Li Ning cuts full-year revenue and margin guidance; BofA downgrades to Neutral on limited second-half earnings visibility

Overview

The report focuses on Li Ning's cuts to its 2026 revenue and net margin guidance, the composition of its 1H26 results, and operating pressures in 2H26. BofA believes the improvement in first-half gross margin is insufficient to offset pressure from weak demand, deeper discounts, and increased marketing investment, and therefore cuts its earnings estimates, valuation multiple, price objective, and rating.

Core views

The report first downgrades Li Ning from Buy to Neutral. Although the 1H26 gross margin exceeded expectations and revenue and net profit grew 2.8% and 4.5% year over year, respectively, the company lowered its full-year revenue growth guidance from high single digits to low single digits and its net margin guidance from high single digits to mid-to-high single digits. Given the first-half results already achieved, this implies a very limited net margin for 2H26. BofA has therefore turned cautious on the second half and believes further earnings estimate cuts may still follow. 1H26 revenue was weaker than expected, mainly due to weak offline traffic, deeper discounts, and a decline in the specialty-store channel. Offline discounts deepened by 3.5 percentage points year over year, while online discounts deepened by a low-single-digit number of percentage points. Low-teens retail sales growth at LI-NING YOUNG and mid-single-digit online revenue growth partly offset these pressures. At the industry level, the rise of emerging vertical brands has made the market more fragmented. Meanwhile, Topsports and Pou Sheng are destocking ahead of the January 2027 termination of their channel rights on Nike's online platforms, further intensifying discount competition. The profit structure did not improve across the board. Cost tailwinds and changes in the product and channel mix drove a 90-basis-point year-over-year increase in gross margin, but the selling and administrative expense ratio rose by 100 basis points, mainly because the advertising and promotion expense ratio increased by 220 basis points, only partly offset by a 50-basis-point decline in the administrative expense ratio. The operating margin contracted by 40 basis points, and operating profit was broadly flat. The normalization of the effective tax rate drove a 7.5-percentage-point year-over-year decline in the tax rate. Although lower interest income and earnings from associates provided a partial offset, the net margin still expanded by 20 basis points, ultimately driving net profit growth of 4.5%. This indicates that net profit growth depended more heavily on changes in the tax rate than on operating profit expansion. Cash flow also weakened the quality of the earnings performance. 1H26 operating cash flow fell 60% year over year, substantially worse than the 4% decline in EBITDA, mainly because the licensing fee for the Stephen Curry partnership had to be prepaid. The payment was capitalized on the balance sheet rather than recognized as a current-period expense, meaning the cash outflow had already occurred while its impact on the current income statement was relatively limited. Operating trends in the second half remain challenging. As of the report date, offline retail sales in 3Q had weakened further from 2Q. Despite a lower comparison base, rainy-season weather and subdued consumer demand continued to suppress traffic. Slower-than-expected sell-through, combined with Nike distributors cutting prices to clear inventory, further increased discount pressure. The report also expects advertising and promotion expenses as a percentage of revenue to rise to the mid-teens in 2H26, above 12.4% in 2H25 and 11.2% in 1H26. Sporting events such as the Asian Games and Chengdu Marathon, new athlete partnerships, and expenses related to the Curry partnership will all increase spending. The combination of revenue pressure and a rising expense ratio further reduces near-term earnings visibility. Based on these developments, BofA cut its 2026/27 EPS estimates by 19% and 24%, respectively. EPS for 2026E, 2027E, and 2028E now stands at RMB0.870, RMB0.923, and RMB0.970, respectively. Of these, 2026E EPS declines 23.3% year over year, while 2027E and 2028E EPS are expected to grow by 6.1% and 5.1%, respectively. The corresponding Visible Alpha consensus estimates are RMB1.08, RMB1.22, and RMB1.37, all above the report's estimates. Adjusted net profit is expected to decline from RMB2.936 billion in 2025 to RMB2.258 billion in 2026, before recovering to RMB2.395 billion in 2027 and RMB2.516 billion in 2028. The price objective was cut by 24% from HKD20.80 to HKD15.90, based on a blended valuation comprising 50% P/E and 50% DCF. The DCF valuation is HKD17.30, assuming a 12% weighted average cost of capital, a beta of 1x, and a 2% terminal growth rate, all unchanged. The P/E valuation is HKD14.50, based on 15x 2026E P/E, down from 16x previously to reflect lower sector valuations. The multiple remains 20% above the three-year historical average because the report expects the company's growth and margin profile to improve. The valuation also assumes an HKD/RMB exchange rate of 0.9.

Analysis framework

The report first compares the company's latest full-year guidance with its previous guidance, then breaks down changes in 1H26 revenue, channels, discounts, gross margin, expense ratios, tax rate, and cash flow to assess the sources and sustainability of profit growth. It subsequently revises its earnings estimates based on 3Q retail trends, industry competition, distributor destocking, and 2H26 marketing investment. Finally, it determines the price objective using a 50/50 blend of P/E and DCF valuations and adjusts the rating accordingly.

Methodology notes

• Valuation MethodologyDCF

  Discounted cash flow valuation

  The report discounts future cash flows using a 12% weighted average cost of capital and assumes a beta of 1x and a 2% terminal growth rate, producing a DCF valuation of HKD17.30; this result accounts for 50% of the final price objective.

