Hong Kong company reporting season

Sportswear giant Li Ning regains its form, just in time for Rio

Company named after China’s Olympic Golden Boy records 113 million yuan profit for the first half, after three years of losses

PUBLISHED : Thursday, 11 August, 2016, 9:36am
UPDATED : Thursday, 11 August, 2016, 11:02pm

The Olympics seem to bring out the best in gymnast-turned-entrepreneur Li Ning, and his namesake company, China’s best-known sportswear brand, which has announced a dramatic turnaround in fortunes.

Li Ning revealed a 113 million yuan profit for the first half of 2016 on Thursday morning, or 5.16 RMB cents per share, compared with a loss of 29 million yuan a year earlier, which followed two years of red ink before that.

The company said its fightback has been given huge impetus by Beijing’s push to build more sports infrastructure as well as encouraging healthier lifestyles.

Analyst said the Olympics, now up and running in Rio, had also played a crucial part in boosting both sales and the company’s share price.

Li Ning’s stock edged up 0.24 per cent to close at HK$4.11 on Wednesday, but its shares have soared 25.76 per cent in the past six months.

The company was founded, and is still led, by the former Olympic gymnast, who won three gold medals at the 1984 Los Angeles games.

The half-time profit, however, is below market expectation, illustrating that the firm – once the leading player in the China sportswear industry before being taken over by Anta Sports Products in market share in 2012 – is still under intense competition from both cheaper local firms and premium global brands, such as Nike and Adidas.

Despite revenue in the first half leaping 13 per cent year on year to 3.596 billion yuan, the board is still not proposing an interim dividend.

“The [government’s] supportive national policies [to promote sporting activity] will continue to facilitate development of the sporting goods industry,” the celebrated Olympian said on Thursday in the results statement.

“Building the value of Li-Ning will remain the group’s development theme in the foreseeable future.

Looking forward, he said the firm will enhance its operational capability in various aspects and strive beyond the limit of just the “value-for-money” proposition it has touted for years, to attract consumers who enjoy sport by providing products with “performance” and “fuctionality”.

Li conceded, however, the ongoing revamp of firm “has a long way to go” and that the company had opted to devote its profits to operational improvements and product design rather than pay a dividend, “in this very early phase of a recovery cycle”.

Sales through e-commerce would account for about 20 per cent of the total in the coming two to three years, he said.

“Making use of its sports DNA, the group will integrate technological, cultural and others elements into its products to promote the idea of sports as a means toward an educated and happy lifestyle, and facilitate the development of a ‘Sports +’ concept.”

He added that people “are kind of taking sports as a part of their life...and definitely, the ongoing Rio Olympics and China’s good performance bode well for us”.

Li Ning is backed by the Singaporean wealth fund GIC, but was hit hard over the past three years as it expanded its footprint in a mass market already crowded with domestic and foreign players.

But analyst are now confident it has turned the bend, and are positive on its outlook.

“We expect Li Ning to retain market share from other domestic brands thanks to its mass-market pricing strategy and strong brand name,” said GF Securities analyst Albert Yip.

“And we still see some room for earnings growth going forward.”

RHB Securities analyst Robin Yuen is now forecasting 17 per cent compound annual growth rate for the domestic sports industry over the coming decade.

Thursday’s statement also showed the company’s same store sales growth, a crucial gauge of any retailer’s health, lifted to the mid-single digit for the first six months of this year.

While its gross profit margin also climbed to 1.5 percentage points to 46.7 per cent in the first half, compared with 45.3 per cent over the same period last year.

The traditionally mid-to-high-end brand also underlined it has resumed its expansion in brick-and-mortar outlets in lower-tier cities, following years of store closures , with a net increase of 36 stores to a total of 6,169 in the first half of the year.

Yuen cautioned, however, that Li Ning’s renewed focus on the casual wear segment could be risky as it faces heavy competition there too, not only from its old peers but also from European fast fashion houses such as Zara and H&M.

“We do not see Li Ning returning to either its former profitability or levels enjoyed by its domestic peers,”Yuen said.