Lining's Dilemma Is Reversed, But Is The Brand Moat Deep Enough?

In just three or four years, gymnastic Olympic champion Lining, who is nearly a year old, will become more fashionable in the 30 years. In Hong Kong stock market Lining, from the end of last year to just ten months, the stock price rose to an astonishing 253%, and the market value exceeded 50 billion yuan.

Recently, Lining released 2019 semi annual earnings report, data show that the company's operating income increased by 33% to 6 billion 255 million yuan, while the net profit of the parent company grew by 196% to 795 million yuan over the same period. On that day, the capital market was warmly reacted, and the share price had surged 13%. The gap with Anta was shrinking.

Lining, who had experienced a long run of water, returned to the right track. Dismantling the company's past development and operating data in the first half of 2019 to explore whether Lining's brand moat is deep enough.

Dilemma reverses, usher in recovery

Lining's brand has gone through twenty-nine years since its founding, and has been in recovery again since its rise to glory. Guo Jin Securities Research Report shows that, under the leadership of Lining, founder of the company and the second CEO Chen Yihong, Lining has risen through the sponsorship of the Asian Games and the Olympic Games, and has pioneered the establishment of a franchise marketing system across the country, and has rapidly grown into the first brand of sporting goods in China. In 2001, Zhang Zhiyong became the third CEO of the company. In 2002, he established the brand positioning: "Lining, everything is possible."

In 2006, Lining became the first mainland sporting goods company to be listed in Hongkong; in the same year, it became the first Chinese sports brand to appear on the NBA field. In 2008, when Lining lit the Beijing Olympic torch at the bird's nest, the brand influence reached its peak. In the 2004-2010 year, the company speeded up the horse race enclosure and expanded the network rapidly with the help of the distribution system. The revenue increased from 1 billion 880 million yuan to 9 billion 479 million yuan, and net profit increased from 133 million yuan to 1 billion 108 million yuan.

Under the impact of China's slowdown in industry slowdown, Nike and Adi, the company has been accustomed to wholesale mode for many years, far from its own real consumer groups, misleading the market trend, the wind direction and even the crisis. At the same time, it has been more aggressive in implementing the reshaping of products, and the performance has emerged in Waterloo. In 2011, revenues and profits declined, and 2012-2014 consecutive years of losses for three years, Anta took the status of the domestic sports brand. In 2012, TPG partner Jin Zhenjun took over Zhang Zhiyong as the acting chief executive officer, and drastically promoted the transformation of the company's business from wholesale to retail, and optimized the product development process, laying the foundation for business recovery.

Three years of dormancy. In 2015, Lining, founder of the company, announced that he would return to be the company's acting chief executive and reopen the slogan "anything is possible". The company has transformed from traditional sports equipment provider to "Internet + sports life service provider".

In the 2018-2019 year, Lining's brand appeared in New York fashion week and Paris fashion week, and its popularity was further improved. In 2015-2018 years, the company's revenue rose from 7 billion 89 million yuan to 10 billion 511 million yuan, and net profit rose from 14 million yuan to 715 million yuan. In the first half of 2019, the company's net profit after deducting disposable profit and loss which was not related to business was 561 million yuan, an increase of 109.1% over the same period last year.

　 Expand south, electricity providers and other channels continue to exert force

Lining disclosed the regional revenue data in the half yearly financial report. The growth of the company in the southern and Southern China regions (Guangdong, Guangxi, Fujian and Hainan) exceeded 40%, and the proportion of the two share in total revenue rose from 47.4% in 2018 to 47.4% in the current period. The total market share of the northern market decreased from 54.5% in 2018 to 51%.

The change of three percentage points does not seem to be great, but the achievements behind it are commendable.

For a long time in the past, Lining's dominant position was mainly concentrated in northern China, and the South was slightly weaker, especially in the Southern China market, such as Anta, XTEP and 31st degree, which were the first line sporting goods companies in Jinjiang. In the past few years, Lining was busy with his own adjustment and failed to enjoy the fast development bonus of the Southern China sports shoes and clothing market, and the gap was once widened by his competitors.

According to the results of the report, the Guangxi factory, which was invested by the company, was officially launched, including the development and manufacture of the raw materials, sports shoes and sportswear. This is the first time since the establishment of Lining in the past 30 years, he has built factories to set foot in the upper reaches of the sporting goods supply chain, and also shows the importance attached to South market.

