26 October 2016
Nike's Greater China pretax profit surged 51 percent in its first quarter. Photo: Bloomberg
Nike's Greater China pretax profit surged 51 percent in its first quarter. Photo: Bloomberg

Sports brands see strong potential in mainland market

The period around the Mid-Autumn Festival is quite suitable for outdoor activities, such as the Oxfam Trailwalker, Standard Chartered Marathon, Color Run and Women’s Open Tennis in mid-October.

All these sports activities need proper sneakers and specific sports clothing.

The sportswear needs to be breathable, quick-dry and prevent muscle strain.

Young people love sports, and they have increasingly high standards for sneakers and athletic apparel.

That’s why Nike has posted robust sales growth in China.

Nike shares soared 8.9 percent to hit a record of US$125 last week after the firm reported a 23 percent jump in first-quarter profit and earnings per share of US$1.34, beating the US$1.19 expected by the market.

By Sept. 29, its share price surged 24.46 percent to close at US$119.69.

Revenue rose 5.4 percent to US$8.41 billion between June and August from the same period last year, better than the market forecast of US$8.22 billion.

Nike’s sales growth stems from online sales, higher prices and many sports events taking place in China during the period.

In the first quarter, its Greater China pretax profit surged 51 percent to US$330 million, and sales revenue jumped 30 percent.

Sales of its sports shoes in the region soared 36 percent in the period, compared with 17 percent growth worldwide.

Greater China contributed the most new orders, up 27 percent, higher than the 26 percent in Japan and 22 percent in Europe.

Meanwhile, its Chinese competitors ANTA Sports Products Ltd. (02020.HK) and Peak Sport Products Co. Ltd. (01968.HK) reported profit growth of 20 percent and 45 percent, respectively.

Adidas, Nike’s biggest rival, reported a 48 percent jump in revenue and 59 percent rise in pretax profit in Greater China. 

The tough times for sportswear companies may be behind us, as the country will hold more world-class games amid a rising awareness among its population of the need for healthy living.

For example, the National EMBA Tennis Competition has been held for eight straight years, with 30 teams participating so far.

Over the last eight years, we’ve seen the rapid improvement of mainland participants.

Also, mainland sports lovers of other sports, including running, basketball, football, badminton and table tennis have increased the demand for sports products and care more about quality now than price.

However, mainland consumers have to pay a high premium to obtain good-quality brands and products.

Chinese tourists snap up Nike and Adidas sneakers, iPhones and Japanese rice cookers when they travel abroad.

Global sportswear brands like Nike and Adidas have managed to post rapid sales growth in China.

Domestic brands like China Dongxiang (Group) Co. Ltd. (03818.HK), XTEP International Holdings Ltd. (01368.HK), 361 Degrees International Ltd. (01361.HK) and Peak have positioned themselves as targeting different groups of consumers to avoid direct competition with the global brands.

Li-Ning Co. Ltd. (02331.HK) used to compete with Nike and Adidas in the high-end market, but it failed.

All the mainland brands have targeted the low-end and mid-range market, and some have expanded their presence on online shopping platforms with potential to gain double-digit percentage growth in online sales.

China’s annual per capita sportswear expenditure is only US$17, far below the average of US$94-142 in developed countries and US$285 in the US.

There is vast growth potential in the sportswear market.

Consumption in China’s big cities has been expanding at 30 percent per annum in recent years, compared with 20 percent growth on average worldwide.

The sportswear market will help boost domestic consumption.

The inventory issue from the 2008 Olympics has been resolved.

So, mainland sportswear stocks may benefit in different time horizons.

ANTA has the highest market capitalization, of 49.6 billion yuan (US$7.8 billion), among its mainland peers.

The company has a long-term vision of acquiring foreign brands like FILA.

And it produces these brands in China to reduce costs.

FILA is in the mid-to-high-end market segment in the mainland and offers a good profit margin.

Some mainland sportswear firms may also try to boost profit through overseas mergers and acquisitions, and they have gained more market share at home and abroad.

Investors should make some bets on these sportswear stocks to benefit from the exploding growth of the mid-to-high-end market segment.

This article appeared in the Hong Kong Economic Journal on Oct. 2.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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