China’s Sportswear Industry Poised to End Losing Streak

Li Ning Shaquille O'neal Campaign | Source: Li Ning

HONG KONG, China — China’s home-grown sportswear industry is finally showing signs of recovery after nearly two years of massive oversupply, and industry watchers are betting that ANTA Sports Products Ltd will be first out of the blocks.

ANTA, the country’s largest sportswear company by market capitalisation, cheered investors on Tuesday when it said the value of its order book grew for the first time in six quarters and its earnings beat expectations.

“The dawn is coming. We expect to see a turnaround story in 2014, while more clues will be seen in the second half,” said Elyse Wang, retail analyst at Haitong Research based in China’s southern boomtown of Shenzhen.

China’s six largest sportswear companies went on an expansion spree after Beijing hosted the 2008 Olympic Games, counting on the event to spark fresh interest in sports and sportswear. They opened a combined total of about 12,300 stores in China between 2008 and 2011 – an average of 11 per day.

Demand failed to live up to those lofty expectations, and they were forced to shut about 4,700 outlets in 2012, averaging nearly 13 closures a day. Foreign rivals such as Nike Inc and Adidas AG were also caught in the downdraft, posting disappointing sales and closing stores.

The combined inventory for China’s big domestic players peaked at 4.3 billion yuan ($702 million) at the end of 2011, triple the 1.5 billion yuan in stockpiles at the end of 2008, according to Thomson Reuters data. They purged stockpiles last year, whittling that figure down to 3.8 billion yuan.

ANTA’s average inventory days – a measure of how long it takes to sell the goods – swelled to 102.5 in mid-2012 from 44.1 at the end of December 2008.

“WORST HAS PASSED”

Soothing comments from ANTA helped push up its share price about 5 percent on Wednesday, adding to gains across the sector over the past few weeks on hopes the industry has hit bottom.

“The worst period for the company has already passed,” ANTA Chairman Ding Shizhong said on Tuesday, although he acknowledged the sector still faced uncertainty due to inventory issues.

Other executives said ANTA’s inventory levels had returned to “normal” and the firm was confident it would be the first to emerge from the trough. Its first-half inventory eased to 575.8 million yuan, down from 627.9 million yuan a year earlier.

The company aims to trim its store network to 7,600-7,700 by the end of this year, down from 8,075 a year earlier. It had 8,764 stores at its peak at end-June 2011.

“Any turnaround story will be early next year. If there is any chance to see a turnaround, ANTA will be the one to come out first,” said Renee Tai, an analyst at UOB Kay Hian.

Since 2008, ANTA’s China market share has increased to 5.8 percent from 5.3 percent, according to Euromonitor, outperforming Nike, Adidas and Li Ning which all posted declines. Nike still leads with about 12 percent of the market.

Eight out of the 19 analysts covering ANTA have raised their earnings forecasts for the company over the past month, with average EPS forecast for 2013 up 5 percent over the same period, suggesting sentiment is turning around sharply.

BRANDING BENEFITS

Signs of a turnaround come just two months after Nike disappointed investors by posting sluggish orders in China, a market many foreign companies see as a growth engine at a time of sluggish demand in Europe.

Nike’s orders for delivery between June and November – known as futures orders – rose 3 percent in China, but were up a more robust 8 percent globally.

Following a model pioneered by Nike, China’s big domestic companies have committed tens of millions of dollars to sign famous U.S. basketball stars such as Dwayne Wade and Kevin Garnett to shoe contracts that have yet to pay big dividends.

In July, Miami Heat’s Wade visited China for the first time since signing a multi-million dollar contract with Li Ning, proclaiming to hundreds of fans that he believed in the brand. He may have to do more to convince market watchers.

Li Ning is seeing considerable earnings downgrades. The last five revisions – all since June – have been cuts and the stock ranks among the lowest in Asia in terms of relative valuation versus peers, according to Thomson Reuters StarMine data.

Li Ning, named after its Olympic champion founder and also backed by Singapore sovereign fund GIC, has a market value of $897 million, lagging ANTA’s $3.3 billion.

While some analysts are optimistic an industry turnaround is in sight, others are more cautious.

“I would say the overall environment is stablising,” said Steve Chow, analyst at Sunwah Kingsway Group Research. “I don’t expect to see a V-shape or a U-shape recovery after consolidation, but an L-shape instead.”