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China gymnast hero's brand vaults back into spotlight with MSCI

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The sports world loves a comeback story, and Li Ning -- both the former gymnast and his apparel business -- are seeking a return to glory.

[SHANGHAI] The sports world loves a comeback story, and Li Ning -- both the former gymnast and his apparel business -- are seeking a return to glory.

Li, 56, is back in the spotlight as his eponymous sportswear company was among the Chinese equities added to MSCI indexes on May 28. It's the second time the shoe and shirt-maker made the list, as Li Ning Co.'s first inclusion in the indexes was pulled in November 2011.

The company's chairman came to fame in 1984, when he took home six medals at the Los Angeles Olympics. He found himself again in the spotlight as the flame-lighter at the 2008 Beijing Games, where he literally walked in the sky -- with the help of wires -- to symbolically kindle the China event.

That star turn in Beijing helped power Li's apparel brand to record highs. But sales and the company's stock soon lagged amid strategic missteps and managerial chaos, prompting MSCI to remove the listing from its indexes and Li's return to the helm. The stock touched a low of HK$2.78 (S$0.49) in 2014, a tenth its peak level four years earlier.

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Sales growth has slowly returned to a steadier path, helping spur the comeback to the MSCI -- something many investors anticipated. The industry is seeing rapid growth, with Euromonitor International forecasting China's sportswear market will reach US$43 billion this year, about double the 2014 level. Stocks in the sector were roiled last week after a short-seller attack against rival Anta Sports Products Ltd. Anta defended its accounting and corporate governance in a presentation on Friday.

Li Ning's stock has climbed 38 per cent in the past 12 months, while the benchmark Hang Seng Index has dropped 12 per cent.

Li Ning still has catching up to do, as its market share has slipped the past three years. The company, whose cheaper prices compared to global brands are a key draw, squandered its 2008 Olympics publicity boost amid fierce competition. Local rival Anta Sports cornered the affordable segment of the Chinese market, while global giants Nike Inc. and Adidas AG did brisk business as the growing middle class spent more on premium goods.

Nike and Adidas had the largest market share in China last year, at 22.9 per cent  and 19.7 per cent, respectively, more than triple Li Ning's 6.1 per cent, while Anta's was 14.9 per cent, according to Euromonitor. The proportions of all but Li Ning grew since 2015.

"The business has had a full overhaul, from product brand to distribution channels and retail operations, and the adjustments can be seen in improved financial performance," Ju Xinghai, an analyst at Guosheng Securities, said in a report. "Based on Li Ning's brand building and renewed consumer recognition, we are optimistic about long-term sales and profitability."

Net profit was 720 million yuan in 2018 on an adjusted basis, a 34 per cent increase from the year before. Gross margin has widened by more than 3 percentage points from 2014, and sales grew 74 per cent in the same period. The turnaround was spurred by the opening of more company-run brick-and-mortar stores to boost brand recognition, and a concurrent pivot to online sales. E-commerce revenue contributed 21 per cent of sales last year, up from just 5 per cent in 2014.

Revenue is expected to grow by 15 per cent annually through 2021 and net profit at 28 per cent, according to consensus forecasts compiled by Bloomberg. If that pace is realized, the company's 2020 profit will finally surpass its performance of a decade earlier, when the post-Beijing Games glow was still bright.

And the Olympics are coming back to Beijing in 2022, albeit in cold weather form, an opportunity Li Ning may capitalize on, said analysts.

"The Winter Olympics will be beneficial to the whole industry, and many brands are already preparing," said Fu Gang, fund manager at River East Asset Management, adding that Li Ning's recent rally makes its shares fully valued for the time being.

Li Ning trades at 25 times forecast earnings for the next 12 months, compared to 20 times for Anta. It's also trading at a premium to other local sportswear brands 361 Degrees International Ltd. and Xtep International Holdings Ltd., at 6.5 times and 9.9 times earnings, respectively.

Currently, 17 analysts have a buy rating on Li Ning, and 14 rate the company a hold. The consensus 12-month target price is HK$13.53, or 4.2 per cent more than the current price.

"The inclusion of Li Ning into the MSCI Index will bring some passive funds into the share," said Arnold Tam, analyst at Bright Smart Securities. "In the long run, the stock price will be driven by fundamentals."

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