Li Ning: energy boost

It has turned out to be more curse than blessing. For years, Li Ning was seen as China's answer to Nike and Adidas. A homegrown brand that could show the Americans and Germans a thing or two about selling sportswear in China. Back in 2010 the company's sales were Rmb9.5bn ($1.5bn) a year. Li Ning had a market capitalisation of more than HK$31bn, and was trading on more than 23 times forecast earnings. It was basking in the glow of a strong domestic showing at the 2008 Beijing Olympics. But the company has since stumbled. Its products lack the cachet of international brands and the low prices of domestic competitors.

So it has come to this. Li Ning is expected to report sales of Rmb6.3bn this year. Its market capitalisation has shrunk to HK$4.3bn. It is not expected to make profits this year, so there is no PE ratio. There is also no chief executive. And the company is to raise up to HK$1.7bn via an issue of shares and convertibles to fund the next stage of its turnround. Nike (market cap $80bn) and Adidas (market cap €11bn) need not worry.

The share issue is priced to go. At HK$2.60, the offer is at a 22 per cent discount to the price before the shares were suspended last week. Big shareholders such as TPG and Viva China, a sports management company, are backing the fundraising. Joining them does not require a belief that Li Ning can match Nike and Adidas. It does however require a belief that the capital can complete a turnround plan that has been under way for two years.

The plan revolves around getting old inventory out of the system, and replacing wholesale revenues with retail revenues. There has been some progress on both fronts. Sales rose 8 per cent in the first half of the year. But the net loss widened from Rmb162m to Rmb563m. So rather than feeling the benefit of sales growth, shareholders are being asked to put up more cash. Li Ning says next year marks the start of its "growth phase". Perhaps. But it has to stop the shrinkage first.

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