24 October 2016
Among makers of sports products, the investors' first choice should be leading brand Nike. Photo: Bloomberg
Among makers of sports products, the investors' first choice should be leading brand Nike. Photo: Bloomberg

Sports industry provides safe haven for investors

Many of my fund-manager friends agree they are having a hard time finding quality companies to invest in the mainland and Hong Kong stock markets.

There’s not a single company which can maintain a stable dividend payout level in the last two decades — even Cheung Kong Infrastructure Holdings (01038.HK) because it only has a history of 19 years.

For conservative investors like us, these days are tough. As a result, many rushed to buy HSBC Holdings (00005.HK) as it offers a good dividend payout ratio.

Right now bonds have poor interest rates. Some bonds issued by blue-chip companies only offer an interest rate of about 1 to 2 percent.

On the other hand, some bonds issued by companies listed on the main board or GEM board charge higher risk premium for the higher interest rates they carry.

In addition, many are junk bonds. Investors will usually hold till maturity to realize the interest income.

Generally, we have an investment horizon of three years and, to reduce liquidity risks, many investors hold a portfolio in which a third of the bonds would reach maturity every year, making it possible for them to seize opportunities whenever they pop out in the bond, stock or property market.

Hongkongers rely too much on the property market and that kills creation. In addition, easy money from mainland travelers is addictive.

We have no other choice but to look at stocks with “domestic consumption” concepts. Among these, sports products look promising.

The sector now has strong support from the country, and it is a natural trend to focus more on health after mainland people become wealthier.

No wonder the new executive president of Adidas Kasper Rorsted said he will expand the brand’s network in mainland China by opening 3,000 new stores before 2020.

At the same time, its rivals Nike and Under Armour are also rapidly expanding in the mainland.

Growth of the three largest sports products makers will be driven by the mainland market.

The domestic sports brand 361 Degrees (01361.HK) recently announced its annual results, showing an over 30 percent net profit growth and proposing to offer a final dividend that is 77 percent higher than in the previous year.

During the period, shoe sales volume surged 11.2 percent and average wholesale price was up 9 percent. Gross margin was 40.9 percent. The number of its outlets climbed to 7,208.

Among the sports products producers, the investors’ first choice should be leading brand Nike, because it focuses on high-end products, which provide higher margin, and is likely to be the first to enjoy mainland’s fast-growing demand for sports products.

But the company is now in embroiled in a scandal involving the suspected bribery of Kenya’s governing athletics body. Also, the US stock market has been correcting.

I believe mid- or long-term investors may be able to find attractive companies to buy in the second quarter.

This article appeared in the Hong Kong Economic Journal on March 11.

Translation by Myssie You

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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