utilized the Li Ning cloud technology with the shock absorption function, and we want to for the basketball series and also for the casual series in the design we want to merge the design features of the 2 to make the shoes more comfortable.

And this is partly done through a fly knitting technology. And this is very well received, confirming yet, again, the Li Ning brand.

As for another function, that is in our training function. Again, we have been focused on the needs of the consumers and we have focused on different areas. Looking at the training needs, for example, in terms of gym consumers, that is fitness training for the gym and also for active training as well as the basic function or essentials.

So we have come up with these different categories of products. In the first half of 2018, in terms of our training, we have been doing very well in the sales of these products. The top 20 SKUs under training

[Technical Difficulty]

in the young sports casual space.

[Technical Difficulty]

in this category has been good.

[Technical Difficulty]

and for our Sports Casual Series, it is part of our strategy to create trends and hot topics for the young audience. And also we want to have a multi-color option printing, making it exciting for the consumers.

And we have over 3.5 million of units or pairs sold in the first half of the year.

And for Apparel series, that includes our WADE line, we have adopted a more playful sport-chic kind of stylish approach in the first half of the year that has been very well received with over 1 million units sold.

And also we have introduced the BAD FIVE apparel series, which is very focused on the street basketball fashion. It's been very much welcomed by the young people, because it is playful, it is also the basketball culture and this is very well received and identified with by the younger generation.

In terms of sales, it has also show that this is indeed a right direction. That is to say, focusing on playfulness and also chic and function.

There have been over 1.92 million units sold.

And further, in terms of channels, we have achieved online and off-line integration, so as to enhance our efficiency and also the experience. Our forecasting had improved based on our data analysis. And this further enhances our efficiency and experience. We continue to upgrade ourselves in this regard. So it is not just about inputting into a calculation model for making forecasts.

Yes, we do have models, but at the same time, we have learning capacity within our teams, so that we improve on our efficiency across the board. We continue to increase our integration online and off-line to increase stickiness and also to be interactive with our consumers. And also to enhance the consumers' experience, so as to increase the loyalty, and also continuously, increasing online and off-line interaction to seek business opportunities. And at the same time, we strengthen our stores, including the high-efficiency stores in high-level markets and also the low-level market and also our different positioning stores. And we also focus on our experience stores and our large store with high productivity and also category theme stores. And by furthering, we strengthened our retail and product operation, and we continue to be learning in this area.

Specifically, speaking, in terms of digitalization, we, through this, have achieved a channel optimization and also we improved on our membership marketing through digitalization. So that we are able to stimulate overall sales through online-and-offline integration.

By online marketing, we are able to expand the scope of our consumers, and also to be able to -- to have online and off-line synchronization by expanding the experience of interactions for the members. So that they can look at the products online, and at the same time, look at the products off-line, and then buy online. Our consumers, a lot of them, have been adopting this new lasting model of ours. And it is -- for some of them, it's become a kind of everyday experience for them. And so for some of the existing and also the potential members, we are able to interact with them, increase their loyalty of stickiness and also to look for a direction through these members of ours to give us more information about their everyday life, so as to inform us of our product design and our marketing strategy.

In the first half of the year, this has been paying out. Online speaking, we continue to create content. And we have put in a lot more resources into this area. Not only in our e-commerce sales, we have put in more resources and development, but at the same time, our content as well. For example, in the New York Fashion Week, the Paris Fashion Week, we have been doing promotions, and also on the young people's platforms of Tmall, et cetera, we also have stories, content and also programs to aim at building a long-term customer recognition.

And so these are online exclusive, so as to make this a leading trades kind of effect. Because for a lot of the promotion, it is about interaction. It is about an interactive relationship between the consumer and us, so as to increase the potentiality of our customers in effecting a sale. I think there is a lot more room for this kind of activity and we will be continuing with this. And we want to be able to, through the Li Ning trade theory, to get -- build a long-term relationship with our customers through this long-term recognition. So that the behavior habit and also building of community online becomes a very hard demand, and to convert that into business turnover for us. In the first half of the year, we have sold 27,000 pairs of shoes on this, and we have been able to be successful by achieving 80% sell-through in this area. Just looking further into how we can utilize this online platform, so that we can be even more focused on this group of customers.

