[HONG KONG] Nike and Adidas, take note. China's sportswear makers are in their best shape for some time.
The country's efforts to shift to a more consumption- oriented economy have done little for domestic sports brands, which have endured a tough three years as the economy slowed and they grappled with the consequences of over-expansion after the Beijing Olympics.
Now they're looking leaner and ready to compete again, helped by cutbacks in store networks, the growth of online sales channels and a government-backed campaign to encourage healthy living.
The change from two years ago is stark. As Beijing prepared to host the Olympics in 2008, sportswear companies began to expand aggressively, with leading brands adding almost 1,000 points-of-sale each every year between 2007 and 2011, according to CLSA analyst Dawei Feng. The anticipated demand fell short as sales were undermined by cheap knock-offs and competition from expanding overseas fashion chains such as Zara, H&M and Uniqlo.
The big Chinese sports brands are now deleveraged. Anta, the biggest and most profitable of the local brands, cut 900 shops across the country between 2012 and 2013. The company's net debt-to-equity ratio fell to 61 per cent at the end of last year, the lowest since 2007. Its Hong Kong-traded shares rose 6 per cent in the past year, compared with a 28 per cent drop in the city's benchmark Hang Seng Index.
Li Ning, named after the Olympic gold medal-winning Chinese gymnast, turned profitable last year after three years of losses. The company has reduced its stores to 6,133 from 8,255 in 2011. While its shares have lost 30 per cent in Hong Kong over the past 12 months, 13 of 25 analysts tracked by Bloomberg now rate the stock a "buy," up from four a year ago. Li Ning had 524 million yuan of net cash (S$109.7 million) on its balance sheet as of Dec 31.
Li Ning stores at end-2015 6,133 Anta has taken a page out of the US sports brand playbook by working with its stores on marketing as well as paying close attention to layouts, says Bloomberg Intelligence analyst Catherine Lim. It has also started a children's brand, after China scrapped its one-child policy.
The company has beefed up its winter-wear offerings by allying in China with Japan's Descente Global Retail. That looks timed to capitalize on a surge of interest in winter sports after the International Olympic Committee awarded the 2022 Winter Games to China. The pending event has "ignited Chinese skiing fever," the official Xinhua News Agency said in a recent article. Anta, which also holds distribution rights to the Fila brand in China, is the official sportswear sponsor of the Chinese Olympic Committee .
While still behind Nike and Adidas, Anta and the other five big Chinese sports brands, all of which are listed in Hong Kong, are now starting to gain share in their home market.
Key to the sales revival is the popularity of these brands in smaller cities outside Beijing and Shanghai where incomes and consumption levels are rising at a faster pace.
China remains well behind most major countries in per- capita spending on sportswear, and the government's plans to turn the industry into a long-term growth pillar should ensure continued expansion.
Nike and Adidas can rest easy for now, but as the sports craze spreads to an emerging class of wealthier consumers, they're likely to face a more crowded field. The five publicly traded Chinese sportswear companies have a combined market value of about US$9.4 billion, or less than a 10th of Nike, the world's largest sporting-goods maker. It's clear which competitors have the most room for improvement in this race.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.