• Valuation MethodologyPE/PEG valuation

  Forward P/E valuation

  The report derives a valuation of HKD14.50 using 15x 2026E P/E. The valuation multiple was cut from 16x to reflect lower industry valuations but remains 20% above the three-year historical average; this result accounts for 50% of the final price objective.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Cross-validation of profit, tax rate, and cash flow

  The report compares operating profit, net profit, EBITDA, and operating cash flow, noting that net profit growth was supported by a lower effective tax rate, while operating cash flow fell 60% year over year due to the prepayment of the licensing fee for the Curry partnership, thereby distinguishing accounting profit from actual cash flow performance.

• Industry Analysis FrameworkVolume-price decomposition

  Channel sales volume and discount decomposition

  The report separately examines offline traffic, growth in online channels and LI-NING YOUNG, specialty-store channel performance, and discount depth, using changes in channel sales and price concessions together to explain why revenue fell below expectations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Li Ning (2331.HK)

  The report downgraded Li Ning from Buy to Neutral due to cuts in revenue and net margin guidance and increased demand and expense pressures in 2H26.

  Strengths

  Li Ning is China's second-largest domestic sportswear brand, with more than 7,300 directly operated and franchised stores; its gross margin increased by 90 basis points in 1H26, LI-NING YOUNG and online channels continued to grow, and its balance sheet and cash position remain strong.

  Weaknesses

  Offline traffic was weak, the specialty-store channel declined, discounts deepened, and operating margin contracted; marketing investment continues to increase, operating cash flow fell 60% year over year, and near-term earnings visibility is limited.

  Comparison

  2Q26 retail sales growth was weaker than 361 Degrees but better than Topsports; the rise of emerging vertical brands has made the industry more fragmented.

  Risks

  Broad weakness in the sportswear market, intensified competition from global brands, and slower-than-expected margin expansion could all pressure the price objective.

Key data

• Rating changeBUY to NEUTRALBofA downgraded the rating after the company cut its revenue and net margin guidance
• Price objectiveCut from HKD20.80 to HKD15.90Cut by 24%; the report lists the current price as HKD14.46
• Full-year revenue growth guidanceLow single digitsPreviously high single digits
• Full-year net margin guidanceMid-to-high single digitsPreviously high single digits
• 1H26 revenue+2.8% YoYRevenue growth fell short of expectations
• 1H26 net profit+4.5% YoYNet margin expanded by 20 basis points, partly supported by a 7.5-percentage-point decline in the effective tax rate
• 1H26 discount changesOffline discounts deepened by 3.5 percentage points; online discounts deepened by a low-single-digit number of percentage pointsWeak traffic and slow sell-through put pressure on discounts
• 1H26 gross margin+90 basis pointsDriven by cost tailwinds and changes in the product and channel mix
• 1H26 expenses and operating marginSelling and administrative expense ratio +100 basis points; operating margin -40 basis pointsAdvertising and promotion expense ratio rose by 220 basis points, while the administrative expense ratio fell by 50 basis points
• 1H26 operating cash flow-60% YoYEBITDA declined 4% over the same period; the difference mainly reflected the prepaid and capitalized licensing fee for the Curry partnership
• 2H26 advertising and promotion expense ratioMid-teensCompared with 12.4% in 2H25 and 11.2% in 1H26
• 2026/27E EPS revisions-19%/-24%Current estimates are RMB0.870 and RMB0.923, respectively
• 2026E adjusted net profitRMB2.258 billionRMB2.936 billion in 2025
• DCF valuationHKD17.30WACC of 12%, beta of 1x, and terminal growth rate of 2%
• P/E valuationHKD14.50Based on 15x 2026E P/E, with the multiple cut from 16x

Impact & implications

The report believes Li Ning's first-half gross margin improvement and lower tax rate are insufficient to offset pressure on revenue, operating margin, and cash flow. If demand and sell-through remain weak in 2H26 while the advertising and promotion expense ratio rises to the mid-teens as expected, the company could still face pressure in meeting its revised full-year guidance, and earnings visibility would remain low. Accordingly, BofA cut its 2026–2028 earnings estimates, valuation multiple, and price objective and downgraded the rating to Neutral.

Risks

• Broad weakness in the sportswear market could further pressure revenue and the price objective.
• Intensifying competition from global brands could increase discount pressure and weaken market performance.
• Slower-than-expected margin expansion could place further pressure on earnings estimates and the price objective.

What to watch

• Monitor whether offline retail sales can stabilize on a lower comparison base in 3Q and 2H26.
• Monitor sell-through, offline and online discount depth, and the progress of Nike distributors' destocking ahead of the January 2027 termination of their channel rights.
• Monitor whether the advertising and promotion expense ratio rises to the mid-teens in 2H26, as well as the actual impact of sporting events, athlete partnerships, and expenses related to the Curry partnership.
• Monitor whether the company can achieve its new guidance of low-single-digit revenue growth and a mid-to-high-single-digit net margin, and whether BofA cuts its earnings estimates further.
• Upside factors cited in the report include rapid retail network expansion, faster-than-expected improvements in wholesale and retail discounts, and stronger-than-expected growth in the China Li Ning collection.