In the future, we will continue to put in resources into content. Just now, I have talked about our channel in these stores. We are enhancing our experience stores and also our larger stores building a brand name through this.

In the pictures, you're able to see -- well, in the first half of 2018, our experience store have amounted to 27 stores and the average size is about 445 square meters. And there have been over 20,000 people participating in our sports experience and our point is to build a sports experience to increase the feeling for the Li Ning brand image. So this is not just about exhibiting our products, but it is to promote sales, definitely.

In platform, for it to be able to attract more fans' attentions in the different sports, to find a point of interaction and experience, that is the purpose of our experience stores. And this is the little more experience store in Shanghai, which was opened in 2017. And in the first or second quarter of 2018, the same-store sales was about 50%. And this is our Chengdu Chunxi South Road experience store, and the same-store sales for the first half was about approximately 70%, very successful.

So for the fans of Li Ning, how we can, through certain formats, be able to create what we want in terms of the Li Ning brand experience. This is the point of our experience stores. For a long-term, sustained interaction with the consumers and also the brand name, our brand image creation, the experience store's important. And for our larger stores with a high store productivity, this is another area where we will be generating a lot of sales.

And these are some of the pictures of our existing larger stores. For example, in Xian, the SAGA Store, it is one of the very important shopping areas in Xian, and it was opened in 2016. The same-store sales for the first half has been approximately 40%, and there has been major renovation in this Beijing Wangfujing Danyao Store. The store size is over 350 square meters, and with the renovation completed in the second quarter 2017, the same-store sales in the first half of this year had been approximately 50%, and that is very satisfactory. We will continue to do so, because the consumer habits and the demand for merchandise, for brands, and also the way they do their shopping is all new.

And we already have a very good phase for that. We will need to finally categorize and adjust our focus on the different categories in this channel by more accurate calibrating our focus, we will be able to do so. And we have these well-defined category stores to do so, and including our WADE store. Now some of the stores, the efficiency has been low in the sense that the display element has been stronger than the actual sales, but for this year, for example, in the Shanghai Longemont Shopping Mall, which opened in 2016, our same-store sales for the first half had been approximately 30%. And Shenzhen, a Raffles City store, which is a WADE-category store, our same-store sale for the second quarter of the year had been approximately 190%. So we have to be getting close to our target audience, so that it really translates into actual sales. And 2 days ago or 3 days ago, we opened in Zhuhai, the Huafa store, the China Li Ning store.

So this is a high-end luxury kind of sport store, and this is a new attempt. And we want to be able to have a new image, and hopefully, it will bring on a new direction and space for future development.

In the past 10 days or 1 week, in the Shenzhen Wan Xiang Cheng Shopping Mall, we have a pop-up store, and we sold 2 million -- of just over 2 million in terms of sales. So that was just in the space of a week or so. And also, the unit price was high for our sales. So you can see that the people that we attract, in terms of consumers, are very fitting.

So they not only came to buy the products, but also, they did selfies, and also, it became a very good hot topic, further promoting our brand. So this has given us a lot of inspiration for us. We will continue with this China LI-NING concept, so that we will be able to achieve even better developmental results, along this direction.

Now for retail capability. We continue to optimize our operation platform. In order to raise our overall retail capability, from the store's point of view, we continue to improve the store image matrix, so as to satisfy the consumption needs of the targeted consumer groups.

As I've mentioned before, we have some omnichannel operation to increase our retail optimization. There was a lot of further room here. We have just started. And also, internally, through the different regions, we will have to work together, so as to raise the experience of our consumers in their purchase.

And also, service is important. There is a lot of room for improvement in service.

And also, training, we want that -- double the further training coverage through LI-NING School training system, so that there will be further online and offline integration.

In terms of operation, there will be more management of the stores. And we will upgrade our store management system and we will strengthen our retail operation by single-store management.

