UPDATE 2-China's Li Ning leads sector fall after $241 mln fundraising plan

Fri Jan 25, 2013 1:42pm IST

Stocks

   

* Li Ning shares plunge 16 pct on inventory fears

* GIC, TPG and Viva China will subscribe to offer

* Rivals Anta, 361 Degrees, Xtep, Peak Sport also fall

By Donny Kwok

HONG KONG, Jan 25 (Reuters) - Struggling Chinese sportswear brand Li Ning Co Ltd, which is backed private equity fund TPG Capital, said on Friday it plans to raise up to HK$1.87 billion ($241 million) through the sale of convertible securities, as it seeks to revive its brand in an industry plagued with bloated inventories.

Shares in the company slid as much as 16 percent, before they trimmed losses to close 14.7 percent down, their biggest drop since July 2011, as investors feared the fundraising, part of which would be used to buy back outdated stock, signalled that Li Ning still had a way to go to bring down inventories.

China's economic slowdown has resulted in inflated stock levels and depressed earnings for retailers including local and foreign sportswear players - a sharp reversal of fortune after an expansion blitz that followed the 2008 Beijing Olympics.

"I am very bearish and very gloomy on the sports apparel sector in 2013 in China," said Shaun Rein, managing director at China Market Research Group. "It's going to be 2015 before we can see any kind of recovery."

Shares in Li Ning, which has a market value of $846 million, fell 5.3 percent on Wednesday prior to the fund-raising announcement after a Hong Kong media report said the sportswear sector still faced an inventory overhang. Its shares had risen more than 20 percent in January up to then.

The stock closed at HK$5.30, vastly underperfoming a 0.08 percent drop in the benchmark Hang Seng Index.

"Li Ning is a role model among the rivals and is a showcase of the industry. The latest fundraising plan suggested that players have to put in a lot more effort to deal with this tough inventory issue," said Steve Chow, analyst at Sunwah Kingsway Research. "That erases hope of a recovery of the sector - at least it won't happen in the short run."

Selling pressure swept across the sector, with domestic rivals Anta Sports Products Ltd and Xtep International Holdings Ltd each down 4.4 percent.

Peak Sport Products Co Ltd fell 3.9 percent, 361 Degrees International Ltd dropped 3.6 percent and China Dongxiang (Group) Co Ltd slid 3.2 percent.

INDUSTRY FEARS

"Li Ning's fundraising move at a time when we still see no sign of improvement in its business and inventory level add more worry for investors toward the company and the industry," said Steven Leung, a sales director at UOB Kay Hian.

In December, Li Ning, which is also backed by Singapore sovereign fund GIC, warned it would post a substantial 2012 loss due to as much as $288 million in expenses under a plan to buy back inventory from distributors.

"Their market share is collapsing in China," China Market Research Group's Rein said, adding that Li Ning was losing out to Nike Inc and would also cede market share to 361 and Xtep. "They no longer look (likely) to become a global player because if they don't make changes, in a year or two they won't even be a player in China."

Li Ning underwent a series of management changes in 2012 and is now run by TPG managing director Kim Jin-Goon and former Olympic gymnast Li Ning.

FUND RAISING

Each convertible security, which is convertible into one share at HK$3.50 each, will be offered to shareholders for every two existing shares held.

Li Ning, which competes with foreign players such as Nike, also said in its filing that GIC, TPG Capital and Viva China Holdings Ltd would subscribe to the offer.

"We are at a critical point in executing our plans and transforming our business," company founder Li Ning said in a statement.

"The additional capital to be raised through the open offer and continued support from its key stakeholders will ensure a stable platform while we work to restore the group to sustainable growth and profitability in the long-term and step into a new phase of our development," Li said.

Li said in October he was selling a stake in China's best-known sportswear group to his talent management firm Viva China for HK$1.36 billion ($175 million), as the sports sector grapples with an economic slowdown and fierce competition.

The Li family currently holds 25.23 percent of the company, while TPG and GIC each own about 5 percent with the ability to raise that to a combined holding of about 20 percent over the next five years by converting bonds into shares.

"After TPG invested in it, I said they have a 3 to 6-month time frame to show the market they are changing things, and they haven't changed it," Rein said. "I don't think TPG is as good as they think they are at managing consumer brands."

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