Now, with the revival and return, Lining has stepped up marketing efforts in the Southern China market, and the southern and Southern China regions have become the other poles of the company's business growth.

According to the description of sales channels in the earnings report, Lining's franchisee accounted for a 48.6% increase in revenue, an increase of 4.2%, a direct store account for 28.1%, a decrease of 5.1%, and an e-commerce account of 21.7%, an increase of 0.9%.

In the Lining strategy, the electricity supplier is not an inventory digestion platform, but an important product sales platform. It is also an omni-directional experience platform for users to interact with brand products, market activities, stars and events.

Alibaba's latest report shows that revenue grew by 42% compared to the same period last year, with net profit of 30 billion 900 million, an increase of 54%, which is nearly 20% higher than that expected by the market. It shows that Chinese consumers' shopping habits are moving rapidly online. The electricity supplier has also become Lining's most dynamic sales channel.

Direct operation and distribution seem to be a difficult choice for enterprises. Direct battalion can better control sales channels and strengthen management; distribution can quickly occupy the market at low cost. From the perspective of the current consumer market, direct sales and distribution go hand in hand, which seems to be more beneficial to the development of enterprises. For example, two major domestic duck listed companies: the weekly black duck adhering to the direct camp mode, and the strong flavor of the franchised store, were two years ago, but the market value of the former is only 1/3 of that of the latter.

In short, Lining's current management level is not enough to support the operation of Direct stores, and expanding the number of outlets is a good choice.

The company said in the earnings report that as the franchisee's confidence in Lining brand increased and the optimization of the overall channel structure of the group was considered, the group transferred some of its original stores to distributors, and agreed that the distributors would set up big stores and fashion shops, so that the franchisee's revenue grew by 40%.

Is brand moat safe enough?

The concept of moat was put forward by Buffett, a famous investor, referring to the sustainable competitive advantage of an enterprise in defending against competing products.

In the field of sports shoes and clothing, moat is difficult to build, and brands and products are still competing for a long time. Although since 2013, Lining's gross margin has increased by 0.5-1 percentage points a year. However, it is noteworthy that in this earnings report, Lining is not as good as Anta in terms of gross margin or net interest rate. Lining is not as good as this.

The high gross margin indicates that the products are highly competitive in the market, and consumers are willing to pay higher prices than similar ones. Lining's gross profit margin is 49.7%, net interest rate is 12.7%, and Anta's gross and net interest rates in 2018 are 52.6% and 17% respectively.

For the excellent enterprises, the core of the enterprise is the ability of self innovation, which is mainly reflected in the investment in R & D.

In recent years, Lining's R & D investment in China's four major sporting goods companies has been compared. The following is a picture of the R & D investment of various companies in 2018.

Compared with the rapid development of revenue, Lining has been trying to save money in recent years. This has also brought about some negative effects on some core categories of Lining. For example, the race category, with the help of China's marathon fever, Lining launched a series of running shoes such as "Chun Jun" and so on, which has always been a good word of mouth among runners, and has a high penetration rate in the past. The annual compound growth of 2014-2017 is 34%. However, in the first half of 2019, Lining's running category was cold, and the growth of retail water was plunging rapidly. It turned to a negative growth, and the growth rate was -8%.

This report shows that Lining's brand promotion expenditure is still declining, but R & D expenditure has increased 0.8 percentage points compared to the same period last year, reaching 2.1%, an increase of 2.1%. With the expansion of the scale of revenue and the great improvement of profits, Lining finally had the money to choose the right thing to do.

Unlike Anta and XTEP, in order to implement multi brand strategy with international acquisitions, Lining focuses on the main brand, develops around Lining IP, and then strengthens its product lines.

The 4 international fashion week since February 2018 has led Lining to become a representative of the "national tide". He has been heavily inviting Wade to endorse basketball shoes, raising the brand's status in the eyes of consumers after 90 and 00.

According to the financial report, Lining's sales in the international market did not change in the first half of the year, and remained 1.6%. Sporting goods giant Nike's 57% quarter revenue in 2018 was from outside North America, with greater market share in the Greater China region rising.

Lining's brand moat does not look so deep in the international market.