Reuters Insider - Breakingviews TV: Sino-Swoosh

Descente

16/07/2018 12:02

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Source: Reuters Insider

Description: July 13- Nike and Adidas are increasingly winning what will soon
be a $50 bln battle for Chinese sportswear against local rivals such as Anta
and Li Ning. Sharon Lam and Jeffrey Goldfarb discuss why foreign brands may be
gaining the edge.
Short Link: https://reut.rs/2zJY5Ll

Video Transcript:

Maybe Nike should change its slogan to "Just Chung Do it." The big US company
known for its swoosh and its European rival Adidas have been increasingly
taking the fight to China where there are some pretty big incumbents who also
have a big chunk of the market. Sharon Lam is not in her athleisure wear today
but has been taking a look at this market. Why is the battle for sneaker and
sportswear been happening in China right now?

Right. So I think, well, everyone is kind of looking at Adidas and Nike kind
of taking it out. There is another kind of war gets kind of brewing. Most
notably, it's the fact that the Chinese sportswear market, it's second largest
market right now, but it's booming, it's growing at 8% right now. It's
forecasted to grow at 8% for the next five years. It's supposed to reach close
to $50 billion.

There's a lot to play for there because it's growing faster than the developed
Western markets where they're bigger but they're not growing as fast.

Right. It's growing at 3.5%, so kind of cracking that market, I think, will be
pretty important.

Now, there's already some local competitions, a big local competition that
people and the rest of the world may not even really know about it.

Right.

There's Anta Sports. It's one of the biggest ones. Maybe people know that they
own Fila which is this international brand, but they're doing quite well,
right?

Yes. So Anta, it's doing quite well. They own Fila and also a ski brand
Descente, their $14 billion company. Analysts are quite bullish on the stock
itself. It's trading at around 20 times forecasted earnings. 

Wow. So there's a lot of expectation that they're going to keep doing well at
20 times earnings.

Right. And they've also struck a number really good kind of key partnerships
with Klay Thompson and the Warriors, for instance, another kind of local
Chinese footballer.

But there also has been some question marks that have been raised right about
not just Anta but some of its Chinese peers. There's a research outfit that
kind of raised a couple of not-so-great issues maybe.

Yeah, right. Yes. So research accounting firm GMT Research earlier in June,
they released a report that said that Anta, Li-Ning, Xtep and some other Hong
Kong-listed sportswear companies exhibited what they called fraud
characteristics that were similar to previous cases of proven or probable
fraud. A lot of that is shown by kind of really high operating profits, but
also really low inventories. So there is kind of that-

Well, the companies have all, obviously, said that these are-

They've denied it.

-that these findings are inaccurate, they're misleading, but there is some
questions about like a company- I mean, the question that's being asked is how
the companies are growing so fast, selling goods cheaper and yet they're like
way more profitable than Nike and Adidas and others are, and that's it.

Right, yeah.

But at the same time, so what's going on with Nike and Adidas and why is that
you think the Chinese consumers are going to keep buying their goods rather
than the local ones?

Right. Yeah, I think Adidas and Nike are doing quite well in China
particularly like they've really gained market share in the recent years.
They've gained around 10.5 percentage points, so they're more or less 41% of
the market, whereas Ni Ling, Xtep and Anta have really lost market share
around like 4.1%. 

Okay.

And I think there are kind of too many reasons for this. I think the first
being that a lot of younger millennial consumers are coming into a lot of
money and they're spending more. In that sense, disposable income is supposed
to double but-

Once again, this is rising middle income smart, middle class in China stories
and they'd like these premium foreign brands, kind of cache to them.

Yes, exactly. The second thing is that what you see is a lot of trading up
which happens a lot within consumer discretionary when consumers come into
more money, they want to spend that money on more premium, luxurious
athleisure. In that case, Nike and Adidas kind of fall quite squarely into
that.

Well, sounds like a great start we're going to obviously going to keep an eye
on. Thanks a lot for that, Sharon. We'll be back with more Breakingviews next
week