Firm Management

China's Li Ning shares slide after it flags full year loss

August 23
8:29 AM 2012

Shares of China's best-known local sportswear group, Li Ning Co Ltd, slid 4 .5 pe rcent on Thursday after it reported disappointing earnings and warned it could post a loss for the full year as inventories piled up 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.

"The weak earnings of Li Ning hit investors' confidence on the whole sportswear market," said Alex Wong, a director at Ample Finance Group. "A decrease in profit margins and cutting back store networks are seen to be the norm in future, and that could drive investors away from the sector."

Shares of Li Ning, whose stock has more than halved in recent months, fell to as low as to H K$4 .23, l agging a 0.9 percent gain in the be nchmarkHang Seng Index.

The private equity-backed Chinese sportswear brand posted a forecast-lagging 85 percent slide in first-half net profit on Wednesday, and warned full-year revenue would fall and it may post a loss for 2012.

"We believe Li Ning will aggressively reduce fall/winter 2012 and even 1H 2013 wholesales 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.

Backed by Singapore sovereign fund GIC and U.S. private equity fund TPG, Li Ning had a network of 7,303 retail outlets in China at the end of June, a net drop of 952 from the end of 2011. It said its gross profit margin was 44.2 percent in the period, compared with 47.3 percent a year ago.

The company's inventories of finished goods swelled to 1.25 billion yuan as of December 2011, up from 872 million a year earlier, weighing on its growth prospects.

It replaced its chief executive in July and said founder and Olympic gymnast Li Ning and executive vice-chairman Kim Jin-Goon, who is a managing director at TPG, will lead the firm during the search for a new CEO after the departure of Zhang Zhiyong.

This article is copyrighted by Reuters

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