For store image, it is not a 1-day effort. Of course, it is not short term. As I've mentioned, we do -- we go step-by-step in our structural change. And I've mentioned, this is about the channel as well as products and also in retail capability. So for a retail operation platform, it is very important for us.

We are changing this as our core area of work that is retail operation platform. We need more time, we need more experienced accumulation, and we need more energy to be put into that.

So this is merely about retail, from the design of the products, to sales and inventory cash management, and so we are continue to -- we continue to work in these areas' health in order to be able to raise the efficiency and the effectiveness of our retail operation. And from the figures, you are able to see that we have -- step-by-step be able to achieve this. From our financials reviews, you were able to see this in the first half of the presentation today. So I do not need to be repeating that.

So we continue to do so, but this is not something that we can achieve in a week or in the short term. We will continue to increase and improve on our creativity, range, the core competitiveness and also to allow our team to increase their capabilities. So that it can be reflected in our operations.

Perhaps, you are all interested to know about our LI-NING YOUNG, LN YOUNG. This is an area that we will be putting a lot of emphasis on. I think it was last year that we have taken this over. Yes, it was late last year. And we are turning and developing this step-by-step. And at the end of June of this year, there were 631 stores opened for YOUNG, and the planned is 751 stores for the year.

But of course, the opening of new stores will depend on the overall economic situation of the country, and also, according to the DNA of LI-NING, we will be designing and developing the YOUNG products. We continue to increase our category's capabilities. There is still a lot more work to do in this regard as we do our fundamental basic work, but at the same time, we are building our ways in WeChat, Weibo and Tik Tok and other social media capabilities. And also, we're working with Disney and other international IP to launch products, and we're going to be working together with our sales channel.

In terms of marketing, we will be expanding, and we'll be creative in the -- in our approach in order to promote and develop this business.

As for Danskin, we are still in an exploratory stage, I would say, because this is a LI-NING, relatively high-end, fashionable, sports performance product category. For Danskin, even though it has some history, but how can we link up with the potential consumer group and to create business out of that. We are still in an exploratory stage. Hopefully, we'll be given more time in order to do this, so as -- so that we will be able to really focus on the strategy. And this year, we have opened just over 10 stores by the end of the first half of the year.

And in terms of products, we'll continue to adjust. This is an opportunity. This is a space for future business development. And in this process, if we're able to find the point and the space for future development, yes, we will continue work on this, Danskin.

But of course, we will also be building our brand name through multilevel, multidimensional marketing. And I've mentioned, we emphasize the core sports: basketball, gym, ping-pong, football and badminton. But this does not affect us in terms of getting very close to the fashion trend, and we're integrated with the fashion trends.

So there are some new attempts. You would know that for China LI-NING, as a brand, through the New York Fashion Week, we have been able to get a lot of attention. And this really enhances the popularity of this LI-NING brand among the trendy youth groups, so this is for LI-NING brand.

Next page. This is the New York Fashion Week and some of the Tao Bao Hot Search page and also some social media and the hot topics getting viral on certain media channels. And we did not direct much of this. We just did one thing, and after that, everybody, because they liked it, because it's fun.

So it was the audience, the consumers, which actually continued to distribute and also to magnify the -- what we had offered. So this is about the Chinese element and also our brand name as well. But definitely, it's done a lot of help for the -- for our brand name.

And in June, we have, again, in another international Fashion Week, this time in Paris, we have made an impact again.

And we have worked on the -- our traditional basis, but at the same time, we have also put in a lot of trendy elements so that for our brand name, we have been able to really project the LI-NING brand name.

Let's look at this video together from the Paris Fashion Week.

[Presentation]

[Ning Li, executive]

Yes. So aren't these a fit? A lot of the younger post-'80s, post-'90s or even the millennials, post-'00s, they became our main participants, and also, they have been sharing on their LI-NING brand. We have had over 40,000 communication briefings, collective, and 140 million in terms of reading volume on Weibo topic discussion. That's volume in China.

