No Medals for China’s Sportswear Firms

China’s spectacular performance at the London Olympic Games, while brining cheer to its fans has done little to boost the prospects of its sportswear firms back home, which have been struggling to grow their share of the $19 billion sportswear market.

Li Ning shoes are on display
Bloomberg | Getty Images
Li Ning shoes are on display

Chinese sportswear companies such as Li Ning , Anta Sports , China Dongxiang and Peak Sports are feeling the strain of a slowing economy, high inventories and rising costs, together with fierce competition from international rivals, which include U.S. sports giant Nike and Germany’s Adidas .

Against this backdrop, share prices of Chinese sportswear firms have taken a drubbing this year and analysts say the pain is likely to continue with high inventory levels expected to remain in place well into 2013. Earnings are expected to stay under pressure as well as domestic brands offer financial support to local distributors to ease their operating costs.

“There are two key reasons why we are cautious on the Chinese sportswear companies. Local brands face high inventory because there has been robust growth in the sector in the past few years, but the demand for sporting goods has not completely matched supply,” Christopher Leung, Retail Analyst at HSBC in Hong Kong, told CNBC.

“The second reason is that the sportswear brands may need to provide more financial supports to their retailers as they are facing cost pressures such as high rentals and wages,” he added.

HSBC estimated in April that Li Ning, the most well-known Chinese sportswear brand, had an excess inventory amount of about 1.65 billion yuan ($259 million) that would take 11 months for retailers to clear. It estimated that Anta had an excess inventory sum of about 3.12 billion yuan ($490 million), which would take about 10 months to clear.

Shares in Hong-Kong listed Li Ning have fallen by almost a third since the start of the year, while Anta’s share price has more than halved. This marks an underperformance compared to the broader Hong Kong stock market, which has rallied 7 percent so far this year.

HSBC last month downgraded its rating on Li Ning to ‘underweight’ from ‘neutral’ and maintained underweight ratings on Anta, China Dongxiang and Xtep, another local sports goods company.

“I’m very negative on sports apparels over the next six to 12 months. The sector is going to get hard hit as Chinese consumers cut back on apparels and spend more on food and beverage,” said Shaun Rein, Managing Director at China Market Research Group and author of “The End of Cheap China.”

“People are still a bit worn out from the Olympics in China four years ago. Chinese sportswear companies expanded too fast and then discounted heavily,” he added.

Li Ning issued a profit warning in June, while Anta said in May that orders for the fourth quarter of 2012 have fallen by more than 10 percent year-on-year in value terms as competition intensifies.

Stronger Foreign Brands

While local sportswear brands suffer, foreign brands, such as Nike and Adidas have had a good run and analysts are optimistic about their future prospects as well.

Nike had sales in China of around $2.1 billion in 2011 and said last year that it aimed to double its revenue in China over a four-year timeframe.

In April, Adidas raised its 2012 sales forecast in China to 10 percent from an earlier 5-9 percent.

According to research house Research in China, Nike held 10.5 percent of Chinese sportswear sales last year, compared with 7.9 percent by Adidas. Li Ning held 7.2 percent of the market, while Anta captured 7.1 percent.

“Previously foreign brands did not enter the second-tier cities and also their relationships with local distributors were not that good. But actually I think they are now targeting that market right now. That is the major challenge faced by local brands,” Alex Wong, Analyst at Ample Capital told CNBC.

Analysts list a number of reasons why foreign retailers in the sportswear sector have fared better than their local rivals. First they did not go and over expand after the 2008 Beijing Olympics in the same way as local brands did and so were not left facing an inventory problem. Plus foreign brands have had a more focused marketing strategy and benefited from Chinese consumers’ preference for big international brands.

“Local brands such as Li Ning are mid-level brands that people tend to cut back on when the economy slows,” Rein said.

In order to get back into the game over the long-term, a strategy change is required from China’s sportswear makers, analysts said.

HSBC’s Leung said local sportswear firms may need to invest in retail and brand management because of the increased competition from foreign brands.

Li Ning, which is backed by U.S. private equity fund TPG, last month replaced its CEO and said it plans to cut back on new store openings.

“The Li Ning brand does have resonance but the company needs to fix its inventory management, supply chain and stores - it has too many stores,” said Rein at China Market Research Group.

Li Ning had 8,255 stores at the end of 2011, compared with about Nike's 7,500 outlets in China.

- By CNBC's Dhara Ranasinghe