China’s challenges come dressed in sportswear

Li Ning

05/01/2024 12:43

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, Jan 5 (Reuters Breakingviews) - Billionaire
Li Ning  2331.HK  may be China’s most famous gymnast. But shares
in the eponymous sporting-goods retailer he founded in 1990 are
creaking along like some parts of the country’s economy.
    The company has the ignominy of being the worst-performing
blue-chip stock on the Hong Kong Stock bourse in 2023, falling
some 70%. That compares with a 27% drop in rival Anta Sports
 2020.HK  and a 15% decline in the benchmark Hang Seng Index
 .HSI . Add on its 2022 decline and Li Ning has lost $25 billion
in market value in two years, and is now worth less than $7
billion.
    Granted, its shares had hit a peak in 2021 after benefitting
from a trend known as “guochao”, literally meaning “national
tide”, that signifies Chinese preference for domestic brands.
The fervor climaxed following a backlash against Western brands
that had voiced concern about the use of forced labour to
produce cotton in Xinjiang. Per Cinda Securities, a local
brokerage, the market share of Adidas  ADSGn.DE  and Nike in
China has dropped from more than 35% in 2019 to less than 30% in
2022.
    Trouble is, off the back of its success Li Ning started to
charge more for its goods, with prices on a few popular labels
now as much as 60% higher than three years ago. That strategy
then backfired after the pandemic with China flirting with
deflation and young shoppers turning more gloomy about their
earnings power and thus more likely to buy less expensive
products. Not only are they switching to cheaper domestic
brands, but Nike and Adidas are making a comeback with more
localised designs. Li Ning is stuck in between, with inventory
in 2022 climbing to the highest level since 2015 and net income
for 2023 likely to fall around 7%, per data collated by LSEG.
    Then last month it splashed out $282 million, equivalent to
more than half of its 2022 net profit, on a 25-storey office
block in Hong Kong to serve as its new headquarters. With the
real-estate industry suffering both on the mainland and in the
city, where property transactions in 2023 hit a 33-year nadir,
it spooked shareholders: they wiped 11% off the stock in a
single day.
    Li Ning last month announced it would buy back up to $385
million of stock. Neither that nor analysts’ estimates of
earnings rebounding some 40% over the next two years, per LSEG,
has convinced investors that it can get back into shape. For
now, at least, they’re regarding the company as a reflection of
China’s economic woes.
    
    CONTEXT NEWS
    Li Ning lost 70% of its market value in 2023, making the
Chinese sportswear firm the worst-performing Hong Kong blue chip
last year.
    On Dec. 11 its share price fell 11% on news that the company
bought an office building in Hong Kong for $282 million.

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Graphic: Li Ning's inventory is rising    https://tmsnrt.rs/3S5E1ZH
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 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com; Reuters Messaging:
KaSing.Chan.thomsonreuters.com@reuters.net))