So that was for Paris Fashion Week. And in this week, we had 3 basic brands: the Furious Rider ACE; Aurora Skywalk; and 001 R-1. And these are not high price points brands. And overall speaking, I would say that we approach more willing consumers and young consumers, we've attracted them to the LI-NING brand, and we want to be able to show off our value, not the price or high price.

In the past few years, why had LI-NING brand done so much adjustment? It is because of so much happening in the market. Everybody looked the same in the market. And what is worse, is that there is competitive pricing that is all captured pricing. We do not want to go into that area. We want our development into the future to be based on value to create our brand. So this is what we're focused on. This is our attempt, our focus and the direction where our resources will be focused on. So we want our products to be well received by the market, but on the other hand, there is still a lot more work to do.

Apart from the Fashion Week, we will go through other formats to promote our brand and also to create the brand value, especially for the professional series, professional image that we want to project, for example, the Wade and others. So apart from activities and events in China, we want to have more interactive events to get close to the consumers, especially for our professional brands.

So this is a China tour for the 2008 (sic) [ 2018 ] Wade and C.J. Tour. And these are some of the pictures we took at the C.J. Tour and the Wade Tour. You can see that they were completely overwhelmed. It was so crowded in the shopping malls. We were -- actually, this was beyond our expectation. And these participants are our consumers, they're not just on the cusp to come to take a look at this task because what they want is an experience from our brand and also the look from our brands.

So we provide this kind of sports and star and image for our brand, but at the same time, we want to build up our value, not just the experience. Only then, will we be continually successful.

So this is the first half of the year, a review for you and also the direction of our focus.

Next, we welcome questions and answers, according to the sportspeople, well, yes, so far from our target, so far from the country's target. So we will continue to work hard. Thank you.

[Unknown Executive]

[Operator Instructions]

[Xiaopo Wei, analyst]

[Foreign Language] I'm Xiaopo Wei from Citi. 3 questions. One question is about the strategy for Chairman Li and then the other, are about financials. Mr. Li, a few days ago, in Zhuhai, you opened a fashion store. And in the future, do you think this is -- this kind of attempt of business model will give you new sources of revenue, or are they just one-off to a -- for the purpose of funding? And then you took part in the New York and Paris Fashion Week. And then in the coming years, are you going to take part in this event? Are they for fun doing purpose for launch of new products? The next question is for Terence. So in that ratio, actually, the ripple went down in year-on-year here. But you should see that if you look at the presentation on Page 8, for your sell-through mix, actually, new product mix is up year-on-year, which is the positive. So the truth here, there seemed to be kind of victory in sellout, but I'm thinking, is that the cost you excel in the shipment of a newer product through the channel, or is there any other reason for the YOUNG decline that's in that rate. That's the first question. The second question is, if you look at the numbers, that's right, the sales performance on the apparel was very strong at 31% year-on-year. Is there any particular reasoning due to the mix, due to the Fashion Week impact or LI-NING YOUNG, whatever, which you want to share with us?

[Wah-Fung Tsang, executive]

