Foreign sports equipment manufactures seen as new favourites for Chinese investors
While European football clubs have attracted Chinese investment in the past, the next target could be foreign sports equipment makers which offer immediate cash flow
European football clubs have been enjoying high popularity among Chinese investors lately, but foreign sports equipment manufactures are expected to become new favourites due to the prospect for more immediate return on investment, according to market watchers.
Chinese investors and companies have been acquiring stakes in football clubs in England, Spain, France and the Netherlands over the past two years.
Wang Qing, an analyst at Yuanta Securities, said she didn’t think the purchases were impulsive, rather, Chinese buyers are actually redrawing their business plans through the acquisitions.
“You will find that their main business will benefit from football club purchases in the longer term,” she said. “What Chinese companies bought is not only the clubs themselves, but the useful resources the clubs can offer.”
Dalian Wanda Group, which acquired a 20 per cent stake in Spanish club Atletico Madrid in 2015, expects to participate in building stadiums in Europe. “It is an effective way to expand its property business into overseas markets,” Wang added.
Hong Kong-listed TechPro, whose primary business is manufacturing LED lighting under the brand name Ledus, bought France’s Sochaux football club for HK$59.3 million last year. “The purchase will definitely increase Ledus’ LED business,” said Wang, because large LED lighting systems are used to illuminate stadiums when games are broadcast worldwide.
While Chinese buyers will benefit longer term from purchasing European football clubs, it will be difficult for them to make money directly from the clubs football operations, she added.
Wang’s view is echoed by An Fuxiu, founder of Beijing-based SportBank. “Acquiring European football clubs will make Chinese buyers better-known in overseas markets, but do not expect earning from the clubs in the short term,” An said.
For those potential buyers who don’t have the patience to wait for long-term returns from clubs, foreign sports equipment manufactures will become their favourite targets, An said.
The sports equipment manufacturing industry produces balls, athletic and fitness training equipment, sports protection gear, and other sporting and athletic goods. However, manufacturers of sporting apparel and footwear are not included in the “equipment” industry.
The operating model of the sports equipment business is one of immediate revenue generation, An said. “You can sell products immediately once you finish the deal and acquire the sports equipment manufactures,” she said . “It takes a much shorter time to make a profit from selling sports equipment products than operating football clubs.”
Wang from Yuanta Securities agreed, saying equipment manufactures usually achieve stronger profitability than football clubs.
The equipment industry has not only proved to be highly lucrative, with average gross margins over 30 per cent, but has also seen significant growth potential in China.
“Chinese investors will certainly be interested in expanding their business in a promising sector,” said An. “The fast growing sports equipment industry is definitely a good investment choice.”
China’s sporting equipment manufacturing in industry generated revenue of US$27.7 billion in 2015, up 9.5 per cent from 2014, according to research company IBISWorld. Over the past five years, industry revenue has been growing at an annualised rate of 12.3 per cent, almost twice the nation’s GDP growth rate of about 6.5 per cent.
However, no single company dominates the industry because sporting equipment manufactures are highly segmented in China. In 2015, there were 1,457 such enterprises operating on the Chinese mainland, most of which were small and medium size companies. “The first ones to actively expand their market shares will be the industry winners in China,” said An.
The top four Chinese companies accounted for a combined share of 8.6 per cent of industry revenue in 2015, according to IBISWorld’s report. The largest manufacturer, Zhongshan Worldmark Sporting Goods, was estimated to account for only 3.5 per cent of total industry revenue last year.
The industry is expected to consolidate further in the near future, An added.
“How to seize the opportunity to expand the business? Acquiring qualified foreign sports equipment companies is a fast and effective way,” she said.
Sports equipment manufacturing tends to be a high-tech and precision enterprise nowadays, rather than one focused on extensive production. “For Chinese companies, buying mature and efficient foreign manufactures is more effective than spending much more time to study the technologies and process,” An added.
Wang from Yuanta Securities said mature operating systems and high tech processes were valuable assets to acquire when Chinese investors bought foreign companies.
After sports equipment, sports nutrition producers are seen as another favourite sector for Chinese buyers, added An. That’s because sports nutrition suppliers are seeing huge growth in demand for their products because, as with sports equipments manufactures, the sector is not just serving trained athletes. A growing number of ordinary people consume these items to pursue a healthy lifestyle. However, food safety regulations may slow its rate of development compared with equipment manufacturing.