UPDATE 1-China sportswear brands rally on upbeat broker report

Fri Sep 28, 2012 1:35am EDT

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* UBS expects sportswear sector to be first to recover

* Sees Anta, Xtep's cash position remaining strong

* Shares of Anta, Xtep jump about 8 percent

By Donny Kwok

HONG KONG, Sept 28 (Reuters) - Shares of Chinese sportswear brands rallied on Friday in healthy trading volume after brokerage UBS said the sector would be among the first to recover from a downturn in the world's second-largest economy thanks to an industry-wide restructuring.

Chinese sportswear groups, including ANTA Sports Products Ltd and Li Ning Co Ltd, have struggled in recent months as China's economy has slowed, leaving inventories bloated and forcing them to cut back on new store openings after an expansion blitz that followed the 2008 Beijing Olympics.

Foreign players are also feeling the heat with Nike Inc saying on Thursday that orders in China for the next several months had fallen for the fist time in three years in what had been a growth market.

Shares rallied across the board, with Anta Sports, the biggest player in the sector by market value, up as much as 11.6 percent at their highest intraday level in more than three months.

Rival Li Ning rose 5.9 percent. Smaller players Xtep International Holdings Ltd surged 8 percent, 361 Degrees International Ltd jumped 6.9 percent and Peak Sport Products Co Ltd rose 5.7 percent. That outpaced a 0.31 percent gain in the benchmark Hang Seng Index.

"We turn bullish on the sportswear segment," UBS said in a research report issued late on Thursday. "We expect sportswear to be one of the first of the consumer discretionary segments to emerge from the current downturn as the consolidation process is near completion."

Store closures for listed sportswear firms seems low, while most non-listed sportswear companies have either exited or scaled back their operations in the past two years, UBS said.

"We believe the domestic brands must enhance their replenishment capability (and) design only products that customers want," UBS said.

Some analysts said, however, that key problems facing the industry still needed to be resolved.

"The rally this morning was seen to be short-lived as the key risk of inventory, cash flow are still there," said Alex Wong, a director at Ample Finance Group. "A weak Nike earnings also spelled out the risk of slowing mainland consumption, which is a negative sign to the industry as a whole."

Domestic brands are also grappling with rising labour and rental costs, while competition has forced them to rethink their business strategies.

The $19 billion Chinese sporting goods market had been a bright spot for companies such as Nike and Adidas, but slowing economic growth in the country and bloated inventories are taking a toll on bottom lines.

Analysts at UBS said the industry-wide restructuring would address issues such as overcapacity and inadequate distribution that have hampered growth, and allow the companies to pay high dividends.

"We analysed Anta and Xtep's cash balances to assess their capacity to pay higher dividends in 2012-14. The results suggest their cash balances will remain strong in a fixed-dividend scenario," UBS said.

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