Broker's View

China’s sportswear makers begin to sweat

Some may see profit growth slow, say analysts

PUBLISHED : Tuesday, 10 May, 2016, 6:58pm
UPDATED : Tuesday, 17 May, 2016, 4:30pm

This year is unlikely to be a wining one for sportswear sellers in China, with some companies expected to see profit growth slow, say analysts.

Peak Sport last week revealed low-single-digit decline in trade fair orders for the fourth quarter this year and flat same-store sales growth in the first quarter. The slide in orders was caused by warmer winter and weak consumer sentiment, the firm said.

“While we remain positive on the long-term growth outlook for the sportswear sector underpinned by supportive policies and peoples’ increasing participation in sports, we see greater downside risk than upside force in the short term,” wrote Albert Yip of GF Securities Brokerage Limited in a research report.

It has downgraded Peak Sport from “buy” to “hold”, saying it expects Peak’s net profit to grow only 1.8 per cent this year and 5.6 per cent next year, compared with a 22.3 per cent growth last year.

“[Peak’s order decline] affirms our view that 2016 is unlikely to be another year when all sports brands in China win, given a higher base, but one with more limited share gain potential from smaller unlisted brands,” Goldman Sachs said in a report.

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Even after the last quarter of 2015, when sales were hit by a warm winter, none of the listed domestic brands saw a recovery in same-store sales growth this year, Goldman Sachs wrote.

JP Morgan said in its research report that the drop in Peak’s orders prompted it to downgrade its peer, Xtep International from “overweight” to “neutral”.

“We note that generally, Chinese sportswear companies have reported incremental decelerating sales from the last quarter in 2015. Given the overall backdrop of weak consumer sentiment, we see limited upside momentum to our forecasts for Xtep,” the report said.

JP Morgan expects Xtep’s net profit growth to slow to 9.8 per cent this year and 9.3 per cent next year, from 10.8 per cent last year.

Xtep’s trade receivable days – the number of days a customer invoice is outstanding before it is collected – has increased from 60 days in December 2011 to 117 days by December last year.

“While we understand that receivable days increased in the second half of 2014 and the first half of 2015 due to greater incentives to help first-tier distributors open more stores, ongoing growth in receivable days post first half is somewhat concerning,” JP Morgan said.

Goldman Sachs said that international brands continued to see strong momentum, given Adidas’ sales growth in China accelerated sharply to 30 per cent in the first quarter this year from 16 per cent the previous quarter. Hence domestic manufacturers for international brands are more likely to outperform their peers.

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“While we agree that the scope of further sales growth acceleration [for sportswear makers] is limited, we do not believe the sector as a whole has entered ex-growth stage,” Goldman Sachs said.

“Peak’s apparel products were seriously affected, but the orders for footwear products still showed strong growth momentum,“ Guotai Junan International said in a report, “We don’t think Peak’s relatively weak performance in the season is a sign of industry downswing, considering the strong growth momentum of footwear products.”

One of Peak’s peers, 361 Degrees, saw first-quarter same-store sales grow 7.2 per cent year on year and fourth-quarter trade fair orders grow by high single-digit year-on-year, Guotai Junan wrote.

Peak’s market share, 2 per cent, is relatively small compared with other leading brands like Li Ning, Anta and Xtep’s 5-9 per cent market share.

“We view Peak’s weak numbers as more company-specific and a sign of share loss to leading brands rather than of an industry slowdown,” Goldman Sachs said.

China’s General Administration of Sport unveiled the 13th Five-Year Plan for sports development last week, saying the revenue from the Chinese sports industry is expected to reach 3 trillion yuan by 2020.