Okay. So let me get through the financial questions. On the sellout rate, okay, so sellout rate is measured between how much we buy and how much would be sell out, sell-through, right? So improvement in this -- in the actual sell-through is percentage of new products. For example, it's this fashion result, CNY 100 million, on the new products. This year, it grew to CNY 114 million. So that's where the sell-through part is, right? So the sellout rate decline, there's 2 parts you always have to look at. Number one, is that the buy, is that the input, or is that the output? The fact that I give out the sell-through, actually improved in the mid-teens, with better gross margins, that proves the point that it's not the sell-through issue, right? The new product continued to do well with better gross margin and an increase in double digits. So the issue is we will need more on Site E, but not the feeding the channel, it's more in our direct stores. Remember, I've been saying that for the past 18 months, last year, we contracted the open-to-buy, right? But we call out how much we want to put in the store because the main thing is we want to control channel inventory. We're going to work under a distributor, under accounts receivable, which the result achieve. But at the same time, it created a top line challenge for us last year. Remember the thing, that we're 18 months. So this year, we actually opened that up and actually, from last year in the fourth quarter and during March, I talked about that. So when you compare, and '18 opened up the open-to-buy with this, what they really controlled, open-to-buy in '17, that's a hot comparison, right? So that caused a decline. The other part I look at, why I'm not as concerned, but again, I want only to carry the good news. It is what it is, right, and the things that we'd need to work on. But the other part I look at, and I told that out in my speech, is if you look at 2016, both the Q1 and Q2 products still improved over the 2016 figures. So basically, what I've just explained, what happened in 2017 when we contracted open-to-buy, that's the main reason. Now having said that, it doesn't mean that that's not an issue, it's still an issue we need to work on, and that's why we invest so much in our product and sales organization because clearly, our product architecture, and by that, I mean, the SKU efficiency, is not the best, right? So this is why we have to go in and really invest so much in the product organization, so then the fall-in on the product architecture can -- makes no sense. So -- and then the buyers, which we also need to account, tick up, can buy more precisely. That's the area that we think we are not -- we have not spent a day enough, but to what the Chairman's talking about, why it takes so long. Well, so that's where the sellout and the sell-through, but honestly, I'm not as concerned why because if you look at sellout rate low. There's 2 issues, right? First, you have to focus where there's a sell-through problem. Second is, well, to create an inventory problem, but if you look at where we are in the ending inventory, we're still in very good shape. However, the second half, we sort of mixed it with that term. That clearance has to continue to execute the way it is. But based on my -- our past 3 years' execution, I'm not concerned, right? So to answer that question, I don't bring it up because it doesn't affect the financials in the first half, but still, it's a piece of key data. Right? The second question on the apparel, the reason is, as you know, before the Chairman comes back, we actually have a lack of -- on the apparel side of business, right? So the mix actually was only 44%, which, in all essence, apparel would need to be at least 50 points more than footwear. Why? Because apparel is where you drive the lifestyle part of the business, right? So since Chairman came back about 18 months ago, we feel guided, so let's focus -- start focusing on apparel. And that's where we increased. So I think, going forward, apparel still will increase slightly on the factor rate because at the end of the day, we want apparel to be in the mix of 55% to 58% of the business. But -- so it's just -- it's a product strategy, initiative that we roll out a couple of years ago. It's not something we did. I mean, I think the New York Week and Paris Week doesn't really drive the apparel perspective. It's just -- so it's more our primary initiative. Okay?

[Ning Li, executive]

[Foreign Language] Concerning the company's strategy, I'm showing our goal is about revenue. We want to have a source of revenue, not only for the sake of promotion. However, looking at brand promotion and communication, that is the first entry point because it may attract not the traditional LI-NING users, perhaps, we will attract children of the traditional LI-NING users. And they are also the -- some of the very active young people. So we want these segments to have awareness and recognition of us. So we will actually introduce some fashionable products, items that are consistent with the LI-NING DNA. And it is a source of revenue. We hope that it will become a product with richer demand, so when people buy, they will get this experience. Concerning the way of launch, we'll see whether we want to do it by means of New York and Paris Fashion Week. It all depends on the communication platform environment for this -- suitable for this group.

[Unknown Analyst]

[Foreign Language] I'm [ George Yan ]. I have 2 questions. The first question, Mr. Li, please? I would like to follow up on a question. First of all, in China for the 001 new products, I would like to know from your present point of view, how would you want to develop this, in terms of product or channel? Which one will you be investing in first? In the next 3 years for LI NING, how much do you think would be the sales proportion coming from LI NING? The second part for Terence, that are margins by your business in the first half, please.

[Wah-Fung Tsang, executive]

Okay. So on the margin for our direct retail, our gross margin actually up almost 2 points to mid-60s, right? And the formal contribution is that low mid-teens. And it's also up almost 2 point -- 3 points. So that's a pretty good profit on the direct retail. On wholesale, our gross margin actually remained the same at about the 40% level, and that's where we stand, right? And then on e-commerce, the gross margin is at the low 50s, basically flat to last year, but the operating margin for the e-commerce is the high 20s. Now it's a little bit lower than last year first half, but for the full year, last year was at low 20s, so -- not, high 20s, so we're actually slightly higher than the full year last year margin.

