This Sports Stock Has Room to Run – Barron’s

Chinese sportswear maker Li Ning Company (2331.HK) has sprinted ahead of rivals Anta Sports Products (2020.HK) and Xtep International (1368.HK) with its 28% year-to-date return.

Still, analysts at Jefferies think Li Ning’s stock could have another 15% or so upside in its locker. The broker just upgraded the shares from Hold to Buy, with a bumped up price target of HKD7.2. Jefferies says it expects the company’s earnings to recover amid restructuring that covers its products, distribution, brand and management.

Here’s more of the nitty-gritty:

We raise our net profit estimates by 11/29% for FY17/FY18. This is driven by revenue growth, online sales, improving channel inventory and operating leverage. From breakeven in FY15, we expect net margin to recover to 8.6% in FY19, in line with smaller domestic sportswear peers.

We stress that improving channel inventory is the key driver for gross margin recovery in retail channel. In FY16, Li Ning has cleared old inventory to improve sell-through mix as new products were 76% of retail sell-through vs. 69% in FY15. We forecast FY17e new product sell through at 84%, +8 percentage points year-on-year.

Jefferies also sees online sales as a big driver for future revenue growth.

The shares trade at 19 times next 12 months’ earnings, versus 20 times for Anta and eight times for Xtep.

Li Ning’s efforts to revamp its brand have included a tie-up with Chicago Bulls basketball star Dwayne Wade.

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