LI NING(02331.HK)：VENTURE INTO COFFEE BUSINESS TO IMPROVE CONSUMER INTERACTION AND EXPERIENCE-格隆汇

机构：中金公司
研究员：Wenhui SONG/Haiyan GUO/Runbo YANG

　　What's new
　　According to PEdaily, Li Ning has recently registered the “NING COFFEE” trademark, and begun offering coffee at some retail stores in Beijing, Guangdong and Xiamen[1].
　　Comments
　　Coffee business venture to improve consumer interaction and experience. According to PEdaily, Li Ning registered the “NING COFFEE” trademark in April 2022, and is offering coffee products at some retail stores in Beijing, Guangdong and Xiamen. Consumers can get a free cup of coffee for any item they purchase at the store. Li Ning management stated it attached importance to customers’ retail shopping experience, with the new coffee service an innovative means towards that end, and that it was a way to create an immersive and comfortable environment[2].
　　Li Ning is not the first apparel brand to foray into the coffee business. Ralph Lauren, a US clothing brand, has dozens of coffee shops in cities such as London, New York and Chicago, and opened its first Ralph's Coffee on the Chinese mainland in Beijing in May 2021. The Ficus, a men’s clothing brand, collaborated with the coffee brand Manner, and has opened several coffee shops in Beijing. Also, China Post, China National Petroleum Corporation and Sinopec have all entered the coffee market. Specifically, Sinopec launched a new brand called Yijie Coffee in 2019. In February 2022, China Post opened its first coffeehouse, named Post Coffee in Xiamen, Fujian, and provided tea beverages, desserts and post office merchandise in addition to coffee products.
　　NING COFFEE likely to help increase footfall and brand popularity. We think coffee culture creates a rich atmosphere for socializing at a low cost, which can help the firm get closer to its customers. Coffee consumers are mainly white-collar workers and students in tier-1 and tier-2 cities, who are also the target consumers of Li Ning. Therefore, we believe the firm’s introduction of coffee business into its offline retail stores will likely help boost footfall, increase consumers’ purchase frequency and the time spent in stores, further driving up sales of its sportswear products. Data from iiMedia Research shows China’s coffee market has potential to grow; the market totaled Rmb381.7bn in 2021 and will likely reach Rmb1trn by 2025, implying a CAGR of 27%. In addition, Li Ning had 7,137 retail stores at end-2021, exceeding that of Luckin, which is China's No.1 coffee chain with 6,653 offline shops[3]. We believe the firm’s venture into the coffee business will likely enhance brand popularity and customer loyalty of the Li Ning brand on the back of its extensive retail channels.
　　Financials and valuation
　　We keep our 2022 and 2023 EPS forecasts unchanged at Rmb1.76 and Rmb2.15. The stock is trading at 27x 2022e and 22x 2023e P/E. We maintain an OUTPERFORM rating and our TP at HK$71.89, implying 35x 2022e and 29x 2023e P/E and offering 31% upside.
　　Risks
　　COVID-19 resurgence; disappointing retail environment; raw material price hikes.