[Ning Li, executive]

[Foreign Language] For our product lines for LI NING, we are still trying out. We have T-shirts introduced and also sports suits and also laser shoes, et cetera. And we find that different consumer groups like different products. For example, those joggings, with like the jogging shoes, those are like shoes or like a shoe, so basically, we do not know at this point what are the main product lines. But we want to be able to identify the sustainable ones. And in the future, it would become -- at present, we're not able to project which product line will become our major contributor of revenue. But there will be development potentials, but to what extent will we be able to grow this, that depends on our next stage of market development.

[Unknown Analyst]

I just had quick questions for Terence around top line. Firstly, could you please let us know how much approximately was Q contribution in the first half and where do you expect things to go in the second half? And secondly, just in terms of triple order, high single digits feel pretty strong but it actually is flowing down a little bit. How much of that do you think is -- you wanting to know control open to that a little bit next year, or how much of that is you wanting to do more replenishment next year? And finally, in terms of your retail stock through trends, how is that trending into, I don't know, August?

[Wah-Fung Tsang, executive]

Okay. So on the LI-NING YOUNG, we don't really break out the numbers, but I mean, I'll give you a little favor. It's worth about of almost 2 to -- I mean, 2% to 3% of our top, right, the best timing, right? So this is where we trend. And again, and Chairman always did that. I mean, I always, let's gets higher and higher. I mean, they could, if you want to redrive your business, we could. But the Chairman wants us to trim it down. He wants to be healthily grow the business, so we are happy. I mean, and I'll tell you this one time, even though I wanted to be above plan, but I think both for the full year, it will be, and then if the business is actually doing so well, a healthy thing there. The growing pain that we expect is there, but not as much as we expect. So I'll say if this is a fair -- it's a pretty encouraging trend. And by the way, it's already making money. Right? So it's still hot, right, for a new business going into the first full year of operation already profitable. On the trades there, actually, you hear both, and it is both the same thing. I mean, as I already said, on the wholesale side, we want the sell-through to control the selling. I mean, and to my -- back in my mind, I never liked selling today, even though that's the important part of the KPIs. Looking at, for example, the first half of wholesale, the distributor sell-through, up 6%. So our selling is at 4%, and literally, we can actually replan it more. For some of this number, one more, but further note, we want to control the channel inventory. I think at this point, our channel inventory is more healthy, so going forward, I don't mind opening that up to be at least similar, the selling and sell-through. But we're not going to have selling more than sell-through. I mean, that has been the trend that destroyed this whole business for the past 10 years. Right? And replenishment, definitely, it's also another factor because as we've been working on the supply chain, we believe now we are getting it, I mean, we are doing it more logically, so I mean, the QSQR, the book kind of thing is 20% of our business already. So -- and now we have the mix -- the profit, the mechanism to do it right. We feel like that's an area we want to do, but without the front end, without the buying, the product planning, doing balance, we don't want to open too much up on that. Okay? So the last fact -- what's the last question?

[Unknown Analyst]

Do you really have sell-through of this trend?

[Wah-Fung Tsang, executive]

Yes, for trending offers, that is continuing the same trend in the first half, except the wholesale, actually, do better than first half. So we're happy, and then I honestly, I think this quarter, that trend will continue for sure. Fourth quarter will be a little tough. Why? Because last year, fourth quarter, we also -- I mean, that's where the chunk go up, right, with the higher trade. And then the macro, I believe, is the trade first thing, who knows, right, and I'm about to trade here the trade walk. So who knows, in the first quarter, definitely, we're going to be very prudent, I mean, not to make all the money in the third quarter and a cheap fourth quarter after that. Correct?

[Unknown Executive]

This gentleman.

