* Shares fall after profit warning, lag broader market
* Bloated inventories weigh on outlook
* Company says full-year revenue may fall
By Donny Kwok
HONG KONG, Aug 23 Shares of China's best-known
local sportswear group, Li Ning Co Ltd, slid 3.8
percent on Thursday after it reported disappointing earnings and
warned it could post a full-year loss as inventories weighed and
marketing costs rose.
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.
"Li Ning's poor performance has more to do with its own
strategic missteps rather than an overall slowdown of the
Chinese market," said James Roy, an analyst at China Market
"As a brand it is in an awkward position - it's neither
premium like Nike or Adidas nor cheap like ANTA or
smaller Chinese brands like Xtep."
Li Ning, backed by Singapore sovereign fund GIC and private
equity fund TPG Capital, is the latest consumer products company
to come under pressure from China's economic slowdown, which has
hit demand for everything from home appliances to luxury goods.
"TPG will have to make major changes to Li Ning's brand
strategy ahead of the three-year timeline it has set if it wants
to get a good return on its investment," Roy added.
Data showing China's factory activity in August shrank at
its fastest pace in nine months provided further evidence on
Thursday that the world's second-largest economy is struggling
Shares of Li Ning, whose stock has more than halved in
recent months, fell as much as 7 percent to HK$4.12 before
closing at HK$4.26 after it posted an 85 percent slide in
first-half, and said it may post a loss for 2012.
That lagged a 1.2 percent gain in the benchmark Hang Seng
"The escalating competition within the Chinese sporting
goods industry is fuelling greater intensity amongst sportswear
brands competing for distribution channels," chairman Li Ning
said at an earnings briefing.
Analysts said Li Ning had tried to approach the higher price
level of the big global sports brands but had failed to convince
consumers it was worthy of such aspirations.
"We believe Li Ning will aggressively reduce fall/winter
2012 and even 1H 2013 wholesale orders, increase inventory
buyback, close non-performing stores and make short-term
operational adjustments to pave the way for long-term growth,"
Bank of America Merrill Lynch wrote in a research note.
"Earnings will be highly uncertain during this transition
process in 2012/13."
Like many other local sportswear groups, Li Ning is cutting
back on new store openings after an expansion blitz that
followed the 2008 Beijing Olympics.
The company said inventories climbed to 1.14 billion yuan as
of end-June, up from 1.13 billion at the end of December and
compared with 991.6 million yuan at the end of June 2011,
weighing on its growth prospects.
Executive vice-chairman Kim Jin-Goon, who is also a managing
director at TPG, told a news briefing that Li Ning would speed
up retail inventory clearance, although he did not provide
details. Kim said in July it could take 6-12 months for
inventories to return to a normal level.
Chief Financial Officer Chong Yik Kay said he expected the
gross profit margin for the second half to be similar to that of
the first half, when it stood at 44.2 percent, down from 47.3
percent a year earlier.
China International Capital Corp Ltd maintained a "sell"
rating on Li Ning and said it saw limited upside to earnings.
"Despite stringent controls and an expensive CBA sponsorship
that has yet to kick in, Li Ning's operational leverage is gone
along with a decreasing revenue base," it said.