Chinese Li Ning risks straying too far from the path

A customer is shopping at a Li Ning sportswear store in front of a poster of NBA basketball player Dwyane Wade in Shenyang, Liaoning province, March 21, 2013. REUTERS / Stringer

HONG KONG, Oct.29 (Reuters Breakingviews) – Li Ning (2331.HK) is experiencing a runner peak. The Chinese sportswear maker will raise $ 1.3 billion to capitalize on a stock rally fueled in part by Gen Z nationalism. International expansion and branding are among the targeted uses of the money, but the company could get more for its money by investing more internally. .

The 8% discount on the stock sale is modest next to the 60% gain this year. Li Ning and other domestic companies have benefited from political and consumer backlash against Western brands, including H&M (HMb.ST) and Nike (NKE.N) after raising concerns about the alleged use of labor forced into cotton production in China. In the third quarter, Li Ning’s sales at stores open for at least a year increased by more than 20%. Potential boycotts of the upcoming Beijing Winter Olympics will only deepen that sense of buying local.

While $ 28 billion Li Ning had cash reserves that Daiwa analysts said were sufficient to cover working capital and investment needs as part of its existing strategy, the decision to increase further indicates a appetite for acquisitions. It only generated 1% of its turnover abroad last year. The spur of earlier unsuccessful efforts in Spain and the United States has likely faded now, and he could become jealous of bigger rival Anta Sports Products (2020.HK), which spearheaded a deal to buy Finnish Amer Sports. in 2018 and succeeded with the Fila brand in China.

However, there are more pressing concerns than building a bigger empire. In September, for example, Chinese Olympic badminton gold medalist Chen Yufei was wearing Li Ning shoes during a national game when one broke. Her bloody sock has circulated widely on social media, suggesting that more attention to quality is warranted.

While Li Ning aspired to rise in international fashion shows, he cut his R&D budget last year to just 2.2% of total revenue, compared to 5% on average at Nike, according to the reports. Morgan Stanley analysts. Even in the midst of Anta’s buying frenzy, it devoted 2.5% of its 2020 revenue to developing new products and fine-tuning existing ones. Li Ning’s patent count is also eclipsed by his rivals. The high of building a lasting brand lasts longer than an endorphin rush in M&A.

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NEWS CONTEXT

– Chinese sportswear maker Li Ning said on Oct. 28 that it plans to sell Hong Kong $ 10.5 billion ($ 1.3 billion) of new shares to raise capital for expansion international, brand building and other reasons.

– He intends to sell 120 million new shares, or about 4.6% of the enlarged share base, to existing shareholder Viva China at HK $ 87.50 apiece, a discount of about 8 , 1% compared to the closing price on October 27.

– Viva will buy its shares after the same amount is sold at the same price to other investors, Li Ning said.

– Li Ning stock closed 8.2% lower at HK $ 87.40 on October 28.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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