[Unknown Analyst]

So my question is on the results. So what we see in the first half, because of the planned investment, we see maybe basically a stable SG&A ratio and keeping margin improvements. So on Terence, I just want to know, like looking at the trend of the kids, can you give -- is there any change on the previous guidance on term '18? And more importantly, on Terence, I think there's really more looking forward for next year, so do you give any guidance of what's your trend? Is there any change on something of finding investment, company investment? Keeping that, there is some CapEx you should be doing in Hero. So one is if there's any margin or sell comments that you can give for next year?

[Wah-Fung Tsang, executive]

Okay. So the first question is just about the guidance for this year?

[Unknown Analyst]

On P&L.

[Wah-Fung Tsang, executive]

On -- okay. So well, I mean, in the first half, we talked about the investment on the headcount, right. And last year, I don't know whether you guys remember, in March, we talked about last year, we added almost 140, 150 people between the new business and the sales and organization. First half, we added another 80-some people. Right? So -- but the point is because last year, the people we added are only in the second half, so that's why the first half, we didn't get investment on what they expect, even though with an 8 -- it was an almost 18% top line growth. In the second half though, you're going to see that because the increase in headcount, while 2 tiers, are not as much. Right? Now for the LI-NING YOUNG, we don't want to put that into any factor yet. We're still new. We're still young, but then, again, I mean, let's see when it's the traction we really updated before we factored and changed the plan. So this year, we maintained 200 basis point improvement in the operating margin, 1 from the gross margin, 1 from the expense leverage. Right? So we maintain that. But it's just that the tax rate is different for the full year, the 200 basis point become only 100 basis point, kind of thing, that's why we've guided 6.5% to 7% from last year, 5.7%, 5.8%. Right? That's the logic. Next year, I mean, it's pretty much the same thing. I mean, again, I also have been saying that for 4 years. I feel pretty confident about 100 basis point improvement in gross margin. Well, and you can see that we've been achieving that every year. So that's not a -- I don't think that's a tough challenge with all the factors we put in, except the top line, where it's going to be mid- or high teens, depending on the meaning of our '16. Right? I mean, like, if you look at first half, to be honest, without the new business, which mainly are -- is LI-NING YOUNG, we're only mid-teens. Right? So that can move the dial a couple of points at this point, and that next year, when the trajectory is out, they're out there, then I think it will change the whole P&L. But do I see that when no one -- in any guidance from a directional standpoint, okay?

[Unknown Executive]

Next gentleman over there.

[Unknown Analyst]

This is [ Walter ] from [ China National Bank ]. So I have 3 questions for Li Ning. The first one is about the ASP growth. So we can tell that you guys are selling more fashionable products, which has quite a decent price premium. So we were just wondering like what was the ASP growth in the region this quarter in terms of same-store sales. So do you think that is perhaps sustainable in the future? And the second question is about the performance by category. We can tell that basketball and sports casual as well as the badminton has done quite well in the first half. And can you elaborate more about the reason behind? And it was quite impressive for badminton. It rose by 51% year-on-year, so is that sustainable? The third one is about the other brand's investment and expenses. So you mentioned that one of the reasons for the OpEx or higher-than-expected OpEx was did -- the other brand's investment. Do you think it's a one-off event? Or are we expecting more? And are we revising our target for a bit even for those other brands in the next year?

[Wah-Fung Tsang, executive]

Okay. So the first question, ASP. ASP, actually for the first half, were up about 5%. Now that's not so much about aggravation of the product architecture, it was more about we increased about 5% to 8% on the MSRP of some of the products, starting from last year third quarter. But remember, in March, we talked about it. That's why, I mean, the discount, you have to book at the discount rate with tier because looking at number to number, that doesn't tell the story. By increasing our MSRP, the better to come in the pack horse. So that's why you have to book a new product gross margin, and we do not switch and then talk about gross margin new product. That's the main reason. So I think the trend will continue a little bit because we're still looking at now. We're analyzing more, we're finding the right areas where we think we can add another 20, 30 parts on the item. So without changing the price value of the product, but those are -- but selectively, not the whole line. Right? And so far you can see. I mean, that's the right strategy. We're just getting the money, what we should. I think, going forward, you see us look more in the third quarter, but being the fact that the major increase is coming last year, third quarter, so I think it's going to come back down a little bit. I don't think the increase in ASP is going to continue to be a 5 points. So I think you see that for the rest of the year, maybe 2% to 3%. Okay? So that's the first question. The second question, on basketball sports casual, I mean, that's just what Chairman talked about. We continue investing in the planning. I think basketball a lot is about the consumer. It's the young generation. And the fact that we have done a lot of things to bring the young generation to come back in vibrance to our brand, that's the main thing. Sports casual, it's because we put more focus on the apparel, right? Apparel, again, is very important for me, sports casual category. I think that trend will continue. Badminton, I think, badminton, I want to make sure, the 50-something-percent is a fall-in now. As you guys remember, badminton has been on a downturn for 3 years. If you look at that pace for the past 3 years, it's been down. So that's -- we've been working that channel down basically back to a pretty more steady level. So why that big jump? But I don't expect that to continue in that rate. But it was stop growing the difference for the past 3 years. So on the new business, what I mean on new business is the investment in Danskin and even YOUNG, right, because the first year of full operation, their expense ratio is definitely higher than your kind of business. That's the reason. And I don't think we would be investing as much as you know as the trajectory starts kicking in. Even though it's already making money, it offsets the laws on the redemption, which we knew, right? We planned that. So I think, this year, we're still stable, that the breakeven this year, not next year -- I think, next year, we definitely will be in the profit level, okay, for the new -- for the 2 new brands.

[Unknown Executive]

Okay. Due to a time limit, this may be the last question. This gentleman, please?

[Unknown Analyst]

[Foreign Language] Morgan Stanley question. For the question for Mr. Li. Terence mentioned just now that for the first quarter, the sales would be good and there may be some uncertainties in Q4. Now for the macro consumer situation, comes July, do you think -- in the third quarter, do you see any major changes? And how would this impact your industry or any consumer industry because of trade war or because of reforms in the third to fourth, dual cities or et cetera, et cetera. What -- how do you see it? That's a first question. Second question, concerning your same-store sales. We're also trying out new things in the stores. Do you have an idea to share with us? How many stores will you be reforming in what period of time and also the number of stores because with the new initiative, you may want to expand on some of your existing stores? Can you give us more color, please?

[Ning Li, executive]

[Foreign Language] Concerning the stores, our present stores, we'll go in the past 20 years or so. They follow that model. There are efficiencies in that model. There are inefficiencies in that model as well. And in the past few years, we have been adjusting that strategy. In optimizing our channel as we optimize our channel, if we are -- make the channels more modern, this was not really just about refurbishing our shops because the cost from the shops, for example, the rental, and this is the environment of those shops, are all changing a lot and people going to the shops as a function event is also changing. So I'm not chasing number of stores anymore, but rather the quality of the stores. The stores, if they're able to give me 100 in terms of revenue, then I will be chasing this 100, rather than to say that I'll open 10 stores in order to achieve 100, let's say, in revenue. If 3 stores, it's able to achieve 100 in revenue, then I will cut the other 7 stores. This is a direction I'm going. But on the other hand, we'll have to be creative in our channeling, not just about the stores, but we have to be clear as to what kind of consumer groups we want to attract. In the past, we have not been doing that very well. Well, in the second half of 2016 and 2017, we have been making adjustments and this year as well. And it seems that we have been able to be more creative in our channel and also our integrated stores, what kind of opportunities will they bring. These are some of the things that we will continue to optimize. And we will be staying steadfast according to our mission. And so your second question, everybody feels the pressure, that is the trade war between China and the U.S. There is a lot of instability in that trade friction. Now at present -- I think the system or the structure in China and the financial system as well of China is not really in-step with international still. So that actually gives us some space for China for certain of our own operation. For example, in leisure-seeking of the Chinese people and the emphasis on children and their demand and need for sportswear, that will not change, I think. And that will still be true of the domestic market in China. So in that sense, the impact on us is not all that strong, but of course, we'll continue to monitor the trade friction and make adjustments where necessary.

[Operator]

Thank